Alternatives boutique Gresham House eyes international growth in forestry management
In a year that was characterised by wild market swings and global economic turmoil, alternative asset manager Gresham House forged ahead with ambitious growth plans. Its CEO, Tony Dalwood, says the next step will be to take the group’s forestry platform international.
By the end of 2020, a combination of new institutional clients, complementary acquisitions, and a surge in the UK forestry market drove assets under management to rise by over 40 per cent to GBP3.9 billion.
While Gresham House is currently the UK’s largest commercial forestry asset manager with more than 130,000 hectares of forests under management on behalf of investors, the asset manager’s ambition is not limited to Europe.
“We’re actually looking to establish an international asset management presence in forestry. You're likely to see us go beyond the boundaries of European forestry,” says Dalwood.
A series of key acquisitions have cemented Gresham House’s presence in forestry within the British Isles, purchasing forestry manager Aitchesse, real assets specialists FIM Services, and most recently Ireland-based Appian Asset Management in the last few years.
In December, Gresham House acquired Appian, partly in order to preserve its access to European markets. “We had to cover the risk of access to international capital markets being constrained as a result of Brexit. So, that was one part of the initiative,” says Dalwood.
Forestry as an asset class has started receiving interest from long-term investors such as the UK Church Commissioners investment managers and Danish pension fund Sampension, on account of the sector’s ability to provide stable returns, diversify portfolios, and offer sustainable characteristics.
“If you go back over the last 10 years it's been one of the best if not the best asset class, beating commercial property by a sizeable number,” says Dalwood.
Forestry returned 15.7 per cent annually to investors over the 10 years to the end of 2017, according to figures compiled by Tilhill and the IPD UK forestry index. Over that same period, bonds, equities and UK property all hovered around 6 per cent returns.
Policy developments are a powerful structural driver for the forestry market, with the UK government pledging to support 30,000 hectares of tree planting annually by 2025 as part of its drive to achieve net-zero emissions by 2050.
“Net-zero ambitions are beginning to become a political pressure as people need to publicly state those ambitions. All of that will mean that forestry as an asset class will be part of the discussion,” says Dalwood.
Demand is escalating in the private sector. With climate-related reporting now mandatory for premium-listed companies in the UK as of January 2021, many businesses including Amazon and BP are seeking to offset their carbon footprints by planting trees and forests and purchasing carbon credits. The UN's Principles for Responsible Investment has forecast that corporate demand for carbon removal and offsetting could rise to USD800 billion annually for investors by the middle of the century.
Dalwood says this is opening up new opportunities for asset managers in the forestry space. “The ability to trade carbon credits on the back of forestry and trees, in order to offset carbon emissions from corporates – that already exists and elsewhere in the world. In the UK and Europe, it doesn't exist apart from voluntary schemes. I expect that to be quite a big topic of a conversation as people try to encourage more planting and more offsetting through the use of carbon credits,” says Dalwood.
Carbon credits from forests were first sold in the UK in 2014, but other regions including the EU, New Zealand, South Korea, and parts of the United States have set up systems for trading carbon emissions. The world’s largest national carbon emitter, China, is set to launch its emissions trading scheme in mid-2021.
“We are looking very hard at the carbon credit market and there are two areas of carbon credits in the world that have a respected and regulated framework. One is New Zealand, and the other one is California,” notes Dalwood.
Some investment managers have already entered these nascent markets. One is Hancock Natural Resource Group (HNRG), which manages USD10 billion timberland investments in Australia, Canada, Chile, New Zealand and the United States for institutional investors, and has sold more than 6.1 million metric tonnes of carbon credits since inception in 1985.
However, Gresham House’s UK forestry is commercial woodland, grown for timber rather than for carbon storage. Commercial woodland is planted with Sitka spruce, a species that is well-suited to house-building and grows quickly in the UK, but may not store as much carbon as broadleaf woodland.
The UK forestry market rose to its highest ever traded value at over GBP200 million in 2020, rising by 58 per cent over the year according to a study by John Clegg & Co and forestry management company Tilhill. Prices for woodland property rose in response to low interest rates, uncertain prospects for other asset classes, and the rise of sustainable investing and decarbonisation targets set by the government.
Forestry demand is related to investors' ongoing search for yield, which has seen allocations increase across the whole gamut of alternative assets, including private equity, renewable energy, and real assets.
“Over the last 10 years, increasingly asset classes which were not perceived as institutional in nature are now viewed as either normal or increasingly normal,” says Dalwood.
Institutional allocations toward alternative assets have skyrocketed over this period, and Dalwood says institutions often allocate between “10 and 20 per cent, and some institutions are 30+” toward alternative assets. A recent survey of institutional investors by Commonfund Capital found that allocations towards alternative assets in private markets are set to rise even higher in 2021.
At the same time, sustainable investing continues to explode, and Dalwood says that Gresham House is looking to achieve a “double bottom-line” for clients by delivering both financial and social returns in 2021. Gresham House has investment strategies covering renewable energies, sustainable infrastructure, housing, public and private equity.
“I don't think there will be anything that's non ESG anymore, everything that comes to market now we'll have to go under the microscope,” says Dalwood.
Gresham House is targeting growth across its various asset classes over 2021, including by expanding capabilities in wind and solar renewable energy, battery storage, social housing and sustainable infrastructure funds.
Dalwood is optimistic in his outlook for the year ahead: “I expect financial returns to continue to be robust because of the zero-interest rate environment, and also the political agenda and aspirations will mean that these sustainability aspects of timber will come increasingly to the fore.”