If you have access to the internet, you were most likely the recipient of some form of solicitation from one of the 153 Section 12J companies in the market looking to attract investors prior to the February 28, 2019 financial year-end.
The enormous hype experienced in the market to invest in Section 12J companies before having to pay income or capital gains tax resulted in a boom in investment - this year, South African taxpayers invested almost as much as the sector has accumulated over the past decade.
Having engaged the Section 12J market, I can report that the total amount invested in the Section 12J sector during the 2019 financial year exceeded R3bn. This may not sound large in comparison to investments in retirement annuities, however, to put this number into perspective, R3bn is close to double the amount raised by the Section 12J market in the previous financial year. This enormous interest has resulted in Section 12J market exceeding R6bn in total assets under management.
Which Section 12J companies attracted investors? True to form, investors predominately looked to invest in property backed Section 12J companies as the underlying investments are underpinned by tangible assets which are generally seen as a lower risk investment.
That being said, investor confidence in private equity-focused Section 12J companies has rapidly increased from previous years, making up 18% of capital raised by the market in the 2019 financial year. Private equity Section 12J companies predominantly look to diversify their investments into a portfolio of different sectors with a mix of startups and post revenue businesses. This will bring some relief to many Section 12J critics who question whether the majority of Section 12J companies are truly within the spirit of the legislation.
Below is a breakdown of the percentage of capital raised per Section 12J asset class during the 2019 financial year:
What investment options will lead the way in this financial year? Unless property backed Section 12J companies can show a committed pipeline of compliant Section 12J property investments, which yield returns in line with the numbers advertised, it’s unlikely that property-backed Section 12J companies will continue to attract as much capital as in past years.
In fact, property-backed Section 12J companies may come under scrutiny from their investors as they have simply not deployed enough capital, with a number of Section 12J companies having already inserted clauses in their investor documents which empower their board to make non-property backed investments should they fail to identify suitable property investments.
With the high likelihood that investors will continue to invest in Section 12J companies, my prediction is that private equity Section 12J companies will continue to gain market share, which will result in greater stimulation of the economy and a significant impact on the job numbers.
This will undoubtedly be excellent news for the future of Section 12J, as Treasury will during the course of 2019 and 2020, make a decision as to whether sunset clause should be extended beyond June 2021.
Jonty Sacks is a Partner at Jaltech. Views expressed are his own.