Tax Deduction I Angel Investment I Venture Capital – grovest.co.za

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Venture capital: A sensible investment?

Despite tax benefits, investors seem to be wary.

JOHANNESBURG – Despite sizeable potential returns and tax benefits associated with specific venture capital investments, individuals (and even institutional) investors seem to be somewhat reluctant to put their money into this asset class.

Erika van der Merwe, chief executive officer of the South African Venture Capital and Private Equity Association (SAVCA), says there is a degree of frustration amongst venture capital members, that there is no institutional investment in this asset class.

“Pension funds, for instance, do not allocate capital to venture capital – they consider it too high risk,” she notes.

Even in the case of private equity (the broader asset class of which venture capital is a small part), pension funds are still reluctant and uncertain about this asset class, Van der Merwe says.

“We think it is just a matter of education and getting our pension fund trustees more comfortable with the asset class because regulation allows them to allocate up to 10% of their portfolios to private equity which includes venture capital.”

Van der Merwe explains that venture capital fund managers are to a large extent reliant on “angel investors” – wealthy individuals who have often made their money through large organisations that they have set up and build over a period of time. Although these investors understand the entrepreneurial spirit and want to give back to society, they are often below the radar and don’t want to be identified.

Who should invest in venture capital?

Van der Merwe says this type of investor is fairly sophisticated and understands the risks associated with venture capital. “So the rewards are potentially very attractive, but there are risks.”

This particular investor understands the risks involved and would only allocate a small portion of his or her total diversified portfolio in this asset class. Van der Merwe says although she is not a financial advisor, her gut feel is that the allocation should not be more than 5%.

Section 12J

Although the South African Revenue Service (SARS) has already introduced tax incentives under section 12J of the Income Tax Act a couple of years ago, the establishment of venture capital companies under this section has been slow.

According to data from the SARS website, only three companies have been granted venture capital company (VCC) status under section 12J.

Olivewood Resources Limited was granted VCC status in October 2009. At the time the company indicated that it would focus primarily on investing in coal and renewable energy and that it would “be at the forefront of developing smaller mining companies”. Efforts by Moneyweb to make contact with the company were unsuccessful. Contact numbers listed on its website are not in service anymore.

Emiscore Limited, another company that was granted VCC status (in February last year), is in the process of being sold to another company. It has not been operational up until now.

Grovest Venture Capital Company Limited was granted VCC status in March this year.

The fact that only a few companies have been awarded VCC status could be related to the challenges in setting up such a company.

“If you listen to a company like Grovest and if you see what it took and what it cost them in effort and time to get this registration… and it is not just the section 12J registration, but I think also the FSB licencing… it is difficult,” says Van der Merwe.

“It is the right thing and it is good because this is a particular asset class where you need to be sure that you’ve got sophisticated investors who know what they are doing, so this is all about protecting the investing public. So it is good to have regulation, but the question is whether the regulation and the incentives that we have, if they’re attractive enough to actually bring in the investors that we so desperately need,” she says.

Jeff Miller, director of Grovest, says the company plans to raise R100 million from investors in the next few months. The funds will be invested in a blend of high quality small and medium sized private companies with significant growth potential, especially in the technology and mobile industries.

Miller says the two main reasons why SMEs fail, is the lack of capital and guidance. He believes Grovest can avoid these pitfalls by ensuring that the companies they invest in are properly funded and by using company’s expertise to the SME’s advantage.

The minimum investment in the fund is R100 000 and the objective is to achieve returns of three to five times money in a five to seven year time frame, equating to an internal rate of return of between 25% and 37%, he notes.

Miller says the tax benefits associated with this particular investment will significantly lower the risk of investing.

Tax benefit

Section 12J offers up to 40% tax relief on the investment. Miller explains that an individual who pays maximum tax at the threshold (40%) would be able to deduct the full amount (100% of his investment) from his or her taxable income.

This means that an individual whose taxable income is R500 000 and who invests R100 000 would only pay tax on R400 000, he notes.

“Once you received the proceeds back, the first 40% that you’ve got as a tax deduction would be treated as a recoupment and the balance would be subject to capital gains (tax).”

In the above-mentioned example, if the fund returns R300 000 to the investor after a couple of years, the first R100 000 would thus be considered a recoupment and the other R200 000 would be subject to capital gains tax.

“If we returned any dividends, the dividends would be tax-free in the hands of the individual.”

