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Understanding the Section 12J marketplace

The Section 12J investment class is anticipated to increase from R3.7bn to R5.5bn by the end of the current financial year.

Political uncertainty, widespread corruption in government leading to additional reluctance by taxpayers to pay tax, investment diversification, and large tax liabilities have collectively been the catalyst to the success of Treasury’s Section 12J tax incentive with future years looking optimistic for the investment class.

The incentive was introduced to encourage investment in venture capital opportunities in South Africa, thereby encouraging investors to invest in the South African economy as opposed to investing their capital offshore.

Although, the Section 12J incentive was introduced with the intention of promoting pure venture capital investments, the majority of the 140 registered 12J companies invest in post-revenue businesses, with investment significantly weighted towards capital preservation investments such as hospitality property investments and investments in businesses which are asset-backed, such as asset rental businesses.

There are a significant number of 12J companies which look to invest in early-stage businesses, which in turn aim to provide investors with much higher returns. These 12J companies look to invest in industries/areas which investors ordinarily wouldn’t have exposure to, such as, technology, agriculture, education, renewable energy, health care, private equity, pure venture capital and mining, all offering investors significantly different investment strategies and returns.

Notwithstanding the diverse Section 12J investment options available to investors, the investment class has attracted a large amount of funds within a relatively short period of time and is anticipated to increase from R3.7 billion to R5.5 billion by the end of this financial year.

What 12J companies should investors invest in? This question is purely dependent on the investor’s risk profile, however, investors should ask the following key questions:

Key question

Key considerations

Does the 12J company have sufficient investment pipeline and within what period will the investor’s funds be invested into the investment pipeline.

12J companies, in general, have struggled to identify suitable investments and have therefore struggled to reinvest investor’s funds. Make sure your funds will be invested within a short period of time.

What are the fees?

It is common for 12J companies to charge a low upfront fee (1% to 2%), an annual fee (2% to 2.5%) and a performance fee on funds over and above the initial investment. Some 12J companies charge fees on the tax saving made by the investor, by charging fees on the growth in the capital less any tax savings the investor received. Don’t get caught out on having to pay a performance fee on a portion of your original investment amount.  

Who will be responsible for managing my investment? 

Make sure you have researched who the people behind the fund and the fund manager are and whether they have the required experience and expertise to manage your investment

How do I exit the 12J company?

Make sure you scrutinise the 12J company’s exit strategy.  There are many 12J companies who have clear and effective means of returning your investment once you decide to exit.  

If you are unsure as to which 12J company to invest in, most 12J companies have sufficient information on their websites to perform a desktop due diligence, however, its always advised to meet with the fund managers in person. Alternatively, there is a Section 12J investor conference taking place on February 1 in Johannesburg, where a number of the more prominent 12J companies will be presenting their investment propositions. 

Jonty Sacks is a partner at Jaltech – A Section 12J Venture Capital Company.

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