Lacan Florestal Fund IV

Lacan Florestal invests in both commercial forests and native forests in Brazil. It generates revenue from the sale of the wood and carbon credits. Lacan leases land through contracts, a long-standing structure that has been applied to Brazil’s forestry and agricultural sector. For the commercial forests, Lacan typically leases land for a period of two forest rotations, i.e., 12 to 14 years.

Lacan is seeking $200 million (USD) of capital for Fund IV; the fund will operate in Brazilian Real. Lacan began fund-raising at the end of 2022 and has secured 10% of the fund target size in commitments from local pension funds and not-for-profit foundations. Lacan is set to raise capital through the end of the fourth quarter of 2023 and this year it intends to establish a subsidiary in London, England with a view to broaden its investor base.

Commercial forestry: The major type of project implemented in Funds I-III and planned for Fund IV is the planting of commercial forests in degraded pastureland, with the sale of the wood products tied to long-term take or pay contracts with major companies. Lacan follows a linear planting schedule over six years for each fund. This allows for a continuous supply of wood to major buyers as well as risk mitigation, particularly climatic variation and silviculture costs. It also allows for the permanent maintenance of an average stock of forest above ground. First-rotation harvests take place between years six and 12. Second-rotation harvests take place between years 12 and 18. This generates a reasonably stable cash flow, with capital calls between years zero and six for the planting of the forests, and capital distributions in tandem with harvesting. Payback has been approximately ten years, with payments starting in years six to seven. 

Carbon credits: Lacan expects to generate carbon credits from commercial and restored native forests, meeting Verra’s Verified Carbon Standard, and will sell these carbon credits via carbon trading companies or directly to companies, and perhaps also in-kind to investors. Carbon credits will issue from year two for commercial forests and from year five for native forests. There will be periodic new issues after this period depending on the analysis of the additional carbon stock, costs involved and the price of carbon. A carbon inventory will be conducted for every new issue. The revenue stream from carbon credits will be USD denominated.

Exit strategy: Each project has its own exit strategy. Some projects will have an automatic divestment strategy simply by returning the land to the property owner once the second rotation harvest occurs. Other projects will involve the sale of standing forest in the market. Lacan mitigates divestment risk by establishing take or pay wood sale agreements with major companies that guarantee a steady cash flow for the projects, thereby making it easier to sell cash flows in the market at a discount upon exit. For some projects which are fully owned by the fund, it will gradually distribute the proceeds of the wood sale to the fund, return the leased area to its owner and cease to exist. The fund, in turn, will distribute capital to its Limited Partnerships (LPs). For other projects, Lacan may either sell standing forest or the invested company to a third-party. Such sales will be based on the discounted cash flow of the forest, which may or may not have a take or pay agreement attached to it. The proceeds of this sale will then be distributed to the fund and then to its LPs. Fund returns will depend primarily on the productivity of the forests, the monitoring and control of silviculture costs, revenue from carbon credits and sale of the wood or forest assets. The governance and rules are fully defined in the bylaws of the fund.