Forestry investors struggle to see wood for the trees
There were early warnings issued about an investment scheme in Irish forestry that has left many shareholders unhappy, writes Fearghal O'Connor
If any of the disgruntled investors of 18 Irish forestry funds sold as a package to Axa recently were reading Twitter last week, they might have looked with some scepticism at a tweet from Taoiseach Leo Varadkar about his dream of new forests in Ireland.
"We want many more trees in Ireland, as part of our plan on climate action," tweeted the Taoiseach. It continued: "440 million is a huge number but it's achievable if all landowners plant just some of their land. We are willing to make it financially worthwhile."
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But a group of more than 12,000 small shareholders in a previous Irish forestry push are still smarting over the final returns they received last month from a scheme that was sold to them back in the 1990s with huge promises regarding the potential returns.
Twenty years on - with almost €5m in capital grants paid in from the Government and the EU - the 4,074-hectare portfolio of Irish forestry planted as part of the scheme is well-established.
But the investors who put in IR£500 (€635) per share have been left with a far smaller windfall than they had originally hoped for, after the forests were sold off early to the huge financial institution.
It has now emerged that some in the investment industry had serious concerns over the promises that were made when the funds were originally established, and that they outlined in detail these concerns to the Government at the time.
The controversy around the long-running investment funds, which kicked off amid a marketing campaign in 1990, began in May.
Veon, the administrator of the funds, agreed to sell the now roughly 20-year-old forests to Axa, and many shareholders have since complained to the company after receiving cheques of around €1,100 per share last week.
Shareholders had expected that their initial IR£500-per-share investment would not mature for another decade but that, at that stage, when the forests were due to be harvested, each share would be worth in excess of €30,000. Veon has argued strongly that the sale was actually the best outcome for shareholders, and that it would lock in an - albeit small - profit at a time when Brexit and a parasite problem with certain trees across central Europe have caused a glut of timber, making the European timber market very uncertain.
But a group of shareholders who control about 300 shares - around 80 individuals in total - are preparing to take legal action over the outcome of their investments. "We've spoken to senior counsel and are awaiting a letter of engagement," said one. It was all supposed to be so different.
Sold as an investment that was ideal to purchase for children or grandchildren, the sales literature at the time had trumpeted returns "conservatively calculated to be in excess of 14.5pc tax-free per annum".
The promoters of the funds were bullish right up until they were offloaded to Axa for at least €55m. In May, days before the early sale of the funds went through, Veon's PR consultancy - Insight Consultants - was eagerly puffing up the impending deal as a bonanza for shareholders.
"This is a very positive development for our 12,400 shareholders, with the portfolio's value and returns serving as a strong endorsement of the Irish forestry and timber sector," a press release said a few weeks later when the deal closed.
But a short time later, this positivity was replaced by the incredulity of shareholders as cheques arrived in the post, and they saw what this bonanza actually looked like.
Yet in some quarters, concerns about the forestry investments started a long time ago. Back in 1998, with the Fianna Fáil/Progressive Democrats government of the day right in the middle of its planning for the Eircom flotation the following year, the mood in government circles was not one particularly amenable to promoting investment caution among small-time shareholders of private-sector assets.
But in May 1998, the Department of Marine and Natural Resources was warned by investment industry experts about the forestry scheme that was then actively seeking investors, according to documents obtained by the Sunday Independent.
A report sent to a senior civil servant in the department about what it described as "the well-publicised scheme" warned that "though we consider the concept of the fund to be a very good one, we feel the estimated return on investment to be overstated".
"Having examined the prospectus of the Third Irish Forestry Fund and its predecessor, the Second Irish Forestry Fund, in detail using our forestry investment appraisal software, it is apparent that the funds' estimate of internal rate of return is excessive. A return of between 6pc and 7pc would be more realistic," said the report.
"In general, a return of 14.6pc for investment in forestry is seen by professional foresters to be extremely high," it said.
