Ecotrust Forest Management has gone where most other sustainable timber funds fear to tread: the Pacific Northwest.
The Portland-based investment manager has successfully closed a $52 million fund for the purchase and sustainable management of northwest forests with an approach it says can both benefit local communities and the environment and deliver market-rate returns for investors. The intended benefits of the fund’s investments include tribal land repatriation, creation of community forests, protection of drinking water quality, and rural job creation.
“In addition to trees, forests provide a host of ‘ecosystem services’— clean water, flood control, habitat for fish and wildlife, soil creation, carbon storage,” says Bettina von Hagen, CEO of Ecotrust Forest. The fund, she said, “offers investors a way to own and benefit from the productivity of the rich, diverse forests of the Pacific Northwest and Ecotrust Forest’s unique forest management strategy which produces high-quality timber while significantly improving forest health, salmon habitat, carbon storage, recreation, and benefits to local communities.”
Stacked Capital
Still, making the investment math work for such a proposition required a feat of financial engineering and a large dose of persistence. Because the region’s Douglas firs and red cedar forests are so valuable for lumber production, timberland prices have historically been out of reach for most conservation-oriented timber investment management funds, or TIMOs.
We’ve become increasingly interested in…how can we use program-related investments to catalyze innovation and to catalyze new funding sources to come to the table to support conservation.Susan Phinney Silver, David and Lucile Packard Foundation
If there were a handbook for conservation finance, you might find Ecotrust Forest Management highlighted under “stacked capital.” The 18-month fundraising effort ultimately attracted as limited partners philanthropic foundations and public agencies, as well as as a mission-focused family office.
“It’s very rigorous,” says Ecotrust Forest director Amrita Vatsal. “We’re held to the same standards as other real assets fund managers.”
Perhaps the key layer in the Ecotrust Forest is a $10 million, 7.5-year loan at one percent interest from the David and Lucile Packard Foundation. That investment helped bring in more commercially-minded investors.
Packard’s investment “allowed Ecotrust Forest to bring a market-rate timber strategy to market in a tough region to operate that strategy from a conservation perspective,” said one limited partner in the fund, who asked not to be identified. “It’s a powerful argument the general partner can make: ‘We’re bringing these special tools into the market that nobody else has, so we can be competitive,” even with the fund’s conservative harvesting practices and intention to sell primarily to native tribes and public agencies rather than commercial timber interests.
Packard’s investment came in the form of a “program-related investment,” a category under the tax code through which foundations can invest in for-profit ventures that advance a charitable purpose. Packard has a $180 million mandate for such “PRIs” and has invested more than $500 million through such vehicles since the 1980s.
“We’ve become increasingly interested in…how can we use program-related investments to catalyze innovation and to catalyze new funding sources to come to the table to support conservation,” says Susan Phinney Silver, who directs PRI portfolio.
Diversified Revenues
In addition, Ecotrust Forest layered in federal New Market Tax Credits, that give equity investors a credit of approximately 25 cents for every dollar invested into low-income communities. The credits effectively give Ecotrust Forest an additional $10 million to deploy over its 10-year life.
Not a conservation group nor a traditional timberland operator, the Ecotrust Forest Management was formed in 2005 as a for-profit subsidiary of the nonprofit conservation group Ecotrust. Ecotrust Forests actively manages the forests it purchases, following the best practices of the Forest Stewardship Council to carefully harvest trees to enhance forest health and resilience and yield real-time cash flows, while increasing the value of the forest over time. In addition, the fund monetizes conservation values with tools such as the tax credits, conservation easements and carbon offset credits. Ecotrust Forest touts the reduced risks of such diversified revenues versus the cyclical log markets.
The firm then seeks to sell the improved land to long-term, conservation-oriented buyers such as land trusts, state and public agencies, tribal groups, and other conversation groups. In six transactions from the new fund, Ecotrust Forest has already acquired 18,000 acres in the region.
“What we are trying to do with our second fund is to act as a patient, long-term bridging vehicle for high-priority, at-risk forestland,” says Vatsal. “Our goal is to partner with long-term land stewards – land trusts, state and public agencies, tribal groups, conservation groups – to identify and transition into their ownership, the most ecologically valuable forests in the region.”
The new fund builds on the track record of Ecotrust Forest first evergreen fund, launched in 2004, which has invested $30 million into 13,000 acres in Washington and Oregon. That fund recently announced its first exit, selling 3,200 acres of forestland that restored ancestral land to the Coquille Tribe. Ecotrust Forest, which acquired the Sek-wet-se property in 2006, had worked to restore habitat, improve species diversity, and remove invasive plants.
Role of Subsidies
Raising the new fund was slow-going, despite Ecotrust Forest’s combination of environmental conservation and rural economic development in a region that supports both. The Meyer Memorial Trust’s new impact-focused fund, called Invest Oregon, made its first investment into Ecotrust’s new fund. The Seattle-based Russell Foundation jumped in to make an environmentally-affirmative investment as part of its decision to divesting coal-based investments. Both foundations made their investments out of their investment corpus and are anticipating market-rate returns.
One of last major investors to come aboard was the state of Oregon. The Oregon Growth Board, attracted to the Ecotrust Forest’s track record of creating jobs in low-income areas approved a $2.5 million investment, its first natural resource investment.
Now, Ecotrust Forest has a chance to test whether subsidies such as Packard’s low-interest loan are a short-term bridge or a long-term support. The limited partner said with additional experience, Ecotrust Forests may be able to generate cash flows to support market-rate returns for investors without such “enhancements.”
“We don’t view it as an ongoing thing that is needed, though maybe it is,” the investor said. “The immediate impact in this deal is that it gives this team a safety net to execute a strategy in a region where it’s historically been tough to execute that strategy.”
This post was originally published on ImpactAlpha.com
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