Investing in Sustainable Timberland. Savoy Baur en Ville, Zurich 7 December EBG Capital. Environmental Investments

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1 Investing in Sustainable Timberland Savoy Baur en Ville, Zurich 7 December 2009 Environmental Investments

2 Table of contents I - II - III - Takeaways for Investors Investment Case Opportunities for Professional Investors 1

3 Takeaways for investors Unique Asset Class Sustainable returns, portfolio diversification, inflation & recession protection, strong fundamental drivers, environmental & social benefits Value Drivers Choice of assets, purchase price, quality of integrated timber management and hence selection of local partners Right Timing Window to acess quality assets and experienced local managers at attractive terms Critical Skills Integrated alternative investments and hands-on timber management, sustainability and emerging markets expertise 2

4 II - Investment Case 3

5 Natural forest (not managed) Grouping timberland assets 4 Natural forest (managed) Diversification Plantation Single-species Plantation Multiple-species Semi-natural forest Semi-natural forest Source: Waka Diversification

6 From plantations and natural forests to timber products Protected Brazil nut tree, Brazil Teak plantation, Costa Rica Araucaria plantation, Australia Selangan batu tree, FSC-certified forest, Malaysia Massaranduba (FSC) fence-posts, Brazil Offcuts from lesser known species (FSC) for hammocks, Brazil Acacia mangium plantation, Borneo Harvesting, FSC-certified forest, Brazil Garden furniture (FSC certified mix of hardwoods), Malaysia 5

7 Unique revenue components Biological growth 65-70% Land value 10% Timber price changes 25-30% Source: Waka, ITTO, Standard & Poors 6

8 Optimizing production: particular non-linear curve for each forest, species, region and site Volume Management Value (Price) Quality Source: Waka 7

9 Low correlation with traditional asset classes and inflation hedge S&P Small Cap % S&P % US Treasury Bills 3% Inflation - US CPI 38% -30% -20% -10% 0% 10% 20% 30% 40% 50% Correlation between NCREIF and respective other indexes Source: Ibbotson & Associates,

10 result in enhanced portfolio efficiency 12% Global Stocks (MSCI) 10% Timber (NCREIF Timber Index) Portfolio including timberland Return Portfolio excluding timberland 8% European Bonds (EFFAS) Real Estate (NCREIF RE Index) European Stocks (DJ Euro Stoxx) 6% 0% 5% 10% 15% 20% 25% Risk (Standard Deviation) Source: IWC,

11 Increasing demand triggered by population growth and rise in income Global timber demand Population 7 Volume (billion m3) Population (billion) Source: FAO, World Bank Development Report 10

12 and serious constraints on the supply side Natural forests Planted forests Protected areas (million Km 2 ) % % 8% Million ha % Source: WHO, USDA, FAO, UNEP World Conservation Monitoring Centre, EBGC 11

13 will necessarily impact prices in the long-term Population growth Land pressure/deforestation Particularly in emerging markets Competition from urbanization, agriculture and biofuels Rising incomes Other alternative uses High correlation with timber and paper consumption Ecosystems services (water, soil regulation, carbon, biodiversity) Carbon Acceptance of forest-related c. capture in major carbon markets Demand Higher prices Supply Input stress Rising transport costs (via oil prices) and water scarcity New forest product/services Environmental concerns Green procurement/buildings, lifestyle, NWFP, ecotourism, etc Rise of protected areas and widespread of certification Bioenergy policy Productivity High demand for forest resources (e.g.cellulosic ethanol, biomass-gas) Motivated by climate change (higher degradation, pests, fires) Source: World Bank, FAO, EBGC 12

14 Timberland an established investment in the US Real assets: shifting from US based sophisticated financial institutions to mainstream investors Timberland: US pension and endowment funds allocate up to 15% of total AuM > 85% of all timberland investment currently within the US Harvard asset allocation and returns 100% Real Assets Other 13% 75% 50% Equities Equities Real Assets Equities 25% 23% Other 25% PE PE 0% Fix Inc PE Fix Inc Fix Inc Source: Harvard Management Company, Annual Report 2008 Real Equities PE Assets Fix 22% Inc 10% 5y Annualized Returns 13

15 III - Opportunities for Professional Investors 14

16 A globally spread but increasingly scarce resource Russia, Brazil, Canada, US and China account for more than half of the total forest area Forest products make up more than 2% of world GDP and global trade in primary wood products > US$ 200 billion 12 million ha of forest are lost every year. Africa, South East Asia and South America provide the best environment for tree growth but account for >75% of total losses Source: FAO. 15

