Phaunos Timber Fund appoints Stafford Timberland to manage its portfolio of timberland assets including Matariki forestry estate in New Zealand, Aurora Forestal loblolly pine plantations in Uruguay and Mata Mineira eucalyptus forests in Brazil

LONDON , June 24, 2014 (press release) – Phaunos Timber Fund Limited ("Phaunos" or the "Company"), the Authorised Closed ended investment scheme established to invest in timberland and timber related assets on a global basis, today announces that it has reached an agreement with Stafford Timberland Limited ("Stafford") to manage its portfolio of assets. The Company also announces the completion of Stafford's strategic review into its portfolio of assets.

Strategic Review

Stafford was initially engaged by the Board of Phaunos in December 2013 to carry out a strategic review of the Company's assets. The key findings of that review are as follows:

- Phaunos has interests in good quality timberland assets in Matariki, Aurora Forestal and Mata Mineira. Combined, these assets represent 56% of the Net Asset Value (NAV) and present a solid base upon which to build out the Phaunos portfolio;

- 36% of the portfolio is represented by higher risk assets, which is a greater proportion than would normally be expected in a balanced timberland portfolio; - There are a large proportion of greenfield 'venture capital' style investments; - Phaunos is reliant on a relatively small number of mature timberland assets for annual cash flows and these assets are subject to export or single product market risk;

- There are several assets whose valuations are subject to significant uncertainty and a forced liquidation value could be more than 30% below the December 2013 NAV;

- Weaknesses in log prices in China have occurred recently, which may have an impact on cash flows in the second half of the year; and

- The Company should seek an exit from some higher / medium risk components of the portfolio and should seek a suitable loan facility in order to make its cash position more robust.

Details of the results of Stafford's review and recommendations are in the Appendix below.

Ongoing Management

After considering carefully all options for the management of the Company's portfolio of assets, the Board concluded that shareholders' interests would best be served by continuing and expanding the relationship with Stafford.

Stafford comprises a team of 11 people with offices in London, Sydney and New Hampshire, USA. Stafford has interests in over 138 timberland assets worldwide, with assets under management of USD 1.5bn from 23 institutional investors across 7 comingled funds & one co-investment.

The Board believes that the appointment of Stafford is the best way to maximise shareholder value. In particular, the Board concluded that:

- Stafford's investment team which includes a number of foresters with on-theground operational experience, has the relevant experience to manage the various different asset types included within the Phaunos portfolio;

- Stafford has extensive market knowledge through strong local networks created from its existing investments which include significant assets in South America, North America and New Zealand, which are regions that overlap with the Phaunos assets;

- Stafford's investment activity in its institutional fixed-life funds has created impressive performance which is significantly better than has been achieved by the Phaunos portfolio; and

- Phaunos will have the benefit of personnel within Stafford who have significant previous experience of managing listed investment companies.

The Board has negotiated a remuneration package which provides strong alignment with shareholders' interests. As part of this package, the Board is recommending the issue of warrants and this will be subject to shareholders' approval at a general meeting (GM). Full details of the agreement with Stafford will be set out in a circular to shareholders, which, together with the formal arrangements for the GM, will be despatched in due course.

The Board has sought to minimise the near-term cash payment to Stafford, which is consistent with an ongoing significant cost reduction programme being undertaken in all areas of the Company's activities.

Key elements of the remuneration package are outlined below:-

1. An annual management fee of 0.35% of market capitalisation of the Company's shares, payable quarterly in arrears. To assist the Company with management of its cash flow, the first payment will be made in December, 2014.

2. A warrant package consisting of:-
- 10 million five year warrants to purchase shares at 50 cents per share, to be issued immediately after the GM;
- 10 million four year warrants to purchase shares at 58 cents per share, to be issued on 1st July 2015; and,
- 10 million three year warrants to purchase shares at 63 cents per share, to be issued on 1st July 2016.

In the event that shareholders do not ratify the issue of warrants at the GM, the terms of Stafford's contract will automatically convert such that their remuneration will be 1% p.a. of market capitalisation, payable quarterly in arrears.

3. In the event that shareholders vote to wind up the company at the continuation vote to be held in 2016, the base fee will rise to 1% p.a. of market capitalisation from the date of the vote. Further, all warrants will lapse and an incentive fee with a similar return profile to the warrants will be payable, based upon the actual net proceeds returned to shareholders.

As a result of these changes, the individuals currently employed by Phaunos Boston Inc. as investment managers will leave the Company in due course. The Board would like to express its gratitude to those individuals for their assistance in the transition period over the last six months.

Phaunos will retain its subsidiary company Phaunos Boston Inc. This company will continue to be responsible for the accounting and day to day administration of its assets. By maintaining these functions the Company will achieve continuity, particularly in the day to day management of its wholly owned subsidiary investments. Phaunos' costs of maintaining its presence in Boston will partly be mitigated by an agreement to share office space with Stafford, which already has a presence in the region.

Meeting for Analysts

The Company will hold a meeting for analysts at 10 am on Tuesday 24th June. At this meeting, Stafford will present the results of their strategic review into Phaunos' portfolio of assets. A copy of the presentation used at that meeting will be available on the Company's website at www.phaunostimber.com. For those unable to attend the meeting, dial in details are as follows: +44 (0) 20 3003 2666; access pin: 9353082.

Industry Intelligence Editor's note: the appendix to this press release can be viewed here.

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