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Abstract
Timberland investing has become an important real asset alternative for private equity capital since at least the early 1980’s. Changes in US law brought about in The Employee Retirement Income Securities Act of 1974 (ERISA) provided the catalyst for many private equity funds to diversity their holdings beyond equities and fixed income investments. In conjunction with this, a strategic divestiture of timberland by many integrated forest product companies in the last two decades of the 20th century. These two events provided a watershed event for a new industry of real asset investors, Timber Investment Management Organizations, timberland appraisers and a large cadre of consultants and consulting companies to service the new sector. Despite this new capital and professional attention to the needs of the new timberland owners and managers, there has been little focus on transaction costs involved in the new real asset investment sector. This study was developed to gain more understanding about the extent of transaction costs in timberland investing as well as the effect that those transaction costs are having an impact on this sector. This dissertation was developed in three main sections around timberland transaction costs. The first section is a review of the literature in and around timberland investing. The second section details a survey that was designed in 2019 and distributed in 2020 to timberland investment professionals. The results of the survey showed that transaction costs vary by timberland region and timberland size. Proportional transaction costs were inversely related to size of the timberland estate. Average total transaction costs were estimated by each due diligence function as well as for entire transaction process. And finally, respondents gave us an estimation of transaction costs by timberland region and how it affects their investment decisions. The third section explores a study that was conducted on the two most significant US timberland regions for institutional timberland investment. It contrasts and compares the National Council of Real Estate Investment Fiduciary (NCREIF) commercial timberland real estate index results from both regions with the 2020 timberland survey responses to look for connections and correlations between transaction costs and total returns. The results of the survey show that investors are willing to pay a higher transaction cost for the potential of a higher investment return in timberland investing.