. They noted that for any non-traditional structure (such as these open-ended structures), finding the appropriate asset class specialist to consider the fund is an additional hurdle for that fund to overcome in the fundraising process
Particularly large-scale institutional investors noted that they were surprised and encouraged to see that many of the products tested were of appropriate scale for their mandates
Investment Drivers and Constraints
INVESTORS NOTED THREE KEY DRIVERS FOR THEIR INVESTMENT IN SDG #15-ALIGNED PRODUCTS
Noncorrelation with other asset classes
Opportunity for at-scale impact investment strategies in well understood asset clas
Diversity and depth of impact characteristics
investments in SDG# 15 were attractive for their risk profiles, relatively low volatility, and noncorrelation with other asset classes. Among timber and agriculture investment strategies, asset maturation is related to biological growth and not economic cycles, making funds in these sectors attractive from a diversification or portfolio efficiency standpoint
, the flexibility to optimize timing of harvests to maximize return was an attractive feature of these funds and assets. Many of the institutional investors with experience in impact forestry and impact agriculture noted that the noncorrelation is, in fact, more pronounced with impact products because the diverse revenue streams, such as payments for ecosystem services (including carbon markets) and sale of land rights (conservation easements), are not tied to market cycles
Private investors (both family offices and wealth managers) noted that the diversity of social and environmental impacts associated with funds targeting SDG #15 were attractive to their clients
INVESTORS ALSO IDENTIFIED CONSTRAINTS IN FURTHER ALLOCATING TO SDG #15-ALIGNED PRODUCTS
Return expectations relative to other real assets investments strategies
Some structures differ from conventional counterparts
While impact timber investments have historically outperformed their purely commercially-oriented peers and many investors noted attractive returns on a risk-adjusted basis, others surfaced the challenge of comparing timber and agriculture strategies to other real assets investment funds like infrastructure
Often, impact investing funds targeting SDG #15 are structured somewhat differently from their traditional commercial peers. While those differences may be in service of better matching the needs of the asset (i.e. long lock- up period to match biological growth cycles of trees, etc.), the difference in fund structure makes the funds harder to explain to investment committees.
Key Fund Features Explored
Open-Ended vs. Closed-Ended Structure
Open-ended funds better match the tenure of the asset, and allow for better management of social and environmental performance: Most investors noted the desire for fund structures to match the tenure of the underlying assets—the forests and agricultural land. In the case of forestry, biological growth cycles of trees are at minimum 20-30 years. The traditional private equity fund structure, with a term of 10-12 years, therefore, is not an optimal match for forestry assets—particularly if the manager is engaging in afforestation7 or reforestation.
Several investors with long- term liabilities (i.e. pension funds, life insurance companies), and those with flexibility in their portfolios (i.e. family offices, foundations), expressed an interest in finding investment structures that better match the tenure of the asset
Open-ended structures are often difficult to account for in asset allocation
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