FIM Sustainable Timber & Energy LP · FIM Sustainable Timber & Energy LP 4 TO BE READ IN CONJUNCTION WITH AND IN THE CONTEXT OF THIS DOCUMENT AS A WHOLE. The LP is designed to provide

FIM Sustainable Timber & Energy LP“C” Additional Limited Partnership Shares

Limited Partnership Number: SL7703

Information Memorandum

Issue of Partnership Shares payable in full on application

Issue Date: 17 February 2014

IF YOU ARE IN ANY DOUBT ABOUT THE ACTION YOU SHOULD TAKE OR THE CONTENTS OF THIS DOCUMENT YOU SHOULD CONTACT YOUR STOCKBROKER, SOLICITOR, ACCOUNTANT, BANK MANAGER OR OTHER

PROFESSIONAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES AND MARKETS ACT 2000, WHO SPECIALISES IN ADVISING ON INVESTMENTS OF THE KIND DESCRIBED IN THIS DOCUMENT

Sponsored and Issued by:

FIMFIM Services Limited

Glebe Barn, Great Barrington, Burford, Oxon, OX18 4USTel: 01451 844655 Email: [email protected] www.fimltd.co.uk

FIM Services Limited is authorised and regulated by the Financial Conduct Authority

Contents

Important Notice To Investors 1

Advisers 3

Summary - Key Attributes 4

1. Investment Summary 5

2. The Business 8

3. The Limited Partnership 14

4. Details of the Limited Partnership 18

5. Taxation 20

6. The Manager 23

7. Fees, Charges and Set Up Costs 24

8. Risk Factors 26

Definitions 28

Appendices

Appendix 1 - Current Portfolio 29

Appendix 2 - Current Portfolio Map 32

Appendix 3 - Summary of Main Documents 33

Appendix 4 - Extract of LP’s Accounts 37

Application Information 38

1. This Information Memorandum (“Information Memorandum”/“IM”) has been issued and approved for the purposes of Section 21 of the Financial Services & Markets Act 2000 (as amended by the Financial Services Act 2012) (“FSMA”) by FIM Services Limited (“FIM”), the Operator and Manager, which is authorised and regulated by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS, in the United Kingdom. It relates to the placing of units in an Unregulated Collective Investment Scheme (“UCIS”).

2. The attention of prospective investors is drawn to the fact that the Limited Partnership will be committing funds to forest properties and UK renewable energy projects and such investments are of a long term and illiquid nature. The Manager may attempt to arrange transactions between sellers and qualified buyers, however, there is no recognised market for a Limited Partner’s interest in the Limited Partnership and at its sole discretion the Manager may decline to permit the sale and purchase of a Limited Partner’s interest. It may therefore be difficult for an investor to sell the investment or to obtain reliable information as to its value, or the extent of the risks to which it is exposed. Prospective investors should note the considerations set out under “Risk Factors” in Section 8.

3. Investment in an unquoted limited partnership such as this Limited Partnership (as hereinafter defined) is speculative and involves a high degree of risk. An investment should only be considered by those persons who could sustain a total loss of their investment. Prospective investors in the Limited Partnership should carefully consider the risks and other factors associated with the investment, as set out in the section headed “Risk Factors” in Section 8 and also other sections.

4. In connection with the matters referred to in this document FIM is acting for the Limited Partnership and for no one else. Accordingly, FIM will not be responsible to anyone other than the Limited Partnership.

5. This document is not an approved prospectus for the purposes of section 85(1) of the FSMA. A copy of this Information Memorandum has not been, and will not be, reviewed by the Financial Conduct Authority (“FCA”) or the UK Listing Authority as it does not constitute an offer of transferable securities under section 85(1) of FSMA.

6. This document contains information relating to a UCIS, which under UK legislation may only be promoted to persons permitted under the Financial Services and Markets Act 2000 (Promotion of

Collective Investment Schemes) (Exemptions) Order 2001 or the categories of persons identified in rule 4.12 of the FCA’s Conduct of Business Sourcebook (“COBS”). As such this document will only be made to or directed to the parties listed below (“Relevant Persons”):

persons who fall within the definition of “eligible counterparty” or “professional client” in the rules of the FCA and as set out in the Glossary to the FCA Handbook (www.fshandbook.info/FS/html/FCA) and who therefore fall within the exemptions listed in COBS 4.12.4R;

Investment professionals authorised under FSMA to advise on UCISs, that is persons within Article 14 of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (www.opsi.gov.uk/legislation);

persons that have completed the FIM Client Financial Information Form, or who otherwise meet the requirements of the Certified High Net Worth Investor, Certified Sophisticated Investor or Self-Certified Sophisticated Investor exemptions set out in COBS 4.12.4.R; and/or persons who meet the requirements of any other applicable exemption in COBS 4.12.4.R or the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemption) October 2001.

If you are in any doubt as to whether you fall within any of the categories above you must not rely on or act upon the contents of this document unless you have taken professional advice which has confirmed that you fall within one of these categories.

Persons authorised under FSMA may provide this document to their clients whom they have assessed as being suitable and appropriate to invest in this opportunity (“Appropriate Clients”) pursuant to an applicable exemption under the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 or the rules of COBS, but this document should not otherwise be distributed, published or reproduced, in whole or in part, nor should its contents otherwise be disclosed by recipients to any other person.

7. This document is exempt from the scheme promotion restriction on the communication of invitations or inducements to participate in UCISs (in Section 238 of FSMA) on the grounds that it is only being made to or directed at Relevant Persons or Appropriate Clients. Persons who are not Relevant Persons or not an Appropriate Client of a FSMA authorised person may not apply to invest in the Limited Partnership.

IMPORTANT NOTICE TO INVESTORS

FIM Sustainable Timber & Energy LP1

8. The transmission of this document to any person in the UK other than a Relevant Person or Appropriate Client is unauthorised by FIM and may constitute an offence under FSMA. If any prospective investor is in doubt as to whether an investment of this type is a suitable kind of investment for them, they are strongly advised to contact a professional adviser authorised by the FCA with permission under Part 4A of FSMA to advise on UCISs.

9. Prospective investors must rely on their own examination of the legal, taxation, financial and other consequences of an investment in the Limited Partnership, including the merits of investing and the risks involved. Prospective investors should not treat the contents of this document as advice relating to legal, taxation or investment matters.

Any prospective investors who have any doubt about the suitability of the Limited Partnership for them should consult their own professional advisers concerning the acquisition, holding or disposal of interests in the Limited Partnership.

10. Investors will not have a right to cancel an agreement to subscribe for an interest in the Limited Partnership.

11. The Limited Partnership is an unregulated collective investment scheme and the UK Financial Services Compensation Scheme is not generally applicable to claims relating to such investments. Investors in the Limited Partnership may have protection under the UK Financial Services Compensation Scheme in certain circumstances but should never assume this until they have satisfied themselves on their position through direct enquiry to their Financial Adviser.

12. Investors can complain to FIM as Operator and Manager. Correspondence should be addressed to the Managing Director of FIM. If a Limited Partner is not satisfied with FIM’s suggested resolution they may have a right to refer their complaint to the Financial Ombudsman Service whose address is South Quay Plaza, 183 Marsh Wall, London E14 9SR.

13. Certain information contained in this document has been obtained from published sources or provided by other parties. FIM has taken reasonable care to ensure that such information and its presentation is fair, clear and not misleading.

14. This document contains figures and statements relating to past performance of the Limited Partnership. Past performance should not

be interpreted as an indication of future performance. The value of any investment made or income arising from it may go down as well as up and investors may not recoup the amount invested.

15. This document contains forward-looking statements. Words such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, “project”, “will”, “should”, “could”, “may”, “predict” and similar expressions are typically used to identify forward-looking statements. You are cautioned that actual results could differ materially from those anticipated in forward-looking statements. Also, the forward-looking statements contained in this document are largely based on estimates and assumptions made by the Manager. These estimates and assumptions reflect the Manager’s best judgment based on currently known market conditions and other factors, some of which are discussed below. Although the Manager believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond the Manager’s control. In addition, the Manager’s assumptions about future events may prove to be inaccurate.

The Manager cautions all readers that the forward-looking statements contained in this document are not guarantees of future performance and the Manager cannot assure any reader that such statements will be realised or that the forward-looking events and circumstances will occur.

16. FIM may receive commissions or other benefits as a result of arranging services for the investment funds it operates, including the Limited Partnership. FIM may retain these payments (provided the Limited Partnership does not suffer material adverse effect).

17. This document does not constitute, and may not be used for the purposes of, an offer of interests in the Limited Partnership to any person in any jurisdiction in which such offer or invitation is not authorised or in which the person endeavouring to make such offer or invitation is not qualified to do so, or to any person to whom it is unlawful to make such an offer or invitation.

It is the responsibility of prospective investors to satisfy themselves as to full compliance with the relevant law and regulations of any territory in connection with any application to participate in the Limited Partnership, including obtaining any required governmental or other consent and adhering to any other formality prescribed in such territory.

2FIM Sustainable Timber & Energy LP

Sponsor, Operator and Manager FIM SERVICES LIMITEDGlebe Barn

Great BarringtonBurfordOxonOX18 4US

General Partner FIM FOREST FUNDS GENERAL PARTNER LIMITEDGlebe Barn

Great BarringtonBurfordOxonOX18 4US

Principal Bankers CLYDESDALE BANK plcAgribusinessEpsilon House, The SquareGloucester Business ParkBrockworthGloucestershireGL3 4AD

Solicitors BRODIES LLP15 Atholl CrescentEdinburghEH3 8HA

Auditors and Tax Advisors CRITCHLEYS LLPGreyfriars CourtParadise SquareOxfordOX1 1BE

FIM SUSTAINABLE TIMBER & ENERGY LP - ADVISERS



TO BE READ IN CONJUNCTION WITH AND IN THE CONTEXT OF THIS DOCUMENT AS A WHOLE.

The LP is designed to provide tax efficient capital growth through the ownership of forests and renewable energy projects, whilst securing 100% relief from Inheritance Tax. The LP is a long-term investment.

ISSUE SUMMARY

• To raise up to £25 million.

• Minimum investment £43,550 (for new Limited Partners).

• Final closing date: 28 November 2014.

• Partnership Shares will be allotted monthly commencing 31 March 2014.

• Qualifying period for 100% Inheritance Tax relief (for new Limited Partners) will commence on allotment.

INVESTMENT FOCUS

• Low risk, asset backed forestry and renewable energy portfolio.

• Long term tax efficient capital growth.

• Annual distributions of 3% of NAV, net of tax.

• Target total return 7%, pre-tax.

• Low total expense ratio.

• 100% relief of Inheritance Tax (once held for two years).

• Defined exit strategy.

• Sustainable management. Forests to be certified in accordance with the UK Woodland Assurance Standard.

THE VALUE OF THE ASSETS HELD BY THE LP MAY FALL AS WELL AS RISE SO NEITHER THE LP NOR FIM CAN GUARANTEE THAT THE TARGET RETURN WILL BE OBTAINED.

MANY FACTORS COULD AFFECT THE PERFORMANCE OF THE LP. PLEASE READ THE SECTION HEADED RISK FACTORS.

SUMMARY – KEY ATTRIBUTES

• Proven management, FIM have been operating and managing similar vehicles for over 30 years, achieving good performance for investors. The blended IRR on all Partnership Shares in the LP to 30 November 2013 has been 14.7% pre-tax.

• Defined lifespan with a First Termination Date of 31 May 2021. There is a right for Limited Partners to vote to extend this by up to two five year periods, subject to 75% by value of those voting being in favour of continuing. There is a final Termination Date of 31 May 2031.

• Clear strategy of providing a balance between capital growth and income, with the aim of maximising the overall return to investors, with a target IRR of 7% pre-tax.

• Defined distribution policy, with a target annual distribution of 3%, net of tax, of the Net Asset Value (“NAV”). Distributions have been made in line with targets to date.

• A low annual cost base. The Total Expense Ratio (“TER”) of all management fees received by FIM was 0.61% of the average NAV in the year to 31 May 2013.

As the LP is a Limited Partnership, each Limited Partner’s total liability in respect to the LP will be limited to an amount equal to that Limited Partner’s capital contribution.

