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“It may sound like a Land-Rover advertisement, but the best investments by far are the ones that solve major problems, keep doing so over a long period of time, and ultimately result in recurring and predictable income streams for investors. Even better if those investments include upfront tax incentives” says Jaco Gerber, CFO of Futureneers Capital, a registered Section 12J Venture Capital Company and registered financial services provider with more than R300m capital under management in the group.
In South Africa everyone is aware of the challenges small to medium sized businesses (SMEs) are facing to cope with constant load shedding by Eskom. This challenge is amplified for many high energy users in the commercial and industrial (C&I) sectors especially manufacturers and operations where constant heating or cooling is required. However, an even bigger threat to their business models is the high rate at which their energy costs are escalated every year, and the uncertainty what to expect in the years to come. From 2008 to 2019 Eskom electricity tariffs have increased by a staggering 446% compared to a compounded inflation growth of only 98%. To put that into perspective – Eskom electricity is increasing on average 4.55 times more than inflation every year.
Ever-increasing energy costs has already forced many SME’s to increase prices of their products and services, but whether this approach could be sustained is doubtful. Eventually higher energy costs will lead to decreased profitability, less growth and increased inflation. The bad news is that there is still no clear indication, and probably substantial doubt that Eskom will be able to maintain future price increases in line with inflation.
There is however light in the tunnel, or in this case a radiant light from above. The price of electricity from solar projects has dropped by a factor in excess of 5 times in the last 10 years leading to many SMEs now investigating and implementing solar as an attractive alternative energy source to expensive Eskom electricity.
As a result of expensive battery storage solutions, the bulk of solar PV system installed in South Africa’s C&I industry is however still “grid-tied”, meaning the system only supplements Eskom energy compared to a total “off-grid” solution with zero reliance on Eskom. Irrespective of additional storage ability, the implementation of grid-tied solar PV systems are excellent news for South Africa. These installation substantially reduce the total energy costs for the business and certainly assist Eskom in generating cleaner energy and additional grid capacity. In addition, there is a clear global trend that the prices of battery energy storage are decreasing sharply and that energy storage may in the next few years become a feasible investment solution for SMEs.
Given the above trends, Futureneers Capital has partnered with Anton Boshoff (ex CEO of the Bigen group – one of Africa’s leading infrastructure development solutions companies) and Ricky Huyser (of AEC, one of South Africa’s most respected and experienced solar consulting and construction companies) to establish a Section 12J registered solar investment fund called the Key Solar Exchange (KSE).
KSE offers medium sized commercial and industrial customers a turnkey solar energy solution, including the funding, design, construction and maintenance of bespoke grid-tied solar PV system with optional energy management and storage capabilities. The customer effectively buys energy from KSE on an easy to understand “pay-per-use” (“opex”) model contractually secured by a 20 to 25 years power purchase agreement (“PPA”). The customer may also in future elect to purchase the solar PV system from KSE at a predetermined formula (“capex” model), offering peace of mind and flexibility.
Back to the Land-Rover comparison – the investors benefit from this implementation model by investing in an asset solving a real problem and generating steady and predictable contracted revenue over a long period of time, being flexible enough to sell or finance and generate cash to exit investors after 5 years.
After successfully raising R30m for their KSE Solar Fund 1, Futureneers Capital is now proud to offer interested investors the opportunity to participate in the KSE Solar Fund 2. As many potential investors may be aware, National Treasury has not extended the Section 12J sunset clause beyond 30 June 2021. This simply means that investors have one final chance to make use of the very attractive Section 12J SARS incentive before 30 June 2021 and invest in Futureneers Capital’s KSE Fund 2 to qualify for a 100% upfront tax deduction.
Over and above the upfront tax incentive of up to 45% of the investment value, the fund targets generating predictable income streams from its PPA’s, paying annual dividends and returning 100% of the total capital invested at the end of year 5. Expressed differently, including your tax benefit, the fund aims to double net cash invested over 5 years after paying all fees and taxes, including a Capital Gains Tax on exiting the fund. For more sophisticated investors, this equates to a very attractive IRR of 23%.
For more information about Futureneers Capital and its KSE Fund.
