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Expert view: Investing in Africa’s frontier markets

Published: 14 February 2023

What does it take to succeed in frontier markets? Barthout van Slingelandt, managing partner at Dutch fund manager XSML, talks about investing where most investors stay away.

A lack of risk capital and support for SMEs means most of Africa’s frontier markets remain unexploited | Naruedom on iStock

In brief

  • XSML invests in SMEs in frontier markets in Central and East Africa, including Democratic Republic of Congo (DRC)
  • Local presence, the ability to scale up and operational discipline are key, former Citigroup banker said
  • XSML is currently fundraising for its fourth fund

Although international investors are increasingly keen to pour money into emerging markets, small and medium sized enterprises (SMEs) often struggle to obtain financing. While helping a small business grow into a medium or large company in a frontier market can produce attractive financial returns for investors and create local jobs, a lack of risk capital and support means most of these markets remain unexploited. 

Founded in 2008, XSML aims to narrow this gap by investing into small businesses, and helping its entrepreneurs grow into them into medium and large companies. Total assets under management now total $125 million, while investors include the Belgian Investment Company for Developing Countries, the Dutch Good Growth Fund, Netherlands-based international development bank FMO and the International Finance Corporation.  

Local presence

“It’s not a fly-in, fly-out model,” Van Slingelandt, a former director at Citigroup with an MBA from Columbia Business School, tells Impact Investor. “It’s really about local presence. We have local offices, we employ nationals, we help grow them into their roles and our team members’ responsibilities grow with the organisation.” 

Barthout van Slingelandt, XSML

XSML’s local teams consist of some 18 investment and operating professionals, all of whom have experience in emerging and frontier markets in private equity, corporate and development banking and corporate restructuring. The fund manager has offices in Kinshasa (DRC) and Kampala (Uganda), while it opened a new office in Luanda, Angola last year.  

The firm manages three funds with a focus on frontier markets in sub-Saharan Africa. The Central Africa SME Fund, the African Rivers Fund and the African Rivers Fund III all provide debt, equity and mezzanine finance to fast-growing companies in these regions. The firm has recently started fundraising for a fourth fund, with a target of $150m, Van Slingelandt says.  


XSML’s investee Geek installs the fibre optic network for Liquid Intelligent Technologies, Africa’s largest fibre and cloud provider | XSML

Through its three funds, XSML has provided more than $116m in risk capital, with investments ranging from $100,000 to $6 million. It has made investments in some 65 SMEs across ten sectors, ranging from healthcare and education and telecommunications.

It has also provided technical assistance to over 100 projects to help portfolio companies improve operations, financial management and environmental and social practices.   

Together with its entrepreneurs, the fund manager has created over 5,000 jobs since 2011. In DRC, which ranks among the five poorest nations on the world according to the Word Bank, each $35,000 invested by XSML has created one sustainable job.  

Investing in underdeveloped markets with fragile political systems comes with its own unique set of challenges. Take XSML’s foray into the Central African Republic  (CAR), from 2011 to 2016.  

“The CAR is a relatively small economy, which faced upheaval and a weak security situation after a coup d’état just about a year-and-a half after we made our three investments,” says Van Slingelandt. “Therefore, we had to pull back out of that market at some point. So if you’re asking me about challenges, that has been one of them.” 

Lessons learnt  

Still, the experience in the CAR taught the frontier market fund manager some valuable lessons. “First, we learnt that you should only take equity stakes in companies of which you are fairly certain they will generate a return via dividends and by having exit strategies in mind when you make the investment. And we were too optimistic about that, thinking we could achieve exits with small business, but these equity stakes are not liquid,” says Van Slingelandt.  

The second lesson XSML learnt was regarding operational discipline. “When Fund 1 started we had a lot of companies that were informal, and we figured we could support them to become more formal,” says Van Slingelandt. “But that just didn’t happen, despite our efforts. There is only a small group of informal entrepreneurs that actually has the intention, and also the vision, to do things differently.” 

In practice, this means entrepreneurs need to improve their business practices, such as accounting, and understand that “an outside investor has come in who has different rules and standards, which can really help growth,” Van Slingelandt says.  

“It is better not to go ahead with an investment when you are dealing with an entrepreneur who does not understand this process,” he explains. “Because chances are that you will run into problems later on.” 

Local contacts 

Nowadays, XSML’s local staff spends “quite a bit of time doing due diligence and background checks through contacts in our markets  about new entrepreneurs before we make the investment decision”, says Van Slingelandt.  

The experience in the CAR also led to XSML revisiting its initial plan to move into smaller markets in Africa. Instead, it decided to focus on local markets capable of scaling up.  

“After working hard in the CAR for a number of years, we asked ourselves the question: ‘Is there enough room for us to develop further?’” says Van Slingelandt. “In the end, we decided to focus on other markets because it was just too difficult to get enough scale there.” 

“What we’re trying to do right now is see if a capital city provides a market that is big enough for companies that we invest in,” says Van Slingelandt, before pointing out this has helped to “de-risk the portfolio”.

“If you start in a small market, where it is really hard to achieve sufficient scale, things will be tough,” he adds. 

New investors  

Last year, XSML closed its first fund after a period of twelve years. “Our investors received all the capital that they invested back, plus some profit. If we can do that for a relatively small first fund in markets that are perceived to be difficult, then we have a raison d’etre: the business case for these types of funds, in these markets, and the way we do that has actually been proven,” Van Slingelandt says. 

XSML’s long track record in frontier markets is now starting to bring in new investors.  

Last April, XSML reached the hard cap for its African Rivers Fund III at $85m. The fund, which aims at growing SMEs in Angola, the DRC, Uganda and the Republic of Congo and surrounding countries, is targeting a net internal rate of return of between 8% and 11% over the lifetime of the fund, which is typically ten years.  

DALHAP Investments, SDG Frontier Fund, the Norwegian investment fund for developing countries, Norfund, and the Swedish Government’s development financier, Swedfund, all joined as new investors.  

“The relationship with our investors is good,” says Van Slingelandt. “We believe we’re quite transparent about what’s going on. We’ve shown quite good performance for African standards and contributed to local job creation. That not only leads to investors coming back, but also making others enthusiastic.”  

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