A Limited Partnership is tax transparent. The structure significantly increases the return in comparison to a corporate vehicle as much of the return from an investment will be tax free, arising from the trade of commercial woodlands. The structure will allow investors to retain this element of the return tax free, as opposed to incurring taxation on dividends paid by a company carrying on such a trade.

1. INVESTMENT SUMMARY

The LP provides investors with an established, targeted vehicle for investment in sustainable forestry and renewable energy, subject to a minimum investment of £43,550, with a target to provide an annual distribution and 100% relief of Inheritance Tax (“IHT”).

1.1 THE BUSINESS

The core business, currently comprising 85% of the LP’s net assets, is the ownership of commercial, sustainable forestry in the UK:

• The LP has a large scale, revenue producing forest portfolio, currently 13,653 hectares in 53 properties, providing diversification of both geographical locations and age class, thus reducing investment risk.

Up to 20% of the LP’s net assets may be invested in renewable energy projects:

• The LP has a 50% holding in FIM Windfarms 2 LP, which has interests in three on-shore wind farms totalling over 28 megawatts (“MW”) of installed capacity. All three are fully commissioned and operational, providing diversification of both geographic locations and turbine suppliers.

Operating renewable energy assets provide a high amortising cash flow. In the case of wind farms this is generally modelled over a 25 year operating lifespan, with the value of the asset being zero on termination.

During this time, the assets may provide high annual distributions, comprising an element of amortisation of capital and operating profit arising from the generation of electricity.

In FIM’s opinion this profile fits particularly well with the LP’s objective of providing a balance between income and capital growth. It should allow regular distributions to be created from up to 20% of the portfolio allocated to renewables, whilst the core forestry portfolio can accumulate value to provide capital growth, all within a structure that should provide 100% relief of IHT.

The LP is an established trading limited partnership with low costs, which has now been successfully operating for almost four years. It has:


The blended return on all Limited Partnership shares to 30 November 2013 is 14.7%.

Annual distributions of £0.30 per Limited Partnership Share have been paid to date as planned, being 3% of the nominal value of £10 per entitled Limited Partnership Share.

The LP is currently fully invested, with net assets of £83.1 million. FIM see a number of opportunities to enhance both the forest and wind farm portfolio, such that Limited Partners have approved a further fund raising at a premium of 10% to the audited NAV as at 30 November 2013.

FIM believe there are significant benefits in expanding the LP’s business. The reasons for expansion are:

1.2 REASONS FOR EXPANSION

INVESTMENT OPPORTUNITIES

PORTFOLIO ENHANCEMENT

The LP has provided good performance to date, substantially exceeding its target IRR of 7%.

This strategy would be of benefit to Limited Partners as it would allow harvesting within the forest portfolio to be reduced whilst at the same time providing for significantly higher distributions to be paid from free cash flow arising from high yielding renewables investments.

As outlined in Section 2.4 FIM expect timber prices to rise. Leaving trees to grow for as long as possible, commensurate with sound silvicultural policy and the requirements arising from managing the forests to the required certification standards, allows them to increase in volume and thus value. As such, this strategy should see capital growth on the forest portfolio enhanced.

FUND BENEFITS

FIM is of the opinion that a larger fund provides:

• Greater operational efficiency and flexibility, to access and take advantage of investment opportunities arising.

• Greater diversification to assist in minimising risk, through a broad range of investment both within the chosen sectors of forestry and renewables and within each sector itself.

• Economies of scale through larger investments in selected sectors.

• Improved liquidity. Although liquidity has been good to date, FIM are fully aware of the benefits of maintaining liquidity in the future, and are of the opinion that a larger vehicle and an actively managed portfolio combine to create better liquidity, improving demand for Partnership Shares and thus prices for those wishing to realise their investment.

FORESTRY

The LP has investments in forest properties which were independently valued as at 30 November 2013 at £70.3 million, representing 85% of NAV at that date.

The recent rise in plantation values has encouraged vendors to bring forests to the market and the Forestry Commission in Scotland are expected to continue forest disposals, providing a transfer of more forest assets from the State to the private sector.

With increased supply FIM is seeing a wide range of good quality plantations come to the market.

Renewed vigour in the timber markets support FIM’s view that timber prices will increase.

Global timber demand continues to grow, underpinned by strong appetite from developing countries. The construction sector in many developed countries is now showing signs of recovery which should further increase global demand for timber.

FIM are of the opinion that purchases made at current levels will make sound long term investments and that the portfolio should be expanded to take advantage of the opportunities available.

Additional funds would first be utilised to increase the LP’s weighting in renewables closer to 20% of NAV, and secondly to increase the forest portfolio.



RENEWABLES

The LP has a 50% holding in FIM Windfarms 2 LP, with a value (based on independent valuation) of £10.3 million as at 30 November 2013 representing 12% of NAV at that date.

FIM Windfarms 2 LP has an interest in three wind farms totalling over 28MW of installed capacity. All three are now operational. By 2014/15 significant distributions are expected to be received by the LP from all three.

There is an opportunity to acquire additional interests in FIM Windfarms 2 LP, as some partners therein wish to realise the development gain made on the construction and commissioning of the consented sites originally acquired, and also other interests in renewable energy assets to provide high returns.

FIM see this as highly advantageous as it believes the LP’s distribution profile will be enhanced by the regular distributions from this sector of the LP’s trade.

The remaining 3% of the NAV as at 30 November 2013 was held as cash and other working capital.


2. THE BUSINESS

The LP’s business plan is to provide a balance between capital growth and income subject to a number of Investment Objectives.

• To invest in UK commercial forests and manage the forest assets to achieve a balance between income and capital growth, increasing income when timber prices are high but reducing harvesting when prices are low, with the objective of maximising the overall total return to Limited Partners from the forest assets.

• To utilise the LP’s forest assets to maximise their value through alternative uses, including, but not limited to, arrangements with renewable energy developers for option for lease agreements, direct development of the portfolio to include securing planning consent for a development and constructing and operating developments.

• To allocate risk capital to the development process, subject to a limit of 1% of the NAV of the LP being applied to such expenditure.

• To allocate equity to the construction and operation of renewable energy projects, subject to a limit of 20% of the NAV of the LP at the time funds are invested in such a project.

• To seek to maximise returns to Limited Partners by utilising gearing to; (a) develop specific renewable energy projects, subject to such gearing being on normal project finance non-recourse terms;

or (b) provide working capital to permit the LP to acquire additional assets when the General Partner, on advice from the Manager, considers it advantageous.

Such gearing, if used, will in total be limited to a maximum of 20% of the NAV of the LP at the date of the gearing being employed. FIM anticipates that any such gearing would be constituted by borrowings in Sterling from UK banks or other financial institutions.

• To make distributions, subject to the overall objective of maximising the total return to Limited Partners, to include a balance between income and capital growth, with target distributions of 3% (net of income tax) of the LP’s NAV as established at each Independent Valuation Date.

• To reinvest surplus funds arising from normal commercial operations, less distributions, made in accordance with these Investment Objectives.

• To engage in such other activities as the General Partner deems necessary, advisable, convenient or incidental to the Investment Objectives above.

2.2 INVESTMENT PERFORMANCE

Performance within the LP to date has provided a blended IRR across all share classes of 14.7% pre-tax, based on the audited NAV as at 30 November 2013.

Issued IRR to 30 Nov 2013

Including Distributions at £0.30 per Share Paid

Founder Limited Partnership Shares May to Aug 2010 16.3% June 2011June 2012June 2013

“A” Additional Limited Partnership Shares Aug to Oct 2010 12.5% June 2012June 2013

“B” Additional Limited Partnership Shares Aug 2011 to Feb 2012 12.8% June 2013

Blended All Limited Partnership Shares 14.7%

These returns are stated pre-tax but net of all costs, including fund raising costs, costs of acquiring properties and fund management, but prior to any Carried Interest Share which may become payable in due course to the Special Limited Partner (FIM Executives Limited Partnership). Under the LP Agreement, distributions will first be made to Limited Partners until such time that

cumulative distributions to Limited Partners produce an IRR equal to a preferred return of 7% on their respective contributions. Thereafter distributions will be paid as to:

• 85% to Limited Partners• 15% to the Special Limited Partner

2.1 INVESTMENT OBJECTIVES


Investors should note that past performance should not be interpreted as an indication of future performance. The value of any investment or income arising from it may go down as well as up and investors may not recoup the full amount invested.

In particular, investors should note that the Manager’s target return for the LP is an IRR of 7% pre-tax.

Unless otherwise stated, the IRRs specified in this IM are pre-tax. Taxation on commercial forestry is limited to Capital Gains Tax (“CGT”) on the land only. Income tax is payable on taxable profits arising from renewable energy investments, and certain investors will be subject to National Insurance Contributions (“NICs”). Summary details of the taxation position are set out in Section 5.

2.3 ALLOCATION OF CAPITAL AND BANK FINANCE

The Manager will allocate capital to investments in accordance with the Investment Objectives, with the objective of providing a target IRR of 7% pre-tax, net of all costs.

In summary:

• The core portfolio of circa 80% will be commercial, sustainable UK forest plantations with a target IRR of 6%.

• Up to 20% of the NAV of the LP can be invested in UK based renewable energy projects, with a target IRR of 12%, pre-tax on leveraged equity.

• Up to 1% of the NAV can be applied as development risk capital to secure consents for a renewable energy project.

The LP intends to maintain a fully invested position. In order to fund the development of the portfolio and to finance short term requirements for working capital, the LP will be empowered to employ gearing to a maximum of 20% of the NAV of the LP at the time of the gearing being put in place.

The 20% limit will include the value of equity invested by the LP in a renewable energy project or Special Purpose Vehicle (“SPV”), but excludes any debt in such a vehicle where this is ring fenced as non recourse borrowing to both the LP and its Limited Partners. This is because the LP’s risk capital is limited to the equity invested only.

In the event that gearing is utilised, other than in the case of developing renewable energy projects utilising project finance, the Manager will seek to make arrangements for the LP to repay this within a maximum of three years.


2.4 FORESTRY

The LP’s core business is the ownership of commercial, sustainable forest plantations, combining unique attributes of an investment in timber, a naturally growing industrial commodity and freehold land. At maturity, land value is circa 20% to 25% of a plantation’s value.

Target Return

The Manager continues to target a post-tax IRR of 6% on the forestry portfolio, similar to the long term performance of the Investment Property Databank (“IPD”) Index once investment management costs and LP overheads are accounted for.

Forestry has proved a particularly good investment over the past 10 years. The industry benchmark is the IPD UK Forestry Index. Over 20 years the index shows an IRR of 8.1%.

Over the past three, five and ten years forestry has outperformed mainstream investments in equities, gilts and commercial property as measured by the IPD Index.

This performance is enhanced for UK taxpayers who hold the assets in a tax efficient structure, such as a limited partnership, and who are likely to be subject to income tax and/or capital gains tax on returns from mainstream investments.

Commercial forestry returns are free of income tax and largely free of CGT, which is payable only on the increase in land value and not the increase in crop value. In addition, commercial forestry qualifies for 100% relief from IHT once held for two years, as opposed to mainstream investments which are mostly subject to IHT at 40%.

IPD UK Forestry Index at 31 December 2012

1 yr 3 yrs 5 yrs 10 yrs 20 yrs

Forestry total return: (%) 18.3 23.9 17.7 16.3 8.1

Timber price changes: (%) (1.9) 20.2 4.8 7.6 (0.1)

Other assets (total returns)

Equities 10.2 6.7 2.1 8.0 7.2

Gilts 4.7 9.9 8.8 6.6 7.7

Commercial property 3.4 8.7 0.7 6.3 8.9

Data Sources: MSCI, JP Morgan, IPD UK Annual Index, Forestry Commission Nominal Price Index of Coniferous Standing Sales (for Great Britain)

Timber Prices

In the UK timber prices have risen since 2003. In the 12 months to September 2013 the FIM Timber Index increased in nominal terms by 3.6%.

0

20

40

60

80

100

120

140

Inde

x

Period to September 2013(Base Sept 2011)

FIM Timber Index(Nominal)

Sources: Forestry Commission, Office for National Statistics


FIM believe that timber prices will rise further, both globally and in the UK in the short term, as economic recovery gathers momentum in the developed world, which still remains by far the largest consumer of timber products, and in the longer term as emerging markets, particularly China and India increase consumption.

