UniSuper’s failure to sell its $400 million timberland portfolio five years ago led it to change strategy so the investment could become a long-term hold instead. The success of that strategy has convinced the fund to invest a further $200 million into the portfolio.
Originally the fund wanted to completely sell the portfolio to free up capacity for illiquid investments, particularly as it had an extensive private equity portfolio (approximately $2.5 billion) and was bidding on the Port of Brisbane.
“The timber assets were considered as the best target to free up capacity based on a number of factors including fee arrangements, governance issues, OH&S [occupational health and safety] risk and the poor performance of the sector at that stage,” said Kent Robbins, head of property and private markets at UniSuper.
The fund had received “attractive offers” on two of its three timber assets, but its preferred purchaser was not willing to acquire the third, based on structural issues.
By the time the issue was rectified the fund had been out-bid on the Port of Brisbane and had also made significant inroads into its private equity sell down.
“As such, our motivation to sell had reduced, and based on our experience dealing with Hancock [the fund’s one manager in charge of timberland] we decided that we could work towards modernising and improving the structure of the investments to re-engineer them to become long-term holds,” Robbins said.
“A bit of luck and a lot of work and we now hold strongly performing assets with sustainable attractive income yields that provide genuine diversification benefits for our members.”
The ongoing investment into timberland has a current yield of approximately 7 per cent with a forecast internal rate of return of more than 11 per cent. In addition, the existing exposure to the asset has generated a return of 12 per cent per annum over the past five years.
Robbins put the “overarching success” down to one concept; partnership.
“We really did take a view that we are partners with our manager, partners with our nominee directors. It wasn’t simply acceptable for us to say we want better outcomes to OH&S, we had to be part of the solution.”
OH&S was one of the biggest concerns, as timberland has been an industry where if something goes wrong it can be catastrophic – but the fund refused to accept it had to be that way.
UniSuper used its position as a large super fund to gain access and learn from some of the best firms in Australia, in particular how mining businesses had improved outcomes.
“It really did involve UniSuper being willing to participate and being willing to provide resources and insights,” Robbins said, adding that the board and the manager, Hancock, have made huge inroads into improving the OH&S outcomes.
The theme of partnership ran internally as well, with the ESG team being “instrumental” in helping Robbins’ three-person infrastructure team get better outcomes in timberland.
“Other teams were involved to have an overall view, absolutely. Even to the extent of the property guys’ involvement around the residential market, because that obviously has a bearing on timber sale.”
“We have our weekly meetings and things like this are internally discussed amongst the full 40-odd people in the investment team. There are no shrinking violets; if someone has an input they speak freely about whether they can help in that process,” Robbins said.
According to Robbins, another crucial aspect for the strategy’s success was giving time to the manager.
“You can’t just give the manager a day here and a day there and then lose traction because we are too busy doing other things. If the manager had suggestions, be it on the fee arrangements or the board governance, we had to respond quickly so momentum was kept.”
Kent Robbins will be presenting at the Private Assets Conference on March 2 at the Crown Towers, Melbourne. To register click here.