Almost a year since TIAA announced its wholly owned Global Timber Resources company to invest in forestry assets, Agri Investor caught up with senior director and timber and agriculture portfolio manager Biff Ourso to find out whether the pension fund is increasing its exposure to emerging markets, what risks that poses and why comparing regional markets is so important.
Institutional investors are increasingly interested in emerging markets. Where do you stand on this?
Investors are looking for diversification. Faster tree growth in the southern hemisphere [means] a quicker return. The cost of production in some of these emerging markets is attractive.
Last year, our Global Resources Company raised just shy of $700 million. We have been investing that portfolio with a very international strategy and are now looking at investments across Latin America, and South America in particular. Recent investments in large, efficient mills for the [Brazilian] pulp industry [have translated into] competitive processing costs, [so] we are investing there. International markets like Brazil, Uruguay and Colombia are less efficient, and with that can come investment opportunity.
As you go into emerging markets, the risk often increases, and there are increased environmental, social and governance issues. How do you tackle these?
When we invest in international jurisdictions we have our own international management company that is integrated from the portfolio level all the way to the asset level. We know how operations are carried out and that we are employing the right people to make decisions for the asset and the community.
We also want to adhere to forest certifications. Intensive, fast-growing plantations can be managed sustainably, so I don’t think it is an either or question there. It is a question of how these investments contribute to a growing demand base sustainably. That is a key point of our due diligence focus.
What are some of the less obvious risks to entering several new markets and regions?
Each market is local and being able to understand, compare and contrast within and across regional markets is very important. [When] there was a downturn in the [US] housing market, the most exposed region from a timberland perspective was the US south-east. But in the Pacific Northwest, performance continued quite well, driven by an export-orientated growth story around Asia. Being able to think about a diversified portfolio, and how different regions and end users can move, is very important.
It is also important to think about where the gaps in cash are going to be. There are other revenue opportunities, like hunting and mineral rights. Our primary desire is to have exposure to the land and [its] timber, but if it makes sense and can be done in a risk-adjusted way, we also look at opportunities further up the value chain.
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