Investors wanting a substantial deduction on their income tax this year, coupled with the prospect of a targeted net return of CPI + 15% per annum over a rolling 5 year period, have the opportunity to invest in a venture capital fund raising starting 1st October.
670 Venture Capital Pty Ltd (670 Ventures), part of the TBI Group stable, has announced that it is opening up its investment portfolio to investors with R250,000 and more to invest. The company is an approved venture capital company in terms of Section 12J of the Income Tax Act, which was implemented to assist small and medium-sized businesses in raising equity finance.
“By offering investors a 100% deduction from their taxable income in the amount of their investment in the year of assessment, Section 12J incentivises investors to gain exposure to up and coming, unlisted companies in the small business sector, helping the South African economy to grow,” says Ian Groenewald, the Chief Executive Officer of TBI. The investor will retain this tax benefit so long as it is held for 5 years.
Although SARS introduced the incentive in 2009, there has been a surge of such companies registering with the Receiver this year, and there are now some 63 companies registered.
“The low returns being achieved by conventional securities such as listed equities is prompting investors to look for other opportunities, and venture capital has become attractive thanks to the tax deduction,” Groenewald says.
However, he cautions, because you have to remain invested for 5 years for the tax deduction to remain in place, it’s important to understand how the venture capital company plans to invest your money so that it generates a return that compensates sufficiently for the lack of access you’ll have to your capital.
Venture capital investments are a sub-set of private equity investments and generally invest in companies when they are in their early development phase. What’s extremely important is to have a well-identified, well-researched pipeline of such companies to invest in when a S12J venture capital company is established. Otherwise, with no companies to invest in, the S12J company may not meet its minimum investment requirements, exposing the investor to the risk of earning returns below what cash generates over the investment period.
“Building a strong pipeline is no easy task, as it means taking a view on how a small company will perform over the next five years, and whether you’ll be able to earn a decent return from their business,” Groenewald says. “It takes in-depth research and analysis, something the ordinary investor doesn’t have access to. It also takes a lot hard work on the part of the venture capital company to steer the small business in the direction of sustainable financial success.”
As a TBI Group managed entity, 670 Ventures has both these capacities. It also has a suite of existing private equity investments, some of which qualify for inclusion as venture capital investments.
Some of the companies it has identified as targets for investment are:
- Sinetech – an importer, distributor and installer of standby and solar power producing products and one of the longest established photovoltaic (PV) solar energy companies in Southern Africa. It has been operating in this industry for over 20 years and its wide product range includes its own brand of Omnipower products, the most prominent of which is its highly regarded range of solar batteries.
- Novo Energy – an established, significant player in the distributed natural gas and alternative fuels business.
- Thunderbolt – a leading supplier of capital equipment and consumables to the Southern African graphic arts and printing industry, representing as agent a number of established principals. Thunderbolt has resolved to establish a specialised paper merchant to the Southern African graphic arts and printing industry as a new subsidiary.