SLM timber fund expects €50m final close in mid-2019

After making good progress on acquisitions of forest properties, SLM Partners expects a final close of around €50 million for its debut Irish forestry fund in mid-2019. The vehicle has raised over half of that target.

Talking exclusively to Agri Investor, Paul McMahon, managing partner at SLM, said: “The strategy is working well, with a good deployment of capital. We have been making good progress on acquisitions, and we have agreed terms for the purchase of 20 properties [out of over 220 looked at]. A final close on the vehicle, which received backing worth €12.5 million from the European Investment Bank, is expected in the middle of this year.”

“The EIB is its cornerstone investor, through the Natural Capital Financing Facility, as well as two European insurers, one Irish endowment and Irish family office,” SLM investment director Darius Sarshar told Agri Investor in June.

“The vehicle comes in response to the very strong market for timber in Ireland for use in saw mills and bioenergy,” McMahon said. He stressed that Irish government forecasts for the industry should underpin strong timber prices.In a new report, it predicted roundwood and wood residue demand for sawmilling, wood-based panel manufacture and wood energy are expected to substantially increase over the medium term to 2025. It forecasts a continued shortfall in the supply of roundwood to the sawmilling sector in Ireland until 2020, with a balancing out of supply and demand by 2025.

The fund’s strategy largely relies on buying small properties planted in the past three decades from private owners. These often sought to benefit from incentives provided by the EU – in the form of grants and “premium,” recurrent payments – to improve Ireland’s low forest cover. These payments, meant to compensate farmers for the lack of revenue on the forests during the first 15 to 20 years, have now expired, inducing some to envisage a sale.

A key feature of the fund is the active management of private forests and development of Continuous Cover Forestry management as an alternative to the clear-fell system, being more environmentally sustainable, Sarshar explained. Continuous cover maintains permanent forest cover while allowing for recurrent yield rather than a lump sum of cash every few decades, he added.

“The EIB also announced in December a tender for technical assistance worth €742,000”, McMahon said. The grant is targeted at third parties to provide services focused around training, monitoring and reporting on environmental impacts, which will benefit the SLM timber fund, he explained.

Brexit impact?

Despite fears about the effect on Irish agriculture of Britain’s impending exit from the European Union, industry insiders said Brexit is unlikely to have much, if any, impact on the strong Irish export timber prices. Ireland exports around 75 percent of its forest products, with 66 percent of panel product exports going to the UK, which is a massive importer and consequently a price-taker in the sector.

Even in the case of a no-deal Brexit, which would see the UK leave the customs union and revert to World Trade Organization rules, trade in sawn timber is unlikely to be affected as it is not subject to tariffs under WTO rules.

The Irish government report explains that wood has a major role to play over the coming decades as a renewable fuel to displace fossil fuels, especially in the heating sector. Energy use will also play a key role in opening up forests, through first thinning and adding value to the remaining crop.