Gresham House Forest Fund I LP “C” Partnership Shares
This is an opportunity to invest in an established, large and growing portfolio of UK commercial forests. Investors could benefit from attractive and largely tax-free long-term income with a substantial degree of inflation protection and the added benefit of IHT relief.
The portfolio is managed by long-standing forestry manager FIM, now part of leading specialist alternative asset manager Gresham House.
Gresham House currently manages c.£3 billion on behalf of institutions, endowments, family offices and private investors. Of this, £1.4 billion is in forestry assets, making it the UK’s largest commercial forestry manager (30 June 2020)
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- Diversified portfolio of 44 UK forests (38,047 acres) with net asset value of £156.5 million (November 2019)
- Experienced manager with c.£1.3 billion of forestry assets
- Largely tax-free income and tax-free capital growth
- Free of IHT if held for at least two years and on death
- Target annual IRR of 7%, net of all fees and costs, not guaranteed
- Annual distributions from November 2022 – not guaranteed (approximately £59.20 per share, c.2% of current NAV)
- Targets growth in distributions of CPI +1% per annum providing inflation protection, not guaranteed
- Minimum investment £91,830
- You can apply online
- Offer closes on 31 October 2020
The Partnership was established in 2008 by FIM Services Ltd, a specialist forestry asset manager with a 40 years’ track record. In May 2018, Gresham House Plc acquired FIM, in a deal that combined two leading UK forestry and renewable energy investment managers. On 1 January 2019, the Partnership management agreement was novated to Gresham House Asset Management (“GHAM”), part of Gresham House Plc.
Gresham House Plc is an AIM-quoted asset manager with a market capitalisation of £180 million (June 2020). The business has total assets under management of c.£3 billion. Of this, forestry assets account for £1.4 billion (30 June 2020). Gresham House now manages more than 135,000 hectares (circa 334,000 acres) of forests on behalf of clients, ranging from family offices and unlisted funds to high net worth individuals and institutions. Gresham House is the UK’s largest forestry investment manager, a position the manager believes gives it a significant advantage in accessing on and off-market transactions and in deploying capital.
Following the acquisition of FIM Services, Gresham House has retained 90% of the investment team, providing investors with continuity. The investment team now consists of 25 investment professionals, chartered accountants, chartered surveyors, foresters, and administrative staff.
Gresham House Forest Fund I LP is the oldest of the four unlisted discretionary Forestry Funds the team manages.
The principal purpose of the fund is to provide capital growth (from the appreciation of the land and the trees) and income (from the sale of timber) through the ownership of UK commercial timberland, whilst also providing 100% relief from inheritance tax after two years. The investment is a Scottish Limited Partnership.
The Partnership intends to use the proceeds from this raise to acquire further high-quality large-scale (c.£2+ million) freehold commercial forests planted with Sitka Spruce, the UK’s principal coniferous tree species, widely used by the UK’s timber processing industry.
The UK’s maritime climate is ideally suited to this tree species, which offers the added benefit of a comparatively short rotation length (35 to 50 years, compared to the 70 to 100 years required for Scandinavian timber).
The Partnership will focus on high quality assets which can produce 16 or more cubic metres of timber growth per hectare per annum, to benefit from economies of scale, with good access to the public road network and well located for timber markets.
For reference, the UK average for privately owned commercial forests is 12 to 14 cubic metres of timber growth per annum, throughout the crop rotation.
Investment in UK commercial forestry can provide significant tax benefits under current rules.
- Inheritance tax: 100% IHT relief after two years due to Business Property Relief (“BPR”), provided you still hold the investment on death.
- Capital gains tax: no CGT on gain in value of timber. The underlying land is subject to CGT although most of the gain would be in the value of the timber.
- Income tax: no income tax on timber revenue.
Please remember, tax rules can and do change and benefits depend on circumstances.
The fund aims to provide a balance between capital growth and income.
It targets an internal rate of return of 7% per annum, which it has achieved in all but two occasions since launch in 2008. Please remember past performance is not a guide to the future.
The Manager plans to make annual distributions after the first two years, which will be largely tax free.
The fund targets annual dividend growth of 1% over the rate of inflation (CPI). It expects to pay a dividend of £59.20 per share in November 2020, representing a yield of 2.2%, on a net asset value of £2,733.64 per share.
“C” Partnership Shares as issued under this offer will first qualify for the distribution planned to be paid in November 2022. At that time all Limited Partnership Shares will rank pari passu with respect to distribution payments and will have equal entitlement to future distributions thereafter.
Please note distributions are not guaranteed. The level of any planned distribution may vary or may not be paid at all and Limited Partners may not get back the capital invested.
Current portfolio overview
The Partnership owns a geographically diversified high-quality portfolio of 44 commercial forests totalling 15,397 hectares, of which 11,983 is commercial crop area. The portfolio is weighted towards South Scotland, which is the centre of the UK’s timber processing industry, and where the highest prices are usually paid for timber.
Sitka Spruce, the UK’s fastest-growing timber crop, makes up 88% of the portfolio. The average age is 22 years old. 4,591 hectares (38.3% of the total crop) is over 30 years of age and should, therefore, be suitable for harvesting over the next 15 years.
