Fund managers, who are backing startups, SMEs and other business ventures that banks don't ordinarily touch, are expecting a bumper year in 2021 after Covid-19 disrupted most of the fundraising initiatives last year.
The private equity and venture capital industry, which in South Africa was given life by wealthy individuals, including Mark Shuttleworth, former FNB CEO Michael Jordaan and Patrice Motsepe, has over the years grown to billions of rands, reducing its dependency on "super angel investors".
Corporates and development finance institutions are increasingly finding private equity and venture capital an attractive sector to back. Over the years, this helped fund managers in this space raise money to support some startups which grew into big businesses - like Tekkie Town, Libstar and SweepSouth - according to Keet van Zyl, founding partner of Knife Capital.
Knife Capital, which was established in 2010, is a product of an investment group that was founded by Shuttleworth too.
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But now international investors are starting to look at the industry through a different lens and it could help attract the much-needed capital for South Africa's SMEs, who, together with the government's infrastructure drive, the country is looking up to in the road to recovery from Covid-19.
"I think the one thing that the international investors have started to really acknowledge is that South African early-stage businesses actually understand the typical intersection between emerging markets solution challenges and solutions that crossover to developed markets," said van Zyl during a discussion held by the Southern African Venture Capital and Private Equity Association (Savca) on Wednesday.
Sthembile Nkabinde, founder and CEO of Khulasande Capital, said fund managers in South Africa, given the country's emerging market status, were well-poised to attract foreign investors this year.
"The reason I'm saying that this year we are better poised, as South Africa, to attract foreign investors is because I'm looking at emerging markets as a basket."
Nkabinde said there is consensus among investors that emerging markets will offer better returns than developed markets, especially because of a weakening US dollar and the sustained increase in commodity prices since last year.
"Last year, there was some aversion to having exposure to emerging markets. This year, we're seeing a huge shift," said Nkabinde, adding that South Africa being that emerging market basket will certainly benefit.
Savca CEO Tanya van Lill said her experience, from engaging with international investors, is that private equity and venture capital fund managers have to sell the region first, putting less spotlight on South Africa's own fiscal problems, as long as there are good projects on the table.
Section 12J continues to attract funds from local investors
When it comes to local investors, on the other hand, fund managers often still need to educate them on what private equity and venture capital is.
But the Section 12J incentives have gone a long way to attract investment from wealthy individuals.
Section 12J of the South African Income Tax Act gives a tax incentive to investors to channel money into qualifying and registered venture capital companies.
But the incentive had a sunset clause, which will end the tax deductions in June this year. The industry has been lobbying SARS and the National Treasury to extend the incentive.
Van Zyl said, even amidst this uncertainty on whether the government will extend the lifespan of the Section 12J incentive, money has not stopped flowing into venture capital companies.
He said while not much has been happening in the public domain, National Treasury has done extensive research on venture capital managers to understand tax-paying businesses and jobs that have been created by the incentive.
In the meantime, Knife Capital alone has seen huge inflows into its Section 12J funds this year. The industry remains "optimistic" about the extension of the incentive, he said.