LionPride Agility VCC, co-managed by LionPride & Newtown Partners

Deven Govender’s presentation from the 12J Marketplace conference on
1 February 2019

Leadership

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Deven Govender
Chief Executive Officer

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Geoff Rothschild
Non Executive Chairman

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Yvonne Mhinga
Independent Non Executive Director

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Mpho Makwana
Independent Non executive Director

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Vinny Lingham
Co-Fund Manager
Newtown Partners General Partner

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Llew Claasen
Co-Fund Manager
Newtown Partners Managing Partner

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Paul B de Chalain
Non Executive Director

A typical Venture Capital Company (“VCC”) comprises of a portfolio of equity investments, in which capital from investors is used to collectively purchase new shares in other businesses. The LionPride VCC invests in compelling businesses, including mature and disruptive technology companies, and is backed by an experienced board and investment committee.

The LionPride Agility VCC has a single structure with 2 different classes of shares. Investors are able to invest within each individual theme according to their desired risk allocation. The two themes are impact investing (share class B) and emerging technologies (Share class C).  The combination of both structures provides a more compelling risk-weighted return on investment profile.

The LionPride VCC aims to achieve the following returns:

  • Share Class B: an investment return of 2.5 to 3 times the risk capital invested within 6 years from date of investment.
  • Share Class C: an IRR of 35% over a 5-year period.

An investment in the LionPride VCC is considered a long-term investment with a minimum of 5 years to retain the income tax deduction received by the investor.

In our opinion, growth in South Africa will come from SMEs. The Section 12J tax incentive will provide the necessary equity finance needed by these SMEs.

LionPride VCC investors will be entitled to deduct from their taxable income the full amount of their investment in the tax year in which the investment is made. This tax deduction reduces investment risk and enhances the potential for returns (please consult your preferred financial/tax advisor for a tailored solution).

Over the next 5-6 years LionPride VCC intends to return realised investment surpluses to shareholders by way of dividends. Dividends paid will be subject to the normal Dividend Withholding Tax (“DWT”) as applicable. For a better understanding about the offering please contact us to get more information on the Section 12J incentive and how LionPride VCC can help you.

Lionpride VCC is an approved VCC and is a licensed Financial Services Provider (“FSP”) in terms of Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) under licence number 49378. LionPride VCC is also registered with SARS as a Venture Capital Company in terms of Section 12J of the Income Tax Act No. 58 of 1962 under reference number VCC-0129. Lionpride Agility Fund has obtained legal opinion that it does not fall within the ambit of the Collective Investment Schemes Control Act no. 45 of 2002.

  • The investment will be subject to capital gains tax rules HOWEVER the base cost of the investors investment into the LionPride VCC will be reduced to zero.
  • Lionpride VCC is an approved VCC and is a licensed Financial Services Provider (“FSP”) in terms of Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) under licence number 49378
  • LionPride VCC is also registered with SARS as a Venture Capital Company in terms of Section 12J of the Income Tax Act No. 58 of 1962 under reference number VCC-0129
  • Lionpride Agility Fund has obtained legal opinion that it does not fall within the ambit of the Collective Investment Schemes Control Act no. 45 of 2002
The LionPride Agility VCC Details
Fund Manager & Promoter LionPride Investment Holdings Limited and Newtown Partners (Pty) Ltd
Administrative Manager Jaltech Financial Consultants
Subscription price per share R10
Share classes Share class B and share class C
Share class B minimum subscription per investor R250 000 (25 000 shares)
Share class B maximum subscription per investor R20 000 000 (2 million shares)
Share class B targeted returns 2.5 to 3 times over a 6-year period
Share class C minimum subscription per investor R1 000 000 (100 000 shares), expect to reduce to R250 000 pending CIPC approval
Share class C maximum subscription per investor 20% of all VCC shares issued
Share class C IRR 35% over 5-year period
Capital raising fee 2.5% of funds raised
Management fee 2% per annum of total funds raised paid quarterly in advance
Performance fee 20% performance incentive available on exit of investment

Supporting Documents that the investor will receive from the VCC

We have appointed Jaltech Financial Consultants to administer the LionPride Agility Fund. Jaltech is  boutique corporate finance firm with extensive experience in transaction advisory. They are industry leaders in structuring and administrating Section 12J Venture Capital Companies in multiple industries.

Jaltech will issue investor share certificates that comply with SARS requirements. This provides SARS with the proof it needs to allow you, the investor, the relevant tax deduction.

In addition, Jaltech will provide the investor with all the support and compliance information.

