Treacle raises new fund to fill gap in private equity market

Johannesburg , 16 May 2005 – Treacle Private Equity has announced that it is raising a new R500 million fund with an investment mandate to provide buy-out, acquisition and expansion capital for medium-sized businesses with the potential to create jobs and generate economic growth. A large number of South Africa 's independent private equity firms including Brait and Ethos are currently raising funds. According to KPMG 2004 Survey of the Private Equity industry, only R2.2 billion in new funds were raised in 2004. Treacle is the first private equity firm to announce its first closing for investors in 2005.

The new Treacle Fund II had its first closing with commitments of R300 million from institutional investors. A further R200 million is expected at the second closing.

Established in 2000 by three investment bankers – Christoff Botha, Konrad Fleischhauer and Rudolf Pretorius – Treacle has since transformed itself into a 50.2% black-owned private equity management company. The founding partners have been joined by Njabulo Mthembu and Jacob Mashike, who together have acquired a 33.2% stake in the business and are operationally involved on a full-time basis as investment professionals.

A further 17% of the company is owned by the Treacle Foundation, a trust established to fund the further education and training of black managers within Treacle's investment portfolio.

Treacle partner Christoff Botha said that most of the current activity in the local private equity market was aimed at funding BEE investment in existing businesses to meet the equity requirements of the DTI and the various industry charters. “It means that the bulk of private equity funds is being channelled into replacement capital – that is, funding the substitution of one shareholder by another – leaving little for investment in those businesses that need capital for acquisitions and expansion.”

“Given the expectations of sustained growth in the South African economy, and the funding challenges faced by emerging and medium-sized businesses locally, the investment opportunity for Treacle Fund II is to provide equity capital to medium sized businesses in the form of acquisition, expansion and buy-out funding”, Botha said. “This is the niche for which we've designed Treacle Fund II, and we're particularly interested in export-based businesses and those that can demonstrate a strong potential for growth and job creation.”

Njabulo Mthembu, one of the new Treacle partners said that BEE was fundamentally important and Treacle would seek to participate in BEE transactions that supported its growth-orientated investment philosophy. A leveraged buy-out, for example, creates an ideal opportunity for medium-sized companies to bring BEE shareholders on board as the equity funding component required by such a transaction is normally relatively small and more manageable for the BEE investor. It also allows the BEE shareholders' stake to be paid for partly through the operational cash flows from the company. In addition, this type of funding provides an ideal opportunity for black management and staff to participate in the buy-out and to acquire an interest in the business.

Treacle's first fund was launched in 2000 to focus on the ICT sector and its investment period is now drawing to a close. Although this fund operated in a very difficult economic environment, it has significantly outperformed the sector and is expected to provide investors with an annualised internal rate of return of more than 35%. Its investments included Datacentrix and ERP.com, two of the best-performing IT companies on the JSE, plus five other unlisted investments. According to the KPMG 2004 Private Equity Survey, only 6 out of 18 respondent firms reported investment returns above 30% p.a. over the past five years.