Venture capital embraces tax breaks
28 September 2015
Posted by: Author: Stephen Timm
Author: Stephen Timm (BDlive)
The number of venture capital companies approved by the South African Revenue Service (SARS) to take advantage of a venture capital tax incentive has increased to 19, following amendments to tax legislation that took effect in April.
The incentive was introduced in 2009 by the National Treasury in terms of section 12J of the Income Tax Act to spur investments in small businesses through approved venture capital companies.
However, because of the onerous criteria, there was initially limited interest. By August 2013 only one small business had benefited from an investment using the new tax regime.
The recent changes make the incentive more attractive, allowing for a higher investee asset threshold (R50m for qualifying small businesses and R300m for junior mining companies) and a permanent investment deduction.
Most of the approved funds are still in the capital-raising period. While there may have been hopes the incentive would encourage investment in startups and high-impact firms, most approved venture capital companies in SA are looking to invest in existing businesses.
JC Bruce, who oversees two venture capital companies, says his funds will focus on existing businesses. The aim is to capitalise Titanium, a fund that will invest in alternative energy, with up to R1bn, and Carbide, a fund that will invest in "fair-sized" companies, with between R250m and R500m.
Richard Asherson, a partner in Westbrooke Capital Management, says his fund would be looking for businesses that have been around for about five years or more. He said startups were "risky investments".
Neill Hobbs, head of Hobbs Sinclair, which has three venture capital companies approved by SARS, says it is difficult for existing small firms to obtain bank finance. The company has so far raised R15.5m for its Redwood fund, approved by SARS in January. Hobbs says the fund’s first investment made in August was R11m pumped into Mastercare, a company operating in the appliance repair sector for 40 years.
Hobbs is also a business rescue practitioner and had been involved in keeping Mastercare afloat when its bank was keen on liquidating it after a troubled merger with TV repair business Early Bird.
Mastercare managing director Wesley Rabie says the investment helped save at least 100 jobs.
Hobbs says Redwood is preparing to invest in a second company, in the medical sector, after its bank had refused an overdraft request.
Samantha Pokroy, who heads Sanari Growth Partners, says the fund is seeking capital of R200m to help small companies scale up.
Pokroy says success will depend on what value a fund manager could add to a business and providing advice would be key.
SMEasy, a company established four years ago with 11 employees, received an undisclosed investment four months ago from Grovest to fund its accounting product.
SMEasy CE Darlene Meintjies says having Grovest on board has helped the company gain access to new networks. "The money was great, but what we got more than that is influence," she says.
Grovest makes investments in early-stage companies. Its first fund invested R25m in six companies. Its CE Jeff Miller says most of its funds are aimed at late-stage investments because of the difficulty of investing in startups.
"When you’re dealing with third-party money it’s very difficult … which is why funds are being cautious," he says.
Miller says Grovest is setting up two new funds — one aimed at the hospitality sector (which has been approved by SARS) and one at the alternative energy sector.
SA Venture Capital Association chairwoman Erika van der Merwe says the SARS incentive was set up to direct investment and skills development towards small business in general — regardless of whether they are startups.
SARS spokesman Luther Lebelo says the approved venture capital companies plan to focus on startups and existing small businesses.
He says the provisions of the tax regime provide a vehicle for a wide range of investments and the level of risk is limited by what the investors "are prepared to accept".
Venture capitalist and Angel Hub founder Brett Commaille says a tax regime should be crafted to allow investors to qualify for a tax break if they invest directly into a small company. The SARS incentive is only available to investors in a venture capital company.
Miller says SARS should also allow individuals to claim a tax rebate for making direct investments into small businesses, as the UK allows. But he concedes that venture capital companies provide the added benefit of helping to reduce investors’ risk by grouping them with other investors.
The SARS incentive is available until June 30 2021.
This article first appeared on bdlive.co.za.