Why energy in South Africa is attractive

The problem Alumni addresses

The South Africa government has identified an urgent need for the country to discover hydrocarbons – currently crude oil imports comprise 4% of GDP and replacement of imports would enable the government to generate 2% of GDP (US$10 billion) per year in taxes, as well as creating 400,000 local jobs. To this end, the government embarked on Project Ikhezi in 2011, where US $1.1 billion was lost when the five-well offshore programme failed. The government has once again highlighted the need for exploration but cannot afford the political risk of investing directly and failing in the high-profile manner they did with Project Ikhezi.

Alumni’s solution

Alumni has engaged Africa New Energies, a UK company with concessions in Namibia and an exploration method uniquely calibrated to the Southern African onshore sector. Alumni has identified six concession areas in South Africa owned individually by six concession companies. These concession companies were awarded Technical Cooperation Permits (“TCPs”) in October 2018, which gives the companies the exclusive right to apply for exploration rights spanning a cumulative area of 3 million hectares – an area almost twice the size of Gauteng. The use of Africa New Energies exploration method creates a unique hydrocarbon opportunity that has the potential to have a transformational impact in South Africa.

Alumni’s mechanism enables retail investors, corporate investors and institutional limited liability partnerships to support these high potential start-ups in the South Africa Oil and Gas Exploration Sector. For investors there is up front tax relief of upto 45% of the capital invested in the financial year of investment, plus returns of capital are not subject to recoupment as long as the venture capital company shares are held for five years.

Why Section 12J?

In short, profits and jobs. And neither of these create themselves.

Section 12J of the South African Income tax Act is an amazing piece of legislation that was conceived to facilitate entrepreneurial job creation. Dissapointingly, to date, much of the application of the act by VCCs has been bereft of this. AEI views this legislation as an opportunity to do the right thing. And so we have set up our fund with the philosophy of infrastructrual development and job creation as the bedrock of everything we do. To illustrate why this is so important, continue reading. And, read more about Section 12J here.

The skew growth of the VC Sector in South Africa – the gap in the market Alumni plans to fill thanks to Section 12J

The latest South African Venture Capital Association (SAVCA) report on Venture Capital (VC), indicates that the South African VC industry is experiencing significant growth with an encouraging rise in the number of new fund managers, exits and deal flow, South Africa has failed dismally in funding concept stage technology startups and green-field exploration projects that Alumni plans to invest in.

The SAVCA 2015 VC Survey suggests that the South African VC industry now represents over R2bn in assets under management, with healthy confidence levels that are commensurate with reported rising deal activity, a pleasing exits record and a significant increase in VC fund managers and industry professionals.

The latest survey reveals that in the 2011-2015 period, 21 public and private VC fund managers and angel investors completed 168 new deals amounting to a total value of R865 million. As at July 2015, total VC assets under management were valued at R1.87 billion, comprising 187 deals.

These optimistic views mask damning evidence as to the extent the market has failed start-ups in South Africa.

In a world of downsizing, automation and business process outsourcing, a job for life is no longer a realistic prospect for any employee. Large businesses, governments and the NGO sector around the world are losing jobs, causing grinding poverty, extremism and social unrest. Entrepreneurs are alone in standing up to this tsunami of employment destruction: In Uganda, one of the world’s poorest economies, 65% of all jobs were created by start-ups.

In Norway, which has a $1 trillion sovereign wealth fund to share between its 5 million citizens, 57% of all new jobs were created by Startups. South Africa stands in between these two extremes with 62% of jobs created by its start-ups. When one includes small and medium-sized businesses, over 100% of net jobs created in the USA, 85% of net jobs created in the UK and an estimated 90% of net new jobs in South Africa were created by SMEs.

South Africa desperately needs jobs to alleviate its poverty

South Africa desperately needs jobs to alleviate its poverty, and it is universally accepted that the private, not the public sector needs to create them. In the latest Quarterly Labour Force Survey issued by Statistics South Africa, there are 37 million adults in the country and 12 million or 36% of the potential workforce are unemployed – one of the highest unemployment rates in the developing world. [1]

And it is not as if there is a shortage of entrepreneurs in this country – 6.9% or 2.5 million South African adults run their own business according to the Global Entrepreneurship Monitor [2] but few of these create jobs, the vast majority of necessity entrepreneurs who subsist in the informal sector. The kind of entrepreneurs who create the jobs quoted above are High Expectation Entrepreneurs, which the Global Entrepreneurship Monitor defines as a person who intends to employ more than 20 people in five years time. In fact these comprise fewer than 2% of the South African entrepreneur population and yet they created 27% of all net jobs in the South African economy in 2016. Studies in Tanzania (a low-income economy) and the United Kingdom (a high-income economy) suggested similar proportions.

Supporting angel funding into start-ups

The founder of Alumni Energy Investments, Shakes Motsilili has lobbied discretely and effectively for support of angel funding into startups. Citing experience in the UK, where Enterprise Investment Scheme tax breaks have enabled over R250 billion rand be invested into over 28,000 startups, it is estimated that over 50% of UK’s high expectation entrepreneurs received funding via EIS. South Africa has an estimated 50,000 high expectation entrepreneurs who in turn created 25% of net new jobs in South Africa between them. Yet according to the SAVCA 2016 report, only 44 were funded and every one funded was not a startup. The sad reality is that only 44 of these companies or 0.1% of the High Expectation Entrepreneur population received funding 2016.

This abject case of market failure is the most important reason for optimism towards Alumni. Currently, it faces literally no competition, leading to a case of miss-pricing of risk capital in the favour of the investor: This means that any funding into the space will achieve better valuations than in a more established venture capital market would when funding innovation projects. It also means that its investee companies will face less competition due to a dearth of potential new entrants. Furthermore, the Alumni-funded startups, especially in the BEE space, which Alumni plans to embrace, will be able to compete with larger, lethargic incumbents unused to nimble technology-rich competitors, particularly in FinTech, Telecoms and the Resources Sectors. The government has and will continue to be supportive of Alumni’s efforts to fund innovation by giving concessionary terms with licenses.

[1] http://www.statssa.gov.za/?page_id=1854&PPN=P0211
[2] http://www.gemconsortium.org/country-profile/108

Would you like to discuss how you can invest in South Africa’s energy future with no risk to your capital? Please let us know using the form below.