The Long and Slow Slog of Deal Origination in Forest Investment 

How to speed up the development of earlier stage forest investments 

There’s origination and then there’s origination. 

There’s the TIMO operating in core markets, where counterparties are experienced with timberland transactions. A shared interest between buyer and seller quickly evolves to opening up of the data room and term sheet negotiations. 

Then there’s the Asset Manager working further upstream when it comes to asset class maturity – maybe in emerging markets, maybe in greenfield commercial reforestation, maybe in newer carbon and biodiversity markets (or maybe even all three). Here the origination process is different – much different. 

In this article, I’m going to share some tips on how you, as an Asset Manager operating in forest investment – targeting less mature markets can improve the efficiency in the deal origination process.  

The Slog is Real – What I’ve Learned from Others 

I have had several conversations lately, touching on various pain-points of early-stage forest investment. “We’re too slow” conceded one Manager, going on to explain that moving a deal through their investment process was painfully dragging out – causing frustration among investors, the deal proponent and the Manager themselves. In so many words, I’m hearing the same thing on repeat. 

Asset Managers with a strategy to invest in earlier stage forest investments, where the impact potential is significant – face many more challenges than their core market TIMO peers. 

Here are some of the real challenges I’ve heard bubbling up in these conversations, largely revolving around foundational investment conditions not being in place: 

• Deal Proponent lacks professional investment acumen. There are a range of challenges here – stemming from lack of track record operating in an investment context. Examples of this could be NGOs transitioning to a for-profit investment model, or a forest business entrepreneur or manager whose experience has been based on technical operations and is not used to meeting the needs of commercial investors. These proponents often come with the mindset that I’ve done this before – I’ve planted and managed a forest, surely, I can scale with the support of investors. What they often lack, however, is the investment management integrity required by investors: transparent and clean financial books, a solid business plan based on realistic and well referenced projections, data integrity, risk management frameworks, policies and procedures covering all aspects of the business, forest management plans, ESG management systems, and so on. They often also lack the language spoken by investors. This alone can drag out the negotiation process, if investors come asking for things that the deal proponent doesn’t even understand. The learning curve takes time for the proponent to climb, and the Asset Manager must exercise patience.  

• There is no structured deal or key terms – it’s just a concept. As mentioned before – the proponent, perhaps experienced in operational forest management – might come with a cashflow model of the capital needed to fulfil their business plan. BUT they lack several other considerations that need to be in place for an investor to consider this an investable opportunity. These often include things like governance – or what will be the decision-making rights of the incoming investors, the deal structure itself – specifics on the equity or debt needs and associated dividends (in revenues, credits or other) or exit options or repayment terms in the case of the later. Land rights may be loose – where the local proponent maybe has some good connections to access the land, but there is nothing in writing legalizing this. A succession plan for change in key people, perhaps a milestones-based incentive system and so on. A deal proponent might have a very good concept in mind and might indeed have a strong track record in operational management – but if they haven’t gone to the lengths to address the needs of the investor, in key terms and proposed deal structure – it could take a lot of back and forth, and a long time to set this up. 

Tips for Asset Managers to Speed-up Origination and the Investment Process 

So, if you have an impact forest investment strategy that is targeting early-stage forest investments, where impact return expectations are much higher than in core timberland markets, and you still seek commercial returns – you probably are looking for a way to originate deals faster. There is no silver bullet – or more asset managers would be doing it, but here are some tips that might help you speed up your origination process. 

1. Origination Checklist – establish an internal checklist that will help you assess the readiness of the project and/or proponent. Including things like business plan in place, feasibility assessment completed, land security, pilot planned or established, and other key markers relevant to your strategy and timeline will help you understand how ready the project and/or proponent are to enter your screening and later due diligence process. 

2. Share expectations with your proponent – Too often is the case that a proponent gets off the second or third call with a prospective investor, and thinks this is going great, its just a matter of time before we sign an agreement, meanwhile the investor is thinking this project is not ready, they are too optimistic about a, b, c, or they haven’t thought through x, y, z, and so on. Everyone’s time is wasted, this disappointing back and forth can waste months of time. Upfront, why not save your time and your proponent’s by sharing your expectations on what is needed for you to consider the opportunity early on in the discussion. Be clear that fulfilling these expectations does not guarantee investment, but at least they will know what you want to see. 

3. Share resources with your proponent – Yes, you want to assess the ability of your proponent to meet your investment requirements – but there is still some support you can give them. If you’re experienced in the geography – maybe you can point them to your corporate lawyer, accountant or local consultants. Let them know the best practice standards you commit to, so that they can develop their documentation in alignment with those. If you have a reporting template that you will require them to use, share it so they can draft their cashflow model according to your standards. Though it might seem like too much hand-holding, it can also save you a lot of frustration and time wasted. 

4. Share your term sheet early – If the deal is really a concept phase, the term sheet you share with a proponent is going to lack content. However, the nuts and bolts of what you want to be included will be in there. Drafting the term sheet early helps the proponent to understand what items need to be addressed before a deal can be negotiated. Don’t only give them the document, walk them through it, so they understand the implications of key terms. The last thing you want is for a proponent to agree in principle, just to speed up the negotiation process, only to back out once it’s time to sign on the dotted line. 

5. Have your various due diligence lined up – If you need to engage external parties to execute various pieces of your DD, get these lined up early. Depending on the context of the deal, there may only be one provider that can execute certain DD, and if they have a busy schedule, you might contribute to the bottleneck more than your proponent. Early in the process, once you understand the ins and outs of the opportunity – prepare the scope of your various DD streams, contact service providers, get an idea of timeline and budget, and get a preliminary plan in place.  

6. Agree on timelines and stick to them – In early discussions with the proponent, agree on the key milestones that need to be achieved by the proponent in order to move the deal forward (and stick to them). If key information cannot be presented to you in a timely manner – this is a red flag that the proponent lacks the professionalism you require. 

7. Originate multiple deals in parallel – There is a risk that you put all your eggs into one deal basket, it takes months for the proponent to get their ducks in a row only to have the deal fall apart. At this point, you’ve invested time and money into a broken deal, and now you might be faced with an investment window that is closing, and you’ve got to start originating and pushing deals through – pronto. This is not a great situation to be in, as poor investment decisions can be made. 

Looking to Save Time and Money on Deal Origination?

If you are an Asset Manager, and find this article resonating with you – You are struggling to fill your pipeline with investment-ready projects for your strategy that seeks both impact and commercial returns, let’s have a conversation. I’d be happy to support you in making your origination and wider investment process more efficient so that you can get your capital to work faster.  

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