| Timberland Investment 101 |
|
|
| 03/09/2006 | |
|
Peter Mertz, CEO of Global Forest Partners, answers this week's 101 on timberland investments 1- What is the size of the US timber investable market? Are there any investment opportunities in Europe, maybe Scandinavia? The size of the investable universe is difficult to estimate because of the lack of a developed market and the variable sizes and quality of forests across the U.S. A reasonable estimate is between $100 to $200 billion, although many forest owners included in those totals are not likely to sell because they are family assets or strategic to their business operations. We estimate that approximately $20 billion has been invested in the U.S. by institutional investors. There are opportunities to invest in Europe, but the scale is much smaller, and return expectations generally lower. 2-What are the main characteristics of a timberland investment as compared to an investment in stocks or bonds? Is timberland somewhat decorrelated to those asset classes? When delivered through a commingled fund (as opposed to a separate account), timber investments tend to be more similar to private equity funds than traditional stock and bond investments. Investors in commingled timberfunds commit a certain amount of capital during the fund's commitment period, which is drawn down over time and invested in timber and related assets. During the life of the fund, investors earn a current yield from income produced by the assets, and assets are liquidated at the end of the fund term. Timber returns tend to exhibit low (and possibly negative) correlation with other mainstream asset classes since what happens in the equity and fixed income markets tends not to have much of a short term impact on the way a forest is managed. 3-What are the main risks associated with an investment in timberland? Would it be possible for an investment in timberland to be wiped out due to a forest fire or an outbreak? Some of the common risks include changes in timber prices and the growth rates of the forest. In addition, as you noted, there are also biologic and natural disaster risks, although these tend to be limited despite their widespread coverage in the press. Historical experience indicates losses from fire of approximately 10-20 basis points, and perhaps less in a well-diversified portfolio. Moreover, when a forest does experience damage from a fire or bug infestation, much of the trees can still be salvaged. In addition, at least outside the U.S., fire insurance is commonly used in areas where past incidents have been more frequent. 4-Usually, what type of institutional investor is interested in timberland? The type of institutional investor that would be most likely to be interested in timber investments is one that already has some exposure to private equity, real estate, or other forms of alternative investments. Since minimum investment amounts for commingled timber funds tend to be in the $5 million range (per investor), larger institutions are more prevalent in the asset class. Investors that take a portfolio approach to pension fund management and are looking for returns that are not correlated with other asset classes, but still exhibit strong risk-adjusted returns, are typically among those most interested in timber investments. |
|
Articles of the same Serie : 101 |
|
Articles of the same Topic : Alternatives |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it