Investing Globally in Forestland September 2007 WFC Investing Beyond the Frontier Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors, LLC Cambridge, MA tel fax website The Risks and Rewards of Emerging Markets Forestry Investments

Investing Globally in Forestland September 2007 WFC 2 Agenda I.Why invest in emerging markets? II.The case for emerging market forestry investments III.Risks associated with emerging market forestry investments IV.Conclusions: understand the risks before you invest your time or your investors’ money

Investing Globally in Forestland September 2007 WFC 3  In developed economies, structural change— disintegration of the forest industry—is over –Forward looking returns in developed markets arefalling –Correlation of returns may be increasing –The liquidity premium has been priced out  HBU sales have become a larger fraction of total returns, and are priced at acquisition  Underwriting standards have loosened  Capital—debt and equity—continues to flow into developed-country timberland I. Why invest in emerging markets?

Investing Globally in Forestland September 2007 WFC 4 II. The case for emerging markets  2003 World Bank Conference – millions of hectares of forest land – extreme capital scarcity – poorly developed markets  Capital scarcity  better risk-adjusted returns  Critical social/environmental/economic concerns  Risky: to investors, to investment managers

Investing Globally in Forestland September 2007 WFC 5 III. Risks “An emerging market is a market from which you cannot emerge in an emergency” -- J. Leonard, GEF Risks to the investors — Macro: what are the metrics? Sovereign spreads? Academic studies? — Rarely can “own” land. And, if you can, how secure are property rights? — Deal structures are complex — Information is poor; collecting information is expensive — Probably need to integrate downstream to pull through value Risks to the investment manager — Very high transactions costs—IBs won’t travel to three star hotels, let alone to shacks with outdoor plumbing! — High variance of fund returns—more like VC than timberland? — Risks of total loss — Discomfort, disease and death?

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10 IV. Investing beyond the frontier: conclusions Investor desire to move out of developed economies makes a lot of sense — Deteriorating forward-looking returns — Lack of investment opportunities Emerging markets offer higher returns, but… Risks are material and differ in scale and kind from those in developed economies — To the investor — To the investment manager