Timos bring new era in forestry

By PAM GRAHAM

The North Americans buying up forest cutting rights in New Zealand are optimistic that entrepreneurs will invest in processing wood here even as mill closures and receiverships mount.

They take a long-term view and believe that if they provide a regular, and diverse, supply of wood, demand for it will increase.

"We will be very receptive to providing supply to a multitude of users and that is a real positive for entrepreneurs," said Peter Mertz, chief executive officer of Global Forest Partners, a New Hampshire-based timber manager, which oversees about 100,000ha in New Zealand.

GMO Renewable Resources director Ian Jolly agrees that timber management organisations, or Timos, now gaining scale here thanks to the sale of the Fletcher Challenge and Central North Island Forest Partnership estates, will provide an opportunity for innovative processors.

"I think they have been constrained in the past," he said.

GMO manages about 50,000ha in New Zealand for seven funds.

The Timos first arrived more than a decade ago and have been willing buyers of trees this year.

Collectively they now manage about 420,000ha.

They have faith in their business model.

"I think it will be a new era in the sense that the classical capital structure will be different," said Mertz.

The predominant model in forestry has moved from government department to state-owned corporate, to listed corporate and now to foreign private equity investment through Timos.

"They will obviously bring an international focus and discipline to the industry," said Devon McLean, Carter Holt Harvey's forest chief.

"I expect them to fully participate in the industry. The difference is they are not here to process. They are here to sell logs.

"I don't think you would want the whole industry doing that, but that is not what we have got."

The Timos invest with no debt. They can be patient managers and will not cut more trees when prices are low to keep cash flow up, as has happened in the past.

Will these new owners bring stability to the communities ravaged by this boom-bust industry, or are they just here to maximise returns from one rotation?

Every Timo investment is different. Some are already in partnership with Maori and some are more long-term than others.

Harvard University's endowment fund, owner of the second-biggest chunk of New Zealand's forests after buying the former CNIFP estate, has cut its harvest to rebuild the age profile of its forest, increasing wood quality.

Jolly of GMO Renewable Resources pitched the CNIFP deal to Harvard.

It was a single-client investment, a management structure put in by the receiver was continued, and Harvard, unusually for a client, has been prepared to publicly articulate its philosophies.

"We identify what is going to give us the greatest rate of return. If it is by letting the trees get bigger, or investing by more pruning, then we have tended to go in those directions," said Jolly.

Timos will want a return on these investments, implying higher wood prices.

Mertz said the price was a function of a global equation and if it rose too much in New Zealand there would be displacement from imports.

Colin McKenzie, Global Forest Partners' director of portfolio management, said mills had to take what was on offer from corporates and that might have been predominantly one kind of log at any particular time.

"Timos will offer timber at regular intervals to test what the market price is. Supply will be diverse and regular.

"Think of it in value terms," said McKenzie. Mills get value by buying wood more in specification to their needs, because there is less waste. "Then you are adding more value."

Hancock Timber Resources, the biggest Timo of them all, is in the process of making its first investment here, cutting rights to 40,000ha.

Prudential Timber Investments entered via the Fletcher sale and has clients with cutting rights to 65,000ha.

"PruTimber believes that in the long term, biological growth is the most dependable source of investment returns," it said. It was committed to a high level of environmental stewardship and maintained Forest Stewardship Council certification on the estate.

New Zealand trained foresters turn up everywhere in the Timos. Jolly is a New Zealander based in Rotorua where GMO has seven staff. He, and Keith Chandler in Auckland, are on their firm's global investment committee.

Harvard has invested a huge 9 per cent of its endowment in forests and employs New Zealanders in Rotorua and Boston.

Some Timos think returns of 10 to 11 per cent are possible from New Zealand's better forests over the cycle.