A pair of former timber company executives have formed an advisory firm to help institutions navigate a market currently characterized by compressed returns and changing fund structures, according to its principals.
One of the executives, John Enlow, spent 17 years at global forest products supplier Rayonier before assuming management positions with Weyerhaeuser and Deltic Timber Corporation. His partner, Eric Schwefler, held senior positions at Sustainable Real Assets, BTG Pactual and Resource Management Services after an earlier stint at BlackRock.
“A lot of the TIMOs like to use three-letter acronyms and we jumped right on that bandwagon, so we are Forest Resource Advisors – FRA,” Schwefler explained to Agri Investor.
Planning to advise university endowments, foundations, sovereign wealth funds, public and corporate pensions as well as high net worth family offices, Enlow told Agri Investor that FRA will assist in strategy, capital deployment, assessing potential acquisitions and problem-solving on existing investments.
Though some generalist consultants do advise on timber investments, Enlow said, they are unlikely to understand the nuances of how the market has changed as returns have compressed from the high single digits in the early 2000s, to low single digits today.
“They are a mile wide and an inch deep when it comes to truly understanding timber,” Enlow said of generalist consultants. “Now more than ever, investors need an advisor that really understands, at a really granular level, the issues and factors that influence return and performance for a timberland investment.”
Schwefler said he expects much of FRA’s work will focus on helping investors solve problems related to their timber investments that have developed in the years since the Great Recession. He said he expects that some of that activity is likely to come in form of transactions between and among the funds and separate accounts managed by the approximately 20 TIMOs FRA has identified as currently active in the market.
“I do believe that the investment returns for the next 10 years will be better than what we’ve seen for the past 10,” Schwefler said. “The buying opportunities for those investors seeking quality timberland investments are going to be there and those folks that are flush with capital are going to be able to pick off some pretty good portfolios and properties.”
Enlow added that such transactions have already occurred over the past 24 months, highlighting properties offered for sale by Hancock and Forest Investment Associates for between $50 million and $100 million.
“Whereas pre-recession, everybody had hundreds of millions of dollars of capital that they could deploy, fundraising is much harder now and the deal size has shrunk considerably, so they are adjusting their offerings and meting those out over time to not flood the market and keep values up,” Enlow said.
Shift to open-ended funds
In response to the more challenging fundraising conditions for closed-end timber funds in recent years, four or five managers have launched open-ended vehicles that have thus far met “moderate success”, Schwefler said, and will be important actors to watch as the market continues to evolve.
Enlow added that the creation of open-ended funds has also allowed some managers to transition assets from closed-end funds, in instances where the investors were interested in maintaining their exposure.
“It’s been a little bit of an evolution where they didn’t have to put them on the open market at a time when sale transactions weren’t the best in the world,” he said.
Another evolution in the timber market, said Schwefler, is the growing pressure to lower fees and expenses, especially in light of lower returns.
“When timberland returns were in the 8 to 10 percent range, investors still paid attention to a 2 percent all in fee, but now that the one-year rolling NCREIF return is 4 percent, you are talking half of that going to fees and expenses,” said Schwefler. “Investors are paying much more attention to that and managers are going to be required to be a little bit more transparent about how that works.”