CASE STUDY

Real Assets – Timberland

German Private Sector Pension Fund | 2021

Engagement at a glance

Client Country/Type: German Private Sector Pension Fund
Year: 2021
Asset Class: Real Assets, Timberland
Mandate Size: EUR 100million
Mandate Geography: Global
Mandate Type: Pooled Funds and/or Separate Managed Accounts
Service Provided: Manager Selection
Investment Objective: Targeted net return of 5%–12%

Impact Maritime Leasing

Client-specific concerns

This client, a German private sector pension fund, was looking to gain global exposure to a specific real asset: timberland. Since the allocation was the client’s first to this sector, the manager search process involved helping the pension fund build an understanding of the most appropriate ways to gain such an exposure with a view to establishing a longer-term, five- to ten-year investment plan. The client wanted to look at global versus regional solutions and the possibility of using pooled funds as opposed to separately managed accounts in key markets: Australasia, Latin America and the US. The client sought to achieve a target return of 5%–12% net, with the goal of realising a consistent annualised net return of 7%.

Outcome

  • Delivering client-specific research: bfinance worked with the client to map the global timberland investment landscape; this process involved looking at aspects of geographic focus relative to projected returns as well as ways to deploy capital: commingled funds, funds of funds or separately managed accounts. The client eventually chose to combine regional exposures—via specialist funds—to create a blended global exposure via two commingled funds and one separately managed account.

  • Assessing the environmental risks of a new asset class: for the client, understanding the regional impacts of forestry operations, particularly in Latin America, was extremely important. The client was particularly concerned about land stewardship and governance issues in Latin America, where the indigenous Mapuche peoples have been dispossessed of their lands in southern Argentina and Chile by forestry operations—disputes that have resulted in decades-long conflicts with the governments of both countries. The client sought to determine what exposure, if any, prospective managers might have to these conflicts to mitigate any reputational risk.

  • Cooperating on manager research and review: bfinance facilitated significant client engagement throughout the manager search process—initially by helping the client compare the opportunities in public (listed) timber investments with private investments to better understand the behaviour of the asset class. Subsequently, bfinance worked with the client to assess how timber managers create value from their strategies, such as relying on the natural aging of forest or actively ‘working’ the portfolio assets by allowing camping and hunting. The client participated in multiple calls and meetings to understand managers’ approaches to maximising asset value.

  • Building a new asset allocation: bfinance helped the client develop an optimal selection of manager solutions to provide good diversification with a view to establishing a longer-term, five- to ten-year investment plan that would deliver an annualised net return of approximately 7%.

Our specialist says

  • Investors are increasingly interested in timberland for the carbon reduction potential of the asset class—as well as its ability to provide meaningful portfolio diversification and modest inflation protection. Understanding how timber specialists create value is essential to that process—for some, performance comes primarily from the aging of the trees, but other groups are actively managing their forests by allowing camping and hunting on these properties. It’s important for any prospective investor new to this asset class to delve into forest management approaches: How are the owners generating returns? Are they running vertically integrated forestry operations, such as logging and milling? Or are they outsourcing those requirements? What are the risks? We were able to help this client look at all the possible permutations and build a truly global timberland allocation by combining managers with strong regional expertise in their specific markets.

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