Par Forestry III LP

The Par Forestry III LP fund is the third fund launched by the collaboration between Par Equity LLP (“Par”), the Edinburgh-based investment management boutique, and Scottish Woodlands Limited (“Scottish Woodlands”), a leading commercial forestry manager. 

Par’s previous LP funds manage £14.7 million in commercial forestry assets (March 2023). Scottish Woodlands manages more than 200,000 hectares of forests, valued at more than £600 million. Its forests supply over 1 million tonnes of timber to UK timber processors annually.

The Par Forestry III LP (the “Fund” or the “Partnership”), provides experienced investors with an opportunity to invest in a portfolio of established commercial forests across the UK, whilst benefiting from the generous tax reliefs associated with commercial forestry – including relief from inheritance tax after two years. Tax rules can change and benefits depend on circumstances.

The Partnership targets a return of 7% per annum from the capital growth of the land and trees, net of all fees. Capital growth and income distributions are not guaranteed. The fund may enhance returns further through the pursuit of other non-forestry opportunities such as leasing the use of its land to renewable energy projects.

The deadline for the next close is 26 April 2024 (5pm, cleared funds).

Highlights

• Young fund seeking to acquire a portfolio of commercial forestry assets
  
• Primarily focused on established plantations
• Eventual target fund size of £15-£21 million, aiming to raise £5-7 million per annum – not guaranteed 
• Scottish Woodlands, a leading forestry management company, appointed as adviser and forestry manager
• 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 7%, net of fees and costs, not guaranteed 
• Minimum investment £50,000
• You can apply online

Tax treatment 

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.

The manager

The Fund is a collaboration between Par and Scottish Woodlands. 

Par – Fund Manager

Par Forestry III LP is managed by Par Fund Management Limited, a subsidiary of Par Equity LLP.

Par Equity LLP is an Edinburgh-based boutique investment management business founded in 2008. It has funded six previous LLP and Limited Partner funds: two investing in commercial forestry, three in residential property, and one in venture capital. 

Its first forestry fund has sold three of its four assets and expects the fund to deliver a 3.5x return to investors – not guaranteed. Past performance is no guide to the future.

Scottish Woodlands – Forestry Advisor and Manager 

Par has appointed its longstanding partner in commercial forestry, Scottish Woodlands, as Forestry Advisor and Manager, with the mandate to assist in acquisition diligence, management and, ultimately, disposal of the Fund’s commercial forestry assets. 

Scottish Woodlands, one of the UK’s leading forestry management companies, has worked closely with Par on the management of its forestry investment activities for almost 10 years. Scottish Woodlands manages 200,000 hectares of woodland across the UK, with an estimated value of £600 million. It sends over 1 million tonnes of timber to UK timber processors annually. Its clients include wealthy individuals, farms and estates, private companies, institutions, local authorities, and government bodies. Scottish Woodland claims to be carrying out 25% of all new private sector woodland creation in the UK at present. 

The business employs more than 200 people and generates an annual turnover of over £100 million. Par believes Scottish Woodlands is uniquely placed to provide effective service and economies of scale to the Fund and its investors. 

Investment Committee

The fund's Investment Committee consists of four individuals: Paul Atkinson, Founding Partner of Par, who has overall responsibility for Par’s forestry investment activities; Dave Robertson, Investment and Business Development Director of Scottish Woodlands, who has over 30 years of experience in the forestry industry and will serve as the Fund’s point of contact at Scottish Woodlands; Tom Croy, Investment Manager at Par, and Pauline Cassie, Investment Relations Director at Par.

Investment strategy

This is a new Scottish Limited Partnership. It is seeking to raise £15-£21 million over three years, with £12.8 million already raised since launch in 2021.

The Partnership aims to purchase forestry land located within the UK, predominantly in Scotland, the North of England, and Wales. The manager will focus on acquiring assets greater than 30 hectares, across a mixture of new planting sites and more established plantations.

The Partnership expects to build a portfolio of plantations that provide a blend of different ages of trees. It is expected that the majority of the acquired plantations will be sold with standing timber, so only a minority of returns is expected to be accrued from felled timber and related products. Any potential returns will therefore be skewed towards capital growth, rather than income distributions. 

