This summer, timber REIT Catchmark led a team that closed one the largest timber transactions of the decade. The $1.39 billion deal, involving 1.1 million acres in Texas, shows how diverse a range of investors the asset class has come to attract: alongside Catchmark, acquirers included BTG Pactual Timber Investment Group (a specialist private manager), Highland Capital and Medley Management (two alternatives investment firms), and British Columbia Investment Management Corporation (a direct investor).
Yet, outside flagship deals, a less benign transition seems to be at play. Timberland’s success in attracting investors of all stripes is not good news for private fund managers: higher prices are turning the asset class into a defensive play; large investors with sourcing capacity see a strong rationale for going direct. Some are clearly looking to downsize mandates: the Catchmark team acquired the Texas portfolio from Campbell Global, with strong indications the latter had managed the asset on behalf of CalPERS.
The trend seems to be catching on in Europe as well. Yesterday, Ulrik Weuder, head of global direct investments at Denmark’s ATP, told us that the $122 billion pension fund no longer uses managers to execute investments, although there is a notable exception: ATP’s (sizeable) Australian holdings are run by Hancock Timber Resource Group. Weuder says investing in funds was helpful to gain exposure in the program’s early years, but that such an approach is harder to justify today.
To understand why, it’s useful to go back to when that program started. In 2007, ATP started researching the asset class, which it found attractive due to its diversifying power and defensive characteristics. It visited colleagues around the world to gain deeper knowledge. “ATP is very much academic-driven,” Weuder explains. By late 2008, the pension was ready to invest, and it subsequently deployed about DKr5.6 billion ($870 million; $750 million) in the asset class, roughly split between the US and Australia.
In the ensuing years, forestry delivered the promised returns. But it also did a good job at convincing others to come in, and the opportunity to add significant value – or alpha, as Weuder says – has since been traded away, particularly for assets of a size pension funds like ATP target. Venturing into new markets has proved tough for ATP: Weuder says Europe, which is also covered by its mandate, is too fragmented; New Zealand, also on the institution’s radar, is a “very competitive” market.
The asset class’s attractive features remain. But that state of affairs means ATP will only buy assets on an opportunistic basis, when the risk-adjusted return makes a deal compelling. Weuder says ATP has no precise allocation for timber, just a cap on how much it can deploy. The pension has spent a bit more than half of what it can invest, but it is in no rush and under no obligation to reach this limit, he says. That elusive time frame doesn’t chime very well with the fixed-term or most pooled funds.
More importantly, the lessened room for optimization means timber is first and foremost a “beta play,” says Weuder, that is “almost comparable to real estate.” The low-risk, low-reward profile has prompted it to lower costs to protect returns, not least by going in without a manager. Timber REITs, with their lower cost of capital, may be less on the hook – though rising interest rates may put them under greater pressure.
Managers still have some sap in their roots. Smaller LPs still lack direct access, some larger ones would rather delegate, and direct investors provide ample exit opportunities for those capable of aggregating disparate assets. There are also opportunities to invest outside the core space: emerging markets, sustainable forestry, conservation, secondaries. But they clearly must be more creative. “Returns are no longer like in the 80s or 90s,” Weuder says.
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