Ex-Harvard investors seek diversification for natural capital strategy

Folium Capital, a fund manager established by former members of the Harvard Management Company’s agriculture investment team, has launched a natural capital impact fund targeting $500 million.

The fund will generate carbon credits as well as traditional agriculture and timberland returns. This is in contrast to a spate of funds brought to market in the past year by natural capital firms that focus solely on carbon credit generation: Manulife’s $500 million-target and Stafford’s $1 billion-target funds will sell the credits in carbon markets, while Climate Asset Management, the joint venture by HSBC and Pollination, will distribute the credits for LPs to redeem in place of yield or capital gains.

Regenerative Natural Resources Fund III is Folium’s third pooled vehicle, and its first to combine carbon credit generation, traditional agriculture and timberland. Like CAM, Folium plans to distribute some carbon credits for investors to redeem in place of capital from their sales open carbon markets. “We have not yet determined the final mechanism for that, but we’re confident we’ll be able to do it,” Andy Wiltshire, who founded Folium in 2016, told New Private Markets.

Multi-strategy approach

Folium’s new fund will develop agricultural assets such as orchards and vineyards as well as timberland; it previously ran separate funds for these two strategies. “Agriculture and forestry assets have quite different liquidity profiles throughout their life,” said Wiltshire. The performance of traditional yield-generating and value-growth assets is still uncertain in this asset class, and the volume and value of future carbon credits is even less so.

“Most institutions are nervous and probably less inclined to take on illiquidity during uncertain financial markets like today.” The multi-asset approach means “you can smooth out some of the humps and bumps around cashflow that you might see over the life of a fund”, said Wiltshire. “Even if you’re developing brand new orchards, for example, you can expect to start to see some cashflow in five, six or seven years. That is much sooner than you would if you’re planting new forests.”

“On the carbon credits side, if you successfully define projects and get them accredited and registered, some carbon units can be sold [the same] year. We tend to strongly prefer to do forestry projects that have both timber and carbon components. It diversifies your risk, so you have two potential revenue streams. Timber and carbon prices may oscillate in different ways,” says Wiltshire, and Folium can optimize returns accordingly.

“We need more carbon locked up in trees, but what often gets overlooked in the carbon story is that the world also needs more wood in place of steel, cement and aluminium,” said Wiltshire. “That’s just as important to us [as the carbon sequestration].”

Agriculture credits

The firm plans to generate carbon credits from its agricultural assets too. Orchards and vineyards in development are carbon negative during below ground and above ground growth stages, said Wiltshire. But these will make up only a minority of the fund’s carbon credits.

Agricultural carbon credits are “much less intensive for carbon sequestration in the agriculture space for every dollar invested or every hectare managed. You get a lot more carbon sequestered on the timber side”. This is because timberland assets “have bigger trees… and [Folium’s] growth effort is in the carbon sequestration. In agriculture, you’re trying to focus the plants’ attention on growing fruits or nuts and getting those harvested every year. It’s a different equation”.

Moreover, said Wiltshire, “there is [currently] no well-estabished forum for trading agricultural credits of this kind”. While Folium may increase its agricultural carbon credits for future vintages of this strategy, the firm does not plan to make this a priority. “I don’t think it will play a big part in mitigating climate change. Timberland, on the other hand, has a significant prospect of making a significant difference. But it’s important for us to know that we’re not making anything worse by growing these foods.”

Wiltshire co-founded Folium in 2016 alongside former HMC colleagues Alvaro Aguirre and Oliver Grantham. All three had managed direct agriculture investments for HMC but peeled away as the institution shifted its focus from direct to fund investments and “a specialist model to a generalist model”, Wiltshire told New Private Markets. “That didn’t really suit my team,” he said.