Investment adventures in Africa’s frontier markets

Barthout van Slingelandt

Interview with Barthout van Slingelandt

Barthout van Slingelandt, managing partner at investment firm XSML Capital, speaks to Jaco Maritz about his experiences of investing in small and medium-sized enterprises (SMEs) in Central Africa.

Highlights from the interview include:

  • Van Slingelandt’s most distressing experience of investing in Africa: dealing with a coup d’état in the Central African Republic;
  • His transition from a finance career in Europe to investing in Central Africa;
  • The appeal of the Democratic Republic of Congo as an investment destination;
  • Giving investors up to a 10% annual return in US dollars: XSML’s investment approach; and
  • Expanding to Uganda, Angola and Zambia.

Dutch-born investor Barthout van Slingelandt, who has spent over a decade investing in Africa, cites a coup d’état in the Central African Republic (CAR) as one of his most harrowing experiences on the continent.

In the early 2010s, XSML Capital made an investment in a coffee roastery in Bangui, the capital of the CAR, which is situated just north of the Democratic Republic of Congo (DRC). The company managed its own coffee plantation and also sourced beans from local farmers.

In March 2013, a coalition of rebel groups known as the Séléka seized Bangui, prompting President François Bozizé to flee the country. During this turmoil, the coffee company’s manager had her pickup truck stolen. She discovered the vehicle a few days later in a supermarket parking lot – now modified with a large mounted gun and commandeered by the rebels. “They just plundered her car and were driving it around town,” Van Slingelandt explains.

He also recalls being in a hotel room in Bangui and hearing gunshots from active fighting in another part of the city.

Although the situation stabilised within a few years, the uncertainties in the country and its small market size, less than 5 million people at the time, compelled XSML to withdraw from the CAR.

From Europe to Africa

Before joining XSML, Van Slingelandt was on a corporate career trajectory. He earned his master’s in law from Leiden University in the Netherlands in 1993 and subsequently started working at the Dutch bank Rabobank as legal counsel. He later pursued an MBA at Columbia Business School in the US, graduating in 1999. Following his MBA, Van Slingelandt worked in strategy consulting at the American firm Arthur D. Little, and then at Alvarez & Marsal, where he focused on corporate turnarounds and restructuring. Thereafter, he joined Citibank where he held senior management positions. One of his biggest projects at Citibank was heading the turnaround of a $400 million small business lending outfit in Poland.

However, Van Slingelandt was itching to do something more entrepreneurial. “With Citi … I was on a nice track, a relatively senior level, but I just didn’t feel that was my destiny,” he explains.

He reconnected with Marcel Posthuma, a former university acquaintance who, along with Jarl Heijstee, had recently established the investment firm XSML Capital. Both Posthuma and Heijstee previously worked at FMO, a Dutch organisation that invests in developing countries. They were seeking someone with Van Slingelandt’s knowledge of managing companies and improving their operational performance.

When Heijstee and Posthuma initially formulated their plans for XSML, focusing solely on Central Africa was not on the agenda. They explored several options, including an emerging markets fund of funds.

The International Finance Corporation (IFC)’s SME Ventures programme, which supports fund managers in fragile and conflict-affected states, ultimately steered XSML’s focus towards Central Africa. This initiative aims to encourage investments in regions where entrepreneurs face limited funding opportunities. Heijstee and Posthuma applied and secured the mandate for the DRC and CAR.

The IFC was the anchor investor in XSML’s first $19 million fund and also provided resources to get the business off the ground. Additionally, FMO, where Heijstee and Posthuma had previously worked, and the Lundin Foundation – supported by Canada’s Lundin Mining – also invested in the fund.

Van Slingelandt joined the firm in 2011, just as it was making its first investments.

Most of XSML’s investments in the DRC have been in the capital Kinshasa.

Most of XSML’s investments in the DRC have been in the capital Kinshasa.

Tapping into the Congolese market

In contrast to CAR, XSML has had a much more positive experience in the DRC.

The DRC has a long history of conflict, political upheaval, and instability. It ranks among the world’s poorest nations, with an estimated 74.6% of its population living on less than $2.15 a day in 2023. The country’s commercial environment is also generally regarded as challenging. Despite these conditions, the DRC has experienced relatively rapid economic growth in recent years. GDP expanded by an average of just over 6% annually from 2010 to 2019. After peaking at 8.8% in 2022, growth remained robust at 6.1% in 2023, supported by a strong mining sector.

