Harvard absolutely positive

By PAM GRAHAM

Harvard, the oldest and most richly endowed university in the United States, is now the second largest forest owner in New Zealand.

It would have been even bigger but was beaten to Fletcher Challenge's estate by a consortium of property investors and pension funds.

Harvard was working with the unsuccessful bidder, The Campbell Group.

Harvard Management, which manages the university's US$21 billion ($31.3 billion) endowment, does not normally talk about investments but Andy Wiltshire, the Boston-based director of the company's timberland investments, agreed to do so because of the scale of its involvement in New Zealand.

Harvard is buying at a time when listed forest companies are less than enthusiastic about the industry.

"Over the last decade, with the exception of a brief period in the early 1990s, the forests have never earned the opportunity cost of the capital invested in them," said Fletcher Challenge Forest chairman Sir Dryden Spring when selling all but one of his company's forests.

Wiltshire takes a more positive view. "We feel optimistic and I think our optimism is well grounded in that we think there can be some improvements in the way things operate and that can flow through to investment returns," he said.


Harvard is not disclosing what it paid for the Central North Island Forest Partnership estate but rumour puts the price slightly below the US$650 million ($970 million) in debt which the previous owners had with banks. The same forest was sold by the Crown in 1996 for $2.2 billion.

Harvard is also not saying if it is interested in the 30,000ha forest estate for sale on the East Coast. Wiltshire knows it well because he is a New Zealander and used to run Rayonier, the developer of those forests, in this country.

If you looked back over five, six or seven very difficult years in New Zealand you would be pessimistic, said Wiltshire. But Harvard was able to look forward.

"I'm not implying we're expecting markets to dramatically rise and bail us out.

"We think it [the investment] can make a reasonable return but one of the pre-requisites for that is the fact that we do not have any debt and we're not having to respond to interest rate hurdles or quarterly market expectations.

"We can look forward over long periods of time and build wealth when that is the most sensible thing to do and harvest when that is the most sensible thing to do."

Although Harvard wanted the Fletcher estate, it does not emphasise the synergies from owning two huge neighbouring estates.

"We did not see it that way at all. We look at every investment opportunity on its own merits and, strange though this may seem, we don't really buy the idea that there are big synergies in these kinds of things.

"We think we will get better results by dealing with things on their own scale and putting sufficient input into each piece of property and making it perform the way it needs to perform."

Harvard is keen on timberland in general because its returns do not correlate with other asset classes and therefore gives diversity to its portfolio. It now has between 9 and 10 per cent of its funds invested in timberland, up from nil eight years ago.

It started in the United States. Wiltshire joined 2 1/2 years ago and said deals in New Zealand had been looked at before he arrived.

Work began on the CNIFP deal about 15 months before it was completed. Harvard bought cutting rights and says it is comfortable with the prospect of the land itself returning to Maori ownership to settle treaty claims.

"It is going to happen that this land is going to be returned to Maori ownership. We see ourselves as stewards of the land in the meantime with the opportunity to make good investment returns from it.

"We actually look forward to the opportunity to rebuild a model for forest investment that can be handed on to the new owners if they choose to take it. But that is entirely their option and opportunity."

When the land is returned to Maori, Harvard has the right to harvest the trees for a maximum of 35 years.

Wiltshire said Timberland deals were not like stocks and bonds. Every property was different and investors had to understand what was for sale.

Harvard was "very happy" to have got CNIFP, now renamed Kaingaroa Timberland.

"We think we paid a fair price for it and we think we have a real opportunity to add value by making a few changes."

There were opportunities in both forest management and marketing of the resource.

"We think we can achieve our goals while at the same time being part of rebuilding this industry to a state that it can be proud of."

Wiltshire said there would be more confidence about investing in manufacturing when supply was stable and forest owners were not supplying their own processing. Harvard has no interest in investing in processing.

"We will be trying to grow good-quality trees and sell them on a competitive basis to whoever is able to manufacture well and market their product well."