The Southern African Venture Capital and Private Equity Association (SAVCA) welcomes the announcement that proposed changes to Regulation 28 will be published by National Treasury later this week for public comment, as outlined by South Africa's Minister of Finance, Tito Mboweni, during the National Budget Speech on Wednesday afternoon. SAVCA has been advocating for changes to Regulation 28 as published in their paper in June 2020, to support the economic recovery of the country.
The current Regulation 28 asset classes and ceilings act as constraints on asset allocation decisions, potentially leaving investors with inefficient portfolios. This is particularly the case when asset classes with uncorrelated returns and risks, stemming from fundamentally different economic drivers, are grouped under a single threshold. Changes to Regulation 28 could provide pension funds with a higher degree of diversification, which would not only offer positive public benefits by improving the overall financial security of pension fund savers in the long run but also provide much-needed economic stimulus to the South African economy.
SAVCA is, however, disappointed that the Section 12J VCC sunset clause is not being extended past 30 June 2021, essentially withdrawing the incentive in its entirety rather than amending the incentive to ensure National Treasury’s objectives are met. The Section 12J incentive has been very successful in raising funding from private individuals and corporates to invest in businesses meeting the Section 12J investment criteria as set out in the Income Tax Act.
This capital takes time to invest into qualifying companies and demonstrate the full benefits in terms of job creation and repayment of taxes to the fiscus. Following the incentive review, National Treasury missed the opportunity to refine the provisions in the Act to be narrower in scope and more targeted to high-risk investments, which aligns with their initial intention and where the funding shortfall for SMEs is the highest. We also note that there were no alternative measures announced to support investment into SMEs in partnership with the private sector. Investor sentiment and the impact on the SME funding ecosystem due to policy change is likely to have lasting ramifications should the National Treasury reenvisage investment into this segment of the market at a later date.
South African technology entrepreneurs are already encouraged to set up their businesses in more startup-friendly investment jurisdictions to raise capital and advance market access. Throttling the South African venture capital asset class in the short-term may have the unintended consequence of missing out on future economic benefit when these high-growth businesses look to other ecosystems that embrace investors and start-ups alike.
SAVCA welcomes continued engagements with the National Treasury on the announcements made, as their objectives of job creation and economic growth for South Africa are aligned.
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