One of the more curious nuances of the private markets investment world is that Australian forestry assets are highly sought after by global pension funds and not by Australian pension funds.

Bar the odd deal or large joint venture, Australian superfunds seem, for the most part, unwilling to invest in this corner of their own natural assets.

For London-based Stafford Capital Partners, which also has an office in Sydney, the lack of engagement from the A$3.7 trillion ($2.4 trillion; €2.2 trillion) pension market is not ideal. Still, this has hardly stopped the firm successfully raising capital for its secondaries timberland strategies.

Stafford has traditionally looked to European and US-based investors for capital commitments and more recently, South Korean LPs have shown considerable appetite as well.

Brett Himbury
Brett Himbury, Stafford Capital Partners chairman

The firm is raising the 10th iteration of its Stafford International Timberland Fund, its largest to date given its $1 billion target. It is also raising the $1 billion Carbon Offset Opportunity Fund, which marks something of a departure from its traditional forestry investment thesis, as it will deploy capital into greenfield afforestation projects as well as taking secondaries stakes.

Chairman Brett Himbury spoke to affiliate title Agri Investor about some of the reasons why Australian superfunds have been cold on forestry, the growth trajectory of the timberland asset class, and where Stafford fits in the new landscape of GPs that now features the likes of JPMorgan and TPG.

A poor legacy

The oddity of superfunds having limited exposure to timberland can partly be traced back to a tax incentive from around 20 years ago that went wrong, said Himbury, the negative sentiment from which continues to hold today.

“Forestry was largely considered to be a tax driven strategy and it wasn’t a good outcome for many investors because they went into it to get a 125 percent tax deduction, but the core investment thesis wasn’t anywhere near as strong as it is today,” he says.

“So there is that lingering 20-year-plus history that I think is still hanging around. Now those tax driven strategies have gone and unfortunately, a lot of people’s money went with it.”

“If you do it one year, then you have to notify all your members and they have the right to do whatever they want. If you do it two years in a row, your fund is, in essence, closed”

Brett Himbury

Another stumbling block is the regulatory landscape in Australia, he added, which presents a far stiffer challenge than overcoming negative perceptions.

‘Your Future, Your Super’ is a performance benchmark introduced by the government in 2021 to hold trustees to account for the investment performance they deliver and the fees they charge members.

Himbury said the reform is “well-intentioned” and the knock-on effect for forestry has not been good, due to the difficulties in defining the type of asset it is.

“What asset class does it get put into? Because it doesn’t have its own defined benchmark. Does it go into the property asset class? Does it go into the infrastructure asset class?

“There is some confusion and concern. If, as a trustee, you don’t meet that YFYS benchmark – if you do it one year, then you have to notify all your members and they have the right to do whatever they want. If you do it two years in a row, your fund is, in essence, closed. So the consequences of YFYS are huge.”

Australia’s Treasury initiated a consultation in March that has now closed, which canvassed options for reforming the benchmark test to improve its performance.

Despite the headwinds, Himbury continues to be hopeful that superfunds will eventually get over the line and become big players in timberland. As he sees it, they will have little choice but to carve out a larger segment of their allocations to the asset class sooner or later.

The new infrastructure?

Prior to joining Stafford in 2022, Himbury held non-executive director roles at QIC, Bluestone Home Loans and Angle Finance. It is his 10 years spent at IFM Investors between 2010 to 2020 – a GP for which infrastructure has acted as the backbone – that most aptly informs the way he views forestry.

“I honestly believe forestry could be the infrastructure of tomorrow,” he says, caveating his prediction with the reality that there is a natural capacity constraint in terms of the size of timberland in comparison with infrastructure, meaning that it won’t reach the 10 percent allocation that some superfunds have to the latter.

“The allocation to timber will fundamentally increase because at the moment, it’s virtually zero. Intuitively, people can see that the supply-demand dynamic around the world is very positive for pricing of timber and therefore for returns to investors. There’s a housing crisis around the world and now, we’re seeing commercial buildings being built out of timber as well.”

“I remember going around the world to the UK, parts of Europe and the US to talk about this nascent asset class called infrastructure, and they’d all say, ‘We’ll wait and see’. Wait for what? For it to become more expensive?”

Brett Himbury

Forestry’s capacity to generate carbon credits, which can simultaneously help to support the bottom line as well as positively contributing to an investors net-zero commitments, is another reason for optimism, Himbury says.

The chairman warns: “I am concerned that everybody will get into this at the same time and all that’ll do is push carbon credit pricing up, push the demand for timber and put prices up, which will then push returns down and people will get in too late.

“I saw that in infrastructure 15 years ago. I remember going around the world to the UK, parts of Europe and the US to talk about this nascent asset class called infrastructure, and they’d all say, ‘We’ll wait and see’. Wait for what? For it to become more expensive?

“You’ve got to do your due diligence and make your assessment but at the highest level, do we think the world needs more timber? Absolutely. Do we think that there is not enough supply? Absolutely. In Australia, over the next decade, we need about 400,000ha of forestry plantations to be planted just to deal with our domestic housing demand, let alone the commercial demand.”

‘We’ve got to get our skates on’

One of the signs that the timberland asset class may follow a similar growth trajectory to that enjoyed by infrastructure may have revealed itself in the shape of a market consolidation.

Between 2021 and 2022, JPMorgan acquired forestry asset manager Campbell Global, as New Forests was bought by Mitsui and Nomura and BNP Paribas took a majority stake in Danish timberland and farmland manager International Woodland Company.

Meanwhile, AXA IM Alts became a founding shareholder in carbon offsets project developer The Shared Wood Company, while TPG consolidated businesses such as Bluesource and Element Markets to create a carbon offsets powerhouse that closed one of the biggest forestry deals in US history – this all occurred in the same two-year period.

“We should also be challenging ourselves strategically and asking, what does an extra-large timber business look like?”

Brett Himbury

Have any large financial groups approached Stafford about an acquisition or corporate tie-up, given the firm’s long track record in forestry?

“Prefer not to say. It’s not something that we’re interested in, put it that way,” Himbury says, acknowledging that the increased competition posed by the new entrants is a new reality.

“There’s no apparent leader in timber at the moment. There’s a range of us that are fighting it out for that leadership position. There’s a lot of interest from some really smart, well-resourced, big and powerful fund managers around the world in this sector now, so we’ve got to get our skates on,” he says.

One of the ways the firm is ‘getting its skates on’ is with an expansion of its SIT strategy, which Himbury describes as SIT XL.

“It’s not a new vehicle. It’s an extension of our strategy where we’re looking at some more transformational opportunities around the world.

“If we think that the world actually needs more forests, better managed forests and more capital going to existing forests, we should be prosecuting our existing strategy and we should also be challenging ourselves strategically and asking, what does an extra-large timber business look like?”

Going back to his infrastructure analogy, Himbury adds that scale works in unlisted assets as more capital gives GPs “greater capacity to invest in scalable assets, get better terms, reduce costs and therefore get better enterprise value and better returns through to investors”.

As well as South Korean investors, Japanese firms – not least of all Mitsui and Nomura – have also shown a new-found desire to get into the asset class in a big way.

Asian investor demand is certainly gaining momentum and presents another well-heeled buyer in need of writing hundred-million-dollar checks.

If Australia’s superfunds do leave it too late, Himbury’s warning may well prove to be a good prediction, with the majority getting into the asset class only after valuations have climbed to new heights and returns have moved in the opposite direction.