Is Phaunos a one-off secondaries deal or a sign of things to come?

Stafford’s successful takeover of a $259m timber fund suggests most investors value a guaranteed exit today more than higher promised gains tomorrow.

On the morning of 28 September, Stafford Capital Partners announced the end of a months-long battle to take control of Phaunos Timber Fund, a London-listed vehicle it used to manage. The outcome proved favourable for the secondaries firm: shareholders accounting for 50.65 percent of issued capital had approved its final bid, Stafford said, which values the fund at $259.1 million.

From then on, the pace accelerated. By Tuesday morning, the firm had received acceptances representing nearly 70 percent of total shares. The only condition remaining to proceed with the deal is a blessing from New Zealand’s Overseas Investment Office, which Stafford expects to get within weeks. The offer will remain open for 14 days after then, so acceptances may well climb much further.

The offer’s attraction was not hard to grasp. The fund had entered a formal realisation process after shareholders decided not to continue it in June 2017, but selling the portfolio in chunks to several bidders – and allowing for respective due diligences to complete – was projected to take 14 to 20 months. Legal uncertainty also weighed on Phaunos’s ability to sell Matariki, which accounts for nearly three-quarters of its portfolio, while some assets were simply not covered by the process. In contrast, Stafford stood ready to buy the whole lot in one go in a transaction expected to complete in three to four months.

And yet, it was not a given that shareholders would say yes. While the bottom end of the Phaunos board’s realisation range – $0.54 to $0.60 – was only 3.8 percent above Stafford’s final bid of $0.52, some may have hoped the top end of that bracket was within reach. That would have yielded an upside of more than 15 percent – enough, probably, to convince some investors that Stafford’s offer left money “on the table,” as UK broker Numis Securities put it last week.

But many more voted the other way, suggesting investors placed a higher value on a certain execution at a decent price than higher promised returns in the future. Does this mean more such transactions are on the cards?

Massive, wholesale timber transactions do happen. In May, timber real estate investment trust CatchMark teamed up with BTG Pactual, CoBank, Medley Management and an unnamed Canadian institution to purchase a forestry portfolio managed by Campbell Global – and ultimately owned by the California Public Employees’ Retirement System, in all likelihood – for $1.39 billion. That deal, however, was of a different nature from the Phaunos deal. It involved a US pension looking for a simple exit from a private asset deemed disappointing, not a collection of shareholders in a public fund.

There are reasons to think take-private transactions may not become the rule. First, the fact that Stafford used to manage the fund made things much easier, scrapping the need for a lengthy due diligence process on the firm’s part and providing it with a good knowledge of the portfolio’s strengths and weaker spots. But that configuration is not so frequent in the world of timber. Listed entities tend to be structured as real estate investment trusts, especially in the US, a much larger market. Most private managers, on the other hand, just oversee private funds.

Many investors – short of large pensions, which got their timing wrong – also lack reasons for wanting to get out of listed timber vehicles. Although 2018 has been a little more challenging, timber REIT returns have outperformed both overall forestry and wider REIT benchmarks in recent years, according to a note released this week by Forisk. In contrast, although some investors were keen to give it more time, Phaunos failed to generate decent revenue quickly enough for a majority of them.

Such deals are rare for Stafford as well: other transactions made by SIT VIII, the vehicle used to fund the Phaunos acquisition, are much smaller. The picture may differ in listed agri – a smaller universe, but one that could be ripe for consolidation. While the ag secondaries market is younger than its timber counterparts, one should not discard the possibility of wholesale portfolio buyouts being cooked up.

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