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The Rise (and Fall?) of TIMOs

The Rise (and Fall?) of TIMOs. Ownership Changes in US Forestland. Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors Cambridge, MA +1 617 945 9059 tel +1 617 868 1096 fax cbinkley@ifiallc.com e-mail www.ifiallc.com website. Agenda.

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The Rise (and Fall?) of TIMOs

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  1. The Rise (and Fall?) of TIMOs Ownership Changes in US Forestland Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors Cambridge, MA +1 617 945 9059 tel +1 617 868 1096 fax cbinkley@ifiallc.com e-mail www.ifiallc.com website

  2. Agenda • A brief history of forest-sector dis-integration in the US II.Why has this happened? III. Some thoughts on the future IV.Implications: why should we care?

  3. I. Dis-Integration of the US Forest Sector • 20+%/yr change since 1980s • A brief history: • First funds in 1970s: Travelers, Eastern Airlines; British Coal Board • Private equity grew out of farm lending • Securitization provided liquidity; protection: IP and Rayonier MLPs; Plum Creek spinout from BN Source: HTRG Research

  4. II. Why has this happened? • Good risk-adjusted returns from timberland as a stand-alone asset: insights from academic research • Total Return = 15.3% 1987-2005 • Low correlation with other assets diversification/low risk • Good inflation hedge, esp. for unexpected inflation • Accounting treatment for public companies • According to American accountants, trees don’t grow! • Even worse, they depreciate (v. IFRS) • ERISA of 1974: private pension funds must diversify • Tax Treatment • IRC 631(b): capital gains tax preference for individuals • IRC 631(b): passive income for tax-exempt institutions • REITs: no tax for “qualifying” corporations

  5. III. Some thoughts on the future • TIMO/REIT growth in the US is just about over • Lots of TIMO/REIT land will be sold in smaller parcels • “HBU” sales ~ 1/3 total return? • Fixed-term funds started in the 1980s are winding down • “We’re eating our babies”—anonymous TIMO forester • Forward-looking returns are falling • Timberland markets are more efficient • More capital pressing against a relatively fixed asset base • A plethora of TIMOs and private-equity funds have emerged • “Quality” of returns is deteriorating

  6. IV. Why should we care? • “Private-equity investing leads not only to value creation, but also to economic and social benefits, for example, increases in employment, innovation and research and development” H. Kravis, 2007 • What about the forest sector? • Positive focus on forest management • Marked reduction in R&D • Ever more fragmented ownership (but not necessarily a more fragmented forest) • Investors susceptible to economic inducements • New-land planting in the US? • Meltdown scenario?

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