Venture capital firms are starting to launch and raise funds to invest in companies located in designated Opportunity Zones, where investors can get protection from certain taxes.
So far, most of the money pouring into Opportunity Zones has been from funds looking to purchase real estate, but recent regulatory guidance from the Internal Revenue Service states that it’s also possible to invest in businesses.
The Opportunity Zone tax break, pushed through Congress by Senators Corey Booker and Tim Scott, defers taxes on the sale of a stock, bond, property, or business if an investor places the money into a fund that invests in a low-income area.
Venture capital funds that have been set-up are targeting companies in Scranton, Brooklyn, Newark, and Provo, Utah.
Venture capitalist Dan Borok didn’t set out to create a fund that would benefit from Internal Revenue Services’ Opportunity Zone tax break. He was trying to invest in new businesses in Newark.
But when the IRS placed Newark among the neighborhoods eligible for tax-deferred funds, it was a no-brainer for Borok: He was going to a run an Opportunity Zone fund now.
Newark Venture Partners’ $40 million fund is one of several VC funds that aims to benefit from the new tax law, which allows investors to sell an asset and within 180 days reinvest those profits into opportunity-zone-focused investments. The profits are later taxed at various levels depending on how long the capital is invested.
Ever since Senators Tim Scott and Corey Booker, who is from Newark, pushed the Opportunity Zone legislation through, real-estate investors have been preparing funds to invest in building projects across the country.
See more: Big-money investors are piling into ‘opportunity zone’ funds in lower-income neighborhoods, but there are a bunch of reasons to be cautious
But only with a recent regulatory update from the IRS has venture capital started looking at the space. Millions of dollars in VC money is now being pulled together to invest in companies in Scranton, Brooklyn, Newark, and Provo, Utah.
“People call me all the time and say ‘Hey, I was just talking to my accountant, is this real?'” said Brian Phillips, who runs the $25 million Pearl Fund that will invest in businesses in Scranton, Pennsylvania and Brooklyn.
Potential of big returns
Troy Gayeski, co-CIO of fund-of-hedge-funds SkyBridge Capital, called opportunity zones the “emerging markets of the United States,” in terms of the potential investment return. Gayeski was speaking on a panel at the SALT Conference last week in Las Vegas. For an investing community starved of yield, the chance to get exposure to venture capital-level returns is enticing.
Estimates vary widely on how much money could be pumped into Opportunity Zones funds; the main lobbying arm that pushed to include them in 2017 tax reform, the Economic Innovation Group, has it projected as high as $2 trillion. Sen. Scott has floated a $100 billion figure.
The newest update from the IRS gives venture capital funds more wiggle room to find attractive start-ups to invest in while also getting the tax benefits from the regulation. The …read more
Source:: Business Insider