Post on 13-Jul-2020
transcript
1Proprietary and Confidential, Timberland Investment Resources, LLC
Tom JohnsonTimberland Investment Resources, LLC
Investment Fund Structuring
Investment Fund Structuring
3Proprietary and Confidential, Timberland Investment Resources, LLC
Agenda
01020304050607
Types of Timberland Investors
Investment Considerations
Typical Fee Structures
Types of Investment Structures
Structure Considerations
Key Contract Related Considerations
TIMO Case Study
4Proprietary and Confidential, Timberland Investment Resources, LLC
TYPES OF TIMBERLAND INVESTORS
5Proprietary and Confidential, Timberland Investment Resources, LLC
Vertically Integrated Manufacturers
Traditional model has been virtually abandoned in the U.S.
Still viable in non-U.S. markets (less market depth and concern about access to fiber resource)
Active Individual Investors
Non-Industrial private landowners
Passive Individual Investors
Timberland real estate investment trusts that are publicly traded (Timber REITs, e.g., Weyerhaeuser)
Other minor vehicles that have proven less popular
• Exchange Traded Fund (ETFs, e.g., Cambium and Phaunos)
• Non-traded publicly-registered REITs (e.g., the former Wells Timberland fund, which is now a publicly-traded Timber REIT called CatchMark)
Institutional Investors
Types of Timberland Investors
6Proprietary and Confidential, Timberland Investment Resources, LLC
Direct Institutional Investors (Foreign and U.S.)
Public Pension Funds (e.g., CalPERS)
Private Pension Funds (e.g., General Motors)
Endowments (e.g., Harvard University Endowment)
Foundations (e.g., The Gates Foundation)
Taft -Hartley Plans (e.g., Sheet Metal Workers National Pension Fund)
Insurance Companies (e.g., general reserve account assets)
Indirect Institutional Investors
Fund-of-Funds
Types of Institutional Timberland Investors
7Proprietary and Confidential, Timberland Investment Resources, LLC
INVESTMENT CONSIDERATIONS
8Proprietary and Confidential, Timberland Investment Resources, LLC
Institutional Investor - Investment ConsiderationsInvestment Objectives
ReturnRiskDiversificationInflation ProtectionCash Flow
ApproachAllocation driven
• By region• By species• By specialty (e.g., conservation)
Deal driven• Availability of appropriate deal flow
9Proprietary and Confidential, Timberland Investment Resources, LLC
Institutional Investor - Investment ConsiderationsConstraints and other Considerations
SizeFund
Typically a $2.5 million minimum investmentPotentially more diversification but less controlPossibly higher fees
Separate accountTypically a $50 million minimum investmentMore control, possibly lower fees, potentially less diversification
TaxesTaxable investors: Generally capital gains treatment for timberland and timber sales held more than 12 monthsU.S. tax-exempt investors: Not taxable, unless unrelated business taxable income (UBTI) is triggered (e.g., dealer sales of timberlands or debt financed income). “Super” tax exempt investors (e.g., public pension funds) generally claim an exemption to UBTI.Non-U.S. investors: Income from U.S business operations and, under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), gains from the sale of U.S. real property interests, including timberland, are treated as Effectively Connected Income (“ECI”) which non-U.S investors must report on U.S. tax returns and is taxable at regular U.S. tax rates.
Exceptions include the use of a Corporate Blocker, REIT investments by an investor that is considered a “Qualified Foreign Pension Fund,” and the sale of REIT interest in a “domestically controlled” REIT.
10Proprietary and Confidential, Timberland Investment Resources, LLC
TYPICAL FEE STRUCTURES
11Proprietary and Confidential, Timberland Investment Resources, LLC
Asset Management Fee
Ongoing fee calculated as a percentage of assets under management
• Committed or invested capital, market value, or some combination of these
Carried Interest
Based on a hurdle rate or preferred return (real or nominal)
Manager participates in returns over the hurdle
Incentive to perform and generate realized returns
Less Common Fees
Acquisition fees
Disposition fees
Other - Property Management Fees
Third-party or charged by a captive subsidiary
Other – Pass-through of specified costs and third-party fees
Professional (legal, accounting, etc.).