The Partnership has net assets of £156.5 million. There is also an arranged debt facility with Barclays Bank. The current debt balance is £20 million, or 12.8% of NAV. The Limited Partnership agreement limits debt to 20% of net assets. The debt facility has been arranged at 1.85% over six-month LIBOR (0.38% as at 1 June 2020). The manager is using debt at a cost of c. 2.2% to acquire additional forestry assets it expects to be earnings accretive, i.e. yield more than 2.2% – not guaranteed.
There are two elements to the fund performance: potential capital appreciation (appreciation in the value of the trees and the land they are on) and income distributions (income produced by harvesting the trees and selling the timber).
Timber prices have a significant impact on income production.
For the period 01 December 2008 to 30 November 2019, the Partnership has delivered an IRR of 12.18% net of all ongoing and initial fees.
The chart below shows the net asset value and cumulative distributions per share since inception to 30 November 2019, the Partnership’s latest valuation date.
Source: Gresham House, as at 30 November 2019. Past performance is not a guide to the future. The opening NAV used for 01 December 2008 is the weighted average share issue price of a Founder Partnership Share. This includes all initial costs associated with founder share offer. Performance is therefore shown net of all initial and ongoing fees.
With regards to income generation, the Partnership’s harvesting activities are actively managed in response to market conditions.
For instance, in the 2019 financial year, the Partnership harvested 254 hectares of forest or 117,094 tonnes of timber. The management team had budgeted to harvest 201,690 tonnes of timber. However, due to droughts in Europe, timber supply increased in the latter half of 2019 as forests choose to harvested distressed crop, resulting in an increase in supply. The management team elected not to sell its crop at depressed prices and still generated £7.0m of income for the Partnership.
The ability to delay harvesting and generate income in more favourable market conditions is a key advantage of forestry over other crops and real assets, such as arable farms.
For the year to 30 November 2020, the Partnership has budgeted to harvest 403 hectares of forest, amounting to 176,000 tonnes of timber, with the potential of generating £8.7 million in income for the Partnership.
Access to your investment
Forestry is a very long-term and illiquid investment.
The fund has set termination dates (the first on 30 November 2033) where limited partners can vote to wind up or continue the Partnership, upon which, assets will be sold and cash distributed.
To provide a degree of liquidity before the set termination dates, Gresham House may look to arrange share sales where required by matching sellers with buyers. There is a charge of 3% + VAT for both parties. For more details see the Information Memorandum.
Whilst there are no guarantees, Gresham house has facilitated share sales of £5.9 million over the last two years across a number of forestry mandates. On average, sales have taken 34 days. Share sales have typically taken place at a premium to net asset value. In Q1 2020, the sale of 164 shares in the Forestry Fund LP was agreed at an 8.8% premium to net asset value.
Risks – important
This is a very long-term and illiquid investment, only available to Wealth Club clients who have successfully completed an Elective Professional Client Application. It is an unregulated collective investment scheme. Capital is at risk. Returns are not guaranteed.
Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks.
Tax rules can change and benefits depend on circumstances. Eligibility for BPR is assessed at the date of death and will depend on the companies in the portfolio remaining qualifying. Broadly speaking, you will need to have held a BPR qualifying stock for at least two years and still hold it on death to qualify.
A previous Chancellor requested a review of IHT to simplify the tax system. A report was published in July 2019, but this has not yet led to any rule changes and no changes that would impact forestry were proposed. Please remember, tax rules can and do change and benefits depend on circumstances.
A summary of the main charges is shown below. The investment may have additional charges and expenses: please see the provider documents for more details.
|Full initial charge||2%|
|Wealth Club initial saving||—|
|Net initial charge through Wealth Club||2%|
|Annual management charge||0.5%|
|Performance fee||See below|
See example of the total charges over 5 years
Forestry appears to have been an attractive real asset to own over the last decade. The founding Limited Partnership share class has delivered an IRR of 12.18% per annum since it launched in December 2008, inclusive of all ongoing and initial fees – past performance is not a guide to the future.
Demand for timber has grown significantly over that period and the drivers of that growth suggest this might continue – although there are no guarantees.
Whether it is demand for wood pellets used in power biomass energy generation, for cardboard to support the surge in e-commerce activity and replace plastic packaging, or for construction timber used to build new homes more sustainably, the drivers of demand seem in place for the decade to come.
Trees planted today will take at least 30 years to mature. The supply/demand dynamics appear supportive of the asset class.
UK Commercial forestry is highly tax efficient. Income from the sale of timber is largely tax free, any increase in the value of timber is tax free, and after two years, forestry falls outside of your estate for inheritance tax purposes – remember tax rules can change and benefits depend on circumstances.
While returns clearly depend on the price of timber, there are relatively few risks associated with the biological growth and harvesting of the forests which underpin value. Remember, however, forestry is one of the most illiquid investments you can make.
The flexibility available with the timing of harvesting timber which allows the manager more control is a safety mechanism not afforded to many other sectors of crop growing, or other renewable assets.
GHAM is a long-established and well respected asset manager and investing alongside them in a large forestry fund mitigates some of the operational and market risks.
This is a long-term investment with no annual income for over two years.
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Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
- Forestry fund
- Target raise
- £60 million
- Minimum investment
- Target IRR
- Closing date
- 31 Oct 2020