17 New growth markets Current value of forests Future value of forests Forest for ecosystem services and carbon sequestration World cons. in 2030:?? Branches to bioenergy World cons. in 2030: 1075 MTOE Small logs mainly for pulpwood World cons. in 2005: 366 ml ton Small logs mainly for pulpwood World cons. in 2030: 746 ml ton Logs for sawn wood World cons. in 2005: 660 ml ton Logs for sawn wood World cons. in 2030: 1115 ml ton Source: FAO, State of World Forests 2009, EBGC 16

18 Along the timber value chain, upstream and select adjacent downstream operations appear most attractive Forests Primary Market Secondary Market Dist./Consumers Value Chain Analysis Current New Future Roundwood and wood chips Forest residues and low value timber Forest related / ecosystems services Carbon sequestration Sawmills Mouldings Pallet mills Pulp mills Forest biorefinary focus Wood products mills Paper mills Wood and paper products Transport fuels and electricity Oils/organic extracts for pharma/cosmetic ind. Biodiversity/green credits Carbon credits Investment Feautues Min Volatility and exposure to markets Max Higher Barriers to entry Lower Tailored Risk management Standard 17

19 Window of opportunity to get access to attractively priced assets and experienced local managers Limited amount of investable timberland assets and experienced investment managers Recent financial crisis led to a decline in prices for timber and to a lesser extent timberland assets 350 Cameroon Logs Price (African Mahogany) 250 Malaysian Logs Price (Selangan Batu) 150 Malaysian Logs Price (Meranti) Sep 09 FOB prices in constant 1990 US$ per cubic meter Source: ITTO Brazil Sawnwood Price (Jatoba) 18

20 Mitigation of risks Potential risks: -Price Geographic and manager diversification Species and end markets diversification -Political / Regulatory -Financial -Operations Selection of tested operational models and best-in-class local partners Robust due diligence process and monitoring Flexible harvesting and possibly hedging instruments -Diseases -Climate -Reputational Best practice operations Insurance products 19

21 Diversification and attractive niche markets help mitigate volatility and create value for investors Species Type c) Market Market Size a) b) Gross a) Prices b) Size Returns Gross Returns mln m 3 US$ / m NRR (%) d) Avg Avg Volatility c) d) Eucalyptus - Brazil Softwood - Planted 250 CAGR: 0,3% % 2,68 50 Teak - Myanmar Hardwood "Commodity" - Planted and Natural 2500 CAGR: 3,9% % 2, Ipé - Brazil Hardwood "Premium" - Natural CAGR: 4,0% % 2,09 Source: Waka, ITTO, FAO a) a) Calculation based on estimated global hectares and density b) b) Prices and trend line c) c) Indicative figures: Volume growth x wood price / land value (based on current explorations in Central & South America and South East Asia) d) d) Planted Forest, Semi Natural and Natural Forest price volatility against regression line 20

22 A broad perspective, market insight and rigorous execution can create value for investors Value Drivers Macro trends, new revenue streams (bionergy, eco services), assets now at discount Acess to attractive niches and assets, global and broad diversification, sustainability Timberland investment features as an asset class 9%* for new revenue streams for timing factor for reinforced macro trend for unique strategy for SRI factor Returns for management quality First downstream operati. Biological (core natural return) Land appreciation Historical Timberland Investments Current Timberland Investments * NCREIF last 10 years, proxy for historical return of average timber manager in US Our Investment Strategy 21

23 Integration of skills, expertise, networks and passion is key Research & Analysis Investment- Strategie Due Diligence Manager- Selection / Investment Decision Monitoring/ Reporting Alternative assets management Sustainability Forest management Emerging markets Customized solutions for clients Funds Managed Accounts Co-Investments Direct Investments / Advisory 22

24 Thank you Unique Asset Class Sustainable returns, portfolio diversification, inflation & recession protection, strong fundamental drivers, environmental & social benefits Value Drivers Choice of assets, purchase price, quality of integrated timber management and hence selection of local partners Right Timing Window to acess quality assets and experienced local managers at attractive terms Critical Skills Integrated alternative investments and hands-on timber management, sustainability and emerging markets expertise 23

25 Contacts Environmental Investments Ralph Kretschmer Dr. Reinhold Glauner AG Telephone: WaKa - Forest Investment Services AG Telephone: r.glauner@waka-fis.ch 24

26 Disclaimer This document was produced by and is for information purposes only. It is not intended as investment advice and under no circumstances is it to be used or considered as an offer to sell, or a solicitation of an offer to buy, any security or a recommendation to buy or sell any security. makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and shall not have any liability for the information contained in, or any omissions from, this document. Neither this document nor any copy thereof may be sent or taken into the United States, or distributed in the United States or to any U.S. person. 25