In a busy week, one of the more interesting announcements was an intention to float notice from Foresight Sustainable Forestry Company. The company hopes to raise £200m and invest that in UK forestry assets. It thinks it can generate rolling annual returns of 5% above inflation (as measured by CPI) once it has got its IPO proceeds invested. It has a seed (not an intentional joke) portfolio valued at £130m and a £125m pipeline behind that. This gives the manager confidence that £200m could be deployed in full within 12 months.
Don’t extrapolate from the past
We have been here before, but the track record wasn’t great. The AIC’s farming and forestry sub-sector currently has just one constituent – Cambium Global Timberland (TREE) – which has a market cap of £4m and trades on a 32% discount. It has been selling off its portfolio since 2014 after its NAV had plunged from £1 to 40p. Phaunos Timber Fund (PTF) was lost to a bid in September 2018 at 52 cents per share, well short of its $1 launch price.
The Foresight fund is a different animal, however. The narrow focus on UK assets makes it a much simpler investment proposition. The UK market is said to be in structural imbalance – we import most of the timber we use – and we have far lower forest cover than the European average – probably thanks to the navy.
The argument for forestry investment is that your portfolio grows, literally. The weighted average age of the trees in the seed portfolio is 15 years. The Forestry Commission requires that at least 1% of the assets isn’t harvested (that’ll include the ancient woodland). The rest can be harvested and replanted, and the manager can try to time that to optimise the fund’s income.
The real driver though is the need to tackle climate change. As Standard Life Investments Property Income’s recent announcement illustrates, there is new demand for forestry as a carbon offset. In addition, the UK Government is providing incentives for tree-planting. We wrote about the woodland carbon guarantee scheme in our last note on GCP Infrastructure (see page 9).
The seed portfolio is comprised of 29,000 acres, most of which (86%) is in Scotland. Just over half (52%) is in mature woodlands and, within that, there is about 200 acres of ancient woodland. About 29% is in afforestation projects and the remainder is a mix of the two. I think the tree-planting projects might be the element that spikes investors’ interests.
Look out for the prospectus
We are told that we’ll see a prospectus in October [apologies originally this said mid-September, my mistake]. The risk warnings should make an interesting read. Fire, disease, infestation and climate change all pose a threat and such factors had a big impact on the track records of Phaunos and Cambium. However, Foresight highlights annualised returns of 11.6%, 13.6% and 15.7% across 3, 5 and 10 year periods to the end of 2017 (based on the MSCI – IPD UK Forestry Index) and compound annual growth of 16.9% between 2017 and 2020 .
One surprising thing about this announcement was that the fund being launched is managed by Foresight rather than Gresham House. Gresham House manages over 300,000 acres of forests and is the UK’s largest commercial forestry asset manager. If the Foresight fund gets away, might a Gresham House competitor be close behind?