Gresham House Forest Growth & Sustainability LP
Gresham House is the UK’s largest commercial forestry manager. It manages more than 138,000 hectares (circa 341,000 acres) of forests – over £2 billion – on behalf of clients, ranging from family offices and unlisted funds to high-net-worth individuals and institutions. Its forests harvest approximately 10% of the UK’s annual softwood supply.
The latest addition to its portfolio of forestry funds is the Gresham House Forest Growth and Sustainability LP (the “Fund” or the “Partnership”), which provides experienced investors with an opportunity to invest in a combination of unplanted land for woodland creation and established forests across the UK. The Partnership seeks to make a positive financial, environmental, and social impact, whilst also providing 100% relief from inheritance tax after two years. Tax rules can change and benefits depend on circumstances.
The Partnership targets a return of 6% per annum from the capital growth of the land and trees, excluding any value from the sale of carbon credits, or any surplus cash distributed through the sale of timber. Targeted annual distributions of c.1% are expected to start approximately five years from the initial investment in new woodland projects. Capital growth and income distributions are not guaranteed. The fund may enhance returns further through the sale of carbon credits generated from the sequestration of carbon on new woodland creation schemes (not guaranteed). The fund is targeting 10,000 hectares (24,700 acres) of new woodland creation, expected to save 1.3 million tonnes of CO2 over 20 years.
The first close in August 2021 raised £127 million. The deadline for the second closing date is 19 November 2021.
Read important documents and apply
- New fund launch seeking to acquire new and existing woodland to grow and harvest timber
- Target fund size of £300 million by December 2023
- Targeting over 10,000 hectares of new woodland creation, potentially saving 1.3 million tonnes of CO2 over 20 years
- Experienced manager with c. £2 billion of forestry assets
- Largely tax-free income and tax-free capital growth
- Should be free of IHT if held for at least two years and on death
- Target IRR of 6%, net of all fees and costs, not guaranteed, not including the sale of carbon credits
- Annual distributions are expected to start approximately five years after the first investment – not guaranteed
- Minimum investment – £100,000
- You can apply online
Investment in UK commercial forestry could 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 or the sale of carbon credits
Please remember, tax rules can and do change and benefits depend on circumstances.
Gresham House Plc is an AIM-quoted asset manager with a market capitalisation of £328 million (October 2021) and £4.7 billion under management.
In May 2018, Gresham House Plc acquired FIM Services Ltd, a specialist forestry manager with a 40-year track record.
As a result, today Gresham House is the UK’s largest commercial forestry manager. It manages £2 billion of forestry assets (30 June 2021) via its wholly owned subsidiary Gresham House Asset Management on behalf of clients, ranging from family offices and unlisted funds to high net worth individuals and institutions.
Its forests, which occupy more than 138,000 hectares (circa 341,000 acres) harvest approximately 10% of the UK’s annual softwood supply, 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 Asset Management manages four other large scale unlisted discretionary forestry funds, all of which are closed to new subscriptions and are fully invested or allocated. All four funds have achieved returns in excess of their targets since inception to 31 December 2020. Past performance is not a guide to the future.
Meet the manager: watch a video interview with Anthony Crosbie Dawson of Gresham House:
This is a new Scottish Limited Partnership launched in 2021, it is seeking to raise £300 million by December 2023.
The Partnership seeks to make a positive financial, environmental, and social impact, whilst also aiming to provide 100% relief from inheritance tax after two years – not guaranteed.
It provides experienced investors with an opportunity to invest in a combination of unplanted land for productive woodland creation and established forests across the UK:
1. Unplanted land for productive woodland creation
Once fully invested, the Partnership expects to have created 10,000 hectares of new woodland, equivalent to 70% of its portfolio by land area, expected to save the equivalent of 1.3 million tonnes of CO2 over 20 years.
The Partnership intends to acquire low-grade agricultural land and add value by transforming it into productive commercial forests. New woodland creation projects carry additional potential upside through the generation of carbon credits in the form of the Woodland Carbon Code’s (“WCC”) accredited Woodland Carbon Units (“WCUs”).
