Twelve private pension funds in Argentina committed a total of $21.4 million to UBS Brinson Inc.'s first timber fund exclusively for Argentinian pension investors.
The fund, which just closed, will make timber investments only in Argentina, said Michael Rivard, executive director of UBS Brinson Resource Investments, New Lebanon, N.H.
UBS began developing the Argentinian fund in 1996, once pension executives there expressed interest in investing in timber. The Argentine pension system had been privatized in 1994, and for the first time the pension funds were eligible to invest in alternatives, said Marilyn Foglia, a director at UBS Brinson responsible for business development in Latin America.
But before the pension funds signed on, the firm had to overcome a number of regulatory hurdles.
"First we had to educate Argentinian participants about timber as an asset class. They tend to have a short-term focus, and timber is an investment for the long term. We explained how it's a good investment because of its low correlation with other asset classes and low volatility," said Ms. Foglia.
Argentinians initially were permitted to invest only 0.5% of assets in alternative investments But UBS Brinson worked with the Superintendencia -- which regulates pension fund investments in Argentina -- and got the allocation increased to 1.5%. The private pension system, with $11.5 billion in assets, now has the potential to invest $172 million in alternatives.
There also was a valuation issue. In Argentina, the government requires all pension fund investments be publicly traded, but timber traditionally has been a private investment. UBS Brinson registered with the Argentinian government, got credit ratings for the timber and developed a valuation methodology. It sold the timber through a closed-end fund it created.
But when the subscription phase to the fund began in mid-December, new problems developed, Ms. Foglia said. Brazil devalued its currency, the real, and the Latin American economy was uncertain. Some Latin American bonds were yielding as much as 15%, which made timber a less desirable investment at that point.
"We had to convince investors that despite the high yields bonds were offering, timber was a good inflation hedge, without the volatility of the bonds."
UBS Brinson's Argentinian fund owns 26,750 acres of young and old forest land. Most of the timber is southern pine and eucalyptus, which are indigenous to the region.
When the first fund has been fully invested, probably in two years, UBS Brinson plans to start a second one for the Argentinian pension funds, Mr. Rivard said. He added he also might look for U.S. investors for the next fund.
UBS Brinson has $900 million in timber assets, and manages nine other timber funds in which mostly U.S. pension funds are the investors.