Van Slingelandt notes that there are misconceptions about the DRC, partly influenced by media coverage. According to him, approximately nine out of ten stories in English-language media focuses on the country’s troubles, whereas coverage in the French press tends to be more balanced, with a roughly equal mix of positive and negative reports.

The majority of XSML’s investments in the DRC have been in the capital Kinshasa. With an estimated population of between 15 million and 20 million, the city has about as many French speakers as Paris. By 2050, Kinshasa is forecast to have 29 million people. “It’s an enormous amount of people on a relatively small surface,” says Van Slingelandt.

He observes significant urban development in Kinshasa over the last decade, with new supermarkets and healthcare facilities emerging throughout the city. Despite many residents having limited financial resources, he says there is a substantial part of the population that does have disposable income and “there is money that is going around”.

A positive about the DRC from an investment perspective, according to Van Slingelandt, is that it is a dollarised economy. Despite having its own currency, transactions are predominantly conducted in US dollars; one can get dollars out of an ATM. This is beneficial for foreign investors who measure their returns in US dollars. Van Slingelandt contrasts this with Nigeria and Egypt, where fluctuating currencies mean that while investors may be doing well in local currency terms, once returns are converted to US dollars, they are substantially diminished.

One of the firm’s first investments in the DRC was Congo Call Center, founded in 2006 by a husband-and-wife team to provide a customer service function for local companies. The call centre started with 12 employees. It landed its first major client, the mobile telephone operator Tigo, in 2009, which catalysed its growth. Congo Call Center later received an investment from XSML, helping it expand to about 350 employees today.

Van Slingelandt also highlights a supermarket retailer which XSML has been involved with. Over the past four years, this business has seen dramatic revenue growth. Moreover, a prominent European retail chain, currently expanding into the DRC, has chosen this company as its main local counterpart.

He also mentions a startup that, in collaboration with local authorities, has launched an app-based parking service in Kinshasa. Previously, the lack of a formal street parking system significantly contributed to the city’s congestion.

XSML’s investment approach

All of XSML’s investments include a debt component, whereby the firm provides a loan that must be repaid in monthly instalments over a predetermined period. In some cases, XSML also acquires an equity stake in the companies, becoming a shareholder with interests typically ranging from 10% to 25%. Often, this equity stake is sold back to the business owner at the end of the investment term.

“The way I would describe our model is that the debt base pays the bills and leads to regular returns because it’s coupons that are being paid on a monthly basis – and therefore regular distributions back to our investors. And the equity can provide a nice kicker helping to increase the IRR (internal rate of return) overall,” Van Slingelandt explains.

He says that in the small and medium-sized business segment in Africa, debt funds have certain advantages over traditional private equity funds. The latter typically buy companies and hold them for five to seven years, aiming to sell them at a profit to realise a return on investment. However, this approach faces challenges in Africa, where firms often struggle to either sufficiently grow these companies or find buyers. In contrast, debt funds start returning capital to investors immediately, as borrowers repay the loan amount on a monthly basis. Debt funding also eliminates disagreements between the investor and the investee over the company’s valuation and – as it is linked to collateral – provides downside protection if an investment does not pan out as planned.

XSML aims to deliver an annual US dollar return of approximately 8-10% to its investors, after its own fees have been subtracted.

In Europe, banks typically perform the functions that XSML handles. However, in most African countries, small businesses cannot secure eight to ten-year loans from banks; the maximum term is typically only four years.

XSML usually requires collateral from companies it invests in to safeguard its loans. Nonetheless, challenges do arise. Van Slingelandt recounts an incident where XSML extended a loan to a “crook” in the DRC who, it turned out, had no intention of paying it back. He also describes a case where, even after thorough discussions and signed agreements, an entrepreneur did not fully grasp that the funds received were a loan and not free money.

Despite prevalent negative perceptions about the legal system in countries like the DRC, it is possible to take a debtor to court and recover the money. However, Van Slingelandt notes that the process can be lengthy, typically taking six to eight years. “We’ve had a number of successful cases … [but] you need to be very patient and very persistent, and have the right lawyers and team in place,” he says.

