The information technology,
media and telecommunications ("TMT") industries
remain under pressure internationally. This is perhaps best
illustrated by the recent cover of Red Herring, the leading
United States based venture capital magazine which read
"How much *#@! longer?". It is not apparent how long
spending on information technology in the United States and
Europe will remain under pressure. The Nasdaq, which remains
the TMT benchmark, is unlikely to recover prior to a reversal
in technology spending patterns.
The resultant negative sentiment
towards the TMT markets directly impacts on the South African
market. Corporate South Africa has also cut back or delayed
technology spend and tenders are being awarded to the larger
players. In addition, many of the business to consumer and
business to business initiatives of technology companies have
come under intense cash flow pressure over the past six
months. This is largely due to lower than anticipated revenue
figures, leading to losses which has impacted more severely on
smaller players who have a bigger proportionate exposure to
this type of activity. The negative impact on smaller IT
companies affects venture capital investments and there is
some evidence that many international and some South African
venture capital funds have not yet fully marked down
investments made during the technology boom to current market
values. We can therefore expect more bad publicity and
negative sentiment in the next six months towards the venture
capital industry.
Notwithstanding all the doom and
gloom, we expect spending in the South African TMT sector to
be fairly buoyant over the next year driven largely by:
- government and parastatal
backlog spending; and
- telecoms spending on the infrastructure required to
establish the third cell phone provider and the second fixed
line operator.
The KPMG Venture Capital and
Private Equity Survey for the year 2000 reported that R750
million was invested into the TMT sector by venture capital
firms in South Africa last year. The survey also pointed out
that exits by way of listing have become extremely difficult
as a result of the weak demand for TMT shares as well as
negative sentiment towards smaller companies listed on the
JSE.
Clearly, the next two years in
venture capital will be the time for investing at reasonable
prices, not realisations. The Treacle Fund is in a fortunate
position in that it is well positioned both financially, with
lots of "dry gunpowder" compared to similar funds
which are mostly fully invested or overexposed to loss making
investments made during the boom times of 1999 and 2000, and
also having the manpower to look at business opportunities in
a positive rather than negative way.
Good investments are like
diamonds, and one has to crush a lot of rock to find diamonds.
Treacle evaluated a total of 201 investment proposals during
the six months to 30 June 2001, resulting in one investment
being made. Although we are still in the process of reviewing
a number of possible investments, the bulk were declined. The
main reason for declining proposals is generally a lack of
strategic management capabilities and/or weak revenue models
by potential investee companies. We had to decline some
transactions purely because of unrealistic price expectations,
but this is slowly becoming less of a problem as reality sets
in.
Kind regards,
Rudolf Pretorius
Christoff Botha
Konrad Fleischhauer
