Prime Forestry Group and Precious Woods (A): Pulp fiction or money growing on trees?

By Benoit F. Leleux and Nir Berger

26 pages

November 2008

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Reference: IMD-3-2039

Anna had thought about investing in forests in the past, but she was not an expert in forestry or plantations and neither was her financial advisor, although he did say that it was a “great asset class for the wealthy, but not necessarily for ordinary citizens.” Timberland, as an asset class, had generated average annual returns of 14.5% since 1972, beating the average returns of most stock markets over that period and on par with those generated by the private equity industry. Other claimed benefits included (1) solid returns over the long term; (2) nice diversification of a portfolio and an original risk/return profile; (3) lenient tax treatment of forest-related income; (4) a feel good factor about what you did for planet Earth. Additional factors played in favor of forestry investments, such as the flexibility to decide harvesting times based on market conditions for wood products, the ability to use long-term contracts to hedge against downturns and the multiple uses for the harvested products, from pulp and wood pallets to high quality wood panels. Timber also offered the ability to “warehouse” its value for long periods of time, as well as the ability to time the harvests to market conditions without suffering potential impairment due to technological or market obsolescence, like many other inventoried tangible assets. Finally, the reckless endangerment of natural forests around the world by so-called “wood pirates,” either driven by greed or survival needs for cooking and heating material, called for action. Regular magazine articles and TV shows trumpeted the fact that the “lungs of the earth” in Southeast Asia and in the Amazon were at great risk of being destroyed by the greed of corrupt military officers, illegal loggers and international companies intent on making a quick buck at the cost of destroying fragile ecological systems.

Learning Objective

Discuss timberland as an alternative asset class. Analyze two real investment opportunities offered in 2004. Discuss sustainable investment and the rules of engagement for profitable investment.

Keywords

Forestry, Ecological Management, Tropical Forest, Asset Management, Private Equity

Settings

Latin America, Switzerland
Prime Forestry Group, Precious Woods, Manufacturing, Forestry
2003-2008

Type

Published Sources

Available Languages

English

Related material

Teaching note, Video

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