Malcolm Segal | B.Com CA (SA) CPA (ISR) | Non Executive Chairman

After qualifying as a Chartered Accountant, Malcolm practised as a partner of Grant Thornton (Chartered Accountant and Business Advisors) and was elected Managing partner of the Johannesburg office in 1986 and National Executive Chairman in 1989. Malcolm established MDM Private Equity Investment Fund in 1997 which he managed until acquired by Sasfin Holdings Limited in 2005. In February 2012, Malcolm resigned from the boards of both Sasfin Holdings Limited and Sasfin Bank Limited to enable him to pursue his passion – entrepreneurship and entrepreneurial funding activities. Malcolm currently sits on the boards of various companies in which he holds a private equity investment and, inter alia, is also an External Member of the Special Credit Committee of the IDC (Industrial Development Corporation of South Africa Limited) and a member of the Listings Advisory Committee of AltX (Alternate Exchange of the Johannesburg Securities Exchange).

Jeff Miller | B.Com B.Acc CA (SA) | Chief Executive Officer

Jeffrey is a Chartered Accountant having completed his articles at Grant Thornton and has over 30 years’ experience investing in unquoted companies across numerous industries. Jeffrey co-founded Brandcorp, which was listed on the Johannesburg Stock Exchange in 1997. He brings many years of operational and investment skills to the company. He was a co-founder of KNR Flatrock, Balboa Finance, Born Free Properties, Eurosuit, Bride & Co., Seed Engine, Seed Academy and VCMS. Jeffrey is a pioneer of Section 12J Venture Capital Companies in South Africa and is an active member of various subcommittees of SAVCA and Simodisa, both of which focus their efforts on the South African Venture Capital industry.

Daniel Rubenstein | BCom (Hon), CA(SA) | Non-executive director

Daniel is a Chartered Accountant. He qualified in 2009 after completing his Articles at PKF. He has been involved in property from a young age and is well networked in the property industry. Daniel was one of the founders of Annuity Properties Limited, a property fund which was started in 2010 and listed on the JSE in 2012. Annuity Properties Limited was sold to Redefine Properties Limited in 2014. Daniel was instrumental in creating a property portfolio valued at R2 billion in a period of three years. Since Redefine’s acquisition of Annuity, Daniel has been involved in various property transactions within South Africa and Europe. During the past twelve months Daniel established Glenrock International which has acquired commercial property in Germany at a cost price of twenty five million Euros. He has a proven track record of sourcing attractive property investment opportunities, structuring transactions and raising acquisition finance, both locally and abroad.

Jarod Kolman | (Hon), Finance. HDip Co.Law. | Non-executive director

Jarod attended Wits university where he qualified with a B.Com (Hon) Finance and an HDip Co.Law. In 2008, Jarod co founded The Capital Group with Marc Wachsburger and successfully sold out his equity interest in 2011. Jarod is the founder of Limestone Property Group, which has successfully developed over 400 sectional title units and has to date sold in exess of 7000 buy-to-let properties. In 2014, Jarod co-founded The Luxury Lifestyle Group which focuses on the management and servicing of fully furnished self catering apartment hotels. Jarod has a track record of finding opportunities in the apartment hotel market and understands the needs of his guests and constantly designs new products to meet the every changing demands of the hotel guest.

Ran Neu-Ner CFA Non-executive director

In 2001 Ran co-founded The Creative Counsel. The company is today (since 2011) South Africa’s largest agency group. In 2015, TCC was sold in the largest agency transaction in Southern Africa for over R1 billion where he remains in the capacity of Co-Group CEO.Ran is an active investor in the property, hospitality and technology space and has access to a large network of deals.Ran is on the board of YPO and an active member of EO.

Jeffrey Livingstone | B.Com CA (SA) HDip Tax Law | Non Executive Director

Jeffrey is a practising Chartered++Accountant and Chairman of Light & Livingstone Inc., Registered Accountants and Auditors. He qualified in 1976 after completing his articles at PKF and completed the Higher Diploma in Tax Law in 1981. Jeff provides a wide range of professional services to a broad spectrum of industries and has acted as a director and consultant to several public and private companies. He was instrumental in the listing of Net1 Applied Technology Holdings Limited on the Venture Capital Market of the Johannesburg Stock Exchange in 1997 and together with Jeff Miller, played a significant role in the listing of Brandcorp Holdings Limited on the Johannesburg Stock Exchange in 1997.Jeff is currently a non-executive director of ADvTECH Limited, VCMS (Pty) Ltd and a director of numerous other companies, as well as a trustee of numerous trusts.

