Soon after the Australian real asset manager announced the first acquisition from its Forests Climate Solutions Fund in late June, portfolio manager Robert Hagler told Agri Investor New Forests started working years ago to help develop carbon projects on properties in Arizona, Alaska and on Native American reservations.
“Around 2015, 2016, some of our investors came to us and said: ‘We really like what you are doing and love the economics, but we actually want to own the assets as well.’ So, we established some separate account vehicles and started buying assets,” explained Hagler, who joined New Forests in 2019 and previously held positions at BTG Pactual, Prudential Timber Investments, Hancock Timber Resources Group and elsewhere, according to his LinkedIn profile. “We have been in the process of developing projects on those assets over the past several years.”
The acquisition announced in June was of McCloud Forest, an almost 19,000-acre timber property in the Mount Shasta region of California. The deal was the first to draw from Forest Climate Solutions Fund, which had raised $71 million from 11 LPs towards a $400 million target as of a June 2022 filing. The strategy builds on the firm’s experience developing more than 20 million forest carbon credits for California’s cap and trade system over more than a decade.
Plans for the McCloud property include timberland harvesting and development of a carbon offset project under California’s ARB compliance protocol. New Forests plans to also search out environmental opportunities such as conservation easements and valuation of ecosystem services.
“We typically lower harvesting intensity on the assets that we put into this kind of strategy. We typically extend rotations a little bit, all of which contributes to the co-benefits you would get from sustainable forestry, such as better wildlife, plant diversity, better water quality and accretive carbon stocking on an asset,” explained Hagler. “From a forester’s perspective, it allows us to manage US forests a little more gently than they have been over the past couple of hundred years.”
Investor demand for the Forests Climate Solutions Fund has been particularly strong over the past year and half, according to Hagler, who said the firm expects to close the vehicle by the end of the year.
“Some investors are looking for ways to clean up their portfolio. They may pull out of an investment in oil, gas and mining for example, and get into something more sustainable,” he said. “Other investors are looking at the forestry asset class, they like the US but are saying: ‘If I can get a little bump in return on carbon, that makes it more interesting to us.’”
The Forest Climate Solutions Fund’s investors include some motivated by biodiversity, who are attracted by its lowered levels of harvesting and longer development cycles, Hagler added. He declined to discuss return expectations, but did add that income from carbon offsets is part of what allows the vehicle to offer attractive returns.
“I’ve talked to a lot of investors who I would call ‘impact investors’ and one of the first things out of their mouth is they want to get a market-rate return on investment,” Hagler said. “There are some co-benefits that come out of the strategy and some people may have an interest, but fundamentally it’s got to be a competitive return.”
Regionally, interest in the fund has been dominated largely by the traditional sources of capital supporting the industry like the US, Europe and Canada, though Hagler said there has been some change recently.
“In the last five years or so, we have seen it expanding particularly into some of the Asian and Middle Eastern entities who have an interest in this asset class, but still today you’d have to say the majority of capital comes from developed market investors,” he said.
Hagler, who also serves as associate director of investor relations, said New Forests’ own acquisition by Japan’s Mitsui and Nomura last year has had no impact on the firm’s strategy and has only helped expand its network of potential LPs.
“One of our new shareholders, the Nomura Group, has certainly helped in terms of identifying some of their clients that we might speak to,” he added.
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