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.

Are we really measuring impact?

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Antonio and his wife with their new baby in Darien, PanamaAntonio and his wife with their new babyHaving read various Duflo and Banerjee papers (see their book Poor Economics), I understand the frustration expressed in this blog post about measuring impact investments. As the post author Anya Kamenetz points out, in measuring our efforts social entrepreneurs incorrectly equate monitoring impacts with measuring the actual impacts created by the initiative.

I’ve always been a bit exasperated by the talk of impacts, and I suspect other social entrepreneurs are, too. It’s tedious to fill out impact performance metrics, especially when those metrics aren’t directly applicable to your project. That doesn’t mean we don’t believe our projects are making a difference or that monitoring isn’t important to do. It’s just that some of the “apples to apples” metrics that allow investors to easily compare projects don’t really quantify the actual impacts.

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Is social investment guilt-driven?

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I recently came across an article by Thomas Kostigen on MarketWatch, called "Investment driven by guilt, and that’s good". He suggests that the impressive growth of socially responsible investing is being driven by guilty investor consciences.

Kostigen makes generic statements about investor motivations and the growth of "social investing" that only confuses the argument and encourages readers to blast him from every angle. Aside: you've got to wonder if the Dow Jones-published MarketWatch (ahem, NewsCorp owned) just runs this blog to entice its readers with fresh liberal meat - most of the comments are scathing.

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Indigenous Land Rights and Economic Efficiency

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Assessing the encroachment of squatters into Arimae's reservation.Assessing the encroachment of squatters into Arimae's reservation.An interesting piece of news recently came out of Indonesia regarding the need for land and carbon rights for Indigenous Peoples if conservation programs (especially REDD) are to work. One of the higher level politicians announced a new focus by the government to deliver and enforce territorial land rights for forest communities.

Often we hear calls for the recognition of Indigenous Peoples land rights, but what is encouraging about this is the government’s recognition that their lack of land rights is economically inefficient. Because the Indigenous Peoples don’t have legal rights to their land, it is partitioned inefficiently and is not generating the potentially significant economic gain and poverty reduction.

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Nurturing Social Ventures

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Liriano inspects a mahogany treeLiriano inspects a mahogany treeTriplePundit recently did a blog post entitled "Social Entrepreneurs Lag Behind Impact Investors".

Citing investor feedback from the SOCAP Europe and San Francisco conferences, the author posits that there aren't enough investment-ready social enterprises to meet the growing demand among impact investors.

At the same time, many of the investors at SOCAP Europe, and the SOCAP conference last September in San Francisco, could be heard noting that the supply of investment-ready social businesses is not adequate. It appears that there may be a mismatch between supply and demand, particularly in developing countries where entrepreneurs with great ideas and great companies lack the commercial sophistication, strategic thinking, and organizational systems to handle investments.

The article goes on to suggest that social enterprises need a support network similar to that found in the tech sector. In addition to venture financing, this network should provide idea incubation, mentorship and strong peer support.

From our perspective, the industry-wide need for venture capital is most pressing.

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