Clive Butkow | B.Sc Computer Science and Applied Mathematics | Chief Executive Officer

Clive is the former Chief Operating Officer (COO) of Accenture South Africa and has 28 years management consulting experience. During his tenure at Accenture (formerly Arthur Anderson and Anderson Consulting), he played numerous leadership roles including Managing Director of Accenture South Africa’s Technology business as well as Managing Director of Accenture’s Resources and Utilities businesses. In addition to his COO role, during the last 6 years, he led sales for Accenture’s Technology business, cultivating an entrepreneurial mindset which helped grow Accenture into one of the top emerging markets globally. Clive has deep technology skills from working across multiple industries including Financial Services, Resources, Retail, Automotive and Communications. He has leveraged these technology and business transformation skills and helped drive significant shareholder value for many South African clients. Since January 2013, he has supported and mentored many technology businesses, assisting them in driving growth. Clive joined Arthur Anderson in 1985 (now Accenture) after graduating from the University of the Witwatersrand with a B.Sc degree in Computer Science and Applied Mathematics.

Fatima Habib | Mcom Economics, Bcom (Hon) Applied Physcology, B.Sc Social Sciences

Fatima Habib, has a strong academic pedigree, and holds a MSoc Sci (economics and industrial and labor studies) from The University of Natal, Honors in Applied Psychology from The University of Witwatersrand and a BSoc Sci from The University of Natal. Fatima successfully began her career with Deloitte and Touche, progressing to very senior positions in both corporate SA and the SA government, as time progressed. A seasoned executive, with 20 years’ experience within both the public and private sector that spanned various environments from telecommunications, to a Wall Street firm in New York, and then private banking; following which a career move to contributing to the public sector. Fatima has over 20 years of experience within all areas of business - HR, Finance, IT, Operations, Strategy. She has held a number of Executive positions in her diverse career, including being the Executive Director: Corporate Services at the City of Cape Town , Executive: Corporate Services at the JDA, Regional HR executive at Telkom, GM of Absa Private Bank, Chief of Shared Services at SITA, Assistant GM at Smarte Carte, inter alia.

Gil Oved | • B.Com Economics and Marketing (Cum Laude), CFA | Non-Executive Director

A serial entrepreneur and astute businessman, Gil Oved is group co-CEO of The Creative Counsel (TCC) which he co-founded in 2001. What started as a tiny promotions company has grown into South Africa’s largest agency group with an annual turnover of R700 million. Employing just over 1 500 full time staff and thousands of temporary staff, TCC runs sales and marketing campaigns for the largest multi-nationals and large local marketing spenders. Over this time Gil has been involved in many successful start-up businesses and has invested in many others. TCC was recently bought by Publicis Groupe, a leading global marketing, communication, and business transformation company in the largest deal in advertising history in South Africa and the continent. Gil feels passionately about entrepreneurship and mentorship and invests much of his spare time in advising, guiding and inspiring entrepreneurs on the continent. He was one of the Dragons in the launch series of Dragons Den South Africa and has co-authored a book, I’M IN with the other four dragons on the show. The book seeks to inspire entrepreneurs through their collective lessons learnt in business with the other four dragons, all proceeds of which go to an entrepreneurial charity.

Arnold Basserabie | Non-Executive Director

Arnold was the Group Chief Executive of Fedsure Financial Services Group from 1988 – 2001, during which time its asset base grew by 25% pa compound to R40b and its share price by about 20% pa compound. Since then he has been a Strategic Business Consultant, focussing on strategy and business development, mergers and acquisitions, and related activities, in a diverse range of industries. Arnold obtained a B.Sc (Math & Math Stats) from Wits University, is a qualified actuary and a certified financial planner. His awards include Insurance Man of the Year, IMM Marketing Man of the Year, Jewish Business Achiever of the Year and Lifetime Achiever, and the World Presidents Organisation’s International Best of the Best Regional Chair.

Nicholas Liebmann | Non-Executive Director

Nic completed a commerce degree majoring in finance at Bond University where after he gained some international exposure working abroad in the United Kingdom. Nic Established a Wealth Management Firm which was absorbed by Sasfin Bank where he also gained work experience for more than 4 years.
Nic has been in Finance for over 15 years and is currently the co-founder and joint-CEO of Caleo Capital, an asset manager whose expertise range across Private Equity, Wealth Management, Financial Advisory Property and Venture Capital. Caleo also manages a private equity stake in the renowned Maboneng Precinct in central Johannesburg.