• Increased Consumption

FIM believe that recovery in consumption in developed countries, continued growth in the developing world and an increase in energy generation from biomass will increase global timber consumption to record levels.

Consumption is increasing in some of the major timber markets in the developed world. Output from the UK construction sector is finally improving, with house starts forecast to be 160,000 in 2014, an increase of 60% over 2012.

The National Association of House Builders in the US are forecasting housing starts in 2014 may be over 1.1 million units for the first time since 2007, an increase of 19% over the 2013 figure of 926,000 units.

At the same time, consumption in China continues to grow rapidly, creating an ever expanding source of demand. RISI, an information provider for the global forest products industry, have revised sharply upwards their forecast of China’s timber supply deficit. In 2011 their projection was that this would rise from 117 million cubic metres in 2010 to 182 million cubic metres in 2015, a 55% increase in five years.

According to RISI, by 2012 China’s actual timber supply deficit had already reached 157 million cubic metres, equating to approximately 10% of the total global production of industrial roundwood. Over the 15 year period from 1997 to 2012, China’s timber deficit grew at a compound annual growth rate of 15.9%, significantly faster than GDP growth during that period, which averaged 10%.

Economic growth is forecast to be lower, so growth in the timber deficit should slow, but it is still expected to be circa 198 million cubic metres in 2015, 8% higher than forecast only two years ago.

Putting this in perspective, the current Chinese deficit is greater than the total harvest of industrial roundwood in Canada (2012, 151 million cubic metres), which is the third largest timber producer in the world.

• New markets are gathering momentum, creating substantial new demand for timber.

Data shows the dramatic increase in the consumption of wood pellets, with imports into the UK, largely from the US and Canada, rising by 163% over 2012 to 2.8 million tonnes in the 11 months to November 2013.

The scale of consumption is now very significant, with forecasts of 3.6 million tonnes in 2013 as more large scale plants such as Drax convert part or all of their generating plants to biomass. For comparison the total UK timber harvest in 2012 was circa 10.6 million tonnes.

The European Biomass Association forecast that consumption of wood pellets for energy production in the EU alone will reach 50 to 80 million metric tonnes by 2020, potentially a fivefold increase on 2012’s consumption of 14.3 million tonnes.

• Supply constraints are beginning to manifest themselves as the effect of legislation begins to be felt.

Legislation in both the US (Lacey Act 2008) and the EU (EU Timber Regulation March 2013), which require all imported timber and timber products to be sourced from sustainable, traceable suppliers and is designed to remove illegal logging which is still rife in many parts of the world, is beginning to have an impact.

There is evidence that EU suppliers are importing less timber from certain countries where compliance with the legislation is proving difficult. It has also been an issue in sourcing pellets for the biomass sector, as it is necessary to be able to prove that they have been sourced from sustainable supplies.

Timber is an industrial raw material with demand/supply characteristics similar to oil. There is a large potential supply but easily won resources have been exploited and increasing environmental constraints will increase the cost of exploitation in the future. Global wood use is rising even during a period of low global economic growth, whilst supply is becoming increasingly constrained. The demand/supply balance is tipping in favour of the supplier; even before the effect of the anticipated growth in the world’s population from seven billion to eight billion by 2030 is felt.

In contrast to timber, the price of oil is nearly 10 times the price in 1998 as fears over security of supply have risen. Global timber prices as measured by the Global Sawlog Price Index published by Wood Resource Quarterly have only increased by 26% (in nominal terms) over the same period. Both commodities have constrained supply and increasing demand but the market appears to have priced in the scarcity of oil, but not yet timber.

FIM believe that timber remains fundamentally undervalued in real terms against historic levels.


Land Prices

Forestry land remains a low cost means of buying into the security of productive land ownership in the UK, where there is limited land availability and very high and expanding population density.

Agricultural land has seen substantial rises in recent years, with values of prime arable land increasing to around £20,000 per hectare in Q3 2013. Against this, forestry land can be acquired at £2,500 to £4,000 per hectare depending on quality and location.

It has similar attributes in relation to protection from inflation (the fact that no more of it is being made) and the same IHT benefits.

It is FIM’s opinion that rising demand and constrained supply will cause the relative value of timber, which in real terms has been in decline in most markets over the past 20 years, particularly in the US and UK, to be re-rated and this in turn will lead to a re-rating of UK plantation values from current levels.


As at 30 November 2013 the LP has exposure to three on-shore wind farms. Since acquiring the projects FIM has overseen the construction and commissioning of each, such that all three wind farms are now operational and producing revenue.

The Manager is focusing on on-shore wind farm developments, as it considers the technology is a proven, reliable form of renewable energy generation. In the first six months of 2013 14 gigawatts (“GW”) of wind capacity was installed globally, taking the total installed capacity to 296GW (1GW = 1,000MW). Total installed on-shore wind capacity in the UK is 6.9GW representing investment of some £7.5 billion. Further, in FIM’s opinion it provides a higher return than solar with limited additional operating risk.

The industry is now well established in the UK with reliable operating data and a service industry to maintain the turbines.

Investment in UK on-shore wind farms provides:

• Security: Circa 50% of current revenue arises from a legislated source, index linked to Retail Price Index (“RPI”).

Renewables generators receive Renewable Obligation Certificates (“ROC”) and Levy Exemption Certificates (“LEC”). The payment of ROCs is set in legislation, which includes a provision for “grandfathering” existing generators at the level of support applicable at the date of commissioning for a period of 20 years.

This element of the income therefore has a high degree of security, providing for long term stable revenue.

• Market Exposure: For the first 20 years after commissioning, circa 50% of revenue currently arises from the sale of electricity on the wholesale market, rising to 100% thereafter.

FIM expect market prices will rise due to:

1. Increasing demand

The Department of Energy and Climate Change (“DECC”) predict that overall demand for electricity may double by 2050 due to the expected expansion in the uses of electricity.

2. Increasing costs

At the same time as demand increases, the cost of mainstream generation is expected to rise. Legislation such as Carbon Capture and Storage and the Large Combustion Plant Directive will increase the cost of generation for many combustion plants.

3. Declining supply

It is estimated that circa 20% of current generation capacity could be removed by 2020 due to reaching the end of it’s useable life. As a consequence of the limited investment in new capacity to date, Ofgem predict that the capacity margin (the difference between peak demand and total capacity) will fall from circa 14% currently to 4% in 2015/16 due to the closure of older and “dirtier” power stations.

Recently UK power prices have been depressed due to slack demand, caused in part by the mild winter. Economic growth, particularly in the manufacturing sector, would see prices rise. Final consumption of electricity (which is an indicator showing energy delivered to the end user for all uses) fell by 3% from 328,824 gigawatt hours (“GWh”) in 2010 to 317,575GWh in 2012. It is not expected to be higher in 2013 when DECC’s figures are published. It was 7% higher in 2008, pre recession, than in 2012.

Longer term price forecasts have also been impacted by the Government’s planned Electricity Market Reform, which are working their way through the political process. In FIM’s opinion, their proposal for a Capacity Market Mechanism is not clearly understood and is thus having a negative effect on market sentiment.

The net result is that long term forecasts used in modelling future revenue from the sale of electricity have dropped by 13% on average over the last two years. This provides an opportunity for upside potential on the 50% of current revenue which arises from market prices.

As cash generative amortising assets, wind farms produce high levels of free cash flow which FIM expect to increase over time as wholesale prices increase and ROCs rise with inflation.

2.5 RENEWABLE ENERGY ASSETS

The LP may commit up to 20% of its NAV to the construction and operation of renewable energy projects with a target pre-tax IRR of 12%, on leveraged equity.


FIM Sustainable Timber & Energy LP (“LP”) is a Scottish Limited Partnership. The LP comprises the Limited Partners (Investors), one General Partner (FIM Forest Funds General Partner Limited) and the Special Limited Partner (FIM Executives Limited Partnership).

The responsibility for running the LP is with the General Partner, an entity that is wholly owned by FIM Services Limited. The LP has appointed FIM as its Operator to carry out the required regulated activities as authorised by the Financial Conduct Authority. The terms of this appointment are detailed in the Management Agreement.

The LP is tax transparent allowing each Investor only to be taxed according to their circumstances. This should ensure that revenue from timber is received tax free.

The Trustees of eleven forestry trusts transferred assets into the LP by August 2010. The LP granted an indemnity to the Trustees of the amalgamating forestry trusts in respect of their acts and omissions as Trustees for the period from the commencement of each Trust until the date of transfer of its assets to the LP. The amount of the indemnity is limited to the value of the assets transferred.

To date 5,246,422 Partnership Shares have been issued.

On the basis of full subscription of £25 million a further 1,435,132 “C” Additional Limited Partnership Shares will be allotted under this issue subject to a Capital Contribution of £17.42 per share. These will qualify for a first distribution in June 2016.

The capital of the LP is divided into Partnership Shares with a nominal value of £10.00 each.

3. THE LIMITED PARTNERSHIP

3.1 STRUCTURE

Limited Partnership Shares allotted and to be allotted

Allotted To Date£10.00

Partnership SharesIssue Price Per

Partnership ShareTotal Issue

Price

First Distribution

DateMay-Aug 2010

Founder Limited Partnership Shares 2,543,740 £10.00 £25,437,410 June 2011

Aug-Oct 2010

“A” Additional Limited Partnership Shares 1,161,952 £11.50 £13,361,760 June 2012

Aug 2011-Feb 2012

“B” Additional Limited Partnership Shares 1,540,730 £13.08 £20,152,748 June 2013

To be allotted (2014)

“C” Additional Limited Partnership Shares (up to) 1,435,132 £17.42 £25,000,000 June 2016

Partnership Shares in issue based on £25,000,000 subscription 6,681,554

Part of the income arises from the LP’s commercial woodlands trade and is tax free. In future, part will arise from the wind farms and will be taxable, with the taxable profit being reduced by the benefit of capital allowances. Income tax will be payable by each Limited Partner on taxable profits at their marginal rate of tax.

The Manager plans to make annual gross distributions in June each year such that the net distribution equates to 3% of the NAV after allowance for tax due at the top rate of tax, currently 45%, on taxable income arising in the LP in the preceding tax year.

As such the gross distribution would be higher than the target distribution of 3% of NAV.

Limited Partners with a lower tax rate would benefit from a net distribution greater than 3% of NAV.

It is not guaranteed that such distributions will be made. Whether or not there is a distribution, and/or the amount of any such distribution will depend on the level of timber harvesting carried out by the LP and distributions received from FIM Windfarms 2 LP and other renewable energy investments.

3.2 DISTRIBUTIONS

Distributions from the LP have been and are planned to be significant.


The strategy will be to balance the level of distribution against the objective of providing tax free capital appreciation from the core forestry portfolio.

Investors should not invest on the basis that distributions will be made at the target level or on the basis that distributions will be made annually, or indeed at all.

Direct operational renewable energy projects and rental income arising under leases on the LP’s forest portfolio could enhance both the distribution profile and enable timber harvesting to be curtailed.

The planned distribution profile is summarised as:

Existing Limited Partnership Shares Only

1. Distributions to date have been paid at the rate of 3%, £0.30, of the nominal value of each Partnership Share.

2. The distribution planned to be paid in June 2014 should be at the same rate of £0.30 per Partnership Share, net of tax as calculated above.

3. Distributions from June 2015 through to June 2021 are planned at 3% of the NAV, net of tax, established in the audited accounts as at 30 November 2013 based on the independent valuations included therein i.e. the distributions, net of tax as calculated above, would be £0.47 per Partnership Share, an increase in the net amount of 57%.

“C” Additional Limited Partnership Shares

“C” Additional Limited Partnership Shares allotted under this IM will first qualify for a distribution in June 2016, if such a distribution is to be made, on the basis described in 3 above.

This allows time for investment of funds raised under this issue and for income to be generated from the investments, whereas the current portfolio is already income producing allowing payment of distributions from surplus cash flow to existing Partnership Shares.

A distribution of £0.47 per Partnership Share, net of tax as calculated above, would provide a net distribution of 2.7% on the issue price of £17.42.

