Think of Exit First 

Why Emerging Market Forest Investment Strategies Require a Detailed Exit Strategy before Committing your First $ 

Register your interest in the Theory of Change Webinar 

Forest assets are infamously illiquid. This is less of an issue in core timberland markets, especially given the entrance of new investors and asset managers where competition for high quality forest assets is fiercer. But what about in emerging markets, where wood markets are often underdeveloped, and investors do not reign a plenty? In this article, I discuss why the “If you build it, they will come” exit strategy doesn’t hold and why you should seriously consider how you will divest, starting from the design phase of your investment strategy. 

Traditional exit strategies for forest investment 

I believe the reasons that forest investors and investment managers don’t tend to put enough emphasis on their exit plan at the beginning of a strategy’s design are twofold – 1. There aren’t that many options, and 2. It’s likely so far in the future that the market fundamentals that exist today could look entirely different in 10-15 years when you may be looking to divest from your investment. Let’s break down the traditional exit strategies: 

1. TIMO exit (sell your assets to a timberland investment management organization), 

2. Industrial sale (sell your assets to an industrial player wanting to secure wood supply for their processing facilities), 

3. Partner buyout or share sale (sell your shares to either another investor in the asset or an investor new to the asset), 

4. Higher and Better Use (sell your assets to a party interested in shifting the forest management regime to a land-use strategy they place a higher value on), 

5. IPO (list your assets on a publicly traded stock exchange), 

6. Evergreen (no planned exit – hold the asset indefinitely and exit opportunistically). 

There are of course other paths, or iterations of above – the buyer might not be a TIMO per se, but maybe a carbon project developer, public forest land purchase, or a local landowner – but these are the primary options. 

However, I would argue that naming one or several of these is insufficient as a guiding north star as you build out your forest investment strategy – because how you plan to exit (and the reality of such an exit), will play a large part in deciding which assets you acquire in the first place, and how you build them during your holding. 

Emerging Markets Forestry Motivations and Exit 

When considering an exit strategy, it is first important to clarify your motivations for investing in emerging markets forestry. This is because your motivations can largely determine how you exit. Below are some of the main motivations, and I will explain why some of the exit strategies are on- or off- the table for you: 

Expand your universe 

You want to source new opportunities, stepping out of the saturation of core markets. This likely would have you seeking more advanced emerging markets – where your exit opportunities will be greater. Depending on the nuances of the asset in question, you may have all exit strategies available to you. Note that an IPO exit strategy would likely only be realistic if you are investing in an already successful and sufficiently large brownfield forest business where markets are quite developed. 

Early mover advantage 

For early movers, you have a high-risk appetite and see the opportunity for growth that emerging markets offer (rising population, rising wood demand). However, if you want to be an early mover, your exit options will depend on how early you want to be. If you’re entering into a jurisdiction with immature industry and wood markets, you need to be prepared not only to execute the development of your asset, but also to support in developing market infrastructure (market, industry, logistics as the case may be) to make the whole package attractive for a prospective buyer. If immaturity exists, a suitable exit strategy could involve co-investing with an industrial player who is interested in expanding into the market in question, where they have an expressed interest in buying you out.   

Impact focus  

You have a strong impact philosophy to develop or improve economic, environmental and social conditions through your forest investments. If you are an impact investor – you’re likely to be opposed to several HBU options – for example selling to a sugar cane producer, who plans to clear your forest and convert it to sugarcane. You will also have greater KYC requirements on your successor investor, because you are concerned with their ability to continue with the impact you’ve created and not revert to unsustainable or irresponsible practices. I discuss this with Anne Valto of Finnfund in this podcast episode.   

Climate focus 

A few things are important to you – carbon credit generation, additionality, high integrity and permanence. Any exit option where the forest management regime could risk the permanence piece of carbon certification will limit you. As with the impact investors, you will also need to understand the motives of your successor. If they intend on HBU by conversion to another land use, you may be creating reputational risk – as your project’s climate integrity is questioned. Another important consideration is that your future asset buyers might not want to take on the permanence liability, which may put restrictions on how they want to develop the asset.  

Biological growth potential 

Most emerging market forest investment opportunities exist in the tropical belt, where forest growth and yield are at its highest – and can compress the long-time horizons experienced by forest investment in many core markets. This, coupled with the market and impact potential is what makes emerging market forestry attractive. To realize this piece and achieve a successful exit (regardless of the strategy), you will need to ensure high quality forest management so that you can benefit from the excellent biological growth conditions where your asset is located. Despite the conditions being right – there are several examples in emerging markets where sub-par forest management has resulted in low quality wood production – and what would transpire to a tougher sell of your asset. So, if this is your motivation, apart from securing the market environment described above, you will need to invest in your people, building up the silvicultural sophistication and forest operations experience of your team. You will also need to ensure that you have a high-quality source of seedling or clonal material so that you have site-suitable trees to plant.  

Evergreen Forest Investment Strategies 

Whether emerging or core forest investment jurisdictions, evergreen strategies are the best suited to the long-time horizons of forestry. Once an asset is experiencing regular harvests, investors can benefit from consistent cashflows and are not forced into an exit when the market conditions might not be favorable. This is especially true if your investment strategy focuses on earlier stage assets (more on that in this article) in emerging markets where industrial development and wood markets might be immature. An evergreen strategy gives the most flexibility in terms of exit timing, though often requires a direct investment, rather than going in through a Fund (which are primarily closed-ended). All that said, you might not have the possibility as an investor to enter an evergreen structure. In such cases, ensure that the term of your investment is sufficiently long – in emerging markets 12-15+ years would be ideal. Again, it is important to seriously think about exit at the beginning of your journey, before you even commit to an asset and start the divestment procedure years before you intend to exit.  

Theory of Change to support your Exit Strategy 

If you have been following my work for a while, you will know what a proponent I am of the Theory of Change. It is an excellent planning tool to combine financial and impact objectives into your forest investment strategy. What’s more, the approach that I use considers exit in the process. If you’re interested in learning more about how the Theory of Change can help you in your forest investment strategy design, I will be holding a webinar this autumn on just this. Registration opens soon – join the waiting list today. 

Register your interest in the Theory of Change Webinar