It is expected that 40-50% of the Partnership’s assets will be used to acquire bare land for this purpose.
2. Maturing forests
The Partnership also expects to acquire established, maturing forests, which – once fully invested – should be equivalent to 30% of its portfolio by land area.
The Partnership will target 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. This tree species 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).
It is expected that 50-60% of the Partnership’s assets will be used for this purpose. Maturing forests can be harvested to provide working capital (creation of new woodland is capital intensive) and in time pay a modest annual distribution to Limited Partners – not guaranteed.
The Partnership will seek to generate returns through the production and sale of timber, the generation of carbon credits, and capital growth arising from the development and growth of new and existing forests. The Partnership will also seek added value opportunities, such as renewable energy income streams.
What are Carbon Credits?
Carbon credits put a monetary value on pollution: one unit represents the sequestration of one tonne of CO2.
The government-led WCC (Woodland Carbon Code) is the UK’s voluntary carbon standard for woodland creation projects. It validates and verifies the carbon impact woodland projects may realistically achieve.
When a new woodland creation project is registered, the WCC provides a forecast of the CO2 likely to be sequestered. Once the trees are planted, the WCC will issue Pending Issuance Units (“PIUs”) and, as the tree growth is verified, convert them into WCUs.
WCUs can generally be sold to a third party, such as a corporate looking to meet its “net-zero” or low carbon reduction target, or retired against the registered owner's carbon emissions. The Manager intends to sell WCUs and distribute net realised proceeds to Limited Partners unless a Limited Partner has elected to receive WCUs for retiring.
On subscription to the offer, investors can elect to have their share of WCUs transferred to them and retired against their own carbon emissions.
Whilst the market for carbon credits remains relatively immature, with few WCUs changing hands, Gresham House believes WCUs are currently trading for approximately £22.50 per unit. The Bank of England indicated orderly transition scenarios required to limit temperature rises to 2oC. Gresham House has not included returns from the sale of carbon credits into its target return.
Existing forests are not currently eligible for any form of carbon credit under the WCC.
The fund aims to provide a return predominantly focused on capital growth, with the potential for modest income generation over time.
The target internal rate of return (IRR) is 6%, on a fully invested basis, net of all fees and costs, excluding any PIUs or WCUs held or distributed by the partnership, and any surplus cash distributed through timber harvesting revenues. Returns are not guaranteed.
The target return is based on:
- A return arising from the biological growth of the crop and resulting increase in value of the timber, as well as any marginal increase in value from converting low-grade agricultural land into new woodland
- An annual real increase in the timber price of 2.5%
- Annual inflation of 2.5%
The Manager expects investments in existing forestry assets to generate an IRR of 5-6% based on current market conditions, and new woodland creation projects to generate a 7% IRR to reflect the risk inherent in obtaining planting approval. New woodland creation schemes are also more susceptible to certain risks such as grey squirrel damage, deer browsing, and adverse weather conditions, compared with established forests. These risks need managing by an experienced forestry manager.
The Manager plans to make annual distributions to Limited Partners approximately five years after the initial investment in new woodland projects.
The scale of distributions will depend on the number and value of WCUs generated and sold. The manager intends to harvest and sell enough timber to cover the operating costs of the Partnership’s annual expenditure, with any surplus cash being distributed to Limited Partners. If WCU prices in the UK rise to £89 per unit by 2040, equivalent to a nominal 7.5% per annum, the Manager expects the economic value of such distributions during the Partnership's term to be on average c.1% per annum of the net asset value of the Partnership's assets. If carbon prices do not rise as expected, the Manager may use its discretion to harvest additional timber to pay a 1% distribution to Limited Partners, although this is not guaranteed.
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
This is a new Scottish Limited Partnership. There is no existing investment portfolio.
The Manager is seeking to raise £300 million from Limited Partners by December 2023.
The fund held its first close in August 2021 and successfully raised £127 million.
As at 30 September 2021, the Partnership has committed £135 million to properties that were either completed or under offer. A further £67 million of potential purchases were being appraised by the investment team.
