The rise of timber and forestry funds in recovering PE and VC markets

Private equity (PE) is undergoing a profound transformation. Amid macroeconomic headwinds, shifting investor expectations, and the growing urgency of climate change, the industry is recalibrating its strategies. Within the sustainability space, one of the most compelling developments in this evolving landscape is the rise of timber and forestry funds – a niche that is rapidly gaining traction due to its dual promise of financial return and positive environmental impact.

This article presents recent key performance indicators and latest trends in the PE and venture capital (VC) markets, with a special focus on Sustainable Finance Disclosure Regulation (SFDR) Art. 8 and Art 9. funds and a deep dive in the timber and forestry sector.

A rise of optimism in a recovering market

The overall evolution of the PE and VC markets is finally showing some signs of optimism after few years of turbulence. Data from Preqin and Pitchbook show that, in 2024, global PE fundraising fell to $680 billion, marking the third consecutive year of decline and the lowest level since 2015. During the same period, the number of VC funds raised dropped to 1,783 (-40% vs. 2203). Despite this contraction, the industry deployed $619 billion across 462 deals exceeding $100 million, signaling a cautious but active investment environment and an increase of 35% as compared to 2023. According to the same sources, exit activity rebounded with $427 billion in proceeds, a 25% year-over-year increase, still below pre-pandemic levels, but the last nine months of 2024 have been the most active ones since 2022. Notably, 27 exits exceeded $1 billion, reflecting a selective but high-value exit landscape.

As far as valuations are concerned, rising interest rates and inflation have led to more conservative deal valuations and a decline in leveraged buyouts. Purchase multiples, while off their peak, remain elevated, with buyout EV/EBITDA multiples averaging 13.9x in 2024.

North America, Asia, and Europe remain the dominant regions for PE activity. Asia, in particular, has seen a surge in VC investments, driven by innovation and digital transformation. Meanwhile, artificial intelligence (AI) has emerged as a central theme across all regions. With AI investments growing by 35% year-over-year, sustainability remains a key topic for EU investors with increasing focus on climate tech, clean energy, circular economy and timber & forestry funds.

Sustainability is still at the heart of the EU PE and VC market 

Despite evolving market dynamics and regulatory complexities, sustainability continues to be a cornerstone of investment strategy across the EU PE and VC landscape. Sustainability considerations have become embedded in the core of value creation, risk management, and long-term performance of the majority of EU funds. This is highlighted by recent Morningstar data from Q1 2025 showing that Article 8 and Article 9 funds, which integrate ESG characteristics or pursue sustainable investment objectives, accounted for nearly 60% of all new fund launches in the EU. As of the end of Q1 2025, the EU alternative investment market is still dominated by Article 8 and Article 9 funds which reached 51.1% of the total number of funds and 58.1% of the total assets under management, according to Morningstar¹. This reflects a clear investor preference for vehicles that demonstrate measurable impact alongside financial returns. 

Fund managers are increasingly aligning their strategies with ESG principles, recognizing that sustainability is not just a compliance obligation but a competitive advantage. As a result, the financial year 2024 witnessed 87 upgrades from SFDR Article 6 to Article 8 (vs. 10 downgrades) along with approximately 100 strategic upgrades across various funds. 

Timber and forestry funds market: A promising niche 

Within the sustainability sector, past years have witnessed the rise of timber and forestry funds, specialized investment vehicles that allocate capital to sustainably managed forest assets, offering both long-term financial returns and environmental benefits. 

Timber and forestry funds continue to demonstrate strong appeal among institutional investors, offering a unique combination of financial performance and environmental impact. In 2024, the sector raised $8.4 billion, slightly below the $9.7 billion raised in 2023, yet still above the five-year average. This resilience underscores sustained investor confidence in the asset class, even amid broader market volatility. Historically, these funds have delivered consistent double-digit net internal rates of return (IRRs), with median returns frequently exceeding 11% and peaking at 16.4% for select vintages². The Total Value to Paid-In (TVPI) multiples also reflect strong performance, with several vintages achieving median multiples above 2.0x, underscoring the sector’s ability to generate long-term value. As demand for sustainable natural resources grows, these funds are gaining prominence as a strategic component in diversified, impact-oriented portfolios.

Timber and forestry funds are expected to play a pivotal role in meeting the EU’s climate ambitions following the EU Sustainable Finance Action plan and EU’s 2030 Forest Strategy (EUFS) which highlights the importance of forests in achieving the EU’s biodiversity and climate goals. Amongst the drivers of growth, several macro and structural factors are fueling demand for timber investments:

• Construction and urbanization: Rising global population and urban development are increasing demand for timber as a construction material.
• Carbon sequestration: Forests are vital carbon sinks, making them attractive for ESG-focused investors.
• Afforestation and reforestation: Funds can incentivize afforestation (planting new forests) and reforestation (replacing lost forests), increasing the overall capacity of forests to absorb carbon dioxide (CO2)
• Supply chain constraints: Disruptions in global supply chains have highlighted the strategic value of domestic and sustainable timber sources.

In this context of increasing demand, the EU is well positioned to act as a strategic hub for this asset class, notably thanks to some key differentiating factors:

• Policy and regulatory support: The European Union’s Emissions Trading System (EU ETS), the world’s first international carbon market set up in 2005, incentivizes investment in carbon-sequestering assets like forests. The system’s cap-and-trade mechanism creates a market-based demand for sustainable forestry and is estimated to cover 40% of EU Greenhouse gas emission.
• Subsidies and tax incentives: In addition, the EU offers a suite of subsidies through programs like the Common Agricultural Policy, LIFE, Horizon Europe, and the Just Transition Fund. Tax incentives include, amongst other, carbon credits, reduced VAT on sustainable timber, and property tax reductions for forest landowners.
• Market Stability: As compared to the US, the EU timber market exhibits greater price stability over the past ten years, with average monthly fluctuations of approximately 7% versus 15% in the US, influenced by factors like trade policies and supply chain issues. As compared to EU, Latin America and Asia are facing land disputes as well as deforestation concerns increasing risk for timber funds. In addition, weak ESG policies in these markets make institutional investment more challenging.
• Climate Resilience: European forests face fewer climate-related risks, such as wildfires and other climate risks, making them more resilient and attractive for long-term investment.

Unlike many traditional asset classes, timberland returns are less correlated with public markets and are supported by biological growth, inflation-linked pricing, and increasing demand for sustainable materials. This makes timber and forestry funds particularly appealing in periods of market uncertainty, offering both portfolio diversification and resilience.

Conclusion

The EU’s alternative investment regulatory framework, anchored by the SFDR, has not only elevated the expectations for transparency and accountability but also incentivizes capital flows toward sustainable assets. This has led to a shift toward a three-dimensional investment approach evaluating risk, return, and non-financial performance and growing demand for funds to deliver on sustainability commitments.

Timber and forestry funds exemplify this shift as they offer a combination of financial performance, environmental impact and low volatility. This asset class is expected to play a pivotal role in the next chapter of alternative investments and its future in the EU is compelling, with the sector poised for significant growth as climate mitigation action gains traction among investors and policymakers. Increasing demand for sustainable resources and a circular economy, coupled with rising investor interest in the asset class, will drive the sector’s expansion.