Loadshedding, tariffs fuel KSE Solar Fund investment case

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The Investment opportunity

Many medium sized Commercial and Industrial (“C&I”) companies in South Africa are high electricity users (for example: manufacturers, abattoirs and businesses operating in an environment requiring regular heating or cooling). Not only are these businesses faced with the challenge of continuous load shedding, but are now also finding it difficult to maintain their profit margins while energy costs are increasing at alarming rates every year.

The investment opportunity is simply to provide these C&I customers with an environmentally friendlier, less expensive energy solution than Eskom and the Municipalities, while at the same time reducing the strain on the national grid. Coupled with an upfront tax benefit, targeted returns to investors are substantial. This is exactly what an investment in KSE Solar Fund 2 entails.

Investment overview

After successfully raising R30m at the end of February 2021 and already deploying a substantial part thereof while building a pipeline of exciting further solar projects, it made absolute sense for Futureneers Capital to extent its first 12J solar offering with the launch of KSE Solar Fund 2 (“KSE”).

KSE enters into 20 year plus power supply and purchase agreements with C&I customers providing them solar electricity on a cost-effective pay-per-use basis.

The benefits to the C&I customers are:

  • No upfront costs or any funding required by the customer (“opex” only).
  • Immediate saving in costs / additional revenue opportunities partnering with KSE – which becomes significant savings or additional income when calculated over 20 years.
  • Option to acquire the Solar PV plant from KSE at any time during the PPA Agreement (option to turn “opex” into “capex”).

The benefits to KSE and its Investors are:

  • Asset backed investment. The equipment is capitalised against the KSE Balance Sheet – meaning the Investment is backed by ownership of the solar asset
  • Contractual income for the next 20-25 years for every power purchase agreement concluded. This equates to predictable cash flows.
  • Attractive asset to finance through debt in partnership with the banks.
  • Attractive asset to build into a substantial consolidated asset portfolio and in the medium to long term sell to pension funds and other interested local or overseas buyers – with the ultimate objective to create cash liquidity to exit investors at the end of 5 years.

Targeted investment returns and fees

Please note that as a registered Section 12J VCC and registered financial services provider, we cannot provide any investment guarantees. Investor returns are therefore indicative and targets only and can be broken down and summarised for individual or trust investors as below. Company Investors – please scroll down the page for more details.

The above targeted returns are after deducting a 5% upfront management fee included in your investment (2.75% effective after tax cost for investors) and ongoing management fees payable from investment returns only. Although management is actively involved in the investment and operational business, no salaries are paid and management is incentivised to grow the portfolio and create liquidity to exit investors at the end of 5 years meeting targeted returns.

Targeted investor cash flows

Indicative Investor Cash flows (individual investors) are illustrated below:

Critical assumptions:

  • Gross annual yields of 3.85% on cash and 12% gross on active solar projects (equating to 10% net yield after 2% management fees). Annual yields are lower in years 1 and 5 to provide for project roll-out and project wrap-up to create cash to exit investors;
  • Dividends paid at the end of every year;
  • 100% Cash back after the end of the 5-year investment cycle. It is the objective of the fund to buy-back investors at the end of term.
  • Capital gains tax on exit deducted from returns in compliance to section 12J of the Income Tax Act.

The above cash flows are for cash investments. Please scroll down or enquire about our funding options available to qualifying investors.

Section 12J solutions suitable for companies

Although the Company tax rate is only 28% compared to 45% for individuals and trusts, Section 12J still offers a significant tax opportunity for company investors. Additional benefits available to Company investors may include:

  • Ability to carry forward a tax loss and utilise section 12J over multiple tax years, even with the 30 June 2021 sunset clause in place and not extended; and
  • Ability to structure investment as an Enterprise and Development contribution qualifying for BBBEE recognition; and
  • Paying no dividends tax on dividends received from the KSE Fund (provided such cash receipts are retained within the company and not distributed to its shareholders);
  • Utilising one of our friendly Loan and funding solutions to assist with spreading cash flow requirements over multiple years; and
  • Further Tax and Estate Tax Planning opportunities.

Please contact us for more information regarding our specific Section 12J Company Investment Solutions.

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Funding options available

Over and above the normal Section 12J cash investment option, we also offer the following funding solutions:

Smart Loan (up to 95% finance available)

Our SmartLoan works similar to a traditional property financed mortgage bond, with one major exception – although the monthly instalment is similar to that of a 20-year bond, by applying and crediting your Section 12J benefit and dividends accrued to the outstanding loan balance, your loan is settled within 5 years. No personal surety required.

Bridge Loan

The Bridge Loan option enables investors to pay 55% Cash while 45% (typically their Section 12J Tax benefit portion) is financed until such time they receive their Section 12J Tax benefit from SARS.

Global Hedge One

In partnership with Sanlam Private Wealth (“SPW”), we offer investors the opportunity to make use of their annual discretionary investment allowances to invest a minimum of R1,000,000 ($68,000) in a SPW listed and managed fund. Investors are then offered a 50% loan through SPW (utilising their USD investment as security), while we offer them a Smart Loan in South Africa for a further 50% – enabling the investor to make a 100% leveraged South African 12J investment over and above their offshore investment. In this manner Investors are able to significantly enhance their global USD returns.

Please contact us for further information and a loan quote on any of the above options.

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About Futureneers Capital – The Section 12J VCC & fund managers

R300m Capital Under Management in the group
R50m 12J Project Pipeline
120 Section 12J Investors Successfully On-boarded
23 Underlying QC’s (Section 12J Qualifying Companies)
4 Funds Under Management by Futureneers
198 Section 12J Certificates Issued

For more information on the Futureneers KSE Solar Fund 2, please click here.

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