TAX-FREE INVESTING
28 February 2021
New 12J offering from venture capital firm
E
ntrepreneurs for Entrepreneurs (E4E) Africa, an entrepreneur-led South African venture capital (VC) firm, has officially launched its Section 12J offering. The Section 12J facility grants investors in E4E Africa a 100% write-off for their South African taxes, representing a saving of up to 45% for individuals and trusts, and 28% for companies. With its 12J offering, E4E says it aims to build on its mandate to invest in and grow transformative South African start-ups, while providing investors with attractive returns. “The 12J incentive offers South Africans – people or companies – a unique opportunity to invest in high-growth, early-stage businesses in a way that lowers risk and increases potential returns through the tax saving, while helping build a better South Africa,” says E4E partner Bas Hochstenbach. According to analysis by the 12J Association of South Africa, the incentive has created an estimated 5 250 permanent jobs since its launch in 2009. Over the short term, Section 12J investments also led to an equal number of temporary (mostly construction) jobs. Total assets under management under the scheme, meanwhile, exceeded R9bn.
THE INCENTIVE HAS CREATED AN ESTIMATED 5 250 PERMANENT JOBS SINCE ITS LAUNCH IN 2009 “With our proven track record as entrepreneurs and investors, we believe that E4E is uniquely placed to ensure that anyone using our 12J facility has the best possible chance of achieving real returns,” adds E4E managing partner Philani Sangweni. “This is only advanced by the fact that we invest in innovation-led, transformative businesses that have the potential to scale globally.” Since its mid-2020 launch, E4E has created a significantly sized fund, investing in a variety of companies that are innovating across key sectors of the South African economy. These include leading township food solutions enterprise YeboFresh, data annotation and labelling startup Enlabeler, and health tech startup Vula Mobile.
Philani Sangweni, E4E Managing Partner
18 WWW.MONEYMARKETING.CO.ZA
DINO ZUCCOLLO Principal, Westbrooke Alternative Asset Management
How to enhance yield in a benign interest rate environment
I
n the wake of the COVID-19 pandemic, one of the most common responses by governments across the globe has been to slash interest rates. In South Africa, our repo rate has been reduced to a historic low of 3.5%, equating to a prime lending rate of 7.0%. Internationally, interest rates in many of the world’s largest and strongest economies are now close to zero, or in some cases negative. One of the downsides to the reduction in interest rates has been a vastly reduced return on the fixed income products that often form a key element of traditional investor portfolios. These portfolios often also include an allocation to equities, many of which have trimmed (or completely cut) the payment of dividends, so as to build cash buffers in response to the pandemic. The combination of these factors has left many investors in an unenviable cash-flow squeeze. It is in this context that the private debt industry has emerged from the global investment periphery, to become one of the world’s largest and fastest growing alternative asset classes. At Westbrooke Alternative Asset Management, we have invested more than R3bn across over 100 private debt transactions since 2016 in South Africa, the UK and Europe. Given the levels of global economic uncertainty and volatility, there are instances where private debt returns have offered similar historic returns to equity investments but with vastly improved security packages (e.g. direct security against a tangible asset). This generates an asymmetric risk/return profile for clients and can ultimately assist in solving the cash-flow squeeze conundrum. Simply explained, private debt is where a loan is made by a non-bank lender and therefore falls into the broader category of ‘alternative debt’ or ‘alternative credit’. The term private debt is used interchangeably with ‘direct lending’, ‘private lending’ and ‘private credit’. Private debt investments are used for a multitude of purposes, including to bridge property transactions, real estate development, finance business growth, provide working capital and fund infrastructure. Compared with traditional fixed income, private debt can provide investors with higher yields, portfolio diversification and lower portfolio volatility. At a high level, the higher returns generated by private debt investments are not always due to an increase in risk, and can be explained by: • an illiquidity premium (private loans earn higher returns because they are not listed and investors are therefore required to invest for a prescribed period) • a structural/complexity premium (deals are often bespoke and require structuring)
• an off-market/disinformation premium (due to a lack of an efficient market in the space) • the size of loans (as banks have moved resources to larger loans, the mid-market is underserviced and accessibility to cheaper capital is limited). Although the rise of private debt as an asset class is still in its infancy (especially in South Africa), there are a few access points for sophisticated investors to gain exposure through local alternative asset managers. While private debt investments may form the foundation for many yield enhancement strategies, alternative asset managers may also be capable of including additional structuring mechanisms in portfolios that ultimately enhance yield. One such mechanism is Section 12J of the South African Income Tax Act, for example. Through Section 12J, clients are able to deduct their full investment against their taxable income in the year they invest, thereby reducing their initial net investment amount by up to 45%. As many Section 12J investment strategies pay an annual dividend, the Section 12J tax break has the impact of almost doubling the net yield received by clients. In respect of all alternative investment strategies, investors should seek out well-established managers who have deep local and international networks, resources, infrastructure and a track record of performance in providing clients with exposure to these compelling and uncorrelated asset classes.
PRIVATE DEBT INVESTMENTS ARE USED FOR A MULTITUDE OF PURPOSES
