What’s replacing 12J investments?

12J Venture Capital Company investments were launched with much fanfare and hope. The investment vehicle was named after Section 12J of SouthAfrica’s Income Tax Act, which was introduced in 2009. It was meant to give the economy a much needed boost from venture capital.

So, what went wrong?

Making the rich more wealthy

In the most basic terms, 12J investments didn’t fulfill their ultimate mandate. According to Investec, these investments were introduced to give “individuals, companies, and trusts, via a tax break, an opportunity to invest in venture capital companies that showed long-term growth potential and would indirectly contribute to economic growth and job creation.”

However, 12J investments were axed by the Treasury in the 2021 budget for ‘failing to achieve its objectives for developing small business, generating economic activity and creating jobs’ and instead providing ‘significant tax deductions for wealthy taxpayers’.

In effect, it only made the rich people rich while the poor didn’t benefit from the growth that the 12J vehicles were purported to encourage.

But all is not lost. Now there’s a new alternative for developers and investors looking for something similar to 12J and it seems to have come at the right time, given South Africa’s energy constraints.

The Twelve B Green Energy Fund

It’s claimed that this is South Africa’s first private equity fund to invest in renewables. It’s been launched by Grovest and enables alternative energy investors to qualify for South African Revenue Service-approved tax deductions. It was launched this year in February and is regulated by the Financial Sector Conduct Authority (FSCA).

Through this fund, investors can profit from green energy structures like solar panels, batteries, and inverters on residential, commercial, and industrial complexes.

The fund is also Shariah-compliant and has a targeted Internal Rate of Return (IRR) of approximately 18% and offers biannual income distributions.

Like the 12J investments, investors have to stump up a lot of capital with the minimum investment of R100,000 according to a report by Moonstone.

Could 12B fail too? 

It’s really too early to tell if this investment vehicle will be more successful than 12J investments or if it will reach the same or similar demise. Some, like Investec, point out that one of the main reasons 12J failed was because the investment threshold was too high. As we pointed out above 12J investors, just like 12B investors, had to invest a minimum of R100,000 (in some cases 12J investors had to invest as much as R500,000). This made it less accessible to the average man on the street.

Investec probably spells out the problem best in its opinion piece where it highlights: ‘perhaps the greatest failing of the 12J Income Tax Act’s approach was that it failed to see its potential for greater transformation in the South African investment landscape.

‘Smaller investors were left out in the cold. It didn’t allow previously disadvantaged people or our emerging affluent – in short, the economic backbone of the country – to participate in the scheme. Without scale and inclusivity, it was never going to grow.’

Here again smaller investors seem to have been left out in the cold. However, South Africa is in need of investment into alternative sources of energy given that Eskom has reached stage 6. With fears of Eskom going beyond this stage the country is surely in need of such a green boost.