All Limited Partnership Shares

Distributions are planned to be rebased every five years in the year following each Independent Valuation Date (May 2020 and five yearly thereafter for the duration of the LP) to be 3%, net of tax as calculated above, of the NAV established in the audited accounts as at each Independent Valuation Date.

Thus the next uplift in distributions, if applicable, would occur in June 2021.


The structures for liquidity are:

1. Arranging deals between vendors and purchasers

A Limited Partner may sell an Interest in the LP for consideration as a whole or in units of not less than 2,500 Partnership Shares at any time.

Under the Management Agreement, FIM undertakes to arrange deals between willing vendors and purchasers for the sale of Partnership Shares at mutually agreed prices. This service may provide an element of ongoing liquidity to the benefit of Limited Partners.

Over the past two years, transactions of shares in the LP have amounted to over £1.4 million, with the average transaction time being 45 days. Demand has been strong, such that all sales have to date been at a premium to the stated NAV at the time of sale. The most recent sale marketed by FIM, for 10,308 Partnership Shares in June 2013, was nearly four times oversubscribed and sold at a premium of 14.7% over NAV.

FIM’s fee for arranging any transfer is 3% plus VAT payable by the vendor and 3% plus VAT payable by the purchaser, on the value of the transaction.

2. Set Termination Dates

Set termination dates are designed to ensure Limited Partners are not locked into an investment in the LP, as they can vote on those dates to wind it up, whereupon the assets would be sold and cash distributed.

The LP has a First Termination Date of 31 May 2021, at which date winding up will commence unless a majority of 75% of Limited Partners by value vote for the LP to continue for a further period of five years to the Second Termination Date of 31 May 2026.

At that date winding up will commence unless a majority of 75% of Limited Partners by value vote for the LP to continue for a further period of five years to the Termination Date of 31 May 2031.

Limited Partners may transfer Partnership Shares for no consideration at any time subject to the minimum transfer being 2,500 Partnership Shares and subject always to the consent of FIM Forest Funds General Partner Limited. FIM charge the transferor an administration charge for implementing and documenting each transfer (other than sales) a fee of £200 plus VAT. This fee is subject to indexation to RPI annually in arrears from May 2010, such that the fee for transfers in 2013/14 is £270 inclusive of VAT.

3.3 LIQUIDITY

The LP structure focuses on providing liquidity to Limited Partners. However, with no recognised market for Partnership Shares, nor any plans by the LP to establish one, it may be difficult for a Limited Partner to sell their interest in the LP.

3.4 ISSUE OF “C” ADDITIONAL LIMITED PARTNERSHIP SHARES

Investors subscribing under the terms of this IM will be allotted “C” Additional Limited Partnership Shares at an issue price of £17.42 for each Partnership Share with a nominal value of £10.00. Such subscription is subject to the terms and conditions contained in the Application Pack supplied with this IM.

• The minimum Capital Contribution for new Limited Partners is £43,550, being 2,500 Partnership Shares with a nominal value of £10.00 each, the minimum permitted holding in the LP, at the issue price of £17.42 each.

• There is no minimum subscription for existing Limited Partners adding to their holdings in the LP.

The fund raising is being conducted on the basis of an independent market valuation by External Valuers of the LP’s portfolio as at 30 November 2013. Forest properties were valued by Smiths Gore. The wind farm portfolio was valued by Jones Lang LaSalle. There have been no additions to the portfolio since the valuation date.

The LP is currently fully invested. The existing Limited Partners have approved a further fund raising, on the terms set out herein, to permit the LP’s business to be expanded to take advantage of current opportunities in the market to build on progress made to date.


The valuations have been incorporated into the LP’s audited accounts as at 30 November 2013, which resulted in an NAV of £83.1 million, equating to £15.84 per Partnership Share. On the basis of raising £25 million, at an issue price of £17.42 a further 1,435,132 “C” Additional Limited Partnership Shares will be allotted to Limited Partners.

The issue price of “C” Additional Limited Partnership Shares is at a premium of 10% to the stated net asset value in the audited accounts as at 30 November 2013, as approved by the existing Limited Partners. The premium includes the cost of fundraising of 2%, the cost of investing funds of 2%, the costs of the issue (capped at £50,000) and the direct costs of acquiring additional investments (Stamp Duty Land Tax, legal and professional fees and registration dues, estimated at 3.5%). The level of direct costs incurred will depend on the mix of assets acquired between renewables and forestry, and the status of the renewable assets, whether operational wind farms or consented sites.

It should be noted that “C” Additional Limited Partnership Shares allotted under this issue will first qualify for a distribution in June 2016, on the basis set out in Section 3.2.

Partnership Shares will be allotted on a monthly basis, commencing 31 March 2014 for applications received prior to that date and on which cleared funds have been received by the LP, until fully subscribed.

The two year qualifying period for 100% relief of IHT will commence on allotment, as the LP is already trading. As the LP is already established and trading there is no minimum total subscription required for applications to be accepted.

The Final Closing Date is 28 November 2014. The issue will close earlier if fully subscribed. The maximum subscription is initially set at £25 million. The Manager may consider raising the maximum subscription if demand is greater, but only subject to the perceived availability of suitable investments at the time.

Early application will:

• Secure an allocation.

• Commence the two year IHT qualifying period.

• Allow the Manager to take advantage of investment opportunities that are currently available.

The Manager does not currently expect the LP to conduct a further fund raising, due to the timespan between investment of funds raised under this offer and the First Termination Date of 31 May 2021.

3.5 INTERMEDIARIES

Where applications are submitted through FCA Authorised Financial Advisers FIM may facilitate the payment of a fee to such Financial Adviser on funds invested in the LP as requested and authorised by the Investor. Authorised Financial Advisers are responsible for ensuring that they promote the LP in compliance with the appropriate rules of the FCA.

3.6 DOCUMENTATION

The following documents and material contracts are available on request or at the offices of the Manager, FIM and the LP’s registered place of business, 15 Atholl Crescent, Edinburgh, EH3 8HA during normal business hours:

• Report and Audited Financial Statements of the LP for the period ended 30 November 2013.

• Amended and Restated Limited Partnership Agreement dated 10 February 2014.

• Management Agreement between the LP and FIM Services Limited dated 12 May 2010 and Minute of Amendment dated 10 February 2014.


4.1 LIMITED PARTNERS

Each investor who is allotted shares in the LP will become a Limited Partner and will complete a Power of Attorney in favour of FIM Forest Funds General Partner Limited to act as Attorney for specific purposes in relation to the Limited Partnership Agreement (“LP Agreement”).

Each Limited Partner will be subject to the terms of the LP Agreement. All decisions relating to the running of the LP will be made by the General Partner subject to certain matters reserved for the vote of Limited Partners. Where decisions are to be made by Limited Partners it is on the basis of one vote per Partnership Share.

Each Limited Partner’s total liability in respect of the LP is limited to an amount equal to their capital contribution plus any tax liability of that Limited Partner.

In order to ensure that they do not lose the benefit of limited liability, Limited Partners must not participate in the management of the LP, which is entrusted to the General Partner and the Manager.

4.2 GENERAL PARTNER

The General Partner is FIM Forest Funds General Partner Limited. The role of the General Partner is the running of the business of the LP. The role also includes:

• fulfilling all requirements placed on them by legislation;

• arranging for any audits of the LP; and

• maintaining all necessary accounting records of the LP’s activities.

The General Partner will receive a profit share of £1,000 per annum.

The General Partner may be removed without cause by a majority vote of 75% of Limited Partners by value at any point on or after 31 May 2021, or at any time for cause by a majority vote by value.

4.3 SPECIAL LIMITED PARTNER

FIM Executives Limited Partnership is a member of the LP. Its sole entitlement is to receive a profit share from the LP based on the performance of the LP as set out in Section 7.

4.4 MANAGER

The LP has appointed FIM Services Limited as the Manager of the LP under the terms of the Management Agreement. The Manager will carry out the principal business of the LP on its behalf and shall carry out activities that are regulated by FSMA.

A summary of the Management Agreement at Appendix 3.2 sets out further information on the services FIM provides to the LP, the duration of FIM’s appointment and the processes for re-appointment and termination of the appointment.

4.5 ADVISORY COMMITTEE

An Advisory Committee of four members has been appointed by the General Partner. Each member is a representative of Limited Partners. Under the terms of the LP Agreement the General Partner and the Manager must refer certain matters for consultation with the Advisory Committee. These include any conflict of interest which it believes could arise.

The Manager is bound to give full and due consideration to the resolutions of the Advisory Committee before proceeding with any course of action on which the Advisory Committee has been consulted. In particular, the Manager will not proceed with any course of action on which a conflict of interest could arise unless the Advisory Committee has waived the conflict and agreed to the course of action proposed.

4.6 VALUATION

Independent market valuations of the LP’s portfolio will be undertaken by an External Valuer on each Independent Valuation Date, being 31 May 2020 and five yearly thereafter for the duration of the LP. In intervening years FIM will provide an opinion of value of the LP’s portfolio as at 31 May. The valuations will be incorporated into the audited annual accounts which are issued to Limited Partners.

FIM’s valuations will be conducted on the following parameters:

1. Forest Properties

A market value of each forest, based on a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

4. DETAILS OF THE LIMITED PARTNERSHIP

The following is a summary of the structure and management of the LP. Further details are included in Appendix 3.1.


The valuation will be in accordance with the Royal Institution of Chartered Surveyors (“RICS”) Valuation Standards applicable at the time.

2. Wind Farms

Wind farms which have been taken over under the construction contract and are thus fully operational will be valued on current market evidence of the sale of operational wind farms. Prior to take over, a wind farm development will be valued at cost.

In the absence of suitable market evidence, operational wind farms will be valued on the basis of forecast distributions, net of debt service costs and principal repayments, with budgeted wind yield from the wind farm and projected output prices less forecast operating expenses, discounted at 12% to give a pre-tax net present value.

3. Wind Farm Rental Income

Forecast pre-tax revenue from the lease in question will be discounted at 8% to give a net present value of the rental income over the life of the lease, disregarding any potential extension of the initial lease.

4.7 FINANCIAL STATEMENTS

The LP’s year end is 31 May. For each year the Manager will prepare a Report and Financial Statements which are issued to Limited Partners. The Financial Statements are audited by the LP’s auditor. The Manager will arrange an Annual General Meeting of the LP within 120 days of the year end.

The Manager will also submit a six monthly report to Limited Partners.

4.8 CASH

The LP’s cash will be held in its own bank accounts with UK clearing banks.

The LP’s main bank is currently the Clydesdale Bank plc. The LP also has deposit accounts with Barclays Bank plc and may use these accounts to obtain a better interest rate on cash balances.

Neither the Clydesdale Bank plc or Barclays Bank plc are associates of the Manager.

Interest on cleared funds accrues for the benefit of the Limited Partners.

The Manager accepts no liability for the loss of such monies in the event of the relevant bank defaulting.

4.9 INSURANCE

The LP will carry insurance to cover:

• The UK forests will be insured against loss from fire and windthrow as appropriate. This is currently subject to an excess of 2.5% of the total insured value with a minimum excess of £2,500 per event and a maximum excess of £10,000.

Public liability cover of £10 million will be held for each property.

• Renewable energy projects will be insured for normal construction and operational risks.

FIM receives a commission from the insurance broker for arranging and administering the insurance cover, which on the forest policy is currently 10%.

4.10 ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE (“AIFMD”)

FIM anticipate that operation of the LP will become subject to the requirements of AIFMD (as the Directive has been implemented in the UK) in July 2014. In order to meet the requirements of this Directive, FIM are applying to vary their permissions with the Financial Conduct Authority and will need to amend certain internal documentation and procedures in order to remain compliant.

It is intended that FIM will become the authorised Alternative Investment Fund Manager of the LP for AIFMD purposes. In addition, the General Partner will be required to appoint a provider of Depositary Services who will provide additional independent oversight in relation to the assets and cash-flows in the LP. The annual cost to the LP of Depositary Services is estimated at £45,000. These requirements will be implemented as required.


Investment in commercial forestry is currently subject to favourable taxation treatment. Under current UK tax law there is no liability to income tax or CGT arising in relation to growing timber. As a consequence, most of the income arising in relation to the forestry investment is anticipated to be free of tax. Income from investments in wind farms does attract income tax. National Insurance Contributions may also be payable by Limited Partners depending on their personal circumstances.

