*This content is brought to you by Jaltech Fund ManagementÂ
By Jonty Sacks*
Section 12J investments have typically been labelled as medium to high-risk investments, particularly if one compares a Section 12J investment to traditional investments such as bonds, listed equities or cash.
To accurately understand the risks associated with a Section 12J investment, in my view, there are two questions that an investor should ask, namely:
- Where will my money be invested?
- How will I exit my investment after the 5-year investment term?
Understanding where the money will be invested will assist an investor with assessing the risk profile of the investment. For example, prior to COVID-19, investors would have categorised hospitality investments as low risk, given that the investment is underpinned by physical property, however, with the current state of the world, one may regard such an investment as medium to high risk, given the low occupancy levels experienced.
The key, from an investor’s perspective, is to understand the investment mandate and whether external factors (such as COVID-19) will impact returns.
Infinity Anchor Fund is of the view that the following factors result in the investment being classified as low risk within the Section 12J sector:
1. Investment strategy
One of Infinity Anchor Fund’s investment strategies is to invest in asset rental businesses which have an exemplary track record of collecting rental income. Asset rental businesses are generally very resilient during poor economic times as corporates and individuals generally prefer to be more conservative with their capital, electing to rent as opposed to purchasing physical assets.
2. Diversification
Infinity Anchor Fund invests capital across multiple businesses in numerous sectors, this ensures that the fund’s exposure is diversified, lowering risk.
3. Track record / historic performance
Infinity Anchor Fund has outperformed the majority of Section 12J investments and is on track to achieving impressive returns over the 5-year investment term. Within the investment term, Infinity Anchor Fund has an excellent dividend distribution track record, having distributed 6-monthly dividends to investors over the past 30 months.
4. Risk mitigation
Critically, Infinity Anchor Fund requires that, prior to making an investment, at least one of the following risk mitigation measures is in place to protect investors’ capital:
First loss protection: Where a first loss mechanism is used, Infinity Anchor Fund will require that the business owner/s invest alongside Infinity Anchor Fund and that their capital will first be at risk before Infinity Anchor Fund’s investors’ capital.
This mechanism is very important in the asset rental market as the success of these businesses are dependent on the creditworthiness of the end-user. Having a first loss mechanism is likely to ensure that the management team performs credit checks on each customer thoroughly before entering into a business relationship.
Guaranteed yield: With this mechanism, the business owner/s or third parties are required to provide a guarantee that the underlying assets will yield a certain minimum return to the business invested into by Infinity Anchor Fund.
5. Exit strategy and performance feesÂ
Infinity Anchor Fund pre-negotiates terms with investee companies to mitigate the potential of a delayed exit. These terms include, for example, the ability to prevent the business owner from reinvesting capital after year 4, so as to allow capital to build up in the business, which would then be used to buy-back Infinity Anchor Fund’s shares and, enabling an exit for investors.
In addition, each investment can either attract leverage or the rental book can be sold to financial institutions in order to raise enough capital to exit Infinity Anchor Fund and its investors.
6. Alignment
Infinity Fund Managers manages Infinity Anchor Fund and will only earn a performance fee once investors are exited. This incentivises the fund manager to ensure that investments have a high likelihood of being exited, and to invest at the lowest price and sell at the highest price.
Ultimately, investing in non-traditional investments does come with a significant amount of risk. Investors should be mindful of what these risks are and if uncertain, always seek financial advice from an experienced financial advisor.
Infinity Anchor Fund 2021, will be raising capital until the end of June and is able to assist investors by facilitating funding of up to 95% of their investment amount.
- Jonty Sacks – Partner at Jaltech Fund Managers.Â
