Investing Globally in Forestland 11- 12 September 2007 WFC

Investing Beyond the Frontier

Clark S. Binkley, Ph.D.Managing Director

International Forestry Investment Advisors, LLCCambridge, MA

+1 617 945 9059 tel+1 617 868 1096 fax

cbinkley@ifiallc.com e-mailwww.ifiallc.com website

The Risks and Rewards of Emerging Markets Forestry Investments

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Agenda

I. Why invest in emerging markets?

II. The case for emerging market forestry investments

III. Risks associated with emerging market forestry investments

IV. Conclusions: understand the risks before you invest your time or your investors’ money

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In developed economies, structural change—disintegration of the forest industry—is over

– Forward looking returns in developed markets are falling

– Correlation of returns may be increasing– The liquidity premium has been priced out

HBU sales have become a larger fraction of total returns, and are priced at acquisition

Underwriting standards have loosened

Capital—debt and equity—continues to flow into developed-country timberland

I. Why invest in emerging markets?

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II. The case for emerging markets

2003 World Bank Conference – millions of hectares of forest land – extreme capital scarcity – poorly developed markets

Capital scarcity better risk-adjusted returns

Critical social/environmental/economic concerns

Risky: to investors, to investment managers

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III. Risks

“An emerging market is a market from which you cannot emerge in an emergency” -- J. Leonard, GEF

Risks to the investors— Macro: what are the metrics? Sovereign spreads? Academic

studies?— Rarely can “own” land. And, if you can, how secure are

property rights?— Deal structures are complex— Information is poor; collecting information is expensive— Probably need to integrate downstream to pull through value

Risks to the investment manager— Very high transactions costs—IBs won’t travel to three star

hotels, let alone to shacks with outdoor plumbing!— High variance of fund returns—more like VC than timberland?— Risks of total loss— Discomfort, disease and death?

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IV. Investing beyond the frontier: conclusions

Investor desire to move out of developed economies makes a lot of sense— Deteriorating forward-looking returns— Lack of investment opportunities

Emerging markets offer higher returns, but…

Risks are material and differ in scale and kind from those in developed economies— To the investor— To the investment manager