Closed-end timber fund PPM against buying a tract myself: the fee stack is eating the whole premium

Sitting with a PPM for a closed-end timberland fund, ten year term with two one-year extensions, and running it against the 400-odd acre direct purchase I've been working on. Trying to decide where the same 600,000 goes.

Fund terms as written: 1.25 percent management fee on committed capital during the investment period, then on invested capital, 20 percent carry over an 8 percent preferred return, catch-up in favor of the manager, plus a 0.5 percent acquisition fee and property management fees paid to an affiliate at market rates. Target net return stated as 7 to 9 percent. The document is careful to say targets aren't guarantees, which I appreciate more than most marketing I read.

My problem is the arithmetic. If timberland delivers something in the high single digits gross, and the long-run index number people cite is around 10.7 percent since 1987 with volatility near 7 percent, then a target of 7 to 9 net after that fee stack implies gross returns at or above the long-run average in a period where several institutional analysts are openly cautious on near-term timber returns and closed-end timber fundraising has been slow. Either the manager expects to beat the index materially, or the net target is optimistic, or the affiliate management fees are more modest than the phrase "market rates" suggests.

What the fund gives me that I can't build myself is geographic and species diversification, a professional forestry team, and access to institutional-quality tracts with mills competing for the wood. What it takes away is my control of harvest timing, which is the specific thing I like about the asset class. Ten years plus extensions, and I can't defer a harvest to suit my own view.

I've asked for the affiliate fee schedule in writing and for the prior fund's realized returns net of everything. Haven't received either. Question is whether that silence is the answer, or normal for a first data request.

2 replies

3tylerbrooks9PassivePRO5

Silence on a fee schedule after you've asked once is normal. Silence after you've asked twice in writing is the answer.

The control point is the one I'd sit with longest. You said the harvest deferral option is why you like timber, and the fund structure takes it and hands it to someone whose fund life ends on a fixed date. A manager facing a wind-up in a soft market has an incentive to cut, or to sell tracts into whatever bid exists. Your direct tract lets you wait ten more years if you feel like it. That isn't a small difference, it's the difference between owning the option and paying someone else to hold it.

1dmitri_v6CapitalPRO6

Structure and documents are what I actually read, so a few clauses I'd find before you decide anything about the fees.

The extension mechanism. Two one-year extensions at whose discretion, GP alone or with advisory committee consent, and what happens if the assets still haven't sold at year twelve. Some documents allow in-kind distribution, some allow a further extension by LP vote, some contemplate a sale to an affiliate or successor vehicle, which is where you want to know the conflicts process.

The fee basis switch. Management fee on committed capital during the investment period and invested capital after is standard, but read the definition of invested capital and whether it steps down on realizations or stays at cost basis. Those two definitions produce very different total fee dollars over twelve years.

Affiliate fees. "Market rates" with no schedule and no cap is the clause I'd push hardest on. Ask whether affiliate compensation is included in or excluded from the preferred return calculation, and whether there's an annual disclosure of affiliate payments to LPs.

And the carry. 20 over an 8 with a catch-up means the GP takes 100 percent of profits above the pref until it's caught up to 20 percent of total. On a mid single digit gross outcome you may pay full management fees and receive under your pref while the GP receives everything except carry. That's the scenario the marketing deck never models.

Whether any of this fits your situation is a question for your own counsel and whoever handles your tax work. But asking for the prior fund's net-of-everything numbers and the affiliate schedule in writing is an ordinary request and a manager who won't answer it is telling you how the next twelve years of information flow will go.

Closed-end timber fund PPM against buying a tract myself: the fee stack is eating the whole premium

2 replies