When did Stafford begin making secondary investments in timberland and how has the space evolved since then?
Stafford Timberland was founded in 2002, and raised its first commingled fund vehicle in 2006. We now manage about $1.7 billion via seven commingled global timberfunds and one dedicated co-investment vehicle. We also took over management of the Phaunos Timber Fund, a publicly-traded timberland strategy, in 2014 and are excited about its future potential.
Timberland has matured as an asset class in the last 10 years, and now has high quality managers in the US, South America, Oceania and Europe. The growth of the asset class has driven an increase in the investable universe while also expanding transaction flow as new funds and separate accounts come under management. The restrained US economy and housing market since 2008 has also been a catalyst for increased secondary transaction volume in recent years.
What is your strategy regarding secondaries in timberland and where do you invest geographically?
Stafford’s funds typically have a global strategy with allocations to well-developed institutional timberland investment regions including the US,
Canada, Brazil, Chile, Uruguay, Australia and New Zealand. In addition to these regions, all our funds contain the ability to make a small, typically less than 10 percent, discretionary allocation to emerging markets. Each of our funds have sought to deliver exposure to these key investment regions, while also delivering manager, species, vintage year, and end market diversification, with allocations varying according to the cycle and local market dynamic at the time. Secondaries provide us with important advantages in this regard; an investment in a Stafford timberfund is effectively a ready-made institutional timber allocation.
Why are secondaries in timberland currently attractive?
At a high level, the assets are usually known and Stafford can undertake detailed due diligence on matters relating to strategy, operations, valuation and the proficiency of the manager. This allows us to gauge how well the asset meets the strategic objectives of the fund, what it’s worth and ultimately whether a transaction makes sense.
Since timberland is an illiquid asset class, significant inefficiencies exist, and transactions typically trade at a discount. The strategy also goes a long way towards minimising or eliminating the J-curve associated with most private equity strategies through immediate exposure to the asset class – valuable at all times and especially when new transaction flow is limited and/or pricey.
As a final point, there are few buyers for these interests. Consequently market inefficiencies exist, and most transactions are negotiated as opposed to auction-based. This allows Stafford to leverage its knowledge of managers, funds and timberland investors to deliver secondary transaction flow to its funds, and ultimately its clients, at discounts to net asset value.
How is deal flow currently?
We are seeing a lot of deals. We recently completed two transactions, which both provided access to top-quality US assets and managers at an appealing discount. Our transaction pipeline is quite full at present, and we expect to continue to call down capital in line with or ahead of expectations in relation to our current funding vehicle. Stafford timber funds are typically sized to fully commit capital in a two-to-three-year period, and while our most recent strategy was approximately 20 percent oversubscribed, robust transaction flow in secondaries, co-investments and primary funds mean that we see no exception with this fund.
Does Stafford invest in secondaries in other asset classes?
Yes, the secondary strategy is in fact the tie that binds the broader Stafford Capital Partners organization together – we have a dedicated secondaries team that works across the asset classes that supports this approach. In total, Stafford has $4.5 billion under management and advice across six key investment strategies: timberland, of course, but also agriculture, infrastructure, private equity, sustainable capital and venture capital. We are now actively raising secondaries focused funds in these sectors, including Stafford Infrastructure Secondaries Fund II and Stafford Venture Opportunity Fund V.