The world’s leading manufacturer of mohair socks, Cape Town-based Cape Mohair, is uniquely positioned for export-led growth following an innovative deal that addressed its need for new machinery and extra working capital. The firm is the latest in a long list of local small, medium and micro-sized enterprises (SMMEs) to benefit from the popular section 12J tax incentive scheme.
“Our acquisition of a 46% interest in Cape Mohair is one of many investments aimed at generating long term shareholder value by matching capital with carefully-selected business opportunities,” says Neill Hobbs, co-founder at Anuva Investments. The section 12J compliant venture capital company paid for its stake in Cape Mohair with a combination of cash and assets, chipping in new working capital alongside ‘state of the art’ sock machinery bought out of a competitor firm’s insolvency. The competitor – Impahla – had gone into liquidation after decades of supplying high volume, low margin clothing and socks to the retail market.
“Anuva initially approached us to manage the sock plant they had purchased out of the Impahla liquidation,” says Denys Hobson, founder of Cape Mohair. “It soon became clear that ‘moving’ our sock manufacturing operations into the newer plant made business sense, despite the respective product ranges and target markets being different”. He adds that the timing of the transaction was perfect: “Our Epping factory had become too small for our needs, while the Impahla plant had loads of spare capacity”. A deal was accordingly structured and Anuva became a shareholder in 2017.
The focus, post-acquisition, has been on exiting unprofitable retail contracts, repurposing the new plant and machinery for high-end sock manufacture and expanding the Cape Mohair product range. “We want to grow off our current base into the high-end of the market where we see a lot of potential, especially in exports,” says Hobson. “Any bottom-end, high volume business that we retain is simply ‘filler’ to ensure that we fully utilise our manufacturing capacity”.
Hobbs notes that the Cape Mohair acquisition illustrates the versatility of the section 12J scheme in structuring innovative business deals. “In this case our section 12J investment was made in support of a company that was already in the sweet spot, we contributed much needed working capital and ensured that Cape Mohair was adequately capitalised for its immediate needs”.
Cape Mohair has come a long way since its humble beginnings as a small-scale mohair sock manufacturer based in Epping, Cape Town, some 25 years ago. Today it operates from ‘state of the art’ facilities in Elsies River and supports 130 jobs in the extremely competitive clothing manufacturing industry. The product range has grown over the years to include leisure socks, medical socks and outdoor sport and adventure socks – each made from different combinations of bamboo, cotton, mohair and wool fibre. “The star in our portfolio is our Medi Sock range which is made from a mix of bamboo and mohair fibres,” says Hobson. “They are leisure socks that are popular with people who struggle with diabetes, poor circulation or concerns over foot infection”.
The Cape Mohair story illustrates the value in the section 12J scheme in that it empowered investors to complete an innovative deal that will set an already impressive firm on an even stronger growth trajectory. Thanks to Anuva and section 12J the business is adequately capitalised to meet its immediate operational needs – with a motivated investment firm as shareholder to assist with future capital intensive projects if needed. “This type of tax incentive has a lot of merit as it takes much of the risk out of SMME investments – the net result is extremely positive,” concludes Hobson. He has ambitious plans to fully utilise the new sock manufacturing facilities on high-end production by 2022 and to double Cape Mohair’s turnover by 2025.
Cape Town-based Cape Mohair is a premier manufacturer of fashion and medical socks for the local and export markets. The firm offers a wide range of high-end socks made from combinations of bamboo, cotton, mohair and wool and is recognised as the largest mohair sock manufacturer in the world. It recently moved to a ‘state of the art’ manufacturing facility following the takeover of a retail sock manufacturing plant bought out of insolvency. The transaction was managed by Anuva Investments, a section 12J Venture Capital Company, which took a 46% stake in Cape Mohair post-merger, in 2017.
About Anuva Investments
Anuva Investments Ltd is a section 12J compliant Venture Capital Company (VCC) that creates value by skilfully combining capital with selected business opportunities, under the guidance of an expert investment and management team. Anuva was incorporated in 2014 in accordance with section 12J of the South African Income Tax Act and has raised more than R265 million in capital since. It is licensed as required under the Financial Advisory and Intermediary Services Act.
For editors, additional information on Section 12J
The South African Revenue Services introduced the Section 12J tax incentive scheme in 2009 to stimulate job creation, small business development and economic growth. It allows South African taxpayers to deduct 100% of their investments into qualifying VCCs from their current taxable income. The following example illustrates the position at end-February 2019:
A taxpayer who earned R2 million in the 2019 tax year would be liable for R900,000 in taxes. If this taxpayer invested R1 million in a qualifying section 12J VCC he or she could reduce their tax liability by R450,000.
The main motivation for investing in a section 12J VCC is the ‘up to’ 45% reduction in tax payable in the tax year the investment is made. Looking at the recent past, a basic analysis suggests that an individual taxpayer who opts for an upfront reduction in his or her taxes coupled with a five year section 12J investment could outperform another who takes the tax hit in the current year and instead invests in the market. (The same rationale applies for section 12J investments made by companies or trusts, though the tax concession for a company is limited to the top company tax rate of 28%).
Analysts warn that investors should seek out VCCs with the potential to deliver long term financial value on the back of high-quality investments rather than focusing on the upfront tax benefit. Before investing they should consider the minimum investment term of five years; the cost structure applied by their preferred investment vehicle; and the quality of its underlying investments. They should also be aware of the additional tax implications triggered upon exiting the investment.
Upon exiting the investment, the base cost for the taxpayer’s capital gain calculation is set to ‘zero’ to compensate for the initial tax benefit. The capital gains tax liability on the Section 12J VCC investment is thus higher than that for investments made outside of this arrangement.
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