Stafford joins wave of GPs banking on carbon upside for higher returns

Stafford Capital Partners’ latest timberland vehicle – the $1 billion Stafford Carbon Offset Opportunity Fund – is another addition to the growing and clearly badged collection of nature-as-climate-solution forestry vehicles to hit the market.

The Article 9 impact fund follows on from the firm’s $695 million SIT IX vehicle which closed in April 2021 and followed its well-practiced secondaries timberland strategy.

Stafford’s carbon offset fund will see the GP do a number of things differently, however.

For a start, it won’t be pursuing a secondaries approach because “carbon funds by their nature are still immature, they’re only just starting to be raised and so that means accessing the market by secondaries is not possible,” Stafford timberland co-managing partner Stephen Addicott told Agri Investor.

The 20-year closed-end vehicle also has carbon credits revenue built into its return profile, with Stafford banking on the offsets to begin delivering cashflow by the fifth year of the fund’s life. In fact, Addicott confirmed that 45-50 percent of the strategy’s cashflow will come from the sale of credits.

What’s also new about the $1 billion fund is that Stafford believes it could outperform all its predecessor timberland vehicles, due to the combination of underpinning the fund with traditional forestry returns while tapping into carbon credits through afforestation. It could deliver IRRs in the low double digits, confirmed Addicott.

“The returns coming from the carbon credits, that is something that is very difficult to put a finger on exactly what that will be,” said Addicott. “But given the way the market has developed over the past couple of years, we’ve seen that there’s more upside on this fund than our traditional funds because of those carbon credits.

“The voluntary market at the moment ranges from $6 to $15 per credit. It’s really a case of will they track up to around $30 by 2030 and then beyond? That’s the general conservative market expectations, but there is an element of the unknown of what those values will get to over time.”

Carbon potential was highlighted by Manulife as one of the factors contributing to a recent US Lake States timberland sale at $1,017 per acre, compared with a 5-year average of $636 per acre.

Manulife’s analysis of the fledgling space also found that as buyers have taken a step back recently due to the economic uncertainty, the price of credits derived from nature-based emissions removal activity has shown more resiliency than those generated from emissions avoidance.

This is not lost on Stafford. But one thing Addicott was also keen to make clear, much like the Manulife research, is that carbon returns alone are not yet sufficient to deliver the returns expected by LPs.

“That market demand that we’ve seen significantly grow over the past few years gives sufficiently more confidence that those credits will provide that cash flow as expected,” said Addicott.

“But the important thing as well is that, because there’s still so much development that’s needed within the carbon market, we feel that any carbon planting needs to be underpinned by the commercial forestry elements. That’s really the baseline given the carbon markets are still so immature.”