The Wisdom of Crowds (Funding)

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Photo of the trunk of a Yellow wood (Armarillo) tree in PanamaLooking up the trunk of a Yellow wood (Armarillo) tree in PanamaLast Thursday, the US Senate approved the JOBS Act, a piece of legislation that would make it easier for small businesses to raise financing. The bill was passed in the House a few weeks ago, and now, with the Senate’s changes, will go back to the House for debate and (hopefully) approval. It would then move to President Obama, who has already said he will sign it into law.

From our perspective, the bill represents a couple of features that would enable smaller investors to access the forestry investments marketplace.

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J.P. Morgan/GIIN report on impact investment

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Measuring the growth of a four year old treeIn December, investment bank J.P. Morgan released a report with the Global Impact Investing Network (GIIN) detailing interviews with 52 impact or potential impact investors. Impact investing represents roughly $4 billion in market potential in 2012, and is expected to capture potentially 5-10% of all investment in a decade.

The survey aims to uncover impact investor motivations and provide a more transparent view of the overall industry by analyzing investor responses to questions ranging from return expectations to investment motivations to topical investment focus. So what do investors think of the impact investing space? Here are some of the more interesting takeaways, from our perspective.

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Panama Free Trade Agreement with US

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Obama signs the "United States-Korea Free Trade Agreement Implementation Act". Official White House photo courtesty of Pete Souza.After five long years, the US Congress finally signed the free trade agreement with Panama last Friday. While Panama isn’t a huge trading partner for the US in terms of timber or other goods, it will definitely help us as we begin to export valuable hardwoods to clients in the US.

Panama already waives export tariffs on timber produced in managed reforestation plots. The addition of a free trade agreement means that Planting Empowerment's sustainably produced hardwoods won’t be slapped with import tariffs upon entering the US. This will increase returns for Planting Empowerment investors and benefits to our partner communities.

ITTO reports China’s timber demand increasing

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The ITTO’s bi-weekly market update newsletter contained an interesting lead story on surging demand from China. From 2001 to 2010, log imports doubled from 17 million cubic meters (m3) to 35.4 million m3.

 ... With the international supply of commodity wood products falling and with rising domestic demand analysts expect to see a strong upward pressure on timber prices in the domestic market.

Interestingly, the article predicts that by 2015 the deficit of timber will be 180 million m3 - an increase of 550% increase over the amount imported in 2010. Meanwhile, log imports from Russia increased 12% by volume and 40% by value just in the first half of the year.

The report did not cite its source of information, but even after discounting the projected deficit by 50%, the growth in future demand and prices could be significant.

That’s positive news for the value of the timber being produced on Planting Empowerment’s plantations.

New forestry investment in Brazil

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A three year old teak tree in Planting Empowerment's plantationsThe title of a recent article on the Environmental Finance website reads Brazil forestry fund eyes $350m. While this amount may not be significant for huge institutional funds to whom the investments are marketed, it is impressive in the world of foreign-managed forestry funds.

Two things about the fund stood out:

  • Targeted 14% internal rate of return (IRR)
    A 14% IRR is possible, but challenging. The main holding of the fund will be monoculture plantations of Eucalyptus, which in Brazil is used for charcoal, pulp, and non-traditional products such as furniture. Forestry investments are most profitable when investors can buy low and sell high. Given that commodity prices are already high and look to remain this way for some time, and assuming this pricing is built into the targeted return, it might be difficult to deliver 14%.
  • 15 year time period for the investments
    While a 15 year time period will make it easier for investors to hold their purchased assets and wait to sell at the top of an economic cycle, such a short time period presents a challenge. 20 years would be a better time period and give them more flexibility to exit their investments at the right time. The most successful timber investments have been made by endowments with no investment time frame who can hold the illiquid investments until the best opportunity presents itself and not be forced to prematurely sell at a discount.

For those who can’t invest millions, Planting Empowerment is offering smaller investment options. Our previous investment term of 25 years was too long, especially considering the lack of exit options. However, we are optimistic that our new opportunities based on shorter term debt periods and convertible debt will be interesting for smaller investors. Assuming that we can bundle the plantations into assets that funds will hold, we should be able to produce exit opportunities within 15 years that produce competitive returns.

The increasing number and variety of forest investments is a good thing, but we still need more funding to flow into the forestry sector to increase its production and reduce pressure on primary forests. While some of the stated goals will be difficult for some funds to reach, investors overall can still expect reasonable returns.