JOHANNESBURG - South Africa’s macro-economic outlook faces a multitude of challenges, not least of which is a crisis of confidence. But, hedge the prospects of developing a company locally for international revenue, and it’s a different narrative altogether, because there is a way to invest in the next technological hit, and get a tax benefit.
Despite the March cabinet reshuffle, there were not any changes to important legislation introduced under then finance minister Pravin Gordhan, and these laws continue to provide high net worth to South Africans with a hedge against volatility through investment into SA firms earning foreign currency abroad.
The former minister’s approval of measures that ease the tax burden, while incentivising investment into small and medium enterprises (SMEs), continues to see many new venture capital funds enter the market.
One way South Africans can invest, and prosper, is through Section 12J, which is an incentive to stimulate growth in priority sectors through venture capital investments. Created by the South African Revenue Service in 2009, Section 12J offers individuals, funds, trusts and companies resident in South Africa an attractive tax rebate on investments in an appropriate 12J Fund, and the tax rebate is up to a hefty 45% for individuals, funds and trusts, and a not inconsiderable 28% for companies.
The trick, of course, is to find the opportunity sweet spot for investors. One way of doing this is to look to an open network that focuses on high growth investment opportunities, predominantly in the innovation and technology sectors.
And this is why: drones and electric vehicles are among those technologically savvy businesses that are generating jobs locally, and revenue abroad.
Taking place quietly
While anyone with an interest in the sector will be familiar with formidable SA-related people and brands like Tesla, founded by household name Elon Musk, what’s less well known is that high-tech manufacturing and management does take place quietly in South Africa with entrepreneurial stars of the highest calibre.
According to the SA Venture Capital (VC) Association, there is a growing interest for investment in start-ups, especially high-tech VC-type businesses, which are still in short supply in South Africa
What’s true, but seldom acknowledged, is that the country’s talent abroad is noteworthy, but much of it remains in the country - and for the most part - unbacked. What this means is that Section 12J provides a means to hedge through international earnings, while putting money to work among the superstars of the country.
In this way, we believe it’s entirely possible to achieve superior returns for investors while creating job opportunities and accelerating economic prosperity throughout Africa.
A critical part, however, of finding the right investment so you can get in at an early level, is to find an investment company that partners with financial management companies that hunt out promising small and medium enterprises. A key aspect of this is making sure it’s the right financial management company: one that provides technical and visionary financial functions, and can identify the next big hits with minimal risk to investors.
By providing financial planning and management to SME clients, such financial management companies can help them succeed, and not just be a flash in the pan. This allows for a pipeline to be built that identifies and helps SMEs with high growth potential to meet that potential, turning them into promising investment opportunities. This, we believe, is the combination of capital and expertise originally envisioned in the legislation.
The irony is, based on our experience, we are seeing more global interest than local, despite tax advantages for South Africans that are unavailable to those abroad. The buy-in prices for a stake in SA’s high SMEs are an opportunity not missed by the savvy.
There is clearly an opportunity to be had here, especially when small local companies come to the attention of international companies, and buyouts are put on the table. This is where the major return is: windfalls come with these buyouts or "exits", and often occur within a few years of making a venture capital investment.
Public success stories underscore the very real value that has been created in South Africa already. Most recently GetSmarter sold for $123million (R1.67billion), as a Cape Town-based education platform.
Fundamo, a mobile services provider, was venture capital-backed as well. It sold for $110m to Visa. Cloud computing start-up Nimbula was bought by Oracle for the same price. The list goes on.
Section 12J is a strategic opportunity to raise capital for investment into South African business which ensure returns. No matter what the challenges are, there remain ways for accomplished individuals and families to remain invested in the very country that made that made their success possible.
Glenheim chairperson Richard von Seidel is a former MD at Deutsche Bank UK, and Garreth Bloor is Glenheim co-founder.