The dos and don’ts of 12J
For investors who find themselves having limited time to identify a Section 12J investment, here are a few dos and don'ts, which should assist with narrowing down the options and making a more informed decision:
Don’t get caught up with investing in a Section 12J investment simply because there is an attractive tax benefit associated with the investment. Ignore the tax benefit when performing a due diligence and select the 12J company based on the merits of the underlying investments available to the 12J company.
Do engage with the 12J company and ask as many questions as are deemed necessary before making an investment. 12J companies earn a fee for managing investor funds, so raise as many questions as needed, to be comfortable with making the investment. Important questions include:
Don’t be fooled by the fee structure, make sure the 12J company charges reasonable fees, particularly around the performance fee. Avoid performance fees based on net/risk capital. 12J companies should earn their performance fees on any amounts above an investor’s original investment.
Do look for Section 12J investments which have realistic and effective exit strategies. Simply “endeavouring to dispose of underlying investments” is not an adequate exit strategy, as this will in many cases, lead to a long delay before an investor’s capital is returned.
Don’t invest in Section 12J companies that have failed to invest the current funds they have under management. Look to invest in Section 12J companies that deploy capital timeously so that the investment can start to grow quickly.
Do consult a financial advisor who has experience and understands Section 12J investments.
- How much capital does the 12J company have under management?
- what percentage of capital under management has actually been invested?
- what is the value of the pipeline available to the 12J company?
- what is the targeted IRR/return after fees and taxes?