In addition, both commercial forestry and wind farms should qualify for 100% relief from IHT, as Business Property Relief (“BPR”) will apply following a qualifying period of ownership. In consequence, it is anticipated that the investment should benefit from up to 100% relief from IHT, once held for two years.

Existing Limited Partners have the opportunity to increase their holding in the LP with the issue of new “C” Additional Limited Partnership Shares. It is believed that this new investment would qualify immediately for 100% IHT relief, provided the Limited Partners’ existing Partnership Shares have been held for two or more years and the new overall percentage holding of Partnership Shares has not increased significantly compared to the percentage held before this new investment.

5.1 SUMMARY

A limited partnership is treated as “tax transparent” during periods when it is carrying on a trade. The main provisions of relevance to UK resident individual Limited Partners under current UK tax legislation are explained below.

Due to the tax transparent nature of the LP the taxable income arising in the LP will be allocated to Limited Partners in accordance with their overall holding of Partnership Shares and the date at which these Partnership Shares were allocated (if these shares were not owned for the full tax year).

Each Limited Partner will be personally liable for any tax liabilities arising out of their individual participation in the LP, in accordance with the legislation applying in their own jurisdiction. The LP will have no liability to pay any tax liabilities on behalf of Limited Partners.

Any tax treatment or tax relief referred to in this IM, and any accompanying documents, are those applying under relevant UK law and HM Revenue and Customs (“HMRC”) practices at the time of publication and may change in the future. Their availability and value depends on individual circumstances.

Any change in the level and/or basis of taxation, in tax reliefs or in HMRC practices may adversely affect the value of an investment in the LP and returns to Investors.

5.2 HMRC REGISTRATION REQUIREMENT

Each Limited Partner is required by HMRC to register their interest in the LP, by completing form SA401 (Registering a Partner for Self Assessment). Following this registration HMRC will provide a Unique Taxpayers Reference (“UTR”) number to those Limited Partners who do not already have one. The UTR must be supplied on the Application Pack before the General Partner will approve each application. HMRC may levy fines against Limited Partners who do not register their interest.

5.3 INHERITANCE TAX (“IHT”)

Once a Partnership Share has been held for two years the entire value of the forest portfolio and the LP’s direct investment in wind farms should qualify for 100% relief from IHT. This is due to the application of Business Property Relief (“BPR”). Accordingly, any lifetime transfers or any transfers on death could be entirely free of IHT.

The two year qualifying period will commence immediately from the date of allotment of each “C” Additional Limited Partnership Share, as the LP is already trading.

The only part of the LP which may not qualify for BPR in the future could be the value attributed to land on which there was lease rental income being received (i.e. from operating wind farms) as such income is not treated as trading income.

Whilst this value might create an IHT liability, should any such income arise on the portfolio this would be additional income which enhances the overall value of the LP.

5. TAXATION

The information below is intended as a general summary prepared in accordance with FIM Services Limited’s current understanding of UK tax laws and should be used only as a guide and does not constitute legal or tax advice. FIM does not provide taxation advice. Prospective investors are advised to consult their own professional advisers in relation to the financial, legal, tax, National Insurance Contribution liabilities and other implications of investment in the Limited Partnership which will vary in relation to their own particular circumstances.


5.4 INCOME TAX

Each individual Limited Partner will be subject to income tax at their marginal rate on all taxable income arising in the LP.

Under UK law different income streams are taxed separately. A summary of this is provided below:

FORESTRY: Timber harvesting

Income generated from the harvesting of timber from commercial woodlands is exempt from both income and corporation tax.

FORESTRY: Other uses

Income arising from alternative uses, in the form of rents, including wind farm leases, or other taxable sources (i.e. sporting rents or interest income), will be subject to income tax.

WIND FARMS: Electricity generation

Profits arising from wind farm electricity generation are subject to income tax. When calculating taxable profits, pre-trading expenditure and capital allowances arising on each development are likely to eliminate any income tax liability in the early years of generation. Therefore distributions in those early years are likely to be free of income tax. FIM Windfarms 2 LP will utilise capital allowances and other reliefs where available, so that taxable profits in these years are extinguished, carrying forward unutilised allowances to offset against future years profits. In future periods, taxable profits will arise from this activity. It is planned that distributions from the LP will be increased to reflect the tax liability which will then arise.

It should be noted that “C” Additional Limited Partnership Shares may incur income tax liabilities in 2014/15 and 2015/16 for the Limited Partner before any distribution is received in June 2016. These liabilities are expected by the Manager to be de minimis.

5.5 CAPITAL GAINS TAX (“CGT”)

FORESTRY: Timber Any gain in the value of the timber crop and plantation is exempt from CGT.

FORESTRY: Land

Any gain in the value of the land (excluding the crop) will be subject to CGT.

CGT would arise on the sale of land in two circumstances:

1. When the LP sells a forest property there may be a taxable gain arising in the LP.

2. When a Limited Partner disposes of Partnership Shares there may be a taxable gain arising.

FIM will provide in the annual tax statement issued to Limited Partners:

1. Details of any capital gain arising in the LP in the tax year concerned; and

2. A split between land and crop values allowing any CGT liability on disposal of Partnership Shares in the year to be calculated.

WIND FARMS

On disposal of an interest in a wind farm, CGT would be payable on any increase in value since acquisition. In addition there could be a balancing charge made to clawback capital allowances previously claimed. Any balancing charge would be subject to income tax.

In the event that a CGT liability arises on a Limited Partner, CGT would be payable at either 18% or 28% dependent on the taxation status of that Limited Partner. The annual CGT exemption may reduce or eliminate such liability.

Entrepreneur’s Relief may be applicable should a taxable gain arise. If Entrepreneurs’ Relief applies the rate of tax payable is reduced to 10%. This relief is subject to a lifetime limit for disposals on or after 6 April 2008 of £10 million.

5.6 STAMP TAXES: LIMITED PARTNERS

TRANSFERS

Following the introduction of the Finance Act 2006, Stamp Duty Land Tax (“SDLT”) no longer applies to the transfer of Partnership Shares unless the partnership is a “Property Investment Partnership” or where certain anti-avoidance provisions apply. Neither of these circumstances should apply to this LP and thus no SDLT obligations should arise in the event of a transfer of Partnership Shares.

ADMISSION OF NEW LIMITED PARTNERS

There is no SDLT payable on the admission of new Limited Partners. This is exempt from SDLT under the Finance Act 2003.


5.7 COMPANIES CONTROLLED BY INDIVIDUAL LIMITED PARTNERS

HMRC may seek to treat individual Limited Partners as “associated” for the purposes of establishing the small companies rate for corporation tax in respect of companies which they control. The Finance Act 2008 introduced legislation to restrict the application of this treatment to instances where the planning has been undertaken to obtain a tax advantage. If relevant, Limited Partners should seek further advice from their accountants or taxation advisers.

This consideration will only be relevant up to 1 April 2015, as HM Government plan to align the main rate of corporation tax with the small company rate with effect from that date.

5.8 TAX RETURNS

The Manager will provide each Limited Partner with an annual tax statement showing each Limited Partner’s share of taxable income and capital gain arising in that tax year. Each Limited Partner will be liable for any tax due on such income or gain.

5.9 NATIONAL INSURANCE CONTRIBUTIONS (“NICS”)

It is important for prospective investors to understand that the LP is a trading business and as a Limited Partner they will be subject to self assessment by HMRC as being self employed. Being self employed means that Limited Partners may be subject to National Insurance Contributions on their earnings arising from their interest in the LP. National Insurance rules are complex and a summary is provided below. Limited Partners may need to seek specialist advice in relation to these rules.

An individual Limited Partner will be regarded by HMRC as self employed and may be liable for Class 2 and/or Class 4 NICs unless eligible for exception or other form of relief. A Limited Partner will therefore be required to register their interest in the LP with HMRC. This registration will be required even if no NICs are payable.

It should be noted that NICs are not payable by Limited Partners over the State retirement age.

There are two classes of NICs relevant to Limited Partners, except those over the State retirement age, in relation to the LP:

CLASS 2 NICS

Class 2 NICs are paid at a flat rate of £2.70 per week - £140 per annum (2013/14). However, if a Limited Partner’s earnings (calculated as accounting profit) from all self-employments (including all partnerships) are below £5,725 per annum (2013/14) they may apply for a Certificate of Small Earnings Exception. In this case Class 2 contributions are not payable.

If a Limited Partner has self-employments which exceed £5,725 then Class 2 NICs will be payable unless:

1. The Limited Partner is over State retirement age; or

2. The Limited Partner is an employee earning more than £41,450 (2013/14) and is therefore paying Class 1 NICs.

In the case of 1 above an application for deferment may be made. This should normally be made before the start of the tax year for which deferment is being applied.

In relation to the LP, accounting profits for the year ended 31 May 2014 are forecast to be £0.38 per share. In consequence only a Limited Partner with circa 15,000 Partnership Shares (and no other self-employments) would exceed the £5,725 Small Earnings Exception.

CLASS 4 NICS

Class 4 NICs are due on taxable profits arising of between £7,755 and £41,450 (2013/14) at a rate of 9%, and at a rate of 2% above £41,450 (2013/14). If taxable profits are lower than £7,755 then Class 4 NICs are not payable.

In consequence, if taxable profits exceed £7,755 (of all self-employments including partnerships) Class 4 NICs will be due at the rates above except where:

1. The Limited Partner is over state retirement age; or

2. The Limited Partner is an employee earning more than £41,450 (2013/14) and is therefore paying Class 1 NICs.

In the case of 2 above Class 4 NICs are payable at a rate of 2% on all taxable profits in excess of £7,755.

There are no taxable profits forecast in the LP in 2013/14 due to taxable losses available from the wind farms being utilised. In consequence, the Manager does not anticipate Class 4 NICs being payable by Limited Partners in 2013/14. However, taxable profits will increase in future years as the wind farms are in full production and the tax shelter provided by capital allowances reduces.

FIM has 35 years experience of promoting, operating and managing UCISs, including trusts, limited partnerships and limited liability partnerships, based on tax efficient structures.


FIM was established in 1979 and is authorised and regulated by the FCA. It has funds under management of circa £555 million across a range of asset backed investments and renewable energy projects.

FIM provides investment advice on the management of circa 63,000 hectares of land and forests. In addition, expertise includes adding value through alternative/additional uses. Acting on behalf of landowners, FIM has marketed potential wind farm sites to developers. There are currently some 1.4GW of potential capacity in various stages of the lease/option/planning process. At 30 November 2013, there are 10 consented projects on FIM clients’ land totalling circa 300MW of installed capacity.

Expertise also extends to managing the risk capital associated with progressing sites through the planning process. The first such site received planning approval in April 2009 for 40MW.

FIM now also has a well established track record in acquiring, managing and selling renewable energy projects on behalf of a UK infrastructure fund and private investors. FIM currently manage 102MW of

on-shore wind farm capacity. Seven projects, 61MW, are operational. Two projects, 41MW, are under construction.

FIM has extensive experience of managing UCISs such as this LP. Within its client portfolio, FIM manages two forestry related funds, being this LP and FIM Forest Fund I LP. It also manages three wind farm vehicles (one limited liability partnership and two limited partnerships). These vehicles have combined assets of some £200 million. All are currently fully invested.

6. THE MANAGER

The LP has entered into a Management Agreement with FIM, summarised in Appendix 3.2


7.1 FIM SUSTAINABLE TIMBER & ENERGY LP (“LP”)

The LP seeks to raise £25 million. All funds raised net of issue expenses will be available to fund the purchase of UK commercial forest properties and interests in UK renewable energy projects, subject to the Manager identifying suitable projects.

A. ISSUE EXPENSES

FIM will be paid a fee of 2% of the funds subscribed, for marketing the LP and raising equity.

The LP will meet all costs in connection with this issue with costs capped at £50,000. Any costs over and above this amount will be met by FIM.

B. ANNUAL MANAGEMENT FEES

In addition to the LP promotion fee FIM is also entitled to the fees and expenses set out below which shall be paid to it by the LP.

i) An annual management fee payable quarterly in arrears. This is calculated on:

To 31 May 2014 – 0.5% of capital transferred to the LP.

