Grovest Venture Capital Company is South Africa’s first operational venture capital fund incorporated under section 12J of the Income Tax Act. Although this is a new asset class in South Africa, venture capital funds have proven to be extremely successful in the UK where such companies are traded as Venture Capital Trusts – a multi million pound industry.
This venture capital company structure has been made possible by the South African Revenue Services under section 12J of the Income Tax Act. It offers investors direct exposure to the rapidly growing venture capital (VC) sector, whilst offering up to 40% tax relief on the investment. This means that if an individual invests R100 000 and is paying tax at the maximum threshold, he will receive income tax relief of R40 000, making the net cost of the investment only R60 000. The tax benefits apply to trusts and companies alike.
In addition to this tax break, which reduces risk capital to 60% of the investment, investors also enjoy tax-free dividends.
With a minimum investment of R100 000, investors have access to venture capital exposure as part of a balanced portfolio. Investors now have exposure to the alternative investment asset class that was previously only available to family offices, VC funds and very high net worth angel investors.
Grovest plans to maximise dividends to shareholders by distributing profits on disposal of investments. It plans to raise R100 million which will be invested in a blend of high quality small and medium sized private companies with significant growth potential. The focus will be on innovative, high growth businesses in the technology and mobile industries.
Says Jeff Miller, director of Grovest, “The two main reasons for the failure of small companies: a lack of capital and suitably trained management. Banks are unlikely to finance young ventures, yet funding is the oxygen of entrepreneurs. Good businesses are being crippled due to lack of finance. The management team of Grovest has combined experience of more than eighty years in investing and in supporting unlisted growing companies and is well placed to attract ongoing deal flow.“
Grovest’s objective is to achieve returns of between three to five times in a five to seven year time frame, equating to an investment rate of return (IR R) of between 25% – 37%.
Erika van der Merwe, CEO of the South African Venture Capital and Private Equity Association (SAVCA), says that SAVCA is pleased to note the progress being made by the South African policymakers in creating incentives for venture capital to flourish.
“Lessons from elsewhere in the world have shown that a sensible tax framework – one which rewards tax payers’ contribution to enabling innovation, kindling growth and boosting job creation – pays off. Equally encouraging is the willingness by National Treasury and SARS to engage with practitioners in the venture capital industry about workable policies and incentives to attract investment.
“The establishment of Grovest’s Venture Capital Fund is an important step towards encouraging other venture capital firms to do the same, thereby creating scope for investors with the appropriate risk profile and level of sophistication to gain exposure to this asset class.”
Miller suggests that investors apply 5% – 7% of their portfolio to this asset class. With the tax benefit of 40% in hand for the individual (assuming marginal tax), the investor’s down side has been extremely reduced. Yet the investor is also positioned to take advantage of the potential upside.
Shares in Grovest can be bought via financial advisors or directly from the company. Grovest is registered with the FSB in terms of section 7 of the FAIS Act as required by section 12J of the Income Tax Act. It is also registered with SARS as a venture capital company.
