In February, Newtown Partners and LionPride Investment Holdings announced plans to raise R500m for a co-managed Section 12J technology investment fund.
The LionPride Agility team includes CEO Deven Govender, formerly of Deloitte, Unilever and McKinsey; Dr. Reuel Khoza, former Chairman of Eskom and Nedbank; Geoffrey Rothschild, former JSE chair; Stanley Subramoney and Paul de Chalain, both formerly of PwC; Mpho Makwana, chair of Ilovo Sugar and Arcelor Mittal SA; and Yvonne Mhinga – also known as Yvonne Chaka Chaka – NEPAD Foundation director.
Also on the team are Newtown Partners founders Vinny Lingham – known for Civic, Gyft and Yola, as well as his role on Dragon's Den – and Llew Claasen, executive director of the Bitcoin Foundation.
The LionPride Agility VCC Fund will be a single technology fund with a choice of two share classes. The two unique themes are impact investing and emerging technologies.
A section 12J investment fund allows investors to deduct 100% of their investment from their taxable incomes in the tax year in which the investments are made, which effectively translates into an investment discount of up to 45% on the total investment discount.
"I’m looking forward to giving many more South Africans the opportunity to really make a dent in the global technology markets through this Fund. We’re also excited about the opportunity to positively impact economic empowerment in South Africa," Lingham said.
Fin24 spoke to Govender, Lingham and Claasen.
Please tell us more about this initiative.
Llew Claasen: The LionPride Agility Fund is an initiative by Lion Pride Investment Holdings and Newtown Partners to create and manage an investment fund specifically targeting the funding gap in South Africa for early-stage technology businesses, looking to raise R5m-R10m, without going through an onerous due diligence process equivalent to that typically used for private equity transactions.
We believe two types of early-stage technology businesses need funding support in this range - impact investing opportunities that make use of mature technologies, as well as disruptive emerging technology start-ups.
Additionally, the S12J vehicle enable investors to deduct the full cost of the investment against their personal income tax in Year 1, which dramatically improves the economics of the offering and also enables the funnelling of tax receipts directly to where it can have an impact on economic participation, rather than indirectly via government spending and parastatals.
Why did you choose to focus on Fintech, Agritech, On-Demand Services, Business Process Outsourcing, Renewables, Healthcare, 4IR and EdTech?
LC: We believe that these sectors in South Africa are either primed for disruption by emerging technologies, else capable of creating economic impact for people from previously marginalised communities by adopting mature technologies that create new business models.
Deven Govender: Some 13 million families live at the bottom of the pyramid, where they have little or no access to financial services, healthcare, agricultural opportunities and employment. For example, an individual who is a gardener who works for more than one family a week, lives in an informal settlement and may not have a bank account.
We believe the sectors we have chosen to invest in, can use technology in a smart way to allow that individual to have access for services in a fair and equitable manner.
How do you see the future of impact investing?
LC: Impact investing has the potential to increase the rate of economic participation and directly address issues that affect social cohesion, like access to healthcare, security, and education. Impact investing that correctly harnesses mature technology increases the efficiency at which these solutions can be offered, so that these consumers can be economically served.
DG: In 2004 Prof CK Prahalad challenged business to reinvent their business models to develop solutions for the bottom of the pyramid (BOP). Most business models in SA and developed economics are built around LSM8 and above.
Businesses try to adapt to the BOP, but unfortunately many fail, as they are not set up for it. We see the future of impact investing where business are targeting BOP specifically and build their business models specifically to serve that market. The best example of that in SA is Capitec.
Your initial announcement said: "Local investors have not had sufficient exposure to the classic Silicon Valley VC model of asymmetric returns versus capital deployed, this fund will create that opportunity." Could you explain that further?
Vinny Lingham: The lack of available venture funding in the R5m-R10m range in South Africa means that early-stage businesses typically need to use Angel funding to get to sub-scale break-even and then make use of private equity financing (like debt) to further scale the business.
This approach tends to create relatively small (in USD terms), marginally profitable product-and-service businesses, rather than global technology product unicorns that have a non-linear relationship between costs and revenue.
These latter businesses are capable of creating massive returns over relatively short periods of time for early investors and have been decidedly absent from the local market.
Any further comments?
DG: South African investors have not had the opportunity to participate in a Silicon Valley VC Fund. The combination of impact investing and new technologies will provide the local investor with a risk weighted return on investment.
What’s next for Newtown Partners and LionPride Investment Holdings?
VL: We'll be meeting with investors for the better part of Q1 (first quarter) and Q2 (second quarter) and expect to be able to make our first investments out of the fund as early as Q2.