121 In­vest­ing

Mat­ters such as trans­parency and deal flows should be in­ves­ti­gated be­fore a se­lec­tion is made, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Front Page -

“List­ing will help to broaden par­tic­i­pa­tion in VCCs by low­er­ing oner­ous min­i­mums most fund man­agers now ap­ply

In­vestors have many sec­tion 12J ven­ture cap­i­tal com­pa­nies (VCCs) to choose from, as 135 are reg­is­tered with the SA Rev­enue Ser­vice (Sars). This can make it hard to know where to in­vest.

Kal­nisha Singh, im­pact eco­nomics ex­ec­u­tive at LifeCo UnLtd, says as a start­ing point that a VCC’s prospec­tus should be an­a­lysed. “It’s pru­dent to in­vest only in funds that are trans­par­ent about the way money will be in­vested. It is in­dus­try best prac­tice to have a pre-ap­proved deal pipe­line the VCC can in­vest in once the cap­i­tal is raised.”

Jeff Miller, CEO at Grovest, urges in­vestors to also re­view the VCC’s man­age­ment team and board. “Stick to VCCs that are man­aged by a knowl­edge­able and ex­pe­ri­enced team with a proven track record,” he says. Another im­por­tant fac­tor to con­sider is speed of de­ploy­ment. He says: “With 36 months to de­ploy cap­i­tal, a VCC may not be proac­tive in fund­ing qual­i­fy­ing com­pa­nies. While fund man­agers must per­form due dili­gence [in­ves­ti­ga­tions] in­vestors aren’t re­al­is­ing a re­turn of their in­vest­ment if funds aren’t flow­ing.”

Jonty Sacks, di­rec­tor at Jal­tech, adds that VCCs that don’t de­ploy funds within ac­cept­able time frames are act­ing ir­re­spon­si­bly. “Their in­ac­tion isn’t meet­ing gov­ern­ment’s man­date, which has a rep­u­ta­tional im­pact on the broader sec­tor.” In­vestors should in­ter­ro­gate the un­der­ly­ing port­fo­lio to en­sure they’re com­fort­able with deal flows, adds Singh. “It’s im­por­tant that in­vestors see the value of the busi­nesses in which the VCC is in­vest­ing. Does it meet a de­mand? Will it af­fect job cre­ation and the econ­omy? Does it have steady rev­enue? What as­sets un­der­pin the busi­ness’s value?

“These are im­por­tant ques­tions to ask be­fore in­vest­ing.”

Jonty Sacks, di­rec­tor at Jal­tech, says a min­ing in­vest­ment made by a VCC that Jal­tech ad­min­is­ters cre­ates more than 800 jobs in a strug­gling sec­tor. Job cre­ation has also been re­alised in sec­tors such as al­ter­na­tive ac­com­mo­da­tion and re­new­able en­ergy.

“Numer­ous VCCs have made big com­mit­ments to projects in these sec­tors, which cre­ates jobs and of­fers sig­nif­i­cant down­stream ben­e­fits. These in­vest­ments are also un­der­pinned by as­set value, and de­liver good yields.”

And re­turns are what in­vestors are ul­ti­mately af­ter. Ac­cord­ing to Sacks, fund man­agers must do more than just de­liver the an­nu­alised 9% re­turn from the tax de­duc­tion over the five-year min­i­mum in­vest­ment pe­riod. “At the very least, in­vestors should only con­sider in­vest­ing in VCCs that of­fer an ad­di­tional 5% to 6% re­turn,” he says.

Clive Butkow, CEO at Kalon Ven­ture Part­ners, echoes these sen­ti­ments. “If in­vestors are par­tic­i­pat­ing only for the tax ben­e­fit, they’re in­vest­ing for the wrong rea­son. We want in­vest­ments to stim­u­late eco­nomic growth and re­alise ro­bust re­turns.” In this re­gard, Kalon Ven­ture Part­ners fo­cuses on higher-risk, higher-re­turn in­vest­ments in early-stage post-rev­enue tech star­tups seek­ing growth cap­i­tal. They re­quire strong man­age­ment teams and a re­peat­able and scaleable busi­ness model.

How­ever, re­turns can only be re­alised fol­low­ing exit op­por­tu­ni­ties. These can, in cer­tain cases, be lim­ited. “While in­vestors need to meet the leg­is­lated five-year min­i­mum to avoid Sars re­coup­ing the tax in­cen­tive, there is no guar­an­tee that an in­vestor will eas­ily exit a VCC af­ter five years,” says James Twidale, di­rec­tor at Vir­tu­os­ity Cap­i­tal.

In­vestors may also have ad­di­tional exit op­por­tu­ni­ties when lo­cal stock ex­change ZAR X be­comes the first to list a VCC. “If VCCs can en­gage with Sars to al­low for an ap­por­tion­ment of the tax ben­e­fit on listed funds, in­vestors could struc­ture an early exit by di­vest­ing their po­si­tion to a will­ing buyer with­out los­ing the full tax ben­e­fit. The re­quire­ment to be Fais reg­is­tered if listed should also be dropped,” sug­gests ZAR X ex­ec­u­tive di­rec­tor Ge­off Cook.

“List­ing will help to broaden par­tic­i­pa­tion in VCCs by sig­nif­i­cantly low­er­ing the oner­ous min­i­mums most fund man­agers now ap­ply, which should cre­ate op­por­tu­ni­ties to have ac­cess to new pools of cap­i­tal to help SMEs grow, which aligns with the Sec­tion 12J man­date,” he says.

Miller says the Metta Cap­i­tal port­fo­lio of funds gives in­vestors a sin­gle point of en­try into the VCC sec­tor, re­mov­ing much of the com­plex­ity from the in­vest­ment process.

Pic­ture: 123RF — GOPIXA

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