Background to the Section 12J legislation

With effect from 1 July 2009, investors (any South African taxpayer both trust, corporate and individual) can claim an income tax deductions in respect of the expenditure incurred on Venture Capital Company (“VCC”) shares. The VCC legislation is subject to a sunset clause which ends on 30 June 2021. The sunset clause will allow for review of the legislation and a decision will then be made as to whether it should be continued, however all investments made prior to the sunset clause will remain complaint even if the incentive is not continued.

Government has implemented this tax incentive to help provide equity financing to small and medium size enterprises (“SMEs”) with the intention to create jobs and to grow the economy. As these investments are potentially higher risk, the added tax investment provides VCC investors a substantial reduction in capital due to the up front tax deduction (speak to your preferred financial/tax adviser).

The LionPride Agility VCC (“LionPride VCC”) is intended to bringing together investors as well as concentrating investment expertise in favour of the small business sector which will lead to SMEs receiving equity financing, create jobs and help grow the South Africa economy.

  • Lionpride VCC is an approved VCC and is a licensed Financial Services Provider (“FSP”) in terms of Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002) under licence number 49378.
  • LionPride VCC is also registered with SARS as a Venture Capital Company in terms of Section 12J of the Income Tax Act No. 58 of 1962 under reference number VCC-0129.
  • Lionpride Agility Fund has obtained legal opinion that it does not fall within the ambit of the Collective Investment Schemes Control Act no. 45 of 2002.

    What does it mean to be an investor for Lion Pride Agility VCC

    Potential tax advantage for investors in LPI Agility VCC

    2table

    *assumed the individual is in the highest tax bracket. Please consult your preferred advisor for the tax advantage in your situation.

    The full amount invested in LionPride VCC is 100% deductible from your taxable income in the tax year in which the investment is made. This applies to individuals, companies and trusts.

    If the investment in LionPride VCC is held for a minimum period of time of 5 years the tax benefit received at the date of investment will become permanent, i.e. no recoupment of the tax benefit in the hands of the investor will occur. LionPride VCC invests in SME which positions Lion Pride VCC with investments in growth companies, thus significantly expanding the investment universe and targeting real alpha returns for its shareholders.

    Governing legislation

    Section 12J is subject to the provisions of the Income Tax Act No. 58 of 1962 (the Act). Section 12J was introduced to cater for the deductions in respect of expenditure incurred in exchange for the issue of venture capital company shares.

    An overview on how it works

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    1. Investment into VCC by investors.
    2. VCC issues investor with VCC share certificate and tax certificate.
    3. VCC capitalises investee companies.
    4. Investee companies pay dividend to VCC.
    5. VCC pays dividend to investors.
    6. Investor allowed to claim tax deduction when submitting return to SARS.
    7. Investor submits tax certificate to SARS (if requested).
    8. VCC pays fund manager fee.

    What does it mean to be an Investor for Lion Pride Agility VCC

    1. The full amount invested in LionPride VCC is 100% deductible from the investors taxable income in the tax year in which the investment is made. This applies to individuals, companies and trusts.
    2. An investor in LionPride VCC will therefore obtain a tax break at the time of the investment.
    3. The investment must be held for a minimum period of time of 5 years at which time the tax benefit conferred at the date of investment will become permanent.
    4. LionPride VCC is able to invest in companies with total assets of a maximum of R50 million at the date of investment which significantly expands the investment universe for the pool.
    5. LionPride VCC will have proper governance through:
      • An experienced board and Audit Committee;
      • An experienced investment committee with sector specific co-offered members o a needs basis; and
      • Appointment of Jaltech Financial Consultant to manage all compliance and regulatory matters with FSCA and SARS.

    Who qualifies to be an investor on Lion Pride Agility VCC

    Any South African taxpayer qualifies to invest in an approved VCC. Qualifying investors can claim an income tax deductions in respect of the expenditure actually incurred to acquire shares in an approved VCCs.

    Where any loan or credit is used to finance the expenditure in acquiring a VCC share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment.

    No deduction will be allowed where the taxpayer is a connected person to the VCC at or immediately after the acquisition of any venture capital share in that VCC. An investor can become a connect person to the VCC if he/she/it owns more than 20% of the VCC and/or owns more than 20% of the funds with family members and/or other persons with connected interests with the investor.

    On request from SARS, the investor must verify a claim for a deduction by providing a VCC share certificate that has been issued by an approved VCC, stating the amount of the investment and the date that the investment was made.

    Except in the case of VCC shares held by a South African taxpayer for longer than five years, the tax deduction is recouped (recovered) if the taxpayer disposes of the VCC Shares (under the general recoupment rules of section 8(4) of the Act)).

    Standard income tax and CGT rules apply in respect of the underlying investments made by VCC.

