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A mere four percent or R120-million of the estimated over R3-billion raised by Section 12J venture capital companies (VCCs) in the 2019 tax year has been raised to invest in venture capital (VC), according to estimates from a Section 12J consultant.
The incentive, which came into effect in 2009 and is administered by the SA Revenue Services (Sars), entitles investors that invest in accredited VC companies that then invest in small businesses, to make a tax deduction of 100% in the year that the investment was made.
Writing in an opinion piece on Fin24 earlier this month, Jonty Sacks, a partner of Jaltech which oversees a number of Section 12J funds, said the overwhelming majority of funds, or 58%, are destined to be invested in property. The remainder was made up of funds destined to private equity (18%) and asset rental or renewable energy (20%).
Speaking to Ventureburn today, Sacks said he gathered the data from 12J funds themselves.
Just four percent or R120m of the estimated over R3bn raised by Section 12J VCCs in 2018/19 will go to VC sector
Earlier this month local venture capitalists reacted with concern to the four-percent figure — calling it “disappointing” and adding that incentives could be better targeted at boosting VC investments.
As the stated intent of #Section12J is to catalyse economic growth by providing equity finance to SMEs + Junior Mining Co’s and concentrating investor expertise in favour of the small business sector, this is somewhat disappointing…
— Keet van Zyl (@KeetvZ) May 6, 2019
A disappointing stat, but a step in the right direction. The incentives could be better targeted
— Brett Commaille (@BrettCommaille) May 6, 2019
Duane Newsman, an expert on incentive schemes for Cova Advisory, added that he expects the National Treasury to close what he called a “loophole” that allowed such a significant percentage of 12J investments to be made in property.
I don’t think the policy intention of S12J was to fund property. I think NT will be aiming to close this “loophole” .
— Duane Newman (@Duane_Newman) May 7, 2019
Sacks questioned whether a rule in Section 12J regulations — that to qualify for a tax break, the companies that VCCs invest in must conduct 50% or more of their business in South Africa — had not acted to limit tech investments, as to scale tech companies must usually target global markets.
12Js not deploying funds
He attributed the property sector netting the higher share of investments to investors looking for safer returns.
When pressed on the implication for jobs that this had, he argued that investments in the property sector could create more jobs than those in the tech sector, but only if the funds are actually deployed.
While Sars has approved over 150 VCCs since the inception of the incentive (see the list here), a number of VCCs, he said, have failed to deploy capital — something that the National Treasury has already voiced concerned about with the 12J investing community, he added.
Should these VCCs fail to deploy capital they will incur a penalty from Sars which will have a direct impact on investors.
Sacks pointed out that before the expiry of the three-year period in which to invest, fund managers will have two options should they wish to avoid a penalty, namely to either return investors’ funds (which he reckons is unlikely as fund managers earn an annual fee off the funds) or to make an investment which may or may not be in the best interest of the investors.
“Both of the above scenarios are not in the interest of the VCCs. In fact VCCs which have failed to deploy, should not go to market to raise capital until such time as funds are deployed,” he said.
He blames fund managers who have gone to market to raise capital without having secured the requisite pipeline. In one case he said he had received an email that reflects that a VCC is sitting on R500-million for student accommodation investments and is willing to pay brokers commission to help find investments.
Sars told Ventureburn last Friday (10 May) that during the period 1 March last year to 28 February this year, a total of 554 approved venture capital companies (VCCs) had together invested R2 405 268 136 in 265 qualifying companies.
In 2021 the S12J regime comes to an end. The government will then assess if it has achieved its objective of creating jobs or not.
Sacks, who is part of the Section 12J Association of South Africa (S12J Association formed earlier this year to lobby for the continuation of the incentive, said the industry body is pushing funds to make it a requisite that they report to the body the amount of funds they raise and how many direct jobs both upstream and downstream they are expected to create.
More on Section 12J funds
Read more: Four Sars Section 12J venture capital funds that invest in SA tech startups
Read more: Section 12J industry body established to ensure industry sustainability
Read more: What investors should look for in a Section 12J VC company [Opinion]
Read more: State must close door on those that misuse VC tax incentive [Opinion]
Read more: Savca raises concern over governance issues in Section 12J VC tax incentive
Read more: Venture capitalists welcome Section 12J proposals but call for more changes
Read more: Investors clamouring for 12J VC incentive following tax hike – fund managers
Read more: Can 12J VC tax incentive create the jobs South Africa badly needs?
Read more: Foreign investment injection could propel South Africa’s VC ecosystem, 12J funds
Featured image: Jaltech partner Jonty Sacks (Supplied)