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On-the-ground realities in central Africa different to investors’ perceptions

An open-air market in Kinshasa, DRC

An open-air market in Kinshasa, DRC

The reality of doing business in French-speaking central Africa is often different to what prospective investors assume, according to Jarl Heijstee, managing partner of private equity firm XSML.

“I think less familiarity with francophone Africa has been more of a barrier for most investors than the actual reality on the ground. For example, contrary to what most people think, it is quicker and easier and cheaper to set up a company in the Democratic Republic of Congo (DRC), than it is in Uganda… It is actually more bureaucratic in Uganda than in Congo,” he explained at the recent SuperReturn Africa conference in Cape Town.

Through its funds, XSML invests in central Africa’s frontier markets, with offices in Kinshasa, DRC, and Bangui, the capital of Central African Republic (CAR). It recently also established a physical presence in Kampala, Uganda.

XSML’s investments to date include a call centre (DRC), pharmaceutical manufacturer (DRC), school (DRC), transport company (CAR), and a coffee roaster (CAR).

Countries such DRC and CAR are generally considered tough business environments – ranking 184 and 185 respectively in the World Bank’s ease of doing business index, out of a total of 190 countries. However, Heijstee said one of the benefits of operating in the region is less competition for deals, which means XSML can buy shareholding at more favourable valuations.

Private equity funds typically have to exit their investments after a certain period. Elsewhere in the world, this is often done by putting shares in a company up for sale on a stock market, in what is known as an initial public offering (IPO). However, because stock markets in most African countries are under-developed, this is a less feasible option for private equity firms on the continent.

But Heijstee doesn’t see this as a significant drawback to investing in the region, saying assets can be sold to other funds seeking exposure to a region such as central Africa. “They don’t have a presence, they don’t know the market that well, but they do want to get some exposure… From an exit point of view, I don’t think not having a stock market makes a big difference.”

XSML’s new African Rivers Fund (ARF), named after the Congo and Nile rivers, targets “growing, well-managed” small and medium enterprises with investments of between $250,000 and $5m. The fund is backed by institutions such as the Belgian Investment Company for Developing Countries (BIO); the CDC, the UK’s development finance institution; the Dutch Good Growth Fund; and the International Finance Corporation.

According to the firm, many of the opportunities in its target countries remain unexploited due to the lack of risk capital and support.

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