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