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In this podcast, the last one before 12J company Bright Light Solar’s Prospectus closes on Thursday, CEO Kevin Shames runs us through the reasons why his business is projecting an effective 21% annual return. It’s all to do with the Government’s tax incentives to promote investment in small businesses and renewable energy. Shames says in response to numerous requests, his company has also dropped the minimum investment level from the previous R100,000 to R50,000. For more information click here. – Alec Hogg
In the past few weeks we have had interviews with our business partners at Bright Light Solar and in particular with Kevin Shames. Kevin joins us again in the pre-close of the prospectus which finalises on Thursday. So if you like the idea of Bright Light Solar, and there’s a lot to like about it, you need to get your transfers made by Thursday morning at the latest because it closes off Thursday evening. I asked Kevin to just give us some more insight into how things have been going. He’s very excited about the reaction from the Biznews community and from investors generally. They’ve gone well beyond the minimum amount that was required in terms of the prospectus. So it definitely is a go. Any money that is invested will be put into the firm, there is a 21% return that is being offered by Bright Light Solar.
Well Kevin it’s been quite a journey over the past few weeks. On Thursday it closes at 17.00. What happens if someone decides on Friday that they wish to invest?
It will be too late to invest then. Friday is the official closing time. In terms of our prospectus we cannot accept any subscriptions after 17.00 on Thursday.
If you want to participate, how do you do that? Is the detail in the prospectus on how to get their money through?
The details are available through a landing page kindly created by Biznews, or through our website which is www.brightlightvcc.co.za. Just ask for us to send you the forms to complete and some FICA documents that we need for compliance requirements. It’s simple and takes around 10 minutes.
You are projecting a return of 21% per annum effective after tax but what exactly would people who are going to be generating that return by investing in?
They will be investing in a section 12J company called Bright Light VCC, VCC being Venture Capital Company. We then use that capital to invest in fully funded renewable energy projects. The capital we raise is invested in solar PV to generate electricity for our customers, as well as solar thermal to provide hot water solutions, atmospheric water generation which provides filtered possible drinking water and even waste management. So we are becoming a full service utility to our customers. Our primary target customers are the gated estates such as sectional title body corporates and homeowners associations. We also do commercial industrial and agricultural solutions. We sell to our customers those utilities, energy, water and hot water over a long period of time at substantial discounts to what they would currently be paying to their existing utility provider and that revenue we then use to pay back to our investors in the form of semi-annual dividends.
So the money invested into Bright Light is used for the equipment and installation into a gated community. The gated estate does not pay for the capital outlay, but they will pay you for the electricity that it generates?
Exactly. The main benefit of a utility are highly predictable future cash flows. You know that your customers are going to use your services over the
long term, they’re highly predictable cash flows. The beauty of this is when you bundle this together with the very significant tax benefits through Section 12J, and the opportunity for an investor to sell their shares at the beginning of Year 6 or anytime thereafter. Those returns then combine into an effective IRO of 21%.
You made an important point that the investor will only be able to sell out in year six?
Yes, so this is effectively a locked up investment. There are restrictions on liquidity imposed by the Income Tax Act that says you have to hold this investment for a full five year period. If you sell within that five year period then there is a recoupment of that upfront 12J allowance.
So you can sell but then all the tax benefits that you received are going to be reversed?
What tax benefits do you receive and how quickly?
So the investor receives a 12J allowance where they get to deduct the full cost of their investments against the taxable income in the current tax year which ends on Saturday (Friday for some people). If you’re a provisional taxpayer, in your second provisional payment that you would be making now this week. If you are a PAYE taxpayer then as soon as you submit your e-filing for your tax return for the period in the 29 of February 2020 once that’s assessed you then get that money back. So relatively quick.
Hence the closing of your prospectus just a couple of days before the tax year ends to give people the opportunity to work out what taxable income they have, then to make the investment, then you get the tax write back and you’ll be getting dividends thereafter?
Yes. We pay dividends every six months for the period end August and February. Our first dividend will be paid at the end of September this year for new investors. The existing investors would continue to get their own dividends. The initial dividend yield for year one is between 6 and 6.5 %. That then grows as we deploy that capital. So you’re looking at about a 9 to 9.5% dividend in year two and that then grows thereafter.
That’s a long way from 21. How do you get 21% .
The 12J is calculated through the 45% upfront tax benefit. This is for marginal taxpayers, taxed at the rate of 45%. Let’s assume you invest a
million rand. You get back R450,000 in very quick time and that has a very important impact on those returns. Thereafter those dividends are paid bi-annually, starting at around 6.5% growing to about 12.5% in year five. When you sell, there is the capital receipt back in your hands. You do have to pay capital gains tax which we’ve taken into account in the 21% after tax return.
Is there a minimum amount that you can put in?
The minimum is R100,000 but we have dropped that R50,000 because we extended our closing from Wednesday to Thursday due to a large fund of funds that is allocated to us. So we needed to facilitate their investment so we can take R50,000 minimums up until Thursday is close.
I know there’s been enormous interest from the Biznews community but you’ve got to get FICA’d and you have to put the cash on the table. How has the reaction been in the practical sense?
The money is flowing in very actively at the moment. When I look at where we are today versus this time last year, we are substantially ahead but a lot will happen in the last four days. Most investors will hang on to their cash until the last moment to earn interest. We are expecting the bulk of the investments to hit our bank account on Wednesday and Thursday this week.
So don’t leave it for Friday because the opportunity will be gone. Kevin it’s been interesting working with you through these past few weeks and I look forward to keeping our community members updated on the performance of Bright Light Solar.
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