In the cover letter of the report, the investment firm requested a meeting to discuss the issue with the senior official. "We feel this is an important issue not only for us but for the forestry industry generally, and though we would like to air our concerns publicly, we are aware of the possible legal implications of doing so," it said.
The report questioned the inclusion of inflation as part of the investment outcome and the investment yield model used by the promoters for the sitka spruce forests, while it also included a detailed land valuation analysis.
"Timber prices used in the calculation are those for years 1994 to 1996," it said. "When average standing timber prices for the years 1990 to 1996 are considered, the choice of the last three may be considered by some to be selective."
In 1993, timber prices were as low as IR£14.63 per metre cubed, compared with over IR£20 per metre cubed in the following three years.
Asked to comment, Veon director Paul Brosnan said the company was unaware of the submission to the department.
"It must be noted that the projections for the Forestry Funds were written more than 20 years ago while the directors' decision made in 2019 was based upon current information and made in the best interests of the preference shareholders considering the information available today. It is also worth noting that all of our shareholders made income tax-free profits on their investments, whilst other investments made at that time did not perform as well," he said in a written statement.
The warnings from the investment firm proved prescient. Each year, investors received letters from the chairman of the funds in May which detailed the value of an individual share.
The rise in value was tortuously slow - nothing like investors might have expected - and in 2012 that valuation suddenly disappeared from the letters altogether.
"Recent experience has demonstrated that the lack of liquidity in the current economic downturn is having a negative effect on the market for semi-mature forest properties, despite the strength of the timber sector generally," said the chairman's letter for the Sixth Irish Forestry Fund. "In prior years, we have provided you with an accounting share value which was not necessarily indicative of market value or reflective of market conditions prevailing at that time.
"Any attempt to second-guess the current market value of a semi-mature portfolio will result in an almost meaningless figure that should not be relied upon.
"The current strength of log prices demonstrates that forestry remains a good long-term investment despite the weak investment climate."
The chairman reassured shareholders with a new measure of performance - the biological growth of the trees - which had been obtained from an independent valuation.
As of May 2012, the sixth fund's forest growth was valued at €2.3m, which, according to the chairman, was "an uplift of forest growth of €208,015 over the 2011 figure, demonstrating the continuing productivity of the company's forests".
But the share price value contained in the chairman's 2006 letter for the sixth fund - at just below €1,100 - was, in hindsight, particularly instructive and likely what investors should have focused on. The true market value in terms of what investors received after the sale to Axa 13 years later would be almost the exact same amount as the 2006 share valuation - far short of what was originally promised.
The first time that the shareholders realised that their 30-year investment was coming to a premature end was when they received an unexpected update from the chairman in May of this year, saying that the funds had been approached by parties interested in acquiring Irish forestry assets.
"The directors are very pleased to announce that we have accepted a strong offer from one of these parties following a competitive process," said the letter. "The strength of this offer is compelling when viewed in the context of emerging economic risks, and it represents a strong, secure return on investment.
"This course of action was also reinforced by an increasing number of shareholder enquiries seeking early encashment of their forestry fund investments. The directors believe that by accepting this robust offer, it will remove future risks which could potentially have had adverse effects on future shareholder returns."
A spokesperson for Veon recently told the Sunday Independent that the decision to sell had been made because of threats to the forestry market that could not have been foreseen when the funds were started.
"Nobody lost any money here. Everybody got their money back. Everybody made a profit on this," he said.
"I acknowledge that there are disappointed people out there. But we do also have people who are contacting us with the opposite point of view and acknowledging that we've got them a positive return, that there were risks in the future and that we've locked in a profit for them."
Nevertheless, if Varadkar's dream of planting millions of new trees across Ireland starts to unfold over the coming decades - and if there is a call for private-sector funding to help plant those seeds - the Taoiseach may find that a few thousand would-be forestry investors will warily keep their hands firmly in their pockets.
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