Institutional Timberland – Typical Fee Structure
12Proprietary and Confidential, Timberland Investment Resources, LLC
TYPES OF INVESTMENT STRUCTURES
13Proprietary and Confidential, Timberland Investment Resources, LLC
Limited Liability Company (LLC) or Limited Partnership (LP)
“Private Equity” Timberland - Structure Options
Generally classified as “partnerships” for U.S. income tax purposes
No entity-level U.S. income tax; instead, the partners are subject to tax on their share of the partnership’s income, whether or not distributed to investors (pass-through)
UBTI issues for tax-exempt investors and FIRPTA-ECI issues for non-US investors – the structure does not alleviate these issues
Appropriate for both separate accounts and commingled funds
Recommended for accounts or funds that involve a co-investment by manager
14Proprietary and Confidential, Timberland Investment Resources, LLC
Private Real Estate Investment Trust (REIT)
“Private Equity” Timberland - Structure Options
Character-through for U.S. tax purposes, similar to an LLC or LP
• Dividends from the REIT are characterized and taxed to shareholders according to the underlying income generating the dividend (ordinary or capital)
Specific Advantages for U.S. Tax Exempt Investors
• For U.S. tax-exempt investors, a REIT blocks UBTI attributable to debt-financed income
Specific Advantages for Foreign Investors
• If U.S. shareholders hold more than 50% of the REIT (“domestically controlled”), foreign shareholders can sell interests and avoid FIRPTA on sale of shares, but capital gain dividends generally subject to FIRPTA withholding and tax
• Even if the REIT is not domestically controlled, a shareholder that is a “qualified foreign pension fund” would generally escape FIRPTA withholding and taxes
More complicated and expensive structure to maintain
Strict rules for REIT qualification and avoidance of penalty taxes (e.g., sales are limited, or TRS must be utilized)
15Proprietary and Confidential, Timberland Investment Resources, LLC
Corporation (C-Corp or LLC taxed as a C-Corp)
“Private Equity” Timberland - Structure Options
C-Corp “blocker” – the investor invests in shares of the corporation which eliminates the need to file tax returns and pay taxes for non-U.S or tax-exempt investors
C-Corp blockers are subject to an U.S. federal entity level tax (corporate tax) at 21%
Debt is often used to lower the taxable income and effective tax rate (because of interest expense)
A TRS also utilizes a C-Corp blocker to generate non-REIT qualifying income (e.g., land sales in excess of the safe harbor)
16Proprietary and Confidential, Timberland Investment Resources, LLC
STRUCTURE CONSIDERATIONS
17Proprietary and Confidential, Timberland Investment Resources, LLC
Cost
Complexity
Tax efficiency
Co-investment• Partnership structure as a way for the manager to obtain
capital gains treatment for carried interest• Lurking political pressure to remove this benefit
U.S. vs. Non-U.S. investors• Frequently, U.S. and foreign investors have different
preferences for investment structure (for example, a foreign investor may prefer to utilize a blocker but a U.S. investor generally will prefer a pass-through)
Taxable vs. Tax-exempt investors• U.S. tax-exempt investors generally have to avoid UBTI
(e.g., dealer property sales), whereas taxable investors don’t have those restraints on income
Structure Considerations
18Proprietary and Confidential, Timberland Investment Resources, LLC
Timberland Investment Holding Structures Simple to Complex Operations Based on Needs
Structure Considerations
19Proprietary and Confidential, Timberland Investment Resources, LLC
KEY CONTRACT RELATED CONSIDERATIONS
20Proprietary and Confidential, Timberland Investment Resources, LLC
Matching structure with investment goals and investor type
Fund vs. Separate Account• Investor size • Liquidity requirements• Term considerations (fixed vs. evergreen)• Tax considerations (one size fits all for a fund)• Up-front legal costs (fund versus separate account)• Fund has a limited “shelf life”
Investment Objective
Specificity versus flexibility/opportunistic
Return objective and benchmark(s)• Absolute benchmark• Relative benchmark
Diversification • Geographic• Species
Leverage (yes or no, any limitations and impact on fees)
Key Management Contract Considerations
21Proprietary and Confidential, Timberland Investment Resources, LLC
Duties of the manager
Fiduciary obligations
Insourced vs. outsourced functions
Key person(s) provision
Fee
Asset management fees
Incentive fees• Hurdle• Carry
Other (e.g., disposition fee)
Alignment of interest
Agency risk - The risk that the management of a company will use its authority to benefit itself rather than the investor
Key Management Contract Considerations
22Proprietary and Confidential, Timberland Investment Resources, LLC
Governance
Advisory board• Generally comprised of significant investors• Deals with conflicts and other duties
Control of major provisions• Term• Manager removal• Other
Term
Fund• Original term• Any extensions
Separate Account• Original term
Key Management Contract Considerations
23Proprietary and Confidential, Timberland Investment Resources, LLC
TIMO CASE STUDY
24Proprietary and Confidential, Timberland Investment Resources, LLC
Case Study
TIMO
Founded in 2004 by 6 principals
Headquartered in Atlanta, Georgia
Has 30 full time employees
6 Managing Directors (Key Functional Areas)
Forest Management• Regional Managers
• Investment Foresters
Finance and Accounting• Client Reporting• Enterprise accounting• Investment analysis and decision support
Client Service and Business Development• Sales, service, portfolio management
Economic Research – Supply, Demand and Price Forecasting
London Office
25Proprietary and Confidential, Timberland Investment Resources, LLC
Case Study
TIMO
Manages 10 separate accounts and 5 funds
Investment strategies focus on different regions depending on the investment objective
Separate accounts have been structured as LPs and LLCs; funds have been LLCs, LPs and private REITs
Currently manages assets in all major U.S. markets and Latin America (i.e., Brazil)
Certification: SFI in the US and FSC in Brazil
Member of National Council of Real Estate Fiduciaries (NCREIF)
• Timberland Subcommittee
Two separate accounts and one fund have gone through a complete “round trip”
• Investment• Management period• Total liquidation
26Proprietary and Confidential, Timberland Investment Resources, LLC
Case Study
TIMO
One domestic separate account client wishes to expand its exposure to the asset class but several “smaller” investors are interested in a fund solution
While the focus in the past has been the return and diversification benefits of the asset class, concern about rising interest rates has directed more attention to timberland’s inflation hedging characteristics
Additionally, the London office has identified interest among European investors in assets that can offer yield (especially given low fixed income returns)
A number of the more environmentally-conscious investors are increasingly focused on the carbon benefits of timberland investing
Alignment of interest has been a concern to many investors and they increasingly want the manager to co-invest to have “skin in the game”
27Proprietary and Confidential, Timberland Investment Resources, LLC
TIMO Case Study
Questions to Consider
• Would you consider offering a fund vehicle?
• What is the advantage of taking this route?
• What are the risks?
• What key considerations would be important given the current investment climate and prevailing marketplace circumstances?
Thank You