New green energy fund offers investors a tax break of up to 100%

Grovest this week announced the launch of South Africa’s first private equity fund that offers investors in renewable energy projects a 100% tax deduction in terms of section 12B of the Income Tax Act.

The FSCA-regulated Twelve B Green Energy Fund is managed and administered by Grovest, which pioneered section 12J funds and has R3.5 billion in assets under administration.

The fund accepts investments from individuals, companies, trusts, and pension and provident funds.

Section 12B of the Income Tax Act allows for a tax deduction for certain qualifying assets used for electricity generation from renewable sources. This enables accelerated depreciation equal to 100% of the investment that can be written off against an investor’s taxable annual income provided the investment is in a renewable energy facility that generates less than one megawatt (MW) of electricity.

If the renewable energy investment produces more than 1MW of electricity in its first year, the asset can be written off over three years, with 50% of the value of the asset deductible from an investor’s taxable annual income in the first year, 30% in the second year, and 20% in the third.

Grovest said that, in terms of the fund’s investment mandate, at least 70% of capital contributions will be invested in projects under 1MW. As such, the fund will invest in a portfolio of renewable energy projects focused on sectional title complexes and select commercial and industrial installations.

“These installations incorporate the latest technology in solar panels, inverters, and battery storage spread across various sectors – multi-family residential, retail, and industrial off-takers. They are also geographically spread across South Africa.”

Each project is governed by a long-term power purchase agreement (PPA), which determines the amount of energy generated at an agreed price over the term of the PPA.

Jeff Miller, the founder of the fund, said Grovest has used section 12B in its section 12J investments. It has now created a partnership structure that allows for the section 12B benefit to flow through to investors. Grovest will use the money invested in the fund to buy solar kits that will be deployed at various energy-generation projects. Profits from the sale of electricity will be distributed to investors bi-annually in February and in August.

Grovest said the fund has about R80 million in potential deals in the pipeline.

Return target

“The Twelve B Green Energy Fund is targeting an internal rate of return to investors of 14% to 15% net of fees and taxes and has a moderate risk profile. The ability to write off the cost of the investment against taxable income provides downside protection and enhances overall returns for investors,” Miller said.

Grovest has published a spreadsheet on the Twelve B website that sets out the return assumptions.

The following fees apply:

• A once-off set-up fee of 1% of the capital raised is paid to the manager.
• A management fee of 2% a year is paid to the manager on the capital invested. This fee is paid quarterly in arrears.
• The manager will earn a performance fee of 20% of all distributions paid to investors after returning the risk capital to investors.

Grovest said there is no capital gains tax on section 12B investments, unlike section 12J investments.

High entry point

As was the case with section 12J investments, the Twelve B fund has a high entry point. Investors need a minimum of R100 000. There is no cap on investments.

Twelve B said an investor who, for example, invests R100 000 in March 2023, with the full amount invested in a solar kit that starts generating energy in May 2023, will be able to deduct the full R100 000 from their taxable income for the financial year to the end of February 2024.

In another example, an investor with R100 000 puts R70 000 towards a solar kit in March 2023 that starts generating in the year ended February 2024. This investor can deduct R70 000 from their taxable income for the financial year ended February 2024, with the balance of R30 000 deducted from their taxable income in the 2025 tax year.

These are once-off deductions and cannot be repeated on the same investment.

“We will endeavour to give investors the opportunity to deduct their section 12B allowance in the year in which they make the investment,” Grovest said.

Capital-raise target

The fund is planning an initial capital raise of R200m, but Miller told Business Day that demand could see a further R300m raised. “Demand has been extremely high, and we believe we could deploy at least R500m a year,” Miller was quoted as saying.

The term of the fund is 10 years, and there is no minimum prescribed period to hold the asset to benefit from the section 12B allowance.

The fund qualifies as a Shariah-compliant investment.

Government pulls the plug on the section 12J incentive

Section 12J was introduced in July 2009 to provide individuals, companies and trusts with a tax incentive to invest in venture capital companies, which fund small and medium-sized enterprises that are believed to have long-term growth potential in economic sectors that are often hard-pressed for financing.

Investors qualified for a full tax deduction upfront in the tax year in which they made an investment. National Treasury hoped this would encourage investors to participate in the capitalisation of SMMEs and infrastructure, thereby stimulating economic growth and creating jobs.

Section 12J became the fastest-growing alternative asset class in South Africa, attracting capital of more than R12bn.

But in the 2021 Budget, then Minister of Finance Tito Mboweni announced that the scheme would not be extended beyond 30 June 2021.

“The incentive did not sufficiently achieve its objectives of developing small businesses, generating economic activity and creating jobs. Instead, it provided a significant tax deduction to wealthy taxpayers. The majority of investments supported by the incentive seem to be in low-risk or guaranteed return ventures that would have attracted funding without the incentive,” Mboweni said at the time.