NEWS & INSIGHTS


P&I: Timber, agriculture cycles forcing firms to examine new avenues by Arleen Jacobius

BY ARLEEN JACOBIUS • JULY 24, 2017 12:01 AM

Managers in a number of real asset sectors — with the possible exception of infrastructure — are having a tough time raising capital. And that is only the leading edge of the storm buffeting them.

Some timber funds are nearing the end of their lives with managers expected to bifurcate into the haves and have-nots when they go out to raise new funds; Farmland is in a state of flux, with managers now making value-added investments; Real estate managers have more money than they can spend, with a record amount of dry powder but fewer deals.

Fundraising is slowing. Many institutional investors’ allocations to real assets have little room for expansion, said Peter Martenson, partner in the San Diego office of placement agent Eaton Partners LLC.

“(Limited partners) have full allocations and commitments are going a little bit slower because, I think, real assets has not had a reason to shine,” Mr. Martenson said. “Commodity prices have stayed low. Oil and gas is a classic example. People thought the recovery would have happened sooner. It’s the same thing with metals and mining, in general.”

Investors might fill in around the edges, like adding a tactical strategy that feels compelling, he said.

Also hurting fundraising is that, at least in the U.S., few investors are expecting either inflation or deflation, which is one of the reasons many investors invest in real assets.

Having second thoughts
At the same time, some investors are reconsidering their real asset portfolios, rebalancing out of strategies that have not worked and boosting investment in sectors that have.

Harvard Management Co., which manages Harvard University’s $37.6 billion endowment, is reviewing the investment strategy for its $2 billion natural resources portfolio, sources said. Currently, Harvard Management Co. is in discussions to sell dairy farms and cows in New Zealand to KKR & Co. LP, sources said. Any transaction would be pending regulatory approval, these people said.

Emily Guadagnoli, an HMC spokeswoman declined comment.

KKR spokeswoman Kristi Huller, said a possible sale by Harvard has not been announced.

Officials at the $323.6 billion California Public Employees’ Retirement System, Sacramento, are in the process of re-examining the role of forestland in its portfolio and restructuring its domestic forestland portfolio.

CalPERS officials are taking a look at its forestland portfolio as part of an asset-liability study that also will examine whether to combine real estate, infrastructure and forestland into a single roughly $35.7 billion real asset program or retain them as separate asset classes. An asset allocation decision could be made as early as December, according to a CalPERS timeline.

CalPERS officials are considering the sale of its Crown Pine

Timber portfolio, sources said. CalPERS had committed $1.25 billion to the Crown Pine Timber/Campbell Opportunity Fund-A in October 2008 to invest in 1.5 million acres in eastern Texas and western Louisiana. Megan White, CalPERS spokeswoman, declined comment.

Timber issues
Whether a manager makes money on a timber investment often depends on how much the manager paid, Eaton Partners’ Mr. Martenson said, more so than in some other asset classes.

“In timber, if you didn’t buy cheap or smart, performance comes out because trees grow only so fast,” Mr. Martenson explained.

There is not much a manager can do to enhance a timber investment and so the purchase price is even more important in timber than in most other investments, he said.

“There will be a group of five TMOs (timber management organizations) that will be rewarded because of their performance. The others will have to figure it out” by finding an acquirer or an investment partner.

Bob Ratliffe, Seattle-based president of hedge fund, private credit and real asset manager Silver Creek Capital Management said this is “an historic” time for the timber industry, involving a confluence of factors, which could result in a number of timber assets coming to market.

“Timber funds … are coming to the end of their lives,” he said. The people who started timber management companies also are getting to the end of their careers, Mr. Ratliffe said. And the timber markets have not recovered as anticipated.

“Housing starts are up but not back as rapidly as people thought they would be,” Mr. Ratliffe said. “So pine timber is flat and it will continue to be flat in the next few years.”

But so far, there is more talk about this coming asset flow than actual transactions, he said. Mr. Ratliffe expects the transaction volume will pick up “in bits and pieces.”

Silver Creek has $6.3 billion in assets under management, with approximately $1 billion in timber assets and about $400 million in dry powder, Mr. Ratliffe said. The firm has a joint venture with Weyerhaeuser, which acquired timber manager Plum Creek Timber Co. last year. A number of pension funds — the $116.5 billion Washington State Investment Board, the $71.4 billion Oregon Public Employees Retirement Fund, the $58.8 billion Alaska Permanent Fund Corp and the $13.3 billion Maine Public Employees Retirement System — committed capital to the joint venture to invest directly in timber.

Great asset, but …
“I think timber is a great asset class when priced at the right level,” said Barry Blattman, vice chairman and a senior managing partner at real asset manager Brookfield Asset Management, New York.

“We’ve struggled to find opportunities that meet that goal,” he added.

Institutional investors are also frustrated, he said: “When they buy timber, they want to own it forever” and it is difficult to scale up their timber allocations.

“We love timber as an asset class but we have been limited in our activities,” Mr. Blattman said.

A few managers are offering open-end timber funds that are longer term and more liquid than the traditional 10-year closed-end funds.

The $22.1 billion New Mexico State Investment Council, Santa Fe and the $16 billion Kansas Public Employees Retirement System, Topeka, have committed capital to RMS Evergreen U.S. Forestland Fund, an open-end timber fund is managed by Resource Management Service LLC.

Slowdown in agriculture
Agriculture fundraising appears to be slowing. This year, three agriculture funds raised $500 million. By comparison, 13 agriculture funds raised $3.3 billion in 2016, which was down from the all-time high point in 2014 of $5.4 billion raised by 14 funds.

Brookfield executives are finding more investment opportunities in the emerging markets, Mr. Blattman said.

“We are deploying significant amounts of capital in places like Brazil and India where there is less competition … better value … and fantastic assets,” he said.

For example, Brookfield invested in an agriculture business in Brazil, where the investment thesis differs from the U.S.

Brazil uses natural gas and sugar-based energy, he said, explaining sugar cane can be used to make ethanol. When energy prices are low, farmers can convert from sugar cane crops to planting soya or natural rubber, he said.

“It’s a great land-based play in commodities,” Mr. Blattman explained. “Ultimately, that land turns into housing developments over time as the urban core expands.”

Eaton Partners’ Mr. Martenson explained the agriculture sector is going through a change. There are two types of agriculture, he said: core agriculture, in which managers or investors own farmland and lease it for planting; and then there’s what he called the “next iteration” of farmland, which is a value-added approach.

Private equity firms pursued the first type of agriculture investing for the past several years, mostly by acquiring and upgrading production on existing farmland or converting pasture into cropland, according to a 2014 report by London-based research firm Preqin.

The number of private equity and other managers focusing on owning the value chain for fund-owned assets for food-related assets is increasing, Mr. Martenson said. 

China-based private equity firm Hosen Capital is an early example. In 2015, the firm bought a company that raises cattle and a company that processes cattle. The firm then entered into long-term contracts with restaurants to buy the cattle.

 “What we (Eaton) are doing more of is this next iteration, the value chain of agriculture. If you take out the middle man you get a lot of margin,” and therefore higher returns, Mr. Martenson said.

 

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