Forest Finance: Analyst’s Creed

27 12 2012

You are an Analyst, a warrior shrouded in mystery and feared for your ruthlessness with Excel. Your actions can throw Investment Committee meetings into chaos, and your existence will shape forest management during this pivotal moment in history.

[Inspired by the Assassin’s Creed]

Forest finance is the language of managing forest resources as investments.  It addresses three questions.  First, the investment decision considers, “How do we screen and value timberland acquisitions or forest management decisions?”  Second, the financing decision asks, “How do we pay for this investment?”  Third, the exit or sale decision asks, “How and when is the appropriate time – during good markets or bad – to harvest timber or sell the property to maximize profits?”

Investment objectives matter.  Analysts use finance to compare projects and identify those that satisfy the predetermined criteria of clients or managers.  This facilitates the investment decision by screening out those that we can set aside, and those that we should consider further.  For example, a preliminary screen may include geography, deal size, information quality, and basic financial metrics. If the potential investment satisfies the initial screen, then managers can allocate the human and financial resources required to investigate further.

As forest analysts, we make investment recommendations.  It is our responsibility to be transparent and truthful in our assumptions and analysis, and practical and clear in communicating recommendations and ideas.  My PhD advisor at the University of Georgia, Dr. Mike Clutter, reinforced the importance of having an integrated feel of finance with forestry when evaluating timber-related investment decisions. For me, this means forestry and investment professionals must be able to:

  • Identify and communicate key financial issues for a given forestry or timberland investment;
  • Differentiate and explain the pros and cons of alternate approaches to financial analysis; and
  • Analyze and value timber and timberland investments and alternatives.

As analysts and researchers, how can we better support our firms and clients?  Over time, I have found few methods as effective for increasing analytic rigor and reducing errors as repeated application of financial tools in a range of forestry-related cases to highlight the range of unique questions and attributes associated with timberland assets….

Click here to learn about and register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments. Registration includes copies of our “Forest Finance Simplified” handbook that distills key forest finance themes and questions into a question-and-answer format for those who want an accessible reference to key concepts but lack the time and inclination for “deep study”…… 

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