From 1 June 2014 to 31 May 2020 - 0.5% of the NAV of the LP as determined at the Independent Valuation Date of 30 November 2013 less the value ascribed to leases with developers where FIM receives or will receive an annual fee under 7.1.B.(ii) below and to investments in wind farms where FIM receives an annual fee under 7.2.B. below plus 0.5% of capital subscribed under this IM, pro rated for part year as appropriate.

The Management Fee will be rebased at each Independent Valuation Date, being 31 May 2020 and five yearly thereafter, to be 0.5% of the NAV established in the audited accounts as at that date less the value of leases and wind farm investments as set out above.

In each intervening year the Management Fee established as above will be uplifted annually in line with the RPI until the next review date.

ii) A fee of 7.5% of income or capital receipts arising from option for lease agreements or leases with developers.

C. TRANSACTION FEES

i) Acquisition Fee

A fee of 2% of capital invested is payable to FIM on completion of an acquisition, to cover the identification and purchase of the investments.

In the case of funds reinvested by the LP, a fee of 2% of capital invested is payable on completion of the acquisition.

ii) Realisation Fee

Where the Manager implements a sale of the LP or any of the LP’s assets, including timber, a fee of 2% of proceeds (net of any debt repayment) from the sale will be payable to FIM.

D. EXPENSES AND OVERHEADS

The LP will pay for all of its direct annual overheads, including audit fees and tax advice. This is estimated to be £25,000 per annum.

The Manager and the Advisory Committee will be entitled to recover from the LP all reasonable travel and other direct expenses incurred in performing their obligations.

Insurance cover for the LP or an SPV may be placed by FIM, in which case FIM will be entitled to any commission which may arise.

The expenses and commission will be charged to specific investment entities where applicable.

The LP will incur normal expenses on investments acquired. On forest acquisitions these include legal and registration fees and SDLT on the land portion of the purchase price. It is expected that the value of the crop should be exempt from SDLT. The current rate of SDLT depends on the purchase value of the land, commencing at 1% over £150,000, rising to 3% over £250,000 and 4% over £500,000.

From April 2015, SDLT will cease to apply to transactions involving land in Scotland and will be replaced by the Land and Buildings Transaction Tax (“LBTT”). LBTT was enacted on 31 July 2013, though the rates of LBTT were not included in the bill and may not be announced until late 2014. LBTT is expected to be a progressive tax. The rates proposed in the latest consultation paper were: 0% up to £150,000; 3% between £150,001 and £250,000; 4.4% on the remainder of the price over £250,000.

7. FEES, CHARGES AND SET UP COSTS


7.2 WIND FARM DEVELOPMENTS

FIM will be entitled to fees from each renewables entity that the LP is invested in. The LP will incur these fees in the proportion in which it owns the entity. The applicable fees are:

A. TRANSACTION FEE: PROJECT ORIGINATION AND CONSTRUCTION

In addition to the transaction fee of 2% specified in 7.3.1 on the investment of equity in a project, for carrying out the services of project origination and construction of renewable energy projects a fee is payable to FIM, either from the entity or directly from the LP:

• On transactions with installed capacity up to 1MW a total fee of £50,000;

• On transactions with installed capacity of between 1MW and 5MW a total fee of £100,000; and

• On transactions with installed capacity of 5MW+ a total fee of £150,000.

The fee is linked to RPI from 1 May 2010 and payable as to 20% for the organisation of bank finance and 80% for the management of construction through to take over of the project.

B. ANNUAL MANAGEMENT FEE

FIM is entitled to a fee of 2% of gross income from a renewable energy project which is funded by the LP. The fee is to cover all the costs of running both the investment entity and each operating entity.

7.3 LIMITED PARTNERS

FIM is entitled to be paid the following fees directly by Limited Partners.

1. FEE ON SALE OF PARTNERSHIP SHARES

When FIM arranges a sale of Partnership Shares in the LP between a willing vendor and a willing purchaser, FIM shall be entitled to a fee from the vendor of 3% plus VAT on the sale price, and a fee from the purchaser of 3% plus VAT on the purchase price.

2. FEE ON TRANSFER (WITHOUT CONSIDERATION) OF PARTNERSHIP SHARES

A processing fee of £200 plus VAT linked to RPI from May 2010 (payable by the transferor unless the transferee has agreed to pay it in place of the transferor) on each transfer of Partnership Shares in the LP. The processing fee for 2013/14 is £225 plus VAT (£270 per transfer).

7.4 PERFORMANCE PROFIT SHARE

FIM will align its interest in maximising returns to investors through a profit share based on a performance fee defined as 15% of any pre-tax return to investors exceeding 7% per annum on equity invested, net of distributions received and payable to the Special Limited Partner.

The Manager intends to add value to the portfolio through focusing on additional sustainable uses of the land combined with investment diversification to create higher returns. The hurdle rate reflects the fact that part of the distributions to investors may be subject to tax, whereas the distributions arising from forestry operations, where a lower hurdle rate is applicable, are tax free.

Under the LP Agreement, distributions will first be made to Limited Partners until such time cumulative distributions to Limited Partners produce an IRR equal to a preferred return of 7% on their respective contributions. Thereafter distributions will be paid as to:

• 85% to Limited Partners

• 15% to the Special Limited Partner (FIM Executives Limited Partnership)

7.5 TOTAL EXPENSE RATIO

The Total Expense Ratio (“TER”) calculated as all fees received by FIM, excluding fundraising and transaction fees, as a percentage of the average NAV of the LP in the period has been:

2011: 0.54%

2012: 0.60%

2013: 0.61%

It is forecast to remain at similar levels.

7.6 VAT

All fees stated herein are subject to VAT (currently 20%) where applicable.


• Investors should be aware that the taxation treatment of the LP and/or of its investments could change in the future. Information regarding taxation is based upon current UK taxation legislation and HMRC practices. Tax law and practice is, of course, subject to change. Any changes in the level and basis of taxation, in tax reliefs or in HMRC practices, may affect the value of an investment in the LP and returns to investors.

• An investment in the LP will generally be illiquid. It is not anticipated that a public market for interests in the LP will develop. An investor may not be able to sell their interest at a reasonable price, or at all. In addition, it may be difficult for a Limited Partner to obtain reliable information about the value of an interest in the LP or the extent of the risks to which such an investment is exposed. There is no guarantee that the valuations given on periodic statements will accurately reflect the realisation proceeds that may be obtained. As with all valuations, the valuations are based only on the valuer’s professional opinion on a stated date.

• The level of any planned distribution may vary or may not be paid at all and investors may not get back the amount of capital invested.

• Although the LP has invested in low risk woodlands and insures against the main risks, damage could be caused to the crops by adverse weather, pests, disease or other uninsured events which could affect both the timing and total amount of the distributions.

• The anticipated timber volume may fail to materialise due to damage caused by uninsured risks such as pests or disease or other factors which slow the growth of the trees.

• Timber prices and/or electricity revenues may fall reducing the return to Limited Partners below expectations. There is thus no certainty that the target IRR will be achieved.

• The LP is a unregulated collective investment scheme and the UK Financial Services Compensation Scheme is not generally applicable to claims relating to such investments. Investors in the LP may have protection under the UK Financial Services Compensation Scheme in certain circumstances but should never assume this until they have satisfied themselves on their position through direct enquiry to their Financial Adviser. Consequently an investor may lose the full amount of their investment in the LP.

• The LP is a long-term investment. It is not suitable as a short-term investment and investors should take independent professional advice on their personal circumstances.

• The directors or employees of the Manager who are responsible for decision making and strategy may change from time to time.

• The success of the LP depends on the ability of the Manager to locate, select and realise appropriate investment opportunities. There is no guarantee that suitable investments will or can be acquired or realised as and when required.

• Any figures set out in this document are prepared on the assumptions stated. These are for illustrative purposes only and do not constitute forecasts.

• The LP may invest up to 1% of its NAV into development risk scenarios, which in the event that planning consent is not obtained will not add any value to the portfolio.

• The LP may allocate capital up to 20% of its NAV as equity to renewable energy projects, which could expose the LP to the construction risks associated therewith. The project could be subject to project finance on normal commercial terms. In the event that costs of construction exceed expectations or in the case of an operational site, revenue from the project fails to meet expectations, banking covenants may be breached, such that the equity allocated to the project by the LP would be impaired or eradicated.

• The LP may utilise gearing in limited circumstances defined in the LP Agreement. FIM anticipates that any such gearing would be constituted by borrowings in Sterling from UK banks or other financial institutions. Such gearing would in total, including equity invested in renewable energy projects subject to project finance arrangements or other non-recourse gearing, be limited to a maximum of 20% of the NAV of the LP at the date of the gearing being employed, as set out in the LP Agreement. Any such borrowings may be secured on the assets of the LP.

• To protect the limited liability status of the investors as Limited Partners in the LP, Limited Partners are excluded from making certain decisions and will have no right or power to control or participate in the day-to-day management of the LP or of any of its assets, including any investment and disposal decisions. All aspects of management are entrusted to the Manager, FIM.

8. RISK FACTORS

Investors in the LP must consider the potential risks of this investment, which include, but are not limited to the following:


• There is no guarantee that the objectives of the LP will be achieved and the value of the Partnership Shares may go down as well as up.

• In the event of a taxable profit arising within the LP, but the LP not having sufficient distributable funds to allow a Limited Partner to meet the tax charge arising thereon, Limited Partners would be liable to fund such a tax charge from other resources.

• Investors, who (alone or with certain associates) control a company that qualifies for a reduced rate of UK corporation tax, may find that their participation in the LP has an adverse effect on the company’s ability to claim that reduced rate.

• There is no certainty that the LP will be able to sell or refinance all or any part of a renewable energy project. The LP may invest in joint venture vehicles with developers. Such an arrangement may make the LP’s investment difficult to realise. The Manager will seek to minimise the risk through a comprehensive agreement with each developer. In either event, the LP would have to continue to hold the asset until the end of commercial generation and the site has been reinstated in accordance with planning requirements, which would require the Limited Partners agreeing to extend the term of the LP.

• Any forced change in the General Partner, the management of the LP, or in any of the projects in which it invests, could adversely impact on the service provided to the LP and the implementation of its business plan.

• The investment opportunity described in this document may not be suitable for all recipients. Any prospective investor who has any doubt about the suitability of the LP should consult an independent financial adviser regarding all aspects of the investment, including taxation matters, prior to committing to invest in the LP.

• A majority of the assets of the LP are situated in Scotland and the LP is registered in Scotland. A referendum on Scottish independence will take place in September 2014. In the event of a vote in favour of independence a period of negotiation of the terms of Scotland’s separation from the rest of the UK would be likely to follow. At the end of such period Scotland would most likely become an independent country. In this case, support for forestry and renewables from the Scottish Government is expected to remain strong as both are considered important industries in Scotland. However, eventual independence could create uncertainty for the LP’s businesses in Scotland.

DEFINITIONS

“A” ADDITIONAL LIMITED PARTNERSHIP SHARES

Partnership Shares which were acquired by Limited Partners under the terms of the IM issued in 2010.

“B” ADDITIONAL LIMITED PARTNERSHIP SHARES

Partnership Shares which were acquired by Limited Partners under the terms of the IM issued in 2011.

“C” ADDITIONAL LIMITED PARTNERSHIP SHARES

Partnership Shares which are acquired by Limited Partners under the terms of this IM.

EXTERNAL VALUER A valuer who, together with associates, has no material links with (i) the client, (ii) any agent acting on behalf of the client or (iii) the subject of the assignment.

FIM WINDFARMS 2 LP FIM Windfarms 2 LP, an English limited partnership formed on 19 April 2011, with registered number LP14405 and a registered place of business at Glebe Barn, Great Barrington, Burford, Oxon, OX18 4US.

FOUNDER LIMITED PARTNER An investor that transferred their interest in an FIM Forestry Trust to the LP.

FOUNDER PARTNERSHIP SHARES Partnership Shares which were (i) originally acquired by Founder Limited Partners in exchange for interests in an FIM forestry trust; or (ii) assigned in favour of Founder Limited Partners by other Founder Limited Partners prior to this offering.