    Criteria for qualifying companies

    • The Investee must be a company;
    • The company must be a resident of South Africa;
    • The company must not be a controlled group company in relation to a group of companies;
    • The company’s tax affairs must be in order (a tax clearance certificate must be requested from SARS to support this requirement);
    • The company must be an unlisted company (section 41 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
    • During any year of assessment, the sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment; and
    • The company must not carry on any of the following impermissible trades:
      • Any trade carried on in respect of immoveable property, except trade as a hotel keeper (includes bed and breakfast establishments);
      • Financial service activities such as banking, insurance, money-lending and hire purchase financing;
      • Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
      • Operating casino’s or other gambling related activities including any other games of chance;
      • Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
      • Any trade carried on mainly outside the Republic.

    Investment Thesis

    Agility VCC has a single structure with 2 different classes of shares. This enables investors to invest capital into one of two capital pools co-managed by LionPride and Newtown Partners and gain a balanced exposure to South African technology or concentrated exposure into the selected theme which provides the desired risk/return profile.

    Agility VCC will invest growth capital into promising South African startups across 2 major themes:

    1.  Impact Investing (Share class B)

    • Focus on SMEs and startups using mature technology to positively impact economic upliftment objectives in South Africa.
    • Unlock value at the bottom of the pyramid (13.5 million South African households).
    • Lower risk, targeting SMEs with largely stable, predictable free cash flows and a defensible moat / large margin of safety.
    • Target sectors include Fintech, Education, Healthcare, Food and 4th Industrial Revolution.

    2.  Emerging Technologies (Share class C)

    • Focus on South African startups utilizing emerging technologies within highly scalable and disruptive business models. Rapid adoption and higher productivity allows startups built on emerging technologies to reach global scale quickly with lower capital outlay.
    • With high mobile penetration, a low cost base, friendly regulation and being the technology hub of Africa, South Africa is the ideal testbed for startups targeting global expansion and scale.
    • Higher risk, classic Silicon Valley VC model with an asymmetric return profile versus capital deployed.
    • Target sectors include Fintech, Agritech, On-Demand Services, Business Process Outsourcing, Renewables and EdTech.

      Investors are able to invest within each individual theme (through the fund’s separate share structure) according to their desired risk allocation. The combination of both structures provides a more compelling risk-weighted return on investment profile.

      Investment Strategy

      Agility VCC will look for the following characteristics in business:

      1. Founders who have ‘skin in the game’ i.e committed capitalInvestment-Strategy
      2. Strong cash flows with good growth potential
      3. A robust business model that is easily scalable
      4. Business that is established to at least pilot and scale tested
      5. Employment of technology where this aids in rapid expansion of the business
      6. Business that has disruptive technology or business model (possible 4th Industrial Revolution of opportunities)
      7. Founders that are looking to make a difference in people’s lives

      Active Management through strategic investments

      Our investment strategy is designed to deliver a well-balanced and diversified portfolio that will maximize sustained long-term returns by managing the risk/reward relationship.

      We believe that an active and adaptive approach to managing the portfolio is essential to preserving and growing assets in ever-changing capital markets. This requires applying a high degree of skill and experience to managing the portfolio across investment programs.

      We will employ seasoned entrepreneurs to join the management team of investee companies. Our decision to manage all aspects of the portfolio actively is not made lightly. Many investors seek above-market risk-adjusted returns but few consistently achieve them. While active management does require specialized skills and additional resources, our operational excellence expertise give us a greater capacity to manage risk and add value well above the associated costs over the long term

      A Total Portfolio Approach

      When making decisions about what to invest in – and what assets to exit we look at the total portfolio, not just specific investments. We don’t aim to achieve targeted ownership levels of assets classes but rather look beyond those labels and focus on maintaining our targeted levels for each of the critical underlying return/risk exposure in the total portfolio.

      We do this by applying our disciplined Total Portfolio Approach through which we analyze the return-risk exposures of each investment along its foundational dimensions in the context of the entire portfolio.

      It is envisaged that all our transactions will be below R50 million in equity with some debt instrument to bolster returns. The fund will look at the following holding cycle:

      1. Identify new markets, technologies and other market variable to unlock potential
      2. Identify a series of opportunities which could be acquired separately but collectively present a unique value proposition.

      Disclaimer

      • The contents of this presentation/document are intended solely for the addressee(s) and may contain confidential and/or privileged information and may be legally protected from disclosure. The addressee(s) accepts responsibility for taking adequate steps to ensure this presentation/document’s confidentiality. The information and content contained in this presentation/document may not be distributed, communicated or disclosed to any party other than the addressee(s) without written consent from LionPride VCC.
      • The information herein is indicative and for illustration purposes only. This presentation/document does not constitute the provision of financial services, financial advice or investment advice of any kind, which includes but is not limited to tax, accounting, investment, legal and regulatory advice.
      • LionPride VCC assumes no responsibility or liability for any errors or omissions in the content of this presentation/document. No guarantees of completeness, accuracy, usefulness or timeliness is provided.
      • LionPride VCC accepts no liability for any losses incurred by any party in implementing any of the strategies and/or structures contained in this document, and brings to the addressee(s) attention that the outcomes of the strategies and/or structures are dependent on a multitude of factors which cannot be predicted/conveyed at the time of writing.
      • LionPride VCC is an authorised financial service provider (FSP# 49378).

