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S12J Investing - the suite spot

As South Africans, we always seem to take good news with a healthy pinch of Atlantic Ocean Sea Salt. December's ANC leadership outcome may not have been perfect (we would have been naive to have expected it to be) but it was a monumental result for our country. Given that we are launching a new long-term South African focused Lucid 12J investment fund I am certainly feeling relieved and even excited about the prospects that this new chapter will bring. By Gidon Novick for Lucid Ventures

And so, it seems, our beautiful country will survive and possibly even thrive in time to come. The early signs of a wholesale clean-up of the corruption nightmare we've been subjected to seems to be gathering great momentum. 

The 12J industry has to date been juggling a double-edged sword. For local investors, the thought of paying tax and seeing it whittled away or stolen has been revolting and as a result, a legitimate, legal and potentially socially uplifting mechanism to avoid tax has had obvious appeal.  Conversely, the thought of having capital tied up in South Africa for a minimum of five years with massive political and policy uncertainty is clearly unappealing. 

A quick recap of 12J: The immediate benefit of Section 12J investing is the upfront tax deduction – your full investment is tax deductible (as long as the investment is held for a minimum of 5 years).  This translates into an upfront return kicker of 8% after all taxes. This offers investors a great headstart. As the fund manager, we can maintain a prudent investment strategy and provide attractive returns to investors.

Looking ahead we all hope, our tax rands are allocated to their intended purpose, the prospect of legally avoiding tax at growing marginal personal tax rates (currently 45%) is still compelling.  And clearly, judging from the super-strong Rand, the risk profile of SA investments, while still carrying a significant premium, is greatly improved. 

We’ve been spoilt by a year of double-digit stock market returns (even in dollars) and so alternative investments like 12J have got a tough benchmark to meet.  My dad taught such an invaluable lesson on compound returns - the rule of 72 a simple way to measure opportunities and returns where 72 divided by your annual return will tell you how long it will take to double your money. For example, if your annual return is 12%, then 72/12 = just 6 years to double your money! If you choose your 12J fund correctly you should comfortably generate a double-digit after-tax return on your net investment.

Assuming that you buy the 12J investment thesis, the next question is which Fund to choose and this is where my theory is self-serving so please consume it with a healthy dose of scepticism. I am convinced that property backed hospitality is the sweet spot of 12J investing.  So much so that we are diverting the focus of our existing fund (Lucid Growth Fund) and our new fund (Lucid Hotel Fund) to this investment strategy. 

The model is to acquire or develop bulk high-end one bedroom residential units in South Africa’s most prolific nodes and to operate an apartment style hospitality business. Investors will have access to a broad portfolio of quality property assets under a fully legitimate (12J specifically includes hospitality businesses) structure and socially impactful industry (tourism is one of the best job creators).  The optionality on exit (sale of hotels businesses, conversion to a Real Estate Investment Trust (REIT), sale of individual units) significantly de-risks the business.  The option to further leverage the business on the back of the underlying assets would further reduce capital outlay and boost returns.  

As with all investments, a sense of comfort with the management team and their track record, a good understanding of the risks involved and appropriate due diligence is critical. I’m proud to share that Lucid has recently been endorsed by one of South Africa’s top banks and several leading wealth managers following a successful due diligence process.   

Investor sentiment has turned positive in short space of time and 2018 seems like it could be a watershed year in South Africa and S12J investing is all set to capitalise on this. 


Lucid Ventures is a venture capital platform with a diversified range of tax-efficient funds supporting the growth of entrepreneurial activity in South Africa. Take advantage of tax breaks in this sector and visit us here

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