IM This information memorandum.

IRR The internal rate of return accruing to Limited Partners, based on their Capital Contributions made to the LP, from distributions made by the Limited Partnership plus the final distribution on termination of the LP derived by calculating the discount rate which when applied to a series of cash flows produces a net present value equivalent to zero.

LIMITED PARTNER Investors who subscribe for Partnership Shares and are admitted to the Limited Partnership.

LIMITED PARTNERSHIP, “LP”, “STELP” FIM Sustainable Timber & Energy LP, a Scottish limited partnership formed on 1 March 2010, with registered number SL7703 and registered place of business at 15 Atholl Crescent, Edinburgh, EH3 8HA.

LP AGREEMENT The agreement entered into by all the Limited Partners and the General Partner that governs the administration and activities of the Limited Partnership.

NAV Net Asset Value.

PARTNERSHIP ASSETS All the assets of the LP including investments and the cash in the LP’s bank accounts.

PARTNERSHIP INTEREST The interest of a Limited Partner in the LP.

PARTNERSHIP SHARE A Partnership Interest of £10 nominal capital.

UCIS An Unregulated Collective Investment Scheme as defined in FSMA.



The portfolio targets Sitka spruce. In the UK this species produces the largest volume of timber in the shortest time with the greatest diversity of end uses. It is the tree species on which the UK timber processing industry is reliant. 71% of the 10,942 hectares of productive land is stocked with Sitka spruce. 19% of the productive area is currently due for planting or restocking, the majority of which relates to the large scale afforestation project at Carrick Farm which has been developed by the LP and has recently received full planting and grant approval.

Within the Sitka spruce crop the LP has a variety of age classes which will provide opportunities for timber harvesting over the life of the LP. A high proportion of Sitka spruce is over 30 years of age, harvestable over the next 10 to 15 years, with the younger crop providing significant capital appreciation in the long term.

Portfolio rationalisation will focus on disposal of higher valued amenity/small forest properties for reinvestment into the target large scale blocks of high yield class commercial conifers, well located for established markets.

APPENDIX 1 - CURRENT PORTFOLIO

1.1 FORESTRY

The large scale, revenue producing forest portfolio currently comprises 53 forest properties amounting to 13,653 hectares (48 properties are freehold - 12,633 hectares, and five leasehold - 1,020 hectares) valued at £70.3 million as at 30 November 2013. This represents 85% of NAV at that date. Diverse geographic locations and age class spread helps minimise investment risk from fire, wind throw, pest and disease.

3% 7%

19%

71%

Current Productive Land Area Breakdown

Larch

Other conifers

Unplanted - Restock Sites

Sitka spruce

0

500

1,000

1,500

2,000

2,500

3,000

0-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41-55 55+

Area

(ha)

Age (years)

Current Age Profile of Sitka Spruce


Certification schemes provide a way of defining sustainable forest management as well as third party independent verification that a timber source meets the definition of sustainability.

These schemes include a mechanism for tracing products from the certified source forest to the end use, providing evidence that it is both legal and sustainable.

The FSC is the most widely regarded scheme, which most effectively ensures that products bearing its label are sustainable. Each operation is audited annually to ensure compliance with the set standard.

1.2 PORTFOLIO ADDED VALUE

FIM continues to focus on generating additional income streams from the LP’s portfolio, currently focusing on the potential for wind farm development.

The Manager continues to work with a number of wind farm developers in order to agree and manage Option for Lease agreements for wind farm developments on the LP’s forest portfolio. Good progress has been made.

Planning consent was secured by the developer on Cowans Law. The installed capacity of turbines on land at Cowans Law is expected to be 33MW (11 x 3MW turbines). Once the wind farm is constructed and operational (expected 2016) the LP should receive rent in excess of £200,000 per annum, net of fees.

Details of the project can be accessed on the developer’s website: http://www.communitywindpower.co.uk/projects/information.asp?ProjectID=34

Planning permission has also now been received at Penmanshiel. Installed capacity on land at Penmanshiel is expected to be 22MW (11 x 2MW turbines). Once constructed and operational (expected 2016) the LP should receive rent in excess of £150,000 per annum, net of fees.

Further information can be found on the following website: http://www.penmanshiel-windfarm.co.uk/

While FIM believes the information on the developers’ websites given above to be reasonably accurate it has not verified such information and the information thereon does not form part of this Information Memorandum.

These successes mean that across the forest portfolio there is now 55MW of capacity with planning consent and circa 140MW of potential capacity in various stages of the planning and option for lease process.

Status of Option for Lease agreements

Properties Potential Capacity

With planning consent 2 55MWSubject to Option for Lease agreements

2 11MW

Advanced negotiations 9 129MW

Each MW of constructed capacity will provide rental income for the LP, adding significant value to a property. There is no risk to the LP, as timber compensation is paid at favourable rates on any trees felled and all costs are met by the developer. The Manager continues to analyse the benefits of wind farm rents relative to the benefits of maintaining the land as forestry to ensure the best economic performance for the LP.

Following planning permission for the wind farms at Cowans Law and Penmanshiel it is expected that the wind farm developers will enter into leases once all planning conditions are discharged and site investigation works complete. Significant value will be added to the LP’s portfolio once a lease is signed and the wind farm is constructed. In the case of Cowans Law and Penmanshiel the value added will be net of the impact of Partnership Shares issued under the clawback arrangement implemented when these properties were transferred into the LP by a number of forestry trusts, as set out in Appendix 3.1.

1.3 RENEWABLE ENERGY DIRECT INVESTMENT

The LP has a 50% holding in FIM Windfarms 2 LP, valued at £10.3 million as at 30 November 2013. This represents 12% of the NAV at that date. This is comfortably within the parameters of 20% as set out in the LP Agreement.

FIM Windfarms 2 LP has made good progress on implementing its business plan by investing in three projects:

Mynydd Portref Wind Farm: 9.35MW in south Wales. FIM Windfarms 2 LP owns a 100% interest in this wind farm.

Turbines 11 x Gamesa 850kWForecast Output 21,600MWhCapacity Factor 26%Date of Takeover 23 July 2012

The wind farm is operational. Performance to date has been good, although in the half year to 30 November 2013 wind speeds were lower than average resulting in lower than budgeted output. However availability, a measure to determine when a turbine is available to generate electricity, has been within expectations and the wind farm is operating well.

All forests owned by the LP will be managed in accordance with the UK Woodland Assurance Standard (“UKWAS”), which results in certification under the Forest Stewardship Council (“FSC”) scheme.


Wathegar Wind Farm: 10.25MW in north Scotland FIM Windfarms 2 LP completed the purchase of a 50% interest in this wind farm in 2012. It is a particularly high yielding site.

Turbines 5 x REpower 2.05MWForecast Output 35,200MWhCapacity Factor 39%Date of Takeover 29 July 2013

The wind farm is operational. First export of electricity to the grid was on 26 March 2013. Ofgem accreditation has been obtained for the turbines and confirmation received that each MWh will benefit from 1 ROC.

Torrance Wind Farm: 9.0MW in south Scotland. FIM Windfarms 2 LP owns a 100% interest in this wind farm.

Turbines 3 x Siemens 3MWForecast Output 25,400MWhCapacity Factor 32%Date of Takeover 3 October 2013

The wind farm is operational. First export of electricity to the grid was on 25 September 2013.

Investment in FIM Windfarms 2 LP provides:

• Geographic diversification: To counter wind speed variability.

• Wind Turbine Generator diversification: Using three established suppliers, Gamesa, REpower and Siemens.

• Economies of scale: Combined output of circa 82.2GWh could increase bargaining power with PPA offtakers.


APPENDIX 2 - CURRENT PORTFOLIO MAP

Forest properties

Forest properties with potential for renewable energy development

Wind farms


INVESTMENT OBJECTIVES

The LP is governed by the LP Agreement as amended and restated on 10 February 2014. This incorporates the Investment Objectives as set out in Section 2.1. The LP Agreement, including the Investment Objectives, may only be varied by a vote of a majority by value of Partnership Shares.

COMMENCEMENT, DURATION AND TERM

The LP will continue until 31 May 2021 when there will be a vote as to whether to wind up the LP. If 75% of Limited Partners by value vote to continue, the LP will continue for a further period of five years to 31 May 2026. The LP can then continue on the same voting basis for a further period of five years, subject to a final Termination Date of 31 May 2031.

POWER OF THE GENERAL PARTNER

The General Partner is responsible for the management, control and operation of and the determination of policy with respect to the LP and is authorised to do anything it determines necessary for the purpose of the LP in accordance with the Investment Objectives.

Neither the General Partner (nor any of its Affiliates) shall be liable for the return of the Capital Contributions of any Limited Partner.

REMOVAL OF THE GENERAL PARTNER

The General Partner may be removed for cause by a resolution passed by a simple majority of over 50% of the Limited Partners by value of Partnership Shares voting.

The General Partner can be removed without cause on not less than 12 months prior notice on or after 31 May 2021 subject to a resolution passed by 75% or more of the Limited Partners by value of Partnership Shares voting.

NO PARTICIPATION IN MANAGEMENT, ETC

No Limited Partner shall take part in the management of the LP’s business, transact in the LP’s name, sign documents on behalf of, or otherwise bind the LP.

LIMITATION OF LIABILITY

The liability of each Limited Partner is limited to its Capital Contribution.

ADVISORY COMMITTEE

• The General Partner shall establish an Advisory Committee.

• The General Partner may appoint up to four members to the Advisory Committee.

• Each member of the Advisory Committee shall be a representative of a Limited Partner.

The Advisory Committee is authorised to provide advice and counsel to the General Partner as requested, in particular on changes to the planned distribution of 3% per annum and conflicts of interest.

The Advisory Committee shall constitute a committee providing advisory services to the LP and take no part in the control or management of the LP, nor have the power to act on behalf of the LP or make any investment decisions for the LP.

The General Partner and the Manager or any of their Affiliates shall not be bound to act in accordance with the Advisory Committee’s decisions, but must consider them.

INDEMNITY

The General Partner, the Manager and their employees and agents, together with members of the Advisory Committee are indemnified by the LP in respect of any claims arising out of their conduct in such capacities. Such indemnities do not apply in any cases where there has been fraud, wilful misconduct or bad faith and, in relation to the General Partner or the Manager, where there has been gross negligence, reckless disregard of obligations or material breach of the LP Agreement or a material violation of FSMA.

DISTRIBUTIONS

The General Partner will instruct the Manager to make distributions in accordance with the Investment Objectives, with the aim being to make the Target Annual Distribution, until the termination of the LP.

Distributions will first be made 100% to Limited Partners until such time that cumulative distributions to Limited Partners produce an IRR equal to 7% on their respective Capital Contributions.

Distributions thereafter will be paid as to 85% to Limited Partners and 15% to the Special Limited Partner.

For each Founder Limited Partnership Share the start date for the measurement of the IRR referred to above shall be the date of creation of the Limited Partnership Share with the base value of £10.00. The start date for any Additional Limited Partnership Share will be the date on which the Partnership Shares were created with the base value being the gross amount paid at that time by the relevant Limited Partners.

APPENDIX 3 - SUMMARY OF MAIN DOCUMENTS

3.1 SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT (“LP AGREEMENT”)


Before payment of any distribution to the Special Limited Partner, the General Partner shall obtain confirmation in writing from the Auditors that in their opinion the amount of the distribution to the Special Limited Partner has been calculated in accordance with the distribution provisions in the LP Agreement.

APPOINTMENT OF THE MANAGER

The General Partner appoints the Manager to:

• operate and manage the LP;

• enter into contracts on behalf of the General Partner and the LP;

• investigate and analyse potential investments;

• acquire investments in line with the Investment Objectives;

• manage the investments and the LP’s business;

• implement disposals of investments; and

• wind up the LP in accordance with the LP Agreement as instructed by the General Partner.

ALLOCATION OF REMAINING INCOME AND GAINS

Net Income, Net Income Losses, Capital Gains and Capital Losses will be allocated among the Limited Partners in the same way distributable cash is distributed between the Limited Partners.

AUDITS AND REPORTS

Limited Partners will receive annual audited accounts along with details of their own partnership capital accounts. The General Partner will prepare and issue a financial report to each Limited Partner within 90 days after the end of each Accounting Period and at least 20 business days before each Annual General Meeting (“AGM”).