Expanding to Uganda, Angola and beyond

For its second fund, which closed in 2016 at $50 million – more than double the size of its first fund – XSML added Uganda as a target market. According to Van Slingelandt, XSML’s geographic expansion has primarily been driven by the entry of its existing clients into new countries.

One of XSML’s investments in Uganda is TMR International Hospital, which was founded in 2016 by Dr Daniel Talemwa, who identified a need for a hospital in the populous north side of the capital Kampala. In its first two years, TMR struggled to improve its occupancy rate and expand its services. Busy running the hospital, Talemwa did not have the time or working capital to secure contracts with insurers. These contracts are crucial for boosting the patient base, but they also increase the need for working capital as insurers take more time to settle bills. XSML had already invested in a comparably sized hospital in the DRC and understood the young company’s need for patient capital to grow. Since 2018, XSML has invested a total of $2.14 million in debt and equity in TMR, enabling it to become a fully-fledged facility treating over 2,300 people every month.

For its $85 million third fund, XSML has also added Angola to its list of countries. In recent years, the Angolan economy has struggled with lower oil production and high inflation. At the SuperReturn conference in Cape Town towards the end of last year, Van Slingelandt noted that the Angolan economy showed signs of stabilisation, although the depreciating local currency, the kwanza, remained a challenge. Angola is also grappling with a shortage of US dollars. He acknowledged the difficulty in extracting hard currency from the country, though the situation had improved somewhat.

So far, XSML has made five investments in Angola, including a US$2.5 million loan to support the working capital needs of Advancetire Comercio, a retailer and wholesaler of car parts. The auto parts sector is forecast to grow more than 10% annually as the government promotes investment in infrastructure, construction, real estate, manufacturing, and agriculture to diversify the oil-reliant economy. “All these activities use vehicles. They need our products,” said Radwan Faraj, the company’s founder, in a statement announcing the investment.

XSML has also announced its expansion to Zambia. The country has faced significant economic challenges in recent years, notably a substantial debt burden. In November 2020, Zambia became the first African country to default on its sovereign debt during the COVID-19 pandemic, with its external debt rising from $4.8 billion in 2014 to $11.2 billion in 2019. More than three years later, Zambia is still negotiating with its creditors. However, progress was made in March when the government and a group of bondholders reached a deal in principle. Last week, Zambia’s kwacha currency reached a record low against the US dollar, partly due to a severe drought that has devastated crops, forcing the country to increase food imports.

While Van Slingelandt acknowledges that Zambia’s economy has experienced ups and downs in recent years, he believes now is a good time to establish a presence in the country. He also thinks that Zambia, with a population of just over 21 million, is sufficiently large for XSML to achieve success.

XSML has backed Uganda's TMR International Hospital.

XSML has backed Uganda’s TMR International Hospital.

People dynamics

XSML currently has 25 employees across several countries. Van Slingelandt believes that the mix between local talent and international expertise helped build a good team foundation. But the firm has found that senior hires from traditional banks tend to be a lesser fit, as these individuals prefer delegating rather than rolling their sleeves up. Conversely, the firm has had greater success by hiring less experienced individuals – those with a few years at prominent accounting firms or recent business school graduates who are then trained on the job.

Van Slingelandt notes that as the team has grown, it has become imperative for the three partners to give employees space to develop. This means not interfering with people’s work and allowing them to learn from their mistakes.

‘It always takes longer’

In March 2024, XSML announced that it had already raised $98.7 million for its fourth fund, African Rivers Fund IV, which has a target size of $135 million.

Reflecting on the company’s journey, Van Slingelandt shares that the three Dutch founders never envisioned dedicating a significant portion of their lives to working in Central Africa. Recounting experiences such as the coup in CAR and dealing with unscrupulous individuals, Van Slingelandt says the business has faced several obstacles over the years.

“It becomes easier over time … But in the beginning there were moments where you thought, ‘Why did we ever start this?’ because it comes with hardship and requires grit in challenging circumstances,” he admits. “Doing this work requires a positive mindset. It always takes longer and is harder than you think it is [going to be] when you start.”