Private equity fund’s tax-exempt green energy investment – how much money you can make

Grovest has launched South Africa’s first green energy private equity fund that gives investors a full tax benefit on their investment.

Grovest was established in 2012 and pioneered the section 12J asset class in South Africa. It has R3.5 billion in assets under administration.

Grovest’s private equity services include offerings for large-scale institutional funds and first-time and emerging fund managers.

Its latest offering is a private equity fund called the “Twelve B green energy fund”, with a mandate to invest in solar infrastructure for residential complexes and commercial buildings.

“Green energy has become a necessity due to South Africa’s unreliable electricity supply, and the private sector needs to step in to urgently improve the situation,” Grovest CEO Jeff Miller said.

“In addition to the longer-term benefits of sustainable energy generation, the Twelve B Green Energy Fund is an attractive initiative.”

He highlighted that South African individuals, trusts, companies and pension funds could write off 100% of their investment against their taxable income in the year the assets produce electricity.

“Effectively, this could provide green energy investors with up to 100% tax relief in that year,” Miller said.

The solar assets are acquired in a special-purpose entity (SPE) – a separate entity created for a specific task. Investors would then form a limited partnership with the SPE.

Within this partnership, investors can gain access to the full tax benefit offered to companies under section 12B of the Income Tax Act in their personal capacity.

Section 12B gives investors a benefit on the full investment in solar infrastructure in the year the investment is made, as long as the solar installation produces below 1 megawatt (MW).

For example, if an investor invests R1,000,000 in the Grovest green fund and they fall within the 45% tax bracket, they would receive a R450,000 tax deduction in the year of investment.

The funds paid into the SPE by investors would be used to install solar infrastructure projects in various locations.

The SPE will generate cashflows by selling the solar electricity to residents or businesses.

After the relevant fees have been subtracted from these cashflows, they will be paid to investors on a bi-annual basis.

The cashflows paid to investors would be taxed at the investor’s personal income tax rate.

How much money you can make

The fund has a 10-year investment period in which investors would receive their cashflows. After ten years, the solar project’s batteries would be replaced.

The next ten year’s cashflows would be sold, and the existing investors would receive a payout based on this sale.

Grovest charges an initial 1% setup fee and an ongoing 2% management fee per year based on the initial investment. On a R1,000,000 investment, it equates to R20,000 per year.

They also charge a performance fee of 20% on all cashflows after the risk capital is recouped.

The risk capital is what remains of the investment after the initial tax benefit is gained. On R1,000,000 this would be equal to R550,000 (R1,000,000 – R450,000 at 45% tax).

If the gross cashflows, before fees and taxes, cumulatively reach R550,000, 20% of all remaining cash flows would be paid out as performance fees, plus the R20,000 management fee.

Based on the estimates made by Grovest, Daily Investor calculated the return investors could expect over a 10-year period.

Investors in the 45% tax bracket will generate an internal rate of return (IRR) of 14.7% if all Grovest’s assumptions are met.

This includes the initial tax benefit received by the investment.

In simple terms, based on Grovest’s projections, a R1,000,000 investment would give the investor total pre-tax benefits of R3,239,086 over ten years.

The minimum investment for the Grovest green fund is R100,000.