1. Investing Globally in Forestland 11- 12 September 2007 WFC Investing Beyond the Frontier Clark S. Binkley, Ph.D. Managing Director International Forestry Investment Advisors, LLC Cambridge, MA +1 617 945 9059 tel +1 617 868 1096 fax cbinkley@ifiallc.com e-mail www.ifiallc.com website The Risks and Rewards of Emerging Markets Forestry Investments

2. Investing Globally in Forestland 11- 12 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

3. Investing Globally in Forestland 11- 12 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?

4. Investing Globally in Forestland 11- 12 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

5. Investing Globally in Forestland 11- 12 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?

6. Investing Globally in Forestland 11- 12 September 2007 WFC 6

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10. 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