Investing in the African Forestry Sector: Successes and Challenges - PowerPoint PPT Presentation

Investing in the African Forestry Sector: Successes and Challenges for a Private Equity Platform Jim Heyes, Managing Director jim@criterionafrica.com June 14, 2017

Outline 1. ASFF I Platform 2. Macro Picture: More Forestry Investment is Needed in Africa 3. Challenges in Attracting Institutional Capital to African Forestry 4. What To Do? 2 Proprietary and Confidential

ASFF Platform Forestry Assets 50,000 ha eucalyptus plantations 56,000 ha pine plantations 8,000 ha teak plantations Minority Partner with IWC in 568,000 ha natural forest concessions 7,500 ha of pine and 682,000 ha productive timberland eucalyptus in Uganda (*) in total, all sustainably managed (99% of the area w/ FSC certification) 8,000 ha of teak and sawmill in Tanzania 568,000 ha natural forest concession and industrial assets in Gabon (*) 28,000 ha of eucalyptus and 22,000 ha of eucalyptus, sawmill, and pine in South Africa mining timber mill in Swaziland 50,000 ha of pine, two sawmills and two biomass energy facilities in South Africa (*) ASFF holds a significant minority position in Global Woods and CBG and a large majority position in all the other portfolio assets. Proprietary and Confidential 3

ASFF: 3 rd largest African Private Plantation Owner (SSA Plantation Universe: 2m ha private, 2m ha public and 1m ha small-holders) Largest Private Plantation Owners in Africa by Specie (in Hectares) 250,000 200,000 ASFF I 150,000 100,000 50,000 0 Pine Eucalyptus Wattle Teak Rubber Source: CAP Proprietary Data and Estimates Proprietary and Confidential 4

ASFF: Largest Source of Plantation Wood for Africa (ASFF Harvest of 2 mill. m 3 /year~ 5% of total SSA harvest from plantations) Plantation Harvest for African End-Markets in 2016 (m 3 ) 2,000,000 1.8 mill m 3 , or ~ 90% of ASFF’s 2 mill. m 3 total harvest was for end markets in Africa 1,800,000 1,600,000 1,400,000 Privately Owned Plantations State Owned Plantations 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Source: CAP Proprietary Data and Estimates Proprietary and Confidential 5

ASFF Financial Results ASFF I Portfolio Revenue (in ZAR mill.) ASFF I Portfolio EBITDA (in ZAR mill) 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Acquired revenue (56%) Organic Growth (44%) Acquired EBITDA (10%) Organic Growth (90%) ASFF I Portfolio EBITDA (in USD mill.) ASFF I Portfolio Revenue (in USD mill.) 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Acquired Revenue (88%) Organic Growth (12%) Acquired EBITDA (18%) Organic Growth (82%) 6 Proprietary and Confidential

Development Impact of ASFF I: 2016 Plantations: 110 000 ha Natural Forest: 568 000 ha Doors, window frames, roofing Sustainable Harvest 2.0 m m 3 Logs and wood products sold to ~ 800 SME trusses, lumber, and furniture firms creating jobs downstream Markets Housing Infrastructure Mining Energy Other (Sawlogs) (Poles) (Mining Timber) (Biomass) (Pulp, Panels, Etc.) 720,000 poles, providing 36,000 km of electricity lines Revenue Retained Earnings (5%) Wages and Taxes Paid (17%) ~ 8,900 jobs Salaries supported (19%) Other Expenses, including SMF & ESG (17%) SME Supporting over Procurement 3,000 SME firms CapEx and Investment (10%) (43%) 7 Proprietary and Confidential (*) The total expenditures for CapEx and Sustainable Management for 2016 are estimates

Climate Impact of Forestry Investments Compared with the universe of registered CDM projects (see graph), the projected investment cost relative to the projected average annual carbon sequestration/offset is lower for forestry and biomass steam investments than for the majority of CDM project types. * Sources: CAP projections and CDM Database of all Registered Projects. Proprietary and Confidential 8

Africa Needs More Wood: Stagnant Supply Will Not Meet Increasing Demand Divergent Demand/Supply Sources of Wood Supply in Africa (million m 3 ) Dynamics How will supply cover demand growth of 2.6% p.a.? 2,000 Demand : Strong industrial wood demand (~5% p.a.) in 1,500 addition to steady fuelwood demand (2% p.a.) 1,000 Supply : Natural forest stock 500 fixed and only small growth from plantations (~1% per year) due 0 to lack of investment 1970 1980 1990 2000 2010 2020 2030 2040 2050 Community-based plantations Natural Forests Industrial Plantations (+3% p.a.) represent an untapped Small-Holder Tree Farms Supply Gap (+10% p.a.) opportunity to increase supply Demand This growing supply gap is leading to higher prices, more imports and increased deforestation Source: Food and Agricultural Organization, Indufor, and CAP Estimates 9 Proprietary and Confidential

