A New Investment Environment
New conditions call for new approaches. The industry has now entered a new phase, one not simply an extension of the old. Until recently, increased timberland value has been driven largely by arbitrage-based ownership transfer, resulting in steady discount rate compression. Markets were forgiving and investments were relatively insensitive to liberal assumptions at acquisition. The transfer from public forest products companies to timberland investors is now complete and the new phase will be less tolerant.
Successful investors of any size will be more proactive in decision making, requiring a higher level of internal expertise, either on staff or from an outsourced portfolio manager detached from the need to both market investment products and place capital. Due diligence will play a greater role at all levels. Timberland as an investment asset has become complex enough that investors without specific experience in forest acquisition and management cannot expect to confidently monitor the decisions and activities of their asset managers.
Timberland investing has been dominated by TIMOs (Timberland Investment Management Organizations) and Timber REITs. Timber REITs are few in number, publicly traded, and, for the most part, deconstructed forest products companies largely “clipped” to manufacturing divisions. TIMOs, serving large institutional investors, originally focused on separate accounts but now rely heavily on commingled funds. Managers with this orientation must market investment products and in turn place capital within narrow placement windows, creating a “use it or lose it” mentality. Their structure operates most efficiently with mega-transactions of $100 Million or more.
TIMOs are currently over-funded, with an aggregate pool of roughly $4 Billion, creating intense price pressure on large transactions. As a result, transactions of $50 Million or less will increasingly trade at a relative discount.
This new environment creates opportunity for investors, both private and institutional, with the capacity for direct transactions of $50 Million or under.See U.S. Timberland for the Private Investor.
