Conflicts in timberland
In his Feb. 21 response to my Nov. 15 Other Views commentary "Timberland market not overheated" Richard Smith claims private equity timberland investments are flawed because timberland investment management companies are "incentivized by their fee structures to meet competitive pressures by acquiring and holding land so they can build and maintain assets under management."
He is incorrect.
He ignores my argument that, in addition to annual management fees, many TIMCOs receive an incentive fee when investment accounts are liquidated, which can easily represent the largest payment from a client. When this is true, I do not understand how manager and client interests are "not well-aligned."
Comparing TIMCOs to the commercial real estate collapse in the early 1990s is similarly flawed.
Pension funds began investing in timberland in 1981. Commercial real estate's problems never materialized in timberland partly because it possesses a unique characteristic: forests grow biologically and office buildings do not. Biological growth always occurs in a positive direction, enhancing returns when timber prices rise and mitigating downside returns when prices decline. One thinks Mr. Smith would understand this fundamental concept.
Mr. Smith chastises TIMCOs for "buying land at roughly five times the rate they have been selling it." TIMCOs are buying faster than they are selling because more investors are committing money to timberland. Most investments are in funds with lives averaging 10 years. This means more money should be flowing into timberland than out of it. Part of the timberland returns-generating process involves buying forests and letting them grow in value. This is just a characteristic of the asset class, not a "problem."
Then he scolds TIMCOs that do sell properties, darkly asserting they are "buying forests at aggressive prices and then flipping small tracts to residential and strip mall developers." TIMCOs acquire assets in areas where the highest and best use is timber production. Some small pieces do get sold, usually to private individuals who buy them for investments or recreation. But if a TIMCO's goal is to provide the highest possible return to clients, we should expect occasional tracts to go to residential development or shopping centers. TIMCOs that don't take advantage of such opportunities for premium prices really are abrogating their fiduciary role.
Finally, Mr. Smith ignored my main argument against his "operating company concept" for securitizing timberland. I do not object to securitization, but there are some issues that must be addressed openly. The biggest is the potential for conflict of interest. In some cases, companies securitizing timberland may be trying to access low-cost timber for company-owned converting facilities. This is not in an investor's best interests when it results in below-market prices from timber sales.
Last year Potlatch Corp. abandoned an effort to place timberland assets into a separately traded real estate investment trust, or REIT. Under the proposed structure, Potlatch would have retained voting rights for the newly formed company with the REIT transferring timber to Potlatch under a timber purchase agreement.
The potential conflict of interest is described in the amended S-11 filed by Potlatch with the Securities and Exchange Commission:
"The potential exists for disagreements and conflicts of interest with respect to the negotiation and adjustment of prices under the Timber Purchase Agreement and decisions concerning the designation of timber to be harvested and the timing of harvests. Because Potlatch will initially have voting control of the Company, it may be able to influence the Company's decisions in the foregoing areas.
"Although a committee consisting of members of the Board of Directors not employed by the Company or employed by or otherwise affiliated with Potlatch will periodically review the implementation of the Timber Purchase Agreement, including the procedures used to determine the prices paid by Potlatch, no assurance can be given that the prices payable by Potlatch will be equivalent to fair market value stumpage prices, or that such procedures will be identical to those that would be established in the absence of Potlatch's influence over the Company."
Potlatch Corp. deserves credit for spelling out this issue. Mr. Smith should be so forthcoming.
professor of forestry
Warnell School of Forest Resources
University of Georgia
I am writing to advise you that Alliance Capital Management LP inadvertently failed to break out our convertible assets in our year-end submission to you of assets under management.
As of Dec. 31, Alliance managed $359 million in convertible assets for institutions.
As a result, the May 1 Pensions & Investments special report on managers did not reflect that Alliance would place in the top 25 managers of convertible securities as tabulated on page 86 of that issue.
Eric P. Johnson
executive vice president
Alliance Capital Management Corp.
Private Capital's assets
In reviewing your May 1 issue, I noticed that my new firm, Private Capital Management Inc., was not included in your listing of the largest investment managers ranked by tax-exempt assets.
At our origin in 1987, we only managed money for high-net-worth individual clients.
Over the succeeding years, we have grown substantially in managing both taxable and tax-exempt accounts.
As of March 31, PCM managed $5.2 billion in client assets.
Of this amount, PCM managed $2.37 billion in tax-exempt accounts for 248 clients.
This would rank PCM as the 292nd largest in your listing of firms' institutional tax-exempt assets.
All of our investments are in small-cap to midcap companies.
Gary W. Queen
managing director-client services
Private Capital Management Inc.
First quarter PIPER
Due to a reporting oversight on our part, our aggressive growth microcap equity return was not included in PIPER's first-quarter survey in the May 15 issue.
The returns for our microcap composite are as follows:
* First quarter: 40.28%;
* One year ended March 31: 217.15%; and
* Three years ended March 31, 100.22%.
Scott Sterling Johnston