15
INVESTMENTSTRUCTURESANDREGULATION
Ordinary retail investors can access the
forestry sector through a number of
different structures. The most common
option is the direct purchase of leasehold
land, harvesting rights or direct tree
ownership. More esoteric structures
include corporate structures including
special purpose vehicles that securitise
underlying assets or instruments of
indebtedness. Investors can also look
to collective investment schemes to
provide diversification across a number of
underlying forestry assets.
DIRECTLY HELD
Directly held forestry investments often
consist of the leasehold or freehold title
to an area of woodland. The investment
opportunities available to the vast
majority of retail investors offer a small
area of woodland, often sold on a per
hectare basis or a set number of trees.
The land may already contain mature
trees or may be recently planted with
saplings. The trees will be managed
on behalf of the investor by a forestry
management company.
Freehold or leasehold land is likely to be
the most secure form of ownership. Due to
the location of a number of investments,
the land title may be held by an
independent trustee, or the investor may
gain beneficial ownership to the land title.
This can be a secure form of ownership
but relies on the trustworthiness of
the counterparty. In many cases the
trustee will be a regulated company or
independent law firm.
Directly held investments can be quite
complex. The freehold title to the land may
be owned by the investment provider or
a local company. This land may be sub-let
to the investor, with the lease including
beneficial ownership of the trees within the
plot. The investor then can sub-let the plot
to a harvest manager. Investments may
be structured in this way to avoid being
classed as collective investment schemes.
Other forms of ownership can include
harvesting rights and tree ownership
rights. Ultimately the investor is gaining
exposure to the price of the timber on
the land, be it through owning the trees
themselves or owning the land they
grow on. The investment is often priced
according to the value of the timber, not
the land. If the timber fails, the land could
be pretty much worthless.
CORPORATE ELEMENT
Investors can gain access to the forestry
sector through investments that include
a corporate element such as bonds, loan
notes and special purpose vehicles. The
investor does not own the underlying
physical asset. Bonds and loan notes are
a form of debt, whilst investors can also
purchase unquoted shares in the company
as an equity investment. Bonds and loan
notes typically pay fixed returns, whereas
shareholders will receive a dividend based
on the performance of the company.
The most common use for a special
purpose vehicle is to hold physical
assets and then issue units (shares
or limited partnership interest) to
investors. Investors hold an interest
in the performance and returns from
the underlying assets, but do not own
the underlying asset themselves. This
structure is often used in order to own
land or trees in foreign countries where
individual ownership may not be possible.
This can also make administrating the
investment much easier, as the land can
be held centrally with units then issued
to a number of investors. The underlying
land will then be managed collectively
by a forestry management company.
The investment can benefit from
economies of scale from being managed
as one large plantation, with all costs
and revenues being paid through the
company. Investors will then receive their
returns from any profits, either through a
dividend or capital gains.
There is a grey area surrounding the
operation, promotion and sale of these
investments as to whether they come under
the FCA’s definition of non-mainstream
pooled investments (NMPI). There are
investments available that are being openly
marketed through unregulated channels
direct to ordinary retail investors. In
March the FCA won a court case against
Capital Alternatives whereby the court
ruled that they were operating a collective
investment scheme without authorisation.
It is unclear what impact this, alongside
the implementation of PS13/03 in January,
will have on the promotion and sale of
investments such as these.
COLLECTIVE INVESTMENT
SCHEME (CIS)
Collective Investment Schemes pool
investors’ funds to purchase underlying
assets. Through pooling money in this way,
the fund can purchase large areas of land
which can be managed collectively by a
forestry management company.
Investors will share in any profits as
and when trees are harvested and sold.
Returns are only paid once all costs, such
as harvesting fees and management
charges, have been paid. This will have an
impact on returns.
CIS include unit trusts, limited partnerships,
investment trusts and open-ended
investment companies (OEICs). They can be
regulated and unregulated (UCIS) and are
operated on both fixed and open-ended
terms. In the USA, vehicles such as Real
Estate Investment Trusts (REIT) or Timber
Investment Management organisations
(TIMOs) help institutional investors to
acquire and manage forestry investments.
Open-ended funds can have unlimited
share capital with shares listed on a
recognised stock exchange such as
the London or Channel Islands Stock
Exchange. This provides liquidity for
investors and these types of funds are
generally considered appropriate for
ordinary retail investors.
Collective Investment Schemes give a
large amount of control to the operator
and forestry management company
for decisions such as when to harvest
trees, plant more trees or buy more
land. This can be an advantage for the
investor, as they benefit from experienced
management and investment risk is spread
