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Investing Beyond the Frontier

Investing Beyond the Frontier. The Risks and Rewards of Emerging Markets Forestry Investments. Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors, LLC Cambridge, MA +1 617 945 9059 tel +1 617 868 1096 fax cbinkley@ifiallc.com e-mail

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Investing Beyond the Frontier

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  1. Investing Beyond the Frontier The Risks and Rewards of Emerging Markets Forestry Investments Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors, LLC Cambridge, MA +1 617 945 9059 tel +1 617 868 1096 fax cbinkley@ifiallc.com e-mail www.ifiallc.com website

  2. Agenda • Why invest in emerging markets? • The case for emerging market forestry investments • Risks associated with emerging market forestry investments • Conclusions: understand the risks before you invest your time or your investors’ money

  3. I. Why invest in emerging markets? • In developed economies, structural change— disintegration of the forest industry—is over • Forward looking returns in developed markets are falling • Correlation of returns may be increasing • The liquidity premium has been priced out • HBU sales have become a larger fraction of total returns, and are priced at acquisition • Underwriting standards have loosened • Capital—debt and equity—continues to flow into developed-country timberland

  4. II. The case for emerging markets • 2003 World Bank Conference • millions of hectares of forest land • extreme capital scarcity • poorly developed markets • Capital scarcity  better risk-adjusted returns • Critical social/environmental/economic concerns • Risky: to investors, to investment managers

  5. III. Risks • “An emerging market is a market from which you cannot emerge in an emergency” -- J. Leonard, GEF • Risks to the investors • Macro: what are the metrics? Sovereign spreads? Academic studies? • Rarely can “own” land. And, if you can, how secure are property rights? • Deal structures are complex • Information is poor; collecting information is expensive • Probably need to integrate downstream to pull through value • Risks to the investment manager • Very high transactions costs—IBs won’t travel to three star hotels, let alone to shacks with outdoor plumbing! • High variance of fund returns—more like VC than timberland? • Risks of total loss • Discomfort, disease and death?

  6. IV. Investing beyond the frontier: conclusions • Investor desire to move out of developed economies makes a lot of sense • Deteriorating forward-looking returns • Lack of investment opportunities • Emerging markets offer higher returns, but… • Risks are material and differ in scale and kind from those in developed economies • To the investor • To the investment manager

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