Timber fund secondaries activity increased for the third consecutive year in 2016, reflecting the natural evolution of both the secondaries and timber asset classes, as well as a degree of frustration among investors in early-vintage timber funds, according to market observers.
In its most recent annual report on the overall secondaries market released last month, Setter Capital reported that 2016 saw $331 million in agriculture and timber fund stake purchases, a 5.8 percent increase over 2015. The latter was a transformative year, in which $313 million in fund purchases constituted a 57 percent increase over a 2014 transaction volume of $200 million.
While Setter does not break down numbers for agri and timber funds, managing partner Peter McGrath told Agri Investor that timber funds accounted for the majority of the activity in the combined category.
The combined category accounts for only a small portion of the $42 billion secondaries market, but McGrath noted that some firms have recently built capabilities specifically to buy real-asset fund secondaries, whereas previously such transactions had been highly opportunistic.
For example, Stafford Capital hired Dan Rocca, a Sydney-based investment analyst with experience in forestry, to help evaluate opportunities in the sector in 2015. The firm reached a $180 million first close on for its latest timberland fund of funds vehicle late last year and invests in funds focused on timber in Australia, the US, Canada, Brazil, Chile, Uruguay and New Zealand.
“Secondary buyers are expanding the scope of what they buy,” McGrath said. “I’d expect that there’s going to be more upward momentum for secondaries of [agri and timber] funds on the buy-side.”
On the sell side, Aberdeen Asset Management senior investment manager Ryan Sullivan told Agri Investor that the growth in secondary transactions for timber funds is in part a natural consequence of the institutionalization of the asset class.
Over the past 15 years, he said, many investors have built timber portfolios that inherently leave relatively few options for managers looking to add value, so it appears that some are now looking to optimize those portfolios themselves, in part through secondary activity.
Another factor, Sullivan said, is some degree of frustration among investors that committed to early stage timber funds in the early 2000s, when returns were expected to be higher than they are today. While many investors made initial allocations based on expectations of returns in the low teens, he said, actual returns have generally been in the single digit range.
“The perception of timber as an asset class is now one of a pretty low return profile,” Sullivan said. “As a result, some of these institutions, which have built out some meaningful timber allocations back in that time, are probably starting to think: ‘I haven’t gotten any liquidity from my manager, so maybe I should create some myself through the secondary market’.”