Romeo Kumalo | Non-Executive Director

Romeo is currently the CEO of Washirika Holdings, an investment holding company with focus in communication, construction, energy and ICT infrastructure. He was previously the CEO of Vodacom/Vodafone International, responsible for all the Africa markets. An accomplished leader and commercial strategist, with over 20 years’ experience in Information, Communication and Telecoms industries, a proven track record of building teams, creating value and turning around underperforming businesses. An excellent communicator with well-established networks in Africa. He has worked, lived, and travelled extensively across the continent. He was appointed to the Board of Vodacom South Africa as Executive Commercial Director in 2007 and was a member of the Vodacom Executive Committee until 2015. He served as non-executive director of Vodacom Tanzania, Lesotho, Mozambique, DR Congo and other Vodacom group of companies. Romeo serves on various private company boards and holds a Master Degree in Commerce and executive management certificates from WITS, INSEAD, and HARVARD Business School.

Mafika Mkwanazi | Non-Executive Chairman

Mafika Edmund Mkwanazi was the Non –Executive Chairman of Transnet SOC from December 2010 to December 2014 and also non-executive director of Eskom from July 2011 to December 2014. He completed a B.Sc. degree in Mathematics and Applied Mathematics at the University of Zululand in 1978. He also graduated with a Bachelor of Science Electrical Engineering from the University of Natal (Howard College) in 1984. He was at some stage CEO of Transnet and Chairman of Letseng diamonds, Western areas gold mine and non-executive director of Nedbank for 9 years.
He is currently Non-Executive Chairman of HULAMIN, and is Non- Executive Director of MSC South Africa as well as Stefanutti and Stocks.

Dr Bonakele Mehlomakulu | Non-Executive Director

Dr Bonakele Mehlomakulu is the CEO of the South African Bureau of Standards (SABS). Under her leadership, the almost 70 year-old institution has undergone a significant transformation, gearing itself towards service relevance within the 21st century. She holds a PhD in Chemical Engineering and her leadership philosophy centres around the empowerment of those entrusted in her care. Her professional career started at Sasol before joining the Department of Science and Technology (DST) in 2003. In September, 2009 Dr Mehlomakulu took over as the Chief Executive of the SABS, South Africa’s foremost body, promoting and maintaining standards and quality. Dr Mehlomakulu was an Eskom non-executive director for more than 5 years. She was Chairman of the Sustainability subcommittee of the board.

Rodney Love | Non-Executive Director

Rodney is an experienced and dynamic businessman with a strong background in building intuitive and innovative business concepts focused on growth and expansion. Rodney also founded ESA in 2012 having identified the energy reduction opportunity management which has resulted in self reliance of energy allowance in Photo Voltaic solar energy plants.
Rodney started Suburban Services (Pty) Ltd over 20 years ago. Suburban Services provider to blue-chip clientele of soft services that include major retailers, listed property funds, national commercial portfolios. Rodney has a profound interest in the growing renewable energy space and is constantly analyzing ways of commercializing energy-based opportunities.

Paul Jenkins |Non-Executive Director

Paul qualified at Randse Afrikaanse Universiteit in 1981 with a BCom and LLB degree and was admitted as an attorney and notary in February 1986. He became a partner of Webber Wentzel in 1988 and left his position as senior commercial legal partner in 1999 to join the Johnnic group full time. In this capacity he served as a director of numerous listed companies and was CEO of Johnnic Entertainment. He is currently self-employed and provides business and legal advisory services to a select group of clients. He holds the position as non-executive Chairman of Caxton and CTP Publishers and Printers

Gil Sperling | Non-Executive Director

After graduating with a B.Sc Electrical Engineering from Wits University, Gil Sperling founded Popimedia at age 23. With his passion for tech, entrepreneurship and pure tenacity, Gil took Popimedia to being the only Facebook Marketing Partner in Africa, one of 40 companies around the world. As one of the leading Ad Tech companies, Popimedia serves fortune 500 brands globally using its proprietary platform meedee8. At age 30 Popimedia was sold to Publicis Group. Through his journey of entrepreneurship and scaling a company to exit, Gil invested, consults and mentors several technology companies, while also sitting on the board and investment committee of GroTech.