Virtuosity Capital recently got a group of high net worth individuals and investment managers into a room with several fund managers who offer Section 12J investment opportunities within their portfolios.
Section 12J of the Income Tax Act is an incentive introduced by National Treasury to encourage investment into a venture capital company (VCC) which then in turn invests into qualifying companies (QC’s) which are SMME’s. Investors benefit from a 100% tax deduction on their investment in approved SMMEs in the tax year of subscription for shares in the VCC This tax-deduction requires investors to hold their shares in the VCC for at least 5 years.
The Virtuosity Capital event highlighted the breadth of Section 12J investment opportunities, as well as the range of returns and liquidity profiles available to investors. Ten fund managers pitched their Section 12J offerings, which ranged from renewable energy to student accommodation – and beyond – in a Dragon’s Den-style format, followed by Q&A sessions from the guests.
The fund manager panels were filled by:
- Gidon Novick of Lucid Ventures (hospitality)
- Mike Bleyenheuft and Percy Ying of NESA Holdings (self-generated renewable solar energy)
- Renier de Wit of GAIA Ventures (agribusiness and infrastructure)
- Jonti Osher of Westbrooke Asset Managers (alternative rental income assets)
- Paul Miller of CCP 12J Fund (secondary services in the mining industry)
- Clive Butkow and Leron Varsha of Kalon Ventures (technology)
- Keet van Zyl and Andrea Boehmert of KNF Ventures (start-ups and scale-ups)
- Dino Zuccollo of Westbrooke Asset Managers (student accommodation)
- Sam Pokroy of Sanari Capital (founder-run, owner-managed and family-owned businesses)
- Peta Chennells of Skye Education (schools and education)
The pitches and discussions were fascinating, with each bringing its own flavour to the Section 12J conversation. Estimated returns on investments discussed by the fund managers ranged from 17-42% over five to seven years, with underlying asset classes varying depending on the industry in question.
James Twidale of Virtuosity Capital facilitated the morning’s proceedings.
“The idea from National Treasury and SARS when they introduced Section 12J was to encourage investment in SMMEs to unlock economic growth and job creation. The full and immediate tax refund is the carrot being offered to investors.
“This is one instance where, even though it sounds too good to be true, it is actually true!”
Section 12J has been part of the Income Tax Act since 2009, but Twidale said it wasn’t until 2014 that the market started seeing any significant capital flows into Section 12J investments. And the numbers are still growing…
“Section 12J investments are growing in terms of the amounts invested, number of funds and number of investors,” he said Twidale. “In February 2017 there were 892 investors who had placed R1.8bn in Section 12J companies through 49 funds. A year later the amount invested had doubled to R3.6bn, while the number of funds had grown to 84 and the number of investors to 2 221.
“This increase in uptake is significant. Financial advisors… your clients are going to start becoming more aware of this type of investment in the very near future – if they aren’t already. I highly recommend that you have a Section 12J offering in your arsenal to avoid losing out to someone else who has.”
Twidale spoke about the regulations that govern Section 12J fund managers, and highlighted some pitfalls to look out for.
“Each fund must have a minimum of five underlying investments within 36 months, with no one investment making up more than 20% of the invested capital in the venture capital company,” he said. “This lends a natural level of diversification in each fund. So you’re not investing in one underlying asset if the fund deploys its assets accordingly.
“There are of course some areas of caution that investors should be aware of. If you sell your shares before the five-year period is up, SARS will recoup the tax deduction that was originally given to you. Also, there is no guarantee that you will have access to your capital after five years, although some most fund managers have attempted to consider liquidity within their funds to help mitigate this risk.
“If you invest in a fund that is not Section 12J compliant or becomes non-compliant, SARS will levy a penalty equal to 125% of the value of tax all deductions taken to date on that fund in the year of non-compliance. Investors and advisors should be aware of the business and compliance risks involved in investing in a non-compliant fund.”
Twidale says the best course of action is to consult with a reputable discretionary portfolio manager that specialises in Section 12J investments to help investors and advisors navigate these potentially tricky waters.
“Section 12J provides an extremely attractive investment vehicle, both from a tax and return perspective, assuming you can deploy the capital into the right underlying businesses and assets so that you’re not taking any unnecessary risk. It also stimulates economic growth and job creation in SA. Now who could say no to that?”