Section 12J investments were introduced as an investment tax incentive in 2009, but it is only in the last few years that this sector has started to grow.
Section 12J was introduced by National Treasury, enabling investors to write off 100% of their investment against their taxable income in the year they invest – benefiting from up to 45% immediate tax relief – by investing in small and medium-sized South African businesses to stimulate the economy.
Estimated total 12J industry assets under management stood at R3.6 billion at the end of November 2018. With R1.7 billion in 12J assets under management, Westbrooke Alternative Asset Management has about 50% market share and is multiples larger than its next biggest competitor.
Westbrooke, a private equity and alternative asset management business founded in 2002, launched its 12J investment offering in 2015 and has seen interest and investment in these assets grow since then.
Westbrooke raises money for a period each year for its closed-ended funds, with its 2019 round set to close on February 23. “We don’t raise on the basis of wide mandates,” says fund manager Dino Zuccollo.
“We have tried to leverage our skills and competencies to offer four options, and those are also encapsulated in investment portfolios. Rather than investing in a single fund, investors can come into a diversified Westbrooke portfolio across different requirements – namely income, balanced, and growth – and four different funds, with each comprising different weightings across Westbrooke funds based on the preferences highlighted in the name.”
Fund manager Jonti Osher adds that in any form of tax-driven incentives, you need to merge investor and National Treasury’s preferences and intentions. It needs to mirror the objectives to boost job creation and stimulate investment in small and medium-sized enterprises (SMEs) in South Africa.
“When we design funds, we try to find underlying investment classes that are in the spirit of the legislation, and lower risk is achieved by way of asset backing, with some sort of movable or fixed asset underpinning the value of the investment.
“We are good at structuring and managing deals, and our focus is on finding exceptional entrepreneurs and businesses, and we use 12J capital to invest in these businesses and help them to grow.”
Investors can choose portfolios that best suit their investment preferences and risk appetite.
One of Westbrooke’s funds, Westbrooke Aria, invests in businesses that rent movable assets like vehicles and equipment. One example is Mobile Macs, which provides delivery motor bikes to the fast-food franchise industry. Since getting a capital injection, it has increased its fleet from 700 to 1 500 bikes and has doubled direct employment.
Aria is focused on strong dividend-yielding investment rather than capital growth. Westbrooke has raised R850 million for Aria since 2016 and provided growth capital to over 20 companies offering attractive yielding investments. Its strategy hinges on backing entrepreneurs across South Africa who have operating businesses and/or movable assets they rent out.
Like Aria, its student accommodation fund, Westbrooke Stac, provides an attractive dividend stream as well as the potential for capital growth with investments in property-backed student accommodation. It has raised R360 million to date, and the second tranche of capital raising is underway.
Currently Stac invests alongside reputable, experienced operators of student accommodation assets. “The investor is getting exposure to a property-backed asset in an area where there is huge demand.” It produces a good yield and capital growth, and is aligned with a national strategic imperative to promote education by addressing the country’s bed shortage in key student hubs.
A new fund, Westbrooke Host, is focused on hospitality and has combined two previous strategies into a single offering. This includes investment in the Capital Hotel Group, which Westbrooke says is currently South Africa’s fastest-growing hotel group, where each hotel room is a sectional title apartment. This investment is combined with others, including an Airbnb fund in Cape Town. The Host strategy targets a blend of income and capital growth, with investors getting exposure to a property-backed investment. Westbrooke’s previous hospitality strategies raised R455 million, deploying funds into more than 10 hotel assets, with on-target investor returns.
“Westbrooke Host looks to benefit from the growing South African hospitality and tourism sector,” says Osher.
The fourth fund, Westbrooke Base (‘Businesses where Assets Support Earnings’), is focused on capital growth and slightly higher returns. “This is a new strategy, based on a competency we have in the group,” says Zuccollo. “In Aria we have done more than 20 deals, and there are a number that we liked but were unable to put in Aria, where we are not mandated to invest in underlying businesses where there aren’t contractual revenue streams or where targeted pay-back periods exceed five years, even though they may generate a lot of cash. An example is solar infrastructure, where there are contractual cash flows but underlying rentals to pay back capital span more than the five-year investment period.
“This is a fund to allow us to invest in these kinds of deals.”
Base seeks to invest in cash-generative businesses where there are assets to support earnings. Other investments may include petrol stations, schools and retirement homes. “We have a strong pipeline of potential deals including Uber fleets, solar, outdoor advertising and petrol station operators. There is no shortage of pipeline, we are just ensuring investments meet the criteria of the fund.”
Zuccollo says 12J investments are fulfilling investor and national needs. Westbrooke 12J investments have, for example, helped dozens of businesses to grow and have created more than 1 200 jobs, while investor appetite for these kinds of investment is growing. The firm raised R415 million in 2016, R470 million in 2017 and over R565 million in 2018.
The minimum investment in all of these Section 12J funds is R500 000, and the offers close on February 23, 2019.