The financial institution in brief:

Karingani Game Reserve is a unique Conservation project in Mozambique founded by three leading conservation investors.

The Founding investors finance the project through their respective Family Office institutions which include:

  • Paul Tudor Jones Family Office: Globally recognised philanthropist and conservation investor, with a passion for, and a significant track record in southern and eastern Africa.
  • Bailes Family Office: 3rd generation African conservationist and owner of world leading eco-tourism brand Singita, with operations in South Africa, Tanzania and Zimbabwe.
  • Twin City Developments: 3rd generation South African family with a track record in land development and game projects in South Africa and Mozambique.

The Founders are committed to leading conservation development in Africa and delivering real environmental and social impact through their investment. To achieve this the Founders believe passionately in implementing and operating a viable economic business model that will ensure viable natural capital sustainability, build long term natural capital asset value and implement best in class conservation management to preserve and protect the natural capital.

Why use natural capital thinking?

Natural Capital is a formalisation of what the project investors do and have been doing. The major advantage to the approach is a credible and defendable tool to holistically measure, quantify and report the special value factors of the project that would otherwise be lost by following a standard valuation or audit approach. Specifically the approach supports the project in 4 key ways:

  • Value Creation: A defendable valuation approach to assess & unlock the ‘special value’ premium in support of equity divestment transactions.
  • Value Growth: Integrate KPI’s and measure value benchmarks to track asset value growth with environmental impact.
  • Investor Reporting: Credible valuation reporting, to international compliance standards, as part of annual company report to investors.
  • Decision making: Identify management options to grow value and improve return to meet investor targets and stakeholder compliance.

What was the approach?

The approach has primarily being used in asset valuation to support investor equity sales. This case study will focus on the successful divestment of a 20% equity interest from the founders to an incoming US Foundation.

The valuation approach used was aligned with the regulations of the Royal Institute of Chartered Surveyors (RICS) and International Valuation Standards (IVS) regarding land valuation. This standard approach was then adjusted to identify, quantify and value the special natural capital factors of the asset, set within the assumptions of the international impact investment market.

The reason this approach was used was to ensure it was robust and defendable as part of a thorough financial due diligence process with PWC.

There were two stages to the valuation approach: 1) Quantify a defendable base value using the existing five recognised methods of land and property valuation 2) Special value adjustments to quantify and defend the premium.

Base Value approach:

The 5 methods of value were adjusted to suit the special natural capital asset and impact investment market situation. Due to a lack of comparable evidence in an immature African market, a weighted approach, balancing the strength of each individual method, was completed to achieve final base value:

1. Comparable Method:

  • Apply benchmark values from what comparable transactional evidence was available, including game farms, conservation land and cattle ranching. Adjust to the subject property allowing for different markets, regions, title, political risk, size, use type, eco- system and other relevant value and risk adjustments.

2. Residual Method:

  • Adapt and apply the standard approach to determine what the ‘Gross Natural Value’ (GNV) of the property is based on a forward looking comparable from South Africa, adjusted back for time & risk and the costs of developing the asset to the GNV level.

3. Cost Method:

  • Apply method to review what the replacement cost would be to re-develop Greenfield land to the current state of security, development and protection. Included an allowance for risk, opportunity value and difficulty of doing this in frontier market.

4. Investment Method:

  • Discounted Cash Flow approach to quantify the net present value considering a natural capital risk adjusted yield/YP to reflect acceptable impact investor level of return of 2-5% irr.
  • Application and addition of specialist ecosystem use approaches into cash flow and feasibility, including use revenue for prime eco-tourism and cost accounting for waste, water, energy, materials and other relevant sustainability variables.

5. Profits Method: 

  • Adjust approach to capitalising conservation levies with a suitable impact risk adjusted risk multiplier over lease term.

Special Value Adjustments:

Natural Capital special attributes were assessed and justified using the following 6 qualitative and quantitative approaches:

1. Scarcity Value (Qualitative 40% adjustment = $22 M value premium);

  • Allowance for the fact that assets of this type, scale, location, unique ecosystem and species are ‘at risk’ and are becoming increasingly under threat in what is a diminishing market.

2. Marriage Value (Qualitative 20% adjustment = $11 M value premium):

  • Allowance to consider that the value of the whole aggregation is more than the individual land parcels on which it made up.
  • Representation that scale and control of the whole property is important for effective conservation ecosystem management.
  • Integration with the Greater Limpopo Trans-Frontier conservation area adds synergistic ecosystem value.

3. Special Value: (Quantitative adjustment of $15 M uplift):

  •  Analysis to quantify the ‘hope value’ of capital growth in what is a) an immature market with significant growth potential and b) a diminishing market with high scarcity variables.
  • Applied evidence from a fully developed comparable in South Africa adjusted back for time, risk, and other relevant market factors, overlayed with data from conservation and social KPI’s.

4. Biological Asset Value: (Quantitative adjustment to Yield and NPV): 

  • Quantifiable analysis allowing for the unique biomass strength, diversity and ‘at risk’ species protected on the property.

5. Eco-system Resource: (Quantitative adjustment to Yield and NPV):

  • Allowance for ecosystem resource control of water (via a dam and pipeline), habitat (via fencing) and vegetation (via mgmt.)

6. Human Capital: (Qualitative % adjustment):

  • Qualitative assessment of the goodwill value inherent in the best in class eco-tourism and conservation management brands and Founders with strong resources and positive track records.
  • Allowance for the social impact of the development in uplifting poor rural communities with jobs and value chain growth.

These premium value adjustments were then added to the base value to reach a final asset value.

The value impact of the above approach translated into an asset value of >$100 M and an uplift in value of more than 2.5X multiple on invested capital.

James Cairns MRICS conducted the valuation as an internal valuer on behalf of the Project Asset management team.

Subjective adjustment were defended by the valuer’s unique market experience and expertise. Adjustments were categorised within the parameters of the RICS and IVS guidance.

What were the outcomes of the assessment?

The direct outcome of this valuation was that it underpinned the price and successfully supported the closing of a 20% equity interest to an investor.

The valuation went through a thorough due diligence process with PWC and was approved and accepted.

The success that this transaction achieved can now be leveraged to:

  • Benchmark future equity sales at, or above, this pricing level
  • Provide a base value for the balance sheet to measure against
  • Internal support for Natural capital and inclusion in investor reports
  • Confidence to support the Natural capital approach across the portfolio

Positive indirect outcomes from the process were:

  • The valuation approach taken was proven to be credible and defendable within an impact investment market context
  • There is a clear opportunity to build market evidence and data to support the development, transparency and liquidity in this market

Lessons learned which Management are now positively responding to are:

  • Implementation of supporting KPI data is vital to make less subjective
  • Regulation and policy needs to catch up with the approach
  • Further engagement with stakeholders will augment value approach

Next steps: 

Continue to refine approach to support transactions, annual reports and audit.

Lead the application and use of the natural capital valuation approach across the investment portfolio and within the conservation investment market.

Read through the other Finance Sector Supplement case studies here.

This case study support the Connecting Finance and Natural Capital project; brought together by the Natural Capital Coalition, the Natural Capital Finance Alliance and the VBDO.