Growing Demand for Industrial Roundwood Already Exceeds Stagnant Supply Robust Supply-Demand Demand and Supply of Industrial Roundwood in Africa Fundamentals in place (million m3) Demand : Demographics and 250 urbanization lead to strong demand for industrial wood (~5% p.a.), in 200 particular for basic building materials. 150 Supply : The combination of low 100 productivity for existing plantations and limited greenfield investments 50 imply a stagnant supply of IRW from both plantations and the fixed 0 natural forest stock. Trade : An accelerating trade deficit Supply from Plantations Supply from Natural Forests is likely for the foreseeable future. Supply Deficit / Imports Demand Source: Food and Agricultural Organization, Indufor, and CAP Estimates 10 Proprietary and Confidential

Sub-Saharan Africa Increasingly Imports from the Rest of the World Sources of SSA Solid Wood Imports (USD million) % indicates $1,800 proportion of 2015 Imports $1,600 Total Import CAGR = 10.8% $1,400 China: CAGR = 36% 29% Bilateral SSA = 5.5% $1,200 Import ROW = 14.4% $1,000 $800 Rest of the World exc. China: CAGR = 11% 44% $600 $400 South Africa and Swaziland: CAGR = 7% 17% $200 Bilateral within SSA excl. SA & Swazi: CAGR = 4% 10% $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ITC 11 Proprietary and Confidential

Urbanization & Growth are Driving Demand for Building Products SSA Imports of Wood Products: Excluding SSA Bilateral Trade % indicates CAGR since 2001 (USD mm) $1,200 All Other: 8% $1,000 Particleboard: 17% Poles: 21 % $800 Joinery: 24% Total CAGR: 14.4% $600 MDF: 21% $400 Plywood: 20% $200 Lumber: 10% $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ITC 12 Proprietary and Confidential

$50b of Global TIMO Capital… Very Little Coming to Africa Why such disequilibrium? Disequilibrium: 1. Country risk (actual & perceived) Africa's Share of Global Forestry 2. Currency risk 50% 3. Land tenure insecurity 4. Reputation risk 5. Poor infrastructure 21% 6. Limited market intelligence & access 7. Lack of downstream channels 5% 1% 8. Environmental, Social & Governance Industrial Wood Total Wood Underutilized Investments in issues Consumption Consumption Arable Land Forestry Mismatch between wood demand and investment capital 13 13 Proprietary and Confidential

Why Do Institutional Investors Choose Forestry? Key Portfolio Characteristics of the Asset Class Timber Investment Portfolio Characteristics African Forestry Sector? Biological Growth Excellent growth potential… Lots of work to do on genetic improvement History of solid returns with low volatility Unproven returns; higher risk profile leads to higher (see NCREIF) volatility Relatively predictable cash flows Negative cash flows? Low Correlation to Other Asset Classes Downstream integration increases correlation (USD) Inflation Hedge Currency risk Ability to store value on the stump… Downstream integration reduces flexibility; Harvest when markets are strong Some high value products (e.g. poles) can’t wait Attractive Risk-Return Profile with Fixed Income Risk profile is much more equity-like (inefficient markets, Characteristics poor infrastructure, management capacity, stakeholder risk, fire risk, political risk, etc.) 14 Proprietary and Confidential

Where Will African Forestry Fit in Institutional Portfolios? (or, “Why shouldn’t I invest in a Nigerian cement factory?”) Timber Investment Portfolio Characteristics African Forestry Sector? Biological Growth Excellent growth potential… Lots of work to do on genetic improvement History of solid returns with low volatility Unproven returns; (see NCREIF) higher risk profile leads to higher volatility Relatively predictable cash flows Negative cash flows? High discount rates challenging for greenfield forestry Low Correlation to Other Asset Classes Downstream integration increases correlation (USD) Inflation Hedge Currency risk Ability to store value on the stump… Downstream integration reduces flexibility; Harvest when markets are strong Some high value products (e.g. poles) can’t wait Attractive Risk-Return Profile with Fixed Income Risk profile is much more equity-like Characteristics (inefficient markets, poor infrastructure, management capacity, stakeholder risk, fire risk, political risk, etc.) 15 Proprietary and Confidential

Attracting More Capital to African Forestry • Build a track record of success • Exits, Returns, Cashflow • Link Forests to Markets… Downstream Processing • Build Human Capital • Better Market Data… Prove the Macro Picture • Greenfield Plantations May Require Concessional Financing • Do More with Brownfield Assets… Public-Private Partnerships 16 Proprietary and Confidential