On Friday morning I had the opportunity to attend the Kalon Venture Partners event in Melrose Arch, here is some feedback on the session and some high-level thoughts on Section12J.
As some background, Kalon is a Venture Capital Company established with a Section12J fund. The fund aims to invest in high-growth technology businesses – primarily in South Africa – and broadly playing in the “FinTech” sector.
The event saw presentations from Lorien Gamaroff around blockchain and then presentations from i-Pay and The Sun Exchange (Kalon are investors in both businesses) and then Luke Warner from Intergreateme (potential Kalon investment) made a presentation.
I thought The Sun Exchange presentation was excellent** and if you are interested in investments with a strong environmental and “feel good” factor then it’s worth checking out their site. Definitely a business to watch.
Thoughts on Section12J and Venture Capital
Section12J has exploded in South Africa with an estimated R3bn going into Section12J funds by the end of the next tax year.
The intent behind the changes to the Income Tax act [to accommodate 12J] was to establish an asset class that stimulated investment in early stage businesses, capital expenditure and new industries. Investors can receive tax breaks of between 28% and 45%.
Kalon – formerly GroTech – were one of the early movers in this space and were aggressive marketers of the 12J asset class for venture capital. On one hand It has been great to see renewed energy in the venture / early stage space but on the other, this has now exploded into a number of 12J funds seeking investors.
While Kalon have been good at identifying potential investments, here are a couple of questions potential investors should ask before they pursue 12J funds for investment purposes.
- Am I investing in 12J for the tax break in year one? Or am I investing for high growth “venture”-type investments?
- Do you REALLY understand the fee structure? For instance, if you invest R1m and get the R450k tax break, are the fees applicable on R1m or on R550k? Are your anticipated returns calculated on R550k or R1m?
- Can the fund actually stay in mandate and make investments? Some of these new funds are sitting with 80% cash, this could see either SARS interrogating the funds or a rush to conclude higher risk deals. Make sure you understand the deal pipeline
- Where are these venture investments going to be domiciled? An interesting factor considering the Sun Exchange situation – 12J is focused on local IP and businesses, where are these investments going to be based?
- 12J precludes investments in immovable property, financial services, gambling and tobacco. A case could be made that businesses like i-Pay and the Sun Exchange are on the edge of financial services (i-Pay is facilitating financial transactions at the merchant level and the Sun Exchange describes itself “solar powered money” and is both an exchange and an investment product)
12J season is in full swing at the moment with a number of presentations coming up as many funds seek to secure new investors ahead of the close of the tax year. We will be attending the Sanari Capital and Knife Capital events and it will be interesting to see what the opportunities are in this sector.
While it’s easy to get caught up in the hype around “venture” investments, one needs to be wary of hype around investment returns. Do your sums – you might find it’s cheaper to max out your Retirement Annuity and Tax Free Savings accounts and leave cash in the bank than generate 30% over 5 years.
Retail investors considering 12J as an investment will need to interrogate the asset class or take advice from a qualified financial advisor.
Businesses looking to use the 12J structure for capital expenditure, franchising and other tax breaks are welcome to drop me a line on email@example.com if they would like to hear how other businesses are enjoying significant tax benefits.
** One caveat was their mention of an Initial Coin Offering (ICO) which I am wary of in principle