A few weeks ago, my August column in the FT looked at forestry. I pointed out that although as a sub asset class, it is appealing, it’s also not without it risks. For a long term, boring asset it’s surprisingly volatile in terms of price and the track record of forestry funds is patchy to say the least. Both Pictet in the world of mutual funds and Gresham House in the world of tax efficient structures have done well but listed funds have been less successful – Cambium and Phaunos jump to mind.
It’s against this back drop that news come that the well-regarded Foresight Group are planning to launch a listed forestry fund. Here’s the details of what we know so far:
- Foresight Sustainable Forestry (FSFC) is looking to raise £200m at IPO
- It’ll invest in UK forestry assets
- The target return is > CPI +5% p.a. on a 5 year rolling basis. I may be wrong but this seems like an ambitious target .i.e if CPI is running at 3% this implies a nominal return of over 8%. In terms of background Jefferies report that the ITF says “that UK forestry has delivered strong annualised returns of 11.6%, 13.6% and 15.7% across, 3, 5 and 10 years to the end of 2017. In addition, UK commercial timber prices have historically outstripped inflation and is therefore expected to offer an inflationary hedge amid increased anticipation of expected inflation. The returns are also expected to be uncorrelated with power prices or real estate, driven by average annual tree growth of 3-4% irrespective of economic cycles.”
- Managers will be Richard Kelly and Robert Guest, who already run the existing Inheritance Tax Fund. Since setting up the forestry programme these managers have been involved in an annual forestry deal flow of over £300 million
- That Tax fund will be a cornerstone 29.9%, investor in the FSFC offering which I suspect means that this fund will almost certainly get away
- According to Numis’ report “ Foresight has managed the acquisition of, or holds exclusivity over, 11,700 hectares of UK forests and afforestation opportunities valued at ~£130m. It observes annual forestry deal flow of >£300m and has a live pipeline of forestry investment opportunities of >£125m.”
- Again according to Numis “seed assets comprise 34 assets valued at £130m, which are diversified by age, project type and geography and cover c.11,700 hectares in total across Scotland (86%), Wales (9%) and England (5%). The assets include both mature standing forestry assets (52%) and afforestation projects to be planted (29%) with the remaining 19% in mixed used assets. The weighted average age of the seed assets is 15 years. The manager has also identified a pipeline of £125m and therefore expects that the IPO proceeds would be deployed within 12 months.”
Obviously we’ll need to see some more details but I would make the following observations. As I said, this stands a decent chance of getting away and Foresight are an excellent house. I think there is latent demand for a well-managed forestry fund and it will tick many ESG boxes for sure. The target return strikes me as a bit ambitious – this feels to me like one of those boring asset classes that shouldn’t really expect returns of more than 2% plus CPI over the long term.
I’m also a tiny bit cagey about the investment trust structure here. The track record of London listed timber assets is miserable and although the UK focus will help allay some fears, it is nevertheless a big mountain of scepticism that needs to be scaled. A few bad reports/market mayhem and we could easily see a discount emerge of say 10 to 20% at which point the mismatch between very illiquid assets and a restive shareholder base could become problematic. Also, it goes without saying that the IHT tax planning benefits that normally come with timber assets is not available here.
Data centre deal for D9
Switching from trees to data centres, I see that Digital 9 Infrastructure has announced a big new deal – remember that D9 is one of my favourite funds and a member of the Dynamic 35 list. Its bought Verne Global, a data centre platform in Iceland, for £231m, representing a multiple of 20x contracted run-rate EBITDA with a base cash yield of 7%+.
It boasts the usual blue chip client base but the key selling point is that its based in Iceland, a big ESG tick – it clearly has big to scale operations via more land (40 acre campus) using its on site power availability. Verne Global is powered 100% by local renewable sources (hydroelectric and geothermal), and delivers strong energy efficiency by making use of year-round ambient low temperatures for cooling. This sounds a bit faddish on first reading but data centres consume a huge amount of energy and just as the ESG brigade have come for the bitcoin miners and their excessive energy usage, so will data centres become a target. Over the next few years as the amount of data grows endlessly and the number of centres – and their intensity – increases, pressure will intensify for ESG friendly sites. 20 times EBITDA – based on existing contracted rates – isn’t as cheap as some of the seed assets but it’s not outrageous given the ESG credentials. And clearly the plan is to expand that footprint.
D9 also announced interim results which saw a 5.5% uplift in net asset value, to 103.34p. This was mostly driven by a new valuation for the seed Aqua Comms asset – good performance enumbers meant that this business saw its value increase by 13.6% to just under £200m. This backs my contention that the Aqua asset was brought into the portfolio at below market rates.
In terms of pipeline for new assets, it looks like its running at around £670m with most attention focussed on a “premier” metro data centre based in the UK.
One thing to bear in mind with D9 is that, as Numis observes, the portfolio is highly concentrated “with Aqua Comms and Verne Global representing c.88%, however we would highlight there is diversity of underlying clients for each business”. That said, the shares have done well and are trading at 14% premium to NAV.