Morgan Stanley-backed fund to buy virus-hit SA firms

Capitalworks Investment Partners plans to invest R5 billion of newly raised cash in mid-sized South African companies hit by a shrinking economy and the coronavirus pandemic.

The firm raised 25% more than planned for its Private Equity Fund III from Morgan Stanley’s Alternative Investments Partners unit, institutional investors and wealthy families, Capitalworks founder Chad Smart said. The Johannesburg-based company is seeking businesses with enterprise values from R250 million to R4 billion in industries such as financial services, food, and health.

"There are high-quality businesses that are unduly punished by the virus that would usually use a crisis to gain market share," he said in an interview. "With the coronavirus, a number of them don’t have turnover coming in, it’s an unusual situation. The liquidity and growth-capital need means that you can find the best companies to invest in."

The economy was in a recession even before measures to contain the coronavirus brought businesses to an abrupt halt. That has also opened opportunities in industries like tourism, which has been especially hard hit by travel curbs, and alternative health care as people look for ways to protect their immune systems, Smart said.

"The investment will have a knock-on effect of another R5 to R10 billion on top of the money raised" as debt is typically used to leverage deal sizes, he said. Capitalworks plans to complete the transactions within the next three to four years.

New York-based Morgan Stanley’s AIP unit focuses on investments in sectors and markets like small- and medium-sized businesses in South Africa, which, while relatively under-capitalised, offer “compelling potential for returns,” said Vikram Raju, the head of the bank’s AIP’s emerging market and impact division.

Prior investments by Capitalworks include Rhodes Food Group, mining company Rosond and Minet Group, a pan-African insurance brokerage.