New cannabis investment company SilverLeaf Investments is seeking a 15% “carry through” on the projects it raises investments for. It plans to raise R500 m in capital over the next few years and says it may head for a public listing, It’s immediate target is to raise R50 m from smaller, non-institutional investors.
One of Silverleaf’s main incentives to investors was the Section 12J tax break, but South African Finance Minister Tito Mboweni effectively pulled the rug from under the company’s feet the day before it launched. He announced in his 24 February 2021 budget speech that the Section 12J tax break will no longer be available after 30 June 2021.
Closing Section 12J doesn’t detract from the underlying opportunities
SilverLeaf co-founder Cliff Giesenow did not seem particularly phased by the Minister’s announcement. He told the Cheeba Africa Craft Cannabis Summit on 25 February that the cannabis industry offered capital gains and double digit returns and did not rely on tax concessions to be profitable. He added that SilverLeaf still had four months to offer investors the break.
Giesenow: invest now before Section 12J goes
Giesenow said there was an over-emphasis on cultivation and export, and that SilverLeaf would seek investment opportunities higher up the cannabis value chain.
As a 12J structure, SilverLeaf will offer a 100% tax deduction for this year only. The fund has set a targeted internal rate of return of between 20% and 30% over five to seven years. Van der Hoven says the initial response has been encouraging, adding that the fundraising plans were put together in just three weeks. The longer-term plan is to raise up to R500m of capital over the next few years, with a possibility of listing the fund on the JSE’s AltX market.
SilverLeaf targeting younger investors rather than institutitons
The initial investment floor has been set relatively low with a minimum investment of R50,000, which could attract younger, first-time investors in the first round of funding.
SilverLeaf’s van der Hoven: cannabis investment is already mainstream
SilverLeaf co-founder and joint CEO, Pierre van der Hoven says institutional investors in SA remain wary of the cannabis industry and that the 12J structure may help mitigate lingering perceptions of regulatory risk in the cannabis sector.
These efforts may coincide with increased institutional investor interest in cannabis. It’s a move that may attract savvy US investors, who see the potential for SA to become a base for cannabis businesses.
Local investor familiarity with cannabis is growing, though.
There are already three micro-cap companies on the JSE dabbling in cannabis — Labat Africa, Nutritional Holdings and Go Life. The collective market value of these small counters is about R325m.
But larger companies, including Remgro and liquor subsidiary Distell, have also invested in cannabis brands — giving a whiff of mainstream appeal to the sector.
Global sentiment for cannabis stocks improving after 2020
Internationally, cigarette giant British American Tobacco has explored cannabis applications, and tobacco and liquor conglomerate Altria holds a 45% stake in Cronos, a Canadian cannabis firm.
Internationally, investment sentiment for cannabis is regaining its high after a sharp drop in 2019. Alternative Harvest, a popular exchange traded fund investing in cannabis-aligned counters, is up a mind-blowing 71% since the start of the year. The share price of Canopy Growth, the world’s largest cannabis company, has surged almost 40% since January.
The global legal cannabis market is estimated to be US$30 billion and is forecast to reach between US$75billion and US$100 billion by 2030.
Van der Hoven believes SA’s fledgling cannabis industry is impossible to ignore.
The “Global Cannabis Report” says Africa is in dire need of investment to take advantage of rising global cannabis demand. “Africa is lacking the infrastructure and facilities necessary for cannabis production. As such, corporate social responsibility (providing much-needed infrastructure, or supporting local workers) is of paramount importance for foreign investors and producers looking to set up in the region,” it says.
SA cannabis economy has ‘powerhouse potential’
SilverLeaf’s joint CEO Giesenow reckons when this unregulated market is professionalised and legitimised, SA will become a “powerhouse green economy with one of the most conducive cannabis-growing climates in the world”.
It seems the initial acquisition thrust by SilverLeaf will capitalise largely on the expertise of Van den Hoven and Giesenow rather than on cash placements.
Giesenow is the founder and owner of Leafolo (African herbal smoking blends) and a co-founder of Canna Trade Africa, the holding company of The GreenSide and CannaFoodsAfrica. Van den Hoven has focused on the cannabis and hemp industries since 2016, and two years ago wrote a report on the commercial potential of these products for SA. He also started AfriCannaBiz and a cannabis-focused consulting company called Baobab International. Perhaps more significantly, Van der Hoven is the founder of cannabis industry advocacy organisation, the African Cannabis Industry Association.
According to the SilverLeaf prospectus, the investment team will look at qualifying companies that are “willing to embark on a journey in an incubated environment for up to six to nine months to develop confidence in each other and conduct a comprehensive hands-on due diligence process”.
SilverLeaf will look to secure a “free carry” of up to 15% of the qualifying company’s equity in return for services provided through the incubation. The purpose behind this strategy is to derisk the investments before they are presented to the investment committee by evaluating and working closely with each company before investment.