The manager will also assess prospective acquisitions for the potential to develop non-forestry opportunities. The UK and Scottish governments have set ambitious targets for renewable energy generation, and there is significant appetite to develop onshore wind and micro-hydro electricity generation projects. If a renewable energy project were to be established on its land, the Partnership could generate rental income. Par’s first fund, Par Forestry Partnership No. 1 LLP, has one such agreement in place where a neighbouring wind farm is seeking to expand onto land owned by the Partnership. If the project succeeds, the Partnership could benefit from a potentially lucrative rental income stream – not guaranteed. 

Other opportunities considered will include rental income derived from the use of the Partnership’s land for mobile phone masts and broadband cable runs. 

The manager is incentivised to seek out non-forestry opportunities through a performance fee of 10% of any distributions in excess of the acquisition cost of non-forestry assets.

New investors will receive the same investments and investment growth as investors who joined the Partnership at outset. To ensure new investors are also subject to the same level of fees costs and expenses (pro rata) they will pay an Equalisation Contribution: please see the offer documents for more detail.

The manager anticipates that a relatively high proportion of commitments will be drawn within 6-12 months of any closing date.

Target return

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 7% net of all fees and costs – not guaranteed.

The target return is informed by the manager’s assessment of:

• A return arising from the biological growth of the crop and resulting increase in value of the timber over time
• Annual inflation
• Anticipated real-term increase in the price of timber 

Current portfolio overview

The manager has so far raised £12.8 m and is targeting £15-21 million over three years. 

It is in the process of scaling up the portfolio, and has acquired 13 assets since April 2022 (October 2023). This equates to a total of 766 hectares, with a balance of new woodland creation sites, establishment forest and mixed-rotation forests. The majority of properties are located in the South of Scotland, with a further diversification in central Scotland and one property in the North of Scotland. 

Par has also developed a significant pipeline of properties across various stages of the growth cycle, with two already set to close in Q4 2023.

Performance

As this is a relatively new fund, it has a limited track record. Between inception and March 2023, the fund invested £10.4 million. That portfolio is currently valued at £11.1 million, or 1.06x cost. Past performance is not a guide to the future. Discrete annual performance for the fund to date is given below. 

For comparison, below we also provide details of the two previous forestry funds Par has established. 

Par forestry funds performance to March 2023

Par Forestry Partnership No 1 LLP

Established in 2011, the LLP acquired four assets: three in Scotland and one in Wales. The fund is now nearing the end of its holding period. It has to date disposed of three assets, the fourth asset has been optioned to a developer for the development of a 27MW wind farm, which may unlock significant additional value for the partnership. To date, the partnership has generated a total return of 3.0x. 

Collectively, Par expects the four assets to achieve a 3.5x money return for investors, not guaranteed. Past performance is not a guide to the future.

Par Forestry Partners L.P.

Established in 2016, the Par Forestry Partners L.P. fund has acquired 12 assets across southern Scotland. As at March 2023, the value of the portfolio has increased from an acquisition cost of £4.6 million to £9.4 million. Past performance is no guide to the future. 

Access to your investment 

Forestry is a very long-term and illiquid investment. 

The fund will have a 20-year investment horizon with the first termination date planned for 31 March 2041.

To provide a degree of liquidity before the termination date, it is intended that limited partners should be able to transfer interests in the fund based on the availability of a willing buyer, following an initial period of three years and yearly thereafter at the point where the partnership’s assets have been valued by a third-party valuation agent. The manager will charge a fee of 3% of any transfer of partnership interests by the transferor, and 2% by the transferee. The total fee payable will be 5%. Please note: the ability to transfer interests is not guaranteed. 

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. 

Charges 

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. 

Our view

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 e-commerce 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.

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 investments could be inheritance tax free – 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.

This is now the third fund offered by the collaboration between Par and Scottish Woodlands. The appointment of Scottish Woodlands as forestry adviser and manager to the fund adds considerable resource and experience, and strengthens the appeal of the offer, in our view. 

The intended size of the fund, which seeks to raise £15-£21 million over three years, may result in a more concentrated portfolio of commercial forestry assets than larger forestry funds on the market. 

Note, this is a long-term and illiquid investment focused on capital growth. 

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.