Criterion Africa Partners is a private equity firm focusing on investments in the continent’s forestry sector. It has backed forestry and wood products related businesses in Ghana, Gabon, Uganda, Tanzania, Namibia, South Africa and eSwatini. Jeanette Clark spoke to Jim Heyes, managing director at Criterion, about the areas within the forestry value chain that hold the most potential and some of the challenges to be aware of.
Why is private equity a suitable investment vehicle for forestry on the African continent?
As Criterion Africa Partners, we’ve been fully dedicated to the sector since 2010 when we closed our first US$160 million fund, the Africa Sustainable Forestry Fund. We are now nearing the end of the deployment of our second fund, which closed in 2018.
Private equity is a suitable investment vehicle for forestry on the African continent because it brings three key elements: capital, expertise and access to an established network. Capital is crucial, as it has been in short supply in the sector. However, with the rise of climate change mandates, this has changed in recent years. Criterion Africa Partners also brings expertise to the table, which helps unlock long-term value in the sector. In addition, investees get access to the fund’s network, allowing for technical support, connections, and other key elements needed for success in the challenging forestry sector.
What are some of the main challenges in the forestry sector in Africa?
First of all, land issues are complicated in Africa. There is a common misconception that there is an abundance of available land for forestry, but much of the biologically productive land near credible markets is already used for farming and food security purposes.
Implementation is another challenge, as projects require significant investment and handholding to succeed. Structural issues, such as the high cost of capital, also impede growth in the sector, making it difficult for projects to become cash-flow positive.
How do you overcome land issues specifically?
It is very important, from the start, to establish good relationships with local stakeholders. I would advise that companies are modest about their ambitions until they demonstrate how they can perform on the ground.
Smallholder forestry can overcome land availability challenges and be a valuable investment opportunity. We are looking for ways to make this model investable.
Which sub-sectors or areas in forestry have the most potential?
Traditionally we have three areas that we invest in.
The first is brownfield plantation forestry operations with established market potential, ESG standards, and management teams. We’ve made various investments in this area and have a few others that we are currently considering. We don’t have any special focus in terms of species. The most common species in plantation forestry are eucalyptus, pine and teak, and we have investments in all three
The second is downstream manufacturing operations such as sawmills, and the production of utility poles and plywood. These are exciting ventures because continued growth and demand in the local, regional, and international markets mean that the value chain will continue to develop over time and more opportunities will become available.
Investment in biomass energy to address the continued dependence on fossil fuels is the third area.
We have also started looking at investments that address deforestation caused by charcoal production. Modern technology for charcoal production can reduce the wood input required by two-thirds.
Currently, we are also exploring investments into agriculture on marginal forestry land, to boost the return on investment from those projects.
What investment opportunities would you not consider?
We have been historically negative about greenfield plantation investments in Africa due to past failures. According to our research, there has been US$1.2 billion invested in 30 greenfield plantation projects over the last 30 years, with two-thirds of that capital lost. However, within the context of the current climate change mandates, we are closely monitoring potential projects to see if an investment could make commercial sense in the future.
Do you see the carbon credits market influencing investments in the future?
It is already having a significant impact. We sold a stake in the Gabonese forestry company Compagnie des Bois du Gabon to TotalEnergies in June, and the company indicated its plans to build a portfolio of projects that could generate five million metric tonnes of CO2 equivalent of carbon credits. Not all investors coming into forestry are necessarily seeking carbon credits, but it is probably the biggest driver at the moment.
However, the realistic supply of carbon credits on the continent is nowhere near meeting the demand from these announced projects. Getting five million metric tonnes of CO2 equivalent per year translates into planting an additional 250,000 hectares a year, which is more than all the new plantations established in the past 30 years.
These are extremely ambitious targets and whether or not it is realistic, remains to be seen. There is potential in the market, but it is more difficult than people realise.
How do you choose which companies to invest in?
We seek companies where we can add value. We try to find companies that are on a clear path to cash positivity within our holding period. We also have high ESG standards as we always hope to have a positive environmental impact.
Considering these criteria, the pool of investible assets in Africa is limited, but our experience and our networks give us access to deal flow. At the moment we have more opportunities than we have capital.
Criterion Africa Partners managing director Jim Heyes’s contact information
Contact details are only visible to our Monthly/Annual subscribers. Subscribe here.