Morgan Stanley-backed fund to invest in local pandemic-hit SMEs

Capitalworks Investment Partners plans to invest R5bn of newly raised cash in mid-sized SA companies hit by a shrinking local 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 company is seeking businesses with enterprise values from R250m-R4bn 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,” Smart said.

“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.”

SA 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 R5bn-R10bn on top of the money raised” as debt is typically used to leverage deal sizes.

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 mediumsized businesses in SA, which, while relatively undercapitalised, offer “compelling potential for returns,” said Vikram Raju, the head of the bank’s AIP’s emerging market and impact division.

Previous investments by Capitalworks include Rhodes Food Group, mining company Rosond and Minet Group, a panAfrican insurance brokerage.