ImpactAlpha, October 23 – Forests are climate-negative technology at scale. So investments in tropical forests should be investment-ready, and fund managers able to tap the opportunity should be rolling in capital.
But fund managers with an eye to conserving the world’s biggest carbon sink had had trouble getting traction.
Terra Silva, a new $90 million fund of funds, will help eight to 10 investment fund managers prove that sustainable tropical forests are a profitable bet for commercial investors.
The Packard and MacArthur foundations backed the fund with low-cost debt program-related investments, with a goal to “build a new asset class where none currently exists,” Packard’s Susan Phinney Silver told ImpactAlpha. A third, undisclosed mission-driven private investor, is contributing equity capital and will manage the fund.
“It’s about inducing investment in a market where there are no institutional investors who are currently willing to assess and take these early-stage risks before the business models are proven out,” says Phinney Silver. “It is enabling investments in funds and intermediaries that otherwise would never have gotten the capital to launch or become viable in the first place.”
MacArthur, which committed $20 million to Terra Silva, made the investment as part of a $150 million allocation meant to jog private investment in underfunded impact sectors by corralling in matching capital. It follows a $30 million investment in Rockefeller’s Zero Gap portfolio of innovative financial structures designed to address the Sustainable Development Goals.
For the remaining $100 million mandate, MacArthur plans to select five to six more investments from among more than 100 proposals submitted as part of the Catalytic Capital Consortium. Selections are expected early next year.
The Catalytic Capital Consortium, a joint initiative of MacArthur, the Rockefeller Foundation and Omidyar Network, was established earlier this year to persuade more foundations, development-finance institutions and wealthy individuals to provide patient, flexible “catalytic capital” to mobilize more financing for higher-risk or lower-return impact investments.
“We believe the Packard Foundation through Terra Silva is a powerful example and powerful leader in the use of catalytic capital,” MacArthur’s Debra Schwartz said in an interview. “This vision of a set of managers, who can be benchmarked, who can draw in capital that would have been on the sidelines, that’s the part of catalytic capital we want to lift up.”
The Packard and MacArthur foundations last year pledged to collaborate on climate investing and “fill capital gaps and help move the needle in the climate fight beyond what any one foundation could do alone.”
Packard’s investment in Terra Silva is the latest in a decade-long commitment to conservation, climate action and mission investing. The foundation has poured $80 million in climate-smart investments since 2010, including with timber fund managers such as New Forests and Ecotrust Forest Management.
Both Packard and MacArthur’s commitments to Terra Silva are structured as long-term, low-interest “program-related investments,” meaning they come from the programmatic and grantmaking sides of the foundations, rather than from the endowments. The third investor is contributing equity capital. The Packard and MacArthur PRI’s sit senior to the equity in Terra Silva’s capital stack, and include “all the protections that one would expect for senior debt holders,” she says.
The fund will make anchor debt and equity investments in funds investing in forest conservation, sustainable forest management, and climate-smart forestry and agriculture. With the number of funds $90 million can seed, investors will be able to benchmark, diversify and exit, explains Phinney Silver.
Packard and MacArthur aren’t subsidizing the risk or propping up their returns of commercial investors. The “catalytic” goal of the foundations’ capital in Terra Silva is to demonstrate the viability of sustainable tropical forest investments.
“It will be the fund managers, who are able to launch and get to scale, build a track record and establish the new asset class of tropical sustainable forestry and climate-smart agriculture funds, that get the benefit,” says Phinney Silver.
Terra Silva’s aim is to be fully invested over the next three to four years. It is targeting funds that currently don’t have adequate access to commercial investment sources. Phinney Silver explains that the partners hope to see Terra Silva’s capital leveraged ten-fold at least.
“We’ve done some rough math. With us as a lead investor, fund managers getting to $1 billion to $2 billion in follow-on rounds is a realistic goal,” she says. “That’s the level at which investors start looking at it more as an asset class.”
“The PRI capital is catalytic in the sense that it is enabling investments in funds and intermediaries that otherwise would never have gotten the capital to launch or become viable in the first place.”