There is no historical performance track record as this is a new fund.
For comparison, the performance for the four large-scale discretionary funds managed by Gresham House since inception is shown in the table below. Please note these mandates are primarily focused on owning and operating existing commercial forestry assets, whereas the Partnership will allocate 40-50% of its capital to new woodland creation.
Gresham House forest funds performance to 30 December 2020
|Fund||Inception date1||IRR||Target IRR||Current NAV|
|Gresham House Forest Fund I LP||2008||12.1%||7.0%||£287.0m|
|FIM Sustainable Timber & Energy LP||2010||12.3%||7.0%||£237.2m|
|FIM Timberland LP||2015||7.4%||7.0%||£132.0m|
Source: Gresham House Asset Management. Data is correct as at 31 December 2020. See below for five-year discrete performance of each fund.
The historical returns of UK Forestry is shown below, based on a starting value of £100,000 in 1995. This is calculated using IPD Forestry index performance from December 1995 to December 2017, when the index discontinued. As there is no suitable replacement index, Gresham House, the UK's leading forestry asset manager, has supplied return data for December 2017 to December 2020 based on independent valuations of its managed portfolios.
UK forestry asset class performance to December 2020
Source: Gresham House, IPD, to 31 December 2020. Please remember, returns are not guaranteed and past performance is not a guide to the future.
Access to your investment
Forestry is a very long-term and illiquid investment.
The term of the fund is 20 years from the final closing date, extendable by five years with consent from Limited Partners representing 75% of Commitments. The deadline for the next close is expected to be on or around 19 November 2021. The Manager may determine to hold more than one Fundraising Period in the same year and more than three Fundraising Periods in the Offering Period. It is expected the fund will continue to raise funds through 2021, 2022, and 2023, with a Final Close no later than 31 December 2023.
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. The charge is reduced to 1.5% + VAT for the purchaser only, if the purchaser is an existing LP. For more details see the Information Memorandum.
Gresham House has an established and successful secondary sale procedure for Partnership Interests. Secondary sales in Gresham House’s Forestry Partnerships during 2019 and 2020 had an average transaction time of 35 days, with a weighted average price premium to NAV of 15%. Past performance is not a guide to the future.
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. It is expected that once a Limited Partnership Interest has been held for two years and the Partnership’s business has been conducting a qualifying business for at least two years, the value of the Limited Partnership Interest should qualify for 100% relief from IHT. ..
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. Please remember, tax rules can and do change and benefits depend on circumstances.
A summary of the main charges and savings 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||0.75%|
More detail on the charges
Forestry appears to have been an attractive real asset to own over the last decade.
Demand for timber has grown significantly over that period and the drivers of that growth suggest this might continue – although this is not guaranteed.
Whether it is demand for wood pellets used in power biomass energy generation, for cardboard to support the surge in ecommerce activity and replace plastic packaging, or for construction timber to build new homes more sustainably, the drivers of demand seem in place for the decade to come, although this is not guaranteed.
2020 was a bumper year for UK Forestry assets. The UK Forest Market Report 2020 highlighted environmental factors as a key driver behind new institutional investors entering the forestry market, with strong demand for new woodland creation schemes. Younger forests also saw strong demand from investors, suggesting growing investor confidence in the longer-term supply/demand dynamics for timber.
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.
Gresham House is a long-established and well-respected asset manager.
The new Partnership may also provide seasoned forestry investors with additional diversification from established forestry assets. Investors gain exposure to the potential growth in the carbon credit market through new woodland creation schemes, which may also appeal to investors with environmental objectives. Forestry has been identified by the government as a key tool within which the UK can meet its carbon reduction targets. 30,000ha of new planting is required annually until 2050 in order to help meet the UK’s net zero target in 2050.
This is a long-term investment with no annual income for over five years.
See five-year performance of Gresham House Forest funds mentioned above
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- Forestry fund
- Target raise
- c.£300 million across three years
- Raised so far
- £127 million
- Minimum investment
- Target IRR
- Closing date
- 19 Nov 2021