Alt Investments

Forestry Investment - Taking A Direct Approach

Tom Burroughes, Group Editor, 5 May 2021

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This news service talks to a specialist investment house focused on forestry in Central and South America, taking a direct approach to an asset class that ticks a lot of "green" boxes.

Ecoforests, a boutique forestry investment house, last month announced that it had added a new carbon capture element to its portfolio. With “green” investing a hot topic, it doesn’t get much greener than trees.

The organisation, founded in Toronto in 2004 by Michael Ackerman, concentrates its work in the Latin American jurisdictions of Honduras, Costa Rica, Panama, Ecuador and Columbia. In total, it oversees €65 million ($78.1 million) of assets. With offices in Hong Kong, the UK, Switzerland and Israel, Ecoforests says that it is tapping into heightened concern about the state of the planet and delivering practical solutions. In total, Ecoforests has 30 management staff and more than 200 employees worldwide.

“Never before has there been such awareness about the damage that we are doing to our planet. The time to take action is now. Investing in forestry does just that,” Ackerman told this news service in a recent call. 

“The future has already arrived. There is very strong interest in carbon capture or, in other words, carbon credits. A forestry project can reduce your emission reduction costs by more than 50 per cent. However, companies cannot just go and buy a forest and claim the emissions, they need to work with a forestry company that has a history of reforestation - not for the purpose of carbon capture solely,” Ackerman said. “I think it is a good approach to control what many identify as greenwashing. We are now offering limited carbon capture projects. However, we will not engage with a company that is not in the process of aligning their philosophy with ESG core values.”

The ascent of firms such as Ecoforests highlights that environmental, social and governance-themed (ESG) investment remains one of the most popular trends in wealth management. In the case of Ecoforests, it doesn’t just play in the world of funds, it is very much a hands-on business.

“Timber has remained resilient to three of the four major market collapses of the 21st century. The McKinsey Global Institute says that there will be 2 billion more people in the planet by 2050. The demand of timber is generally parallel to population growth,” Ackerman said. 

“Investing directly into timber is what I call a `direct asset allocation’ - in this way you bypass the fund structure and you become much closer to your investment. You can perhaps describe it better as a real estate investment (the land) with the tangible asset (the trees),” he continued.

“Most timber funds raise capital and then hire third-party operators, therefore increasing management costs which, in turn, reduce the expected return for clients. We are a vertically integrated company. We have our own nurseries, team of forestry engineers, topographic engineers and managers, we manage the growth of the timber, we handle the harvesting and processing of the timber in our sawmills and our marketing offices handle international trading for the timber,” he said. 

But Ackerman knows that there aren’t free lunches in capitalism, or in forests. 

“As with any investment, there are risks. Our projects come along with an insurance policy against any ‘acts of god’ whether it would be a hurricane, earthquake, pests, fire, etc. On the other hand, another risk could be a slump in world timber prices. In this case, the benefit of owning a timber asset is that you can hold the timber until prices recover,” he said. “During that period the tree continues to grow, however the maturity of your investment is extended. Finally, and most importantly I would say, having an experienced manager that knows the way of the land.” 

The sector is getting more attention. In 2019 The Global Impact Investing Network (GIIN) released the Scaling Impact Investments In Forestry report to take a closer look at the investment returns of forests and how managers and owners can increase capital allocation. The report analysed 39 forestry-focused vehicles for their key attributes and risk factors. Typically, these vehicles include the sale of timber, the use of forests as carbon offsets, and leasing and selling forestry land. Sustainable forestry assets are generating net returns of 8.6 per cent or higher compared with 4.2 per cent or higher among conventional timber investment.

Another report by The Business Research Company showed that the global forestry and logging market reached a value of nearly $535.96 billion in 2020, having increased at a compound annual growth rate of 0.8 per cent since 2015. The market is expected to grow from $535.96 billion in 2020 to $726.51 billion in 2025 at a rate of 6.3 per cent. 

Getting introduced
Forestry investment requires guidance. 

“From my experience, it is very rare for an investor to wake up in the morning and say:`today I will invest in trees.' With that note, education is crucial to us, we want to make sure the client fully understands the investment. We generally offer in-depth presentation of the asset class and its performance. We follow by introducing our company alongside all the necessary due diligence from title property checks to soil analysis of the land and much more. In some cases, we give clients the option of paying a refundable deposit upon acceptance of a proposal. We then bring them to the plantations so that they can see for themselves our business operations. We also offer them a plantation development workshop which is guided by our engineers and managers,” Ackerman said. 

Ecoforests puts investments into a special purpose vehicle (SPV). To enter an SPV, investors must put in at least $1 million, although if they co-invest that sum can be reduced. The investment is a one-off payment that includes all management, caretaking, and insurance for the lifetime of the investment. 

If investors achieve the returns they expect, Ecoforests charges a “success fee” of between 2 and 3 per cent. The investments are monitored by the organisation's annual maintenance reports and third party audits. Additionally, Ecoforests uses drone and infra-red technology to check how fast forests are growing in order that clients may be kept informed on how plantations are faring.

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