Thursday, May 29, 2014

AIMCo Scores Huge on Timberland?

Darcy Henton of the Calgary Herald reports, Investment in Australian woodlots pays off for Alberta:
An Alberta Heritage Savings Trust Fund investment into private woodlots in Australia is paying huge dividends since more than 2,500 square kilometres of land was purchased out of bankruptcy following the 2008 global recession, says AIMCo chief executive Leo de Bever.

De Bever said the $400-million investment in 2011 paid a nearly $100-million return this year after the bankruptcy issues were resolved and the Great Southern Plantations started to produce forestry products.

“This is a perfect example of why it pays to be a long-term investor,” he told an all-party legislature Heritage Fund committee meeting Tuesday.

“We were the only investor that could come in and say: ‘Ok, this is a royal mess . . . but we can provide cash now to the receiver and you will be through with this problem, and we’ll work it out over time.’ In this particular year, that strategy came to fruition.”

Most investors can’t wait two or three years for a return on their investment, but the Heritage Savings Trust Fund is an investment for future generations and doesn’t have to post quarterly profits for clients, he said.

The investment’s staggering 27 per cent return last year helped boost the fund’s overall annual rate of return on investments to 11.6 per cent by the end of December 2013 and pushed its net value to $17.3 billion.

More than $1.4 billion will be transferred to the provincial treasury and $178 million will be retained in the fund for inflation-proofing. The PC government stopped putting non-renewable resource revenue into the fund in 1987.

Alberta Investment Management Corp., investment managers for 26 provincial government funds with assets of more than $70 billion, has also invested recently in the Chinese e-commerce giant Alibaba, the committee heard.

“This was an opportunity where one of the founders of Alibaba needed some liquidity and AIMCo was able to close very quickly on that kind of deal and pick up a very interesting asset that’s now getting ready to IPO (initial public offering) hopefully by the end of this year,” said AIMCo’s executive vice-president David Goerz.

De Bever said in an interview following his presentation that the Australian woodlot investment is “a picture deal” that will likely generate another $50 million to $100 million in profit.

Other deals may produce significant returns, but this one captures people’s imaginations, he said.

“People can visualize what we did,” he added. “In fact, you’re going to see it featured in our annual report. We’re highlighting this transaction as one where we could use our expertise to get a better result.”

The opportunity to purchase 640 properties in a half-dozen Australian states occurred after a government program to induce Australians to invest in timber to address a nationwide shortage of wood fibre went off the rails during the world economic crisis, he explained.

De Bever, who has announced his retirement from AIMCo but has committed to stay until a replacement can be found, said the organization could beat out smaller competitors because it has the internal expertise and resources to handle such a huge deal without having to hire expensive consultants.

The committee heard the province, through AIMCo, owns a piece of virtually every public company on the continent and that 60 to 70 per cent of its assets are foreign.

Committee member David Eggen, an Edmonton-Calder NDP MLA, questioned why more investments aren’t made into Alberta companies to help diversify the economy.

“I just think that in the interests of diversifying our economy, increased investment would be prudent,” Eggen said.

De Bever said AIMCo has been directed to invest in innovative Alberta technologies with an objective to make a 10 to 15 per cent return commercializing that technology.
I've already covered AIMCo's 2013 results here. In aggregate, AIMCo earned 12.5% net in 2013 led by a strong performance in public markets but there were significant gains in private markets too.

AIMCo's annual report isn't available yet, but we see from the article above just how well their investments in timberland have done. I like the article because it demonstrates the advantage of a well governed, well staffed pension fund has over other investment managers.

In particular, Canada's large pension funds have a long investment horizon and the expertise to enter into complex private market transactions that other players, including private equity funds, wouldn't touch. The typical investment horizon of a private equity fund is 4 to 6 years, but with pensions, it's much longer. And forget mutual funds, they invest in public markets and are basically closet indexers whose returns are determined by the vagaries of markets.

And you'll notice that because AIMCo has the internal expertise and resources to handle such a deal, they don't have to pay huge fees to some useless investment consultant peddling garbage or some overpaid hedge fund guru who has become a large, lazy asset gatherer charging outrageous alpha fees for leveraged beta.

In three years, AIMCo earned $100 million on a $400 million investment, and the beauty is that they did so at a fraction of the cost that it would have cost if they farmed it out to an external manager who would have charged them a huge fee and not returned anything close to what they delivered. That is what I call smart investing and this is the type of value-added that deserves to be well compensated.

Now, timberland is a hot asset class. In September 2012, I wrote about how Harvard is betting big on timberland. In June 2011, I told you all the Timberwest transaction involving PSP and bcIMC. Timberland investments have a nice fit in an institutional portfolio but you need expertise and resources to manage the evolving risks of these investments which are often underestimated.

There is another problem, as everyone starts jumping on the timberland bandwagon, pricing pressure will put downward pressure on future returns. But if you have the right team in place to evaluate deals and jump on opportunities like the one in Australia that AIMCo did, you will make excellent risk-adjusted returns.

Finally, I had a chance to chat with Leo de Bever following my recent comment on why he is stepping down. Leo told me he was somewhat disappointed that I quoted the aiCIO article which was "factually wrong" and he told me that he will be focusing his attention on this new fund looking to help innovative Alberta companies commercialize their technology, which is what he always wanted to do.

I wished Leo much success in this new venture and invited him to write guest commentaries on my blog. We also talked about how difficult it is to monetize a blog and asked him to subscribe to my blog.

Below, Bank of America Private Wealth Management's Doug Donnell discusses investing in timberland with Deirdre Bolton on Bloomberg Television's "Money Moves" (December, 2013).