In a letter to government, South Africa’s largest Section 12J (S12J) manager, Westbrooke Alternative Asset Management, has asked the minister of finance to help fast-track emergency amendments to the Section 12J legislation so that up to R6 billion of investor capital can be more speedily invested in SMMEs during the Coronavirus pandemic.
According to Dino Zuccollo, principal at Westbrooke and chairman of the Section 12J Industry Association of South Africa: “We estimate that approximately R6 billion of S12J capital is still to be invested in the SA economy. This is primarily because most of this capital was raised over the past 12 – 13 months, and it takes time to make equity investments into a large number of SMMEs, especially during periods of elevated risk and uncertainty.”
Zuccollo believes that industry investment will decrease in the current lockdown context due to the complexities of making equity investments into high risk SMMEs: “Historically, access to funding by SMMEs has been challenging and in the current circumstances it is even more difficult. A significant portion of existing 12J investments are in the hospitality industry, which is experiencing severe liquidity issues as a result of lockdown.”
“The end of the lockdown is unlikely to solve these issues, as the impact of local and international travel bans and social distancing will likely remain. We don’t expect to see a significant increase in the amount of capital invested until the Coronavirus pandemic has passed.”
Should local SMMEs not receive emergency funding in the coming months, it is likely that many will close permanently due to inability to pay staff, occupancy costs and other significant fixed costs.
Emergency amendments needed
Despite these challenges, Westbrooke believes that with certain emergency amendments to the 12J legislation, the industry will be well positioned to assist government in navigating the cashflow needs of SMMEs during the pandemic. “The industry is well-positioned. Westbrooke has over R1 billion in 12J investor funds available for immediate investment, and we estimate that the industry has an additional R5 billion. Emergency amendments to the existing legislation, including changing the permissible activities to include the granting of loans, as well as explicit and appropriate government support would encourage S12J investor capital to be invested at speed,” explains Zuccollo.
“The industry is currently restricted because we are not allowed to invest in businesses where the gross book value of assets of the investee company exceeds R50 million. Should this limit be increased to R100 million, or the definition changed to net assets, it would increase the scope of businesses that could potentially benefit from S12J capital as the Coronavirus liquidity squeeze tightens.”
The minister of small business development announced a debt relief fund to assist SMMEs and president Rampahosa announced the creation of a solidarity fund to support those whose lives are disrupted.
According to Zuccollo: “Whist we applaud government for the swift steps taken to curtail the spread of the Coronavirus and the associated impact on SMMEs, the economic reality is that only a coordinated and integrated response between government and the private sector can address the magnitude of this problem. Enabling S12J industry funds is an important mechanism.”
S12J is a growing asset class which is successfully creating jobs, stimulating the economy and attracting high net worth investor capital at a time when the economy needs it most. Since 2015, Westbrooke has invested more than R1.3 billion into more than 50 SMMEs in the hospitality, tourism, student accommodation and asset rental industries.
“We are able to assist government in navigating this crisis, and we hope to work collaboratively to find solutions for the 12J industry to provide immediate support for SMMEs. Speed is of the essence,” concludes Zuccollo.
A provision of the Income Tax Act, Section 12J, was established to assist qualifying small, medium and micro enterprises to gain access to equity funding by providing investors with a 100% tax deduction for making investments in these businesses.