LIMITED PARTNER’S MEETING

• The General Partner will arrange for the LP to have an AGM of the Limited Partners.

• At the AGM the General Partner will review the investment performance of the LP.

• The AGM will be held within six months of the end of each Accounting Period of the LP.

• The General Partner will give the Limited Partners at least 20 business days written notice of the AGM.

• Each Limited Partner is permitted to appoint the General Partner as their proxy to vote on any resolution.

ADDITIONAL LIMITED PARTNERS

With the consent of the Limited Partners by a resolution passed by a 75% vote, Additional Limited Partners can be admitted to the LP and existing Limited Partners may increase their Capital Contributions at Subsequent Closing Dates as determined by the General Partner.

Approval to issue Additional Limited Partnership Shares under the terms set out herein was granted by a majority of those existing Limited Partners of over 75% by value of Partnership Shares on a vote held on 3 December 2013.

GENERAL PARTNER TRANSFER PROVISIONS

• The General Partner can only transfer all or part of its Interest to an Affiliate.

• If the General Partner transfers its entire Interest the Transferee is automatically admitted to the LP as the replacement General Partner without further action or approval and without dissolution of the LP.

• The Special Limited Partner can only transfer all or part of its Interest to an Affiliate.

• Where a Limited Partner is a Limited Partner for only part of the Accounting Period his entitlement shall be in proportion to the profits (or losses) which would have been allocated to him had he been a Limited Partner for the full Accounting Period.

TRANSFERS OF PARTNERSHIP SHARES AND SUBSTITUTE LIMITED PARTNERS

• At the discretion of the General Partner, Substitute Limited Partners can be admitted to the LP.

• When admitted they will assume the responsibilities, assets and liabilities of the Limited Partner substituted by the sale or transfer of the Interest in the LP.

• A Limited Partner may sell his Partnership Interest in whole or in units of not less than 2,500 Partnership Shares, provided that such sale does not reduce his holding in the LP to less than 2,500 Partnership Shares.

• The Manager will arrange such transactions between buyers and sellers at mutually agreed prices and the Manager will be entitled to a fee of 3% plus VAT payable by the vendor and 3% plus VAT payable by the purchaser on the value of the sale.

• A Limited Partner may assign for no consideration his Partnership Shares in whole or in units of not less than 2,500 Partnership Shares at any time, provided such assignation does not reduce his holding in the LP to less than 2,500 Partnership Shares.

• The Manager will be entitled to an administration charge of £200 plus VAT (uplifted by RPI from May 2010) to effect registration of each such assignation.


VALUATIONS

The General Partner shall arrange for all assets of the LP to be independently valued on 31 May 2020 and every five years thereafter throughout the duration of the LP.

TERMINATION

The LP will be dissolved on 31 May 2021 (or thereafter on 31 May 2026) unless extended by a 75% majority vote by value in favour of an extension. If the duration of the LP is so extended, it will ultimately terminate on 31 May 2031.

POWER OF ATTORNEY

Each Limited Partner appoints the General Partner and its officers or successor to act as its Attorney for specific purposes in relation to the LP.

WIND FARM OPTIONS FOR LEASES: CLAWBACK

The mechanism set out below will apply in relation to a lease entered into by the LP where an Option for Lease agreement was already in place or negotiations for such an agreement were in progress at the time of transferring the property by a Trust into the LP. This currently applies to three properties comprising:

Sites Potential Capacity

Option for Lease agreements signed

2 55MW

Option for Lease agreements under negotiation

1 10MW

The LP will undertake not to dispose of any of those properties whilst an option agreement on those properties is in force, subject to an overall vote to wind up the LP.

Should a development eventually happen, an uplift in value will occur to reflect the rental income which will arise, over and above the value as at the date of the independent valuation.

Founder Limited Partners who were a Member of a Trust (and who are still Limited Partners in the LP at the time of the LP receiving benefit by entering into a lease over that Trust’s property) will benefit directly by having an increase in their aggregate Partnership Share equating to 40% of the value of the estimated cash flow from the lease, discounted at 10%.

The total value attributable to the lease would be a fixed figure and divided by the number of shares in the Trust at the date of transfer into the LP. Those Trust Members still in the LP, or those to whom LP interests have been transferred, but not sold, would benefit from an increased interest in the LP reflecting their original holding in the Trust. Where LP interests have been sold, no additional benefit would accrue to the new party.

3.2 SUMMARY OF THE MANAGEMENT AGREEMENT

APPOINTMENT

FIM Services Limited/the Manager:

• agrees to operate the LP including managing its investments;

• is authorised and regulated by the Financial Conduct Authority; and

• is liable to the LP in accordance with all relevant regulations, statutes, etc.

DURATION

The Agreement may be terminated by the LP or Manager on one year’s written notice at any time on or after 31 May 2021 and by the LP at any time if the General Partner has been removed with cause by a majority by value of Limited Partners in accordance with the LP Agreement.

DUTIES OF THE MANAGER

The Manager:

• will carry out all tasks required to establish, operate and wind-up the LP;

• will carry out any activity prescribed by FSMA, Financial Conduct Authority Rules, COBS or otherwise; and

• will have power and authority (acting as agent) to act as the Manager judges appropriate regarding the operation of the LP in accordance with the Management Agreement and the LP Agreement, including:

• hold (or arrange a trustee company to hold) all evidence of title (including deeds, documents, etc) to the investments or assets of the LP;

• arrange for the audit of the LP’s accounts and liaise with the auditors to prepare the annual accounts and tax returns of the LP;

• prepare budgets for the LP;

• prepare and circulate annual reports and accounts as per the LP Agreement;

• arrange the LP’s insurance;

• act on behalf of the LP in the sale process if the assets of the LP are sold; and

• consult with the Advisory Committee.


MANAGEMENT OF THE LP’S ASSETS AND INVESTMENTS

The Manager in compliance/accordance with the Investment Objectives, the Management Agreement and the LP Agreement (as applicable) will:

• have full responsibility for the management (on a full discretionary basis) of the investments and assets of the LP including the timing and quantum of distributions.

• Use reasonable endeavours to:

• identify commercial forests for purchase by the LP (including negotiating purchase terms, documentation and due diligence);

• identify opportunities for adding value to the LP’s portfolio through renewable energy option for lease agreements;

• allocate risk capital for securing planning consent for development projects which would add value to the portfolio; and

• allocate capital to renewable energy developments that have received planning consent.

• implement the sale of timber from forests in which the LP has an interest;

• exercise all powers of borrowing of the LP;

• appoint suitable parties to carry out specified tasks;

• oversee the project management of each renewable energy development and act as the LP’s representative under the terms of any construction management agreement; and

• in respect of each renewable energy project, oversee the operations and management contractor and provide a full management service, including implementing the sale of electricity.

ASSIGNMENT

The Management Agreement cannot be assigned by either party without the consent of the other.

SUB-CONTRACTING

The Management Agreement cannot be sub-contracted by either party.

PROFESSIONAL LIABILITY RISK

FIM maintains professional indemnity cover in amounts which comply with the rules of the FCA and that are reasonably commensurate with its duties as determined by FIM and in consultation with the Advisory Committee.


These accounts are a summary of information extracted from the audited accounts. The summarised accounts may not contain sufficient information to allow for a full understanding of the financial affairs of the LP. For further information the full audited accounts, the auditor’s report and the Report of the Manager should be consulted. These are available from the Manager.

INCOME AND EXPENDITURE ACCOUNT P/E 30/11/2013 Y/E 31/5/2013 Y/E 31/5/2012£ £ £

Forestry income 2,076,963 4,519,250 3,360,087Other operating income 57,018 177,754 81,435Total turnover 2,133,981 4,697,004 3,441,522Forest expenditure (588,846) (1,403,117) (1,064,543)Administrative expenses (276,344) (507,890) (418,704)Profit on sale of properties 27,784 (3,180) 40,361Other operating costs (2,030) (7,231) (1,377)General Partner’s share (500) (1,000) (1,000)Operating profit 1,294,045 2,774,586 1,996,259Interest receivable 5,284 17,710 7,253Interest payable (477) (3,327) (606)Share of profit/(loss) in partnership 23,813 (11,801) (49,957)Profit for the period/year 1,322,665 2,777,168 1,952,949Distributions - (1,573,927) (1,111,708)Profit and loss account carried forward 1,322,665 1,203,241 841,241

Statement of Total Recognised Gains and Losses

Retained profit for the period 1,322,665 1,203,241 841,241Unrealised surplus on revaluation of properties 3,087,938 8,783,485 4,090,799Unrealised surplus on revaluation of investment 1,147,000 52,000 -2013 property disposal - removal of revaluation deficits 25,486 14,000 -

Total gains for the period/year 5,583,089 10,052,726 4,932,040

BALANCE SHEETFixed AssetsInvestments 80,614,731 76,374,858 58,250,000Current AssetsDebtors 1,094,661 825,761 810,985Cash at bank 2,522,549 2,903,226 10,517,191

3,617,210 3,728,987 11,328,176Creditors: amounts falling due within one year (1,103,117) (2,558,110) (2,085,167)Net Current Assets 2,514,093 1,170,877 9,243,009

Total Assets less Current Liabilities and Net Assets Attributable to Partners 83,128,824 77,545,735 67,493,009

Represented By

Limited Partners’ capital 56,657,393 56,657,393 56,657,393Revaluation reserve 22,943,780 18,683,356 9,763,871Profit and loss account 3,527,651 2,204,986 1,071,745

Limited Partners’ funds 83,128,824 77,545,735 67,493,009

Total Limited Partnership Shares 5,246,422 5,246,422 5,246,422

Net asset value per Limited Partnership Share £15.84 £14.78 £12.86

APPENDIX 4 - EXTRACT OF FIM SUSTAINABLE TIMBER & ENERGY LP‘S ACCOUNTS

4.1 INDEPENDENT AUDITOR’S REPORT

SUBSCRIPTION

Applications will only be accepted on the receipt of the approved Application Pack accompanying this IM.

THE LP IS OPEN FOR IMMEDIATE SUBSCRIPTION

Allotment of “C” Additional Limited Partnership Shares is subject to a minimum investment for new Limited Partners of £43,550 (2,500 Partnership Shares) at a cost of £17.42 each.

There is no minimum subscription for existing Limited Partners.

Partnership Shares will be allotted on a monthly basis, commencing 31 March 2014 for applications received prior to that date and on which cleared funds have been received by the LP, until fully subscribed.

The two year qualifying period for new Limited Partners for 100% relief of IHT will commence on allotment, as the LP is already trading. As the LP is already established and trading there is no minimum subscription required for applications to be accepted.

The Final Closing Date is 28 November 2014. The issue will close earlier if fully subscribed. The maximum subscription is initially set at £25 million. The Manager may consider raising this if demand is greater, but only subject to the perceived availability of suitable investments at the time.

Early application will:

• Secure an allocation.

• Commence the two year IHT qualifying period.

• Allow the Manager to take advantage of investment opportunities that are currently available.

The monies subscribed to the LP will be held with a UK clearing bank until investments are made. Interest on cleared funds, pending investment by the LP, accrues for the benefit of the LP.

MONEY LAUNDERING REGULATIONS 2007

FIM is obliged to comply with the Money Laundering Regulations 2007, and also adheres to the guidance notes from the Joint Money Laundering Steering Group. This means that FIM must verify the identity and place of residence of each investor. FIM may also request that an Investor informs FIM how any monies paid to FIM were obtained/accumulated. This process may require sight of certain documentation. If an Investor provides false or inaccurate information and FIM suspects fraud or money laundering, FIM will report this to the appropriate authorities.

FIM will not accept an application for Partnership Shares until its verification requirements have been satisfied. FIM shall not be responsible or have any liability for loss or damage (whether actual or alleged) arising from any delay in processing and/or accepting an application for Partnership Shares where identity verification is outstanding.

LAW

The promotion of the LP, application process, acceptance of applications and contracts resulting therefrom shall be governed by and construed in accordance with Scots Law and each party submits to the jurisdiction of Scottish Courts by signing the application documents set out in the Application Pack.

APPLICATION INFORMATION
