|Title||The Lyme Timber Company|
|Size||$800 million through four funds and one separate account|
|Revenue Model||Sale of sustainably harvested timber, conservation easements, mitigation bank credits and carbon offsets|
|Private Investment/Finance Structure||Private equity funds|
|Env/Social Impact||Forest conservation, ecosystem restoration, carbon sequestration, job creation in forest products supply chain|
The Lyme Timber Company, a timberland investment management organisation (TIMO), has been working to conserve threatened working forests in the US and prevent them from being converted for other uses. It manages over $800m in private equity funds and to date has sold conservation easements on over one million acres.
Forests in the U.S. store and filter more than half of the country’s water supply and sequester 15% of all domestic fossil fuel emissions, according to The Nature Conservancy, while also providing millions of jobs.
Since 1976, The Lyme Timber Company, a private timberland investment management organization (TIMO) that focuses on forest-related investments in the U.S. and Canada, has been working to conserve threatened working forests and prevent them from being converted for other uses.
TIMOs acquire and actively manage timberland investment portfolios on behalf of their investors. Lyme Timber does this by raising capital from institutional investors, such as endowments, foundations, insurance companies, pension funds and funds of funds, as well as high-net-worth individuals. This capital is deployed via pooled private equity funds, in which Lyme Timber co-invests and serves as the general partner.
It currently manages four such funds – three timberland investment funds and The Lyme Conservation Opportunities Fund –which have three- to four-year investment periods. Lyme also has one separately managed account for an investment property in New York state, which it manages on behalf of one institutional investor.
Forestlands make up over 85% of Lyme Timber’s assets under management. The company’s current portfolio includes approximately 1.5 million acres of third party certified working forest in New York, Pennsylvania, West Virginia, Tennessee, Alabama, Florida, Michigan and Wisconsin, mostly in hardwood forests that are naturally regenerating and climate resilient.
Lyme generates attractive total returns for its investors in several ways through its private equity funds. It acquires, develops and sells timberland properties that are well-suited for sustainable timber harvesting, as well as forest management businesses, such as sawmills, logging businesses and log distribution yards. Since 2007, it has also invested in stream, wetland and habitat restoration through mitigation banks (see GFI Hive case study), and since 2010, has invested in carbon sequestration, mostly by selling forest carbon offsets generated by its existing timberland investments.
For example, The Lyme Forest Fund V, which launched in 2018 with $300 million in capital commitments, has made five investments in working forests totalling over 900,000 acres. In 2020 alone, The Lyme Forest Fund V sold more than 758,000 metric tons of sustainably harvested wood and sequestered 1.3 million tons of carbon.
One of the Fund’s investments in 2020 was the acquisition of 92,000 acres of timberland next to existing property managed by Lyme in Pennsylvania. The combined property contains hardwood timber, including black cherry, red oak, and hard maple, which is used for sustainable timber production.
The Fund has also made investments in several area businesses: the Emporium Hardwoods and Bradford Forest sawmills and the North Appalachian Log and Forestry log marketing business. Together, its regional businesses employ more than 200 people, with its forest operations supporting hundreds of additional local jobs in forestry, logging, trucking and manufacturing.
Selling conservation easements
Historically, one of Lyme’s core investment strategies has been the sale of working forest conservation easements. This involves working with conservation organisations to identify large working timberlands that will attract conservation funding, buying them, working with government natural resource agencies to assemble funding for easement purchases, and returning a significant amount of the proceeds to investors.
Under these legal agreements, the government natural resource agencies, the easement holders, provide funds to Lyme to permanently protect the working forests it owns from development, conserving water supplies, wildlife habitat, and open space, among other things.
These agreements, which are permanently binding on all future owners of the land, leave the property under private ownership and management and allow Lyme to continue to generate income on the protected land from sustainable timber harvesting, recreational activities, and the sale of ecosystem services.
At the same time, government agencies can: conserve working forests without having to buy the land outright; reduce public land management expenses; and, in some cases, secure permanent access to the protected land for the public. “Whenever this issue comes up on ballot initiatives or referendums, public support for spending funds on conservation is high, so there continues to be state and local funding available for conservation,” says David Hoffer, president and managing director of Lyme Timber.
He adds that federal support has also increased in recent years, since the Land and Water Conservation Fund (which provides federal funding for conservation and had been subject to annual appropriation cycles) became permanently funded in 2020.
However, he points out that assembling and securing public funding for conservation projects still requires a lot of work, and is not always successful. “It takes a number of years to mobilise support, apply for, and secure public funding for conservation easements,” he says. He adds that some states in the U.S. are much more supportive of conservation than others. “Interest in buying conservation easements continues to be robust, but it does tend to be quite regionally specific.”
To date, Lyme has structured conservation easement transactions on over one million acres throughout the U.S. and Canada. In December 2021, for example, it sold a conservation easement on the 13,352 acres of forest owned by one of its funds next to the Lower Suwannee National Wildlife Refuge on Florida’s northeastern coast, known as the Big Bend, to the USDA’s Natural Resources Conservation Service.
This will protect freshwater flows into the Gulf of Mexico, stop forest fragmentation and conserve a key wildlife corridor that is home to numerous species, including Gulf sturgeon, alligator snapping turtles, wood storks, gopher tortoises, Florida black bears and many migratory and resident birds. Half of the property will be used for sustainable timber production, supporting the local economy, while the other half, primarily made up of forested wetlands, will be set aside to grow into mature habitat.
While the most regular, recurring portion of investment returns from its three timberland investment funds tends to come from timber harvesting, Hoffer says that returns from conservation easements can account for higher investment returns than timber harvesting in certain years in a fund’s cycle.
Changing investor appetite
Investor demand for timberlands assets has ebbed and flowed in recent years. “The returns that drew some of the big players like Harvard, Yale and CaLPERS into this asset class a couple of decades ago were spectacular,” says Hoffer. The consequence was increased demand and higher prices for timberland properties, which meant that returns subsequently dropped. “That meant that for a few years, we heard from a lot of our investors that they were taking a step back, and some who said they’d made a strategic decision to stay out of timberland altogether,” he says.
However, he thinks that the pendulum is now swinging back in the other direction, partly because corporations and other entities view timberland as a vehicle to offset their carbon emissions, and more generally, because of demand for this asset class from ESG investors. “In recent years, many investment managers have suddenly branded themselves as ESG investors, and we get a smile out of that because we’ve been doing this for over 45 years,” he says
Hoffer thinks that the next step in the evolution of the TIMO market may be an increasing interest in perpetual or open-ended funds, which could better match the longevity of timberlands as an asset class. “When TIMOs were first established, many were raising closed or fixed-term funds, which are required after 10 or 15 years to smash the cookie jar and sell their assets someone else,” he says. “It’s not clear that is an optimal strategy for anyone. We’re just starting to see more interest in different types of investment vehicles.”
Interview with David Hoffer, president and managing director of Lyme Timber
Photo of US logging: Courtesy of Ruber Hanssen