The 12J Suite Spot

As South Africans we always seem to take good news with a healthy pinch of Atlantic Ocean Sea Salt. December’s ANC leadership outcome may not have been perfect (we would have been naive to have expected it to be) but it was a monumental result for our country.  The early signs of a wholesale clean-up of the corruption nightmare we’ve been subjected to seems to be gathering great momentum. And so, it seems, our beautiful country will survive and possibly even thrive in time to come.  Given that we are launching a new long-term South African focused Lucid 12J investment fund I am certainly feeling relieved and even excited about the prospects that this new chapter will bring.

The 12J industry has to date been juggling a double edged sword. For local investors the thought of paying tax and seeing it being whittled away or stolen has been revolting and as a result a legitimate, legal and potentially socially uplifting mechanism to avoid tax has had obvious appeal.  Conversely the thought of having capital tied up in South Africa for a minimum of five years with massive political and policy uncertainly is clearly un-appealing.  Looking ahead, regardless whether, as we all hope, our tax rands are allocated to their intended purpose, the prospect of legally avoiding tax at growing marginal personal tax rates (currently 45%) is still compelling.  And clearly, judging from the super-strong Rand, the risk profile of SA investments, while still carrying a significant premium, is greatly improved.

We’ve been spoilt by a year of double digit stock market returns (even in dollars) and so alternative investments like 12J have got a tough benchmark to meet.  My dad taught such an invaluable lesson on compound returns – the rule of 72  – 72 divided by your annual return will tell you how long it will take to double your money. For example if your annual return is 12%, 72/12 = it will take only 6 years to double your money! If you choose your 12J fund correctly you should comfortably generate a double digit after-tax return on your net investment.

Assuming that you buy the 12J investment thesis, the next question is which Fund to choose and this is where my theory is self serving so please consume it with a healthy dose of scepticism. I am convinced that property backed hospitality is the sweet spot of 12J investing.  So much so that we are diverting the focus of our existing fund (Lucid Growth Fund) and our new fund (Lucid Hotel Fund) to this investment strategy.  The model is to acquire or develop bulk high-end one bedroom residential units in South Africa’s most prolific nodes and to operate an apartment style hospitality business. Investors will have access to a broad portfolio of quality property assets under a fully legitimate (12J specifically includes hospitality businesses) structure and socially impactful industry (tourism is one of the best job creators).  The optionality on exit (sale of hotels businesses, conversion to a REIT, sale of individual units) significantly de-risks the business.  The option to further leverage the business on the back of the underlying assets would further reduce capital outlay and boost returns.

As with all investments, a sense of comfort with the management team and their track record, a good understanding of the risks involved and appropriate due diligence is critical. I’m proud to share that Lucid has recently been endorsed by one of South Africa’s top banks and several leading wealth managers following a successful due diligence process.

All the best for a prosperous 2018, seems like (post the water crisis!) it could be a watershed year in South Africa.

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