      Contact information

      Company Registration No:   2018/028424/06)

      Address:   22 Kildoon Road, Bryanston 2021

      Website:   www.lionpride.co.za

      Tax number:   9370099195

      Attorneys:   Denton’s Attorney

      Auditors:   PWC

      Bankers:   First National Bank

      Corporate Advisory:   Deloitte Capital

      Secretarial:   Acorim

      Contact Details:   011 463 8246

      info@lionpride.co.za

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      FAQs

      • How long does an investor have to be invested in an approved Section 12J VCC for?

      An investor is required to be invested for a minimum period of 5 years. The investor can dispose of these shares within the 5 year period but will be required to pay back the full tax deduction with no interest or penalties being incurred. Please noted that dividends can be paid to an investor during or after the 5 year period.

      • What is the minimum/maximum investment amount that can be made by an investor?

      In the case of it being publicly raised, the minimum amount is at the discretion of the fund and is permitted to be below R1m. If the funds were raised from a private source, the minimum amount is R1m. There is no limitation as to the maximum amount an investor can invest into the fund.

      • How long does the Section 12J VCC have to invest the capital which it has raised?

      The Section 12J VCC has three years, from the issue of the first VCC share, to deploy 80% of the total capital raised.

      • What is the maximum amount a Section 12J VCC can invest?

      A Section 12J VCC can make multiple investments, however, no single investment can result in the target/investee company’s gross asset value (book value) exceeding R50 million on the date of the investment and the VCC cannot hold a QC that accounts for more than 20% of the total funds held by the VCC.

      • Can an investor raise debt and invest the debt into the Section 12J VCC and then claim the tax deduction?

      The simple answer is yes, provided the investor is at risk for the debt. By way of illustration, should an investor invest equity of R30m and debt (at risk) of R70m into a Section 12J VCC, the investor will receive a deduction on the full R100m (this would amount to a deduction of R28m for companies and up to R45m for individuals and trusts).

      Accordingly, under this scenario and assuming the investor has sufficient taxable income, a company could effectively repay close to half of the debt in year one and in the case of an individual or trust, close to two-thirds of the debt could be repaid over the same period, from their tax saving.

      • How does the investor exit the structure?

      There are many ways to exit and the most efficient mechanism is dependent on if the investor is a company or an individual. When an investor is seeking to exit the structure, we would, based on the investors instruction, potentially dispose of the underlying entity and issue the profits as a dividend to the respective investor. We have also included a share swap to LionPride Holdings.

      Creating Long term shareholder value

       

      Of course, these shortcomings were obscured during much of that decade, and corporate governance took a backseat as investors watched stock prices rise at a double-digit clip. The climate changed dramatically in the new millennium, however, as accounting scandals and a steep stock market decline triggered a rash of corporate collapses. The ensuing erosion of public trust prompted a swift regulatory response—most notably, the 2002 passage of the Sarbanes-Oxley Act (SOX), which requires companies to institute elaborate internal controls and makes corporate executives directly accountable for the accuracy of financial statements. Nonetheless, despite SOX and other measures, the focus on short-term performance persists.

      In their defense, some executives contend that they have no choice but to adopt a short-term orientation, given that the average holding period for stocks in professionally managed funds has dropped from about seven years in the 1960s to less than one year today. Why consider the interests of long-term shareholders when there are none? This reasoning is deeply flawed. What matters is not investor holding periods but rather the market’s valuation horizon—the number of years of expected cash flows required to justify the stock price. While investors may focus unduly on near-term goals and hold shares for a relatively short time, stock prices reflect the market’s long view. Studies suggest that it takes more than ten years of value-creating cash flows to justify the stock prices of most companies. Management’s responsibility, therefore, is to deliver those flows—that is, to pursue long-term value maximization regardless of the mix of high- and low-turnover shareholders. And no one could reasonably argue that an absence of long-term shareholders gives management the license to maximize short-term performance and risk endangering the company’s future. The competitive landscape, not the shareholder list, should shape business strategies.
      What do companies have to do if they are to be serious about creating value? In this article, I draw on my research and several decades of consulting experience to set out ten basic governance principles for value creation that collectively will help any company with a sound, well-executed business model to better realize its potential for creating shareholder value. Though the principles will not surprise readers, applying some of them calls for practices that run deeply counter to prevailing norms.
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