Manage S12J risks better
SEEK AN ATTRACTIVE INVESTMENT A common misconception is that these investments always have a high-risk, high-return profile.
Section 12J investments provide investors with a 100% deduction against taxable income in the year of investment. Every investment carries a degree of risk, but some investments are more prone to risk than others.
Look to invest in a s12J company with a clearly-defined investment risk strategy and approach that supports your risk appetite relative to the investment return profile.
Ensure the s12J investment manager you choose fully understands and complies with the rules and regulations required to obtain and maintain s12J status.
Look for a s12J company with the depth of investment, finance and private equity expertise you’d expect from any professional asset manager.
Qualifying companies may sometimes be young, with an inherently higher investment risk versus more mature, larger businesses. Lower risk, asset-backed investments which offer predictable returns can go a long way towards mitigating this start-up risk.
Section 12J legislation requires investors to hold their shares in the s12J company for at least five years to make the up-front tax deduction permanent. If you can’t do this, you’ll have to repay Sars the upfront tax benefit you enjoyed when making your initial investment.
At the end of the five-year holding period, it may not be easy to liquidate your s12J shares. It’s essential that any investment in a s12J vehicle comes with a clearly-defined, understandable exit mechanism and/or path to liquidity.
An investor seeking a lower-risk profile should seek to invest in a s12J company whose investment strategies are focused on capital preservation (eg asset-backed investments and investments with predicable revenue streams).
Some investors may find five years a long time to wait for a return of capital. You could opt for an investment in a s12J company that aims to provide an annual or semi-annual dividend throughout the investment period.
While s12J legislation requires companies to be diversified (investing in a minimum of five investee companies), spreading your allocation across different s12J companies is worth considering.
Assess the level and nature of the due diligence which the s12J company undertakes to measure the risk associated with each investee company.
Invest with a professional asset manager with a proven track record, with the systems in place to manage all aspects of your investment and provide accurate periodic investor reports. Consider if the manager’s fee structure is aligned to performance, the s12J company is subject to an external audit, a third-party compliance function is in place, etc.
Ensure the s12J company is registered with Sars and holds a valid FSB category II licence (check on the Sars and FSB websites). This is needed before investment, to ensure you receive your up-front tax benefit.
Jonti Osher and Dino Zuccollo are fund managers at Westbrooke Alternative Asset Management