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XSML Capital growth story

We don’t speak with fund managers every day who focus their portfolios on small and medium-size enterprises in Central and East Africa – so naturally we were excited to talk to Barthout van Slingelandt, Managing Partner at XSML. The firm manages about $70mn in two funds that focus on investments in the Democratic Republic of Congo and Uganda and is currently raising a new fund. XSML aims to generate a positive return for investors and make a social impact.

XSML adopted Preqin Solutions to help standardize its financial reporting. Preqin Solution’s technology has helped XSML form one source of truth and streamline operations as it evaluates KPIs across its 50+ portfolio companies.

Thank you Barthout for your time for this interview. XSML has a great growth story. How was the firm founded and what is the firm’s primary mission and objective?

We started with our first fund almost nine years ago. With the close of our first fund, we had $19mn under management and this was mostly from development finance institutions (DFIs). After a year of studying and analyzing the markets, we made our first investments. Since then, we have seen significant growth in terms of assets and the number of companies that we have invested in, have extended geographically and closed our second fund in 2016. The team has grown, and we now have offices in Kinshasa, where we have about seven people, and three in Uganda.

We focus on small and medium-sized enterprises (SMEs) in markets where there is a clear need for capital. We believe a combination of elements makes these markets attractive to invest in, including a huge opportunity for growth, a lack of locally available financing, a sizeable population and a low GDP base.

Investing in SMEs in the DRC and Uganda might present challenges in liquidating the companies at the end of the fund lifecycle. What investment strategy does XSML follow to ensure it generates returns for its investors while making a socio-economic impact through its investments?

For us, it is very important to understand the local market needs and what you can achieve as an investor. Needs are very much driven by the market; typically, in emerging and early-development markets, consumer demand for basic goods and services is significant and often undeserved. These include consumer-facing industries such as education, health care and retail, among others.

Our investment strategy includes a mix of debt and equity. The reason why we do not follow a pure equity strategy – and we see this a lot with other SME funds, particularly across Africa – is because it is difficult to exit an equity stake after 5-10 years, which is the usual timeline for these funds. It is not easy to find a buyer, let alone go for an initial public offering (IPO) because often capital markets do not exist. Therefore, debt is a good way to help those companies grow and at the same time get your money back as an investor by securing principal and interest payments throughout the lifetime of the investment. In some cases, where we feel there is an opportunity to do more than that, we also take a minority equity stake, but always in combination with debt. In addition in some cases we add an equity-kicker in the form of revenue-share to improve the return on the debt .

It would also be interesting to know how you screen these private companies, the entrepreneurs and the businesses in which you invest. What are the criteria that XSML follows?

We look for businesses which produce or sell products or services at affordable prices for the local population. There obviously needs to be an opportunity where we see future growth in the company. And we check if we believe the entrepreneur can build/grow a sustainable business in the long term.

We are reluctant to take on significant additional risk in markets that are already seen as risky by looking at completely new ventures or sectors that can be difficult if you lack the right expertise. For example, the markets we’re in need agriculture investment, but we’re also aware that this particular sector requires a certain skillset that we do not necessarily have in our team. So, we also look for the right fit between what the entrepreneur is doing and what we can deliver.

During screening, we need to make sure that we understand upfront that the entrepreneur wants to reach the same type of goals as we do. Then we look at track record. You want to make sure you “bet on the right horse” and that is typically someone who has already proven their acumen, as, they have been able to grow their company to a certain level and/or because they have a good reputation in the industry  – that is the ideal scenario for us as then we can step in to help them grow further. With all this comes trust: while this builds over time, we would shy away if we had doubts from the start whether  we would be able to build a relationship on that basis.

XSML was the first international fund to venture into the DRC. How difficult was it for the firm to establish in this region and how did you go about it?

We started off in collaboration with our cornerstone investor for the first fund, the International Finance Corporation (IFC). IFC was looking for fund managers in  DRC and Central African Republic and several other countries.  We agreed to focus our attention on these two markets.  . As anyone who starts off, we first needed to rent offices, get furniture and hire people while looking at the opportunities. Particularly for the first year in the DRC, it was about trying to find our way, taking the time to meet the right people and following up on some leads from our investors.

Then it was about trying to “pick the right cherries”. Over time, we were relatively successful with the first couple of investments in the DRC. That led to a network of other entrepreneurs and companies that we were then introduced to, while actively looking for prospects on the ground. It’s a bit like a snowball, where you start small and then you carefully add the next layer and the next layer, and so on. As you can imagine in markets like these, we have learned quite a bit since starting, including navigating political distress in CAR and finding ways to continue to collect money during times of restricted liquidity in DRC.

So, it seems like this journey has been a great learning experience for XSML. What would be your top key learnings that you could share with other fund managers in the industry?

You need to start somewhere. When you get into a market, it is important to get a grip on whether there is sufficient size for a fund manager to operate in. GDP for the whole of Africa is still relatively small, so when you then look at individual markets, you realize that some markets are just more attractive based on population or GDP. A low (formal) GDP base, combined with a large enough population, for example in Kinshasa, can be an interesting opportunity.

Next – on a more practical level – is finding the right people. Often both the biggest challenge and biggest opportunity. And that applies to both your team as for the entrepreneurs you work with.

When you have that, it is about a mix of processes, principles and systems. Including discipline which is  vital: the fact that you are doing well one year means nothing for the next year, so it is about continuing the things that you see working. And having the flexibility to change what is not working.

In our case, about 90% of our exposure is in debt and 10% in equity, and so making sure we are managing our debt exposure is crucial: there are weekly, sometimes daily follow-ups with entrepreneurs to obtain payment of the monthly invoices; we almost work like a collections unit, but everyone is involved as it is core to the business. This requires quite a lot of discipline, but also helps to maintain contact with the entrepreneurs, which in turn continues the relationship and helps us obtain more information on the business and the entrepreneur.

Finally, we had to think about how to move that knowledge into something the team can use on an ongoing basis. We had to make sure we had the right reporting.  We used to have a system that was Word and Excel based, but we realized that over time we needed to standardize, at which point using technology was the logical next step.

Could you tell us more about what technology XSML has used and how it has improved your processes?

We now have over 50 companies in our portfolio spread over two funds. With a third fund there will be significantly more companies, even if we exit most of the companies in the first fund over the next two years.

Initially, when the portfolio was smaller, say 10-15 companies, we started to think about where we were storing all our information. We had different forecasts in separate Excel sheets. When we did our monthly KPI calls, it became quite a bit of work to manage that. Our thinking was that we needed to run one system where everything was included in one location.

We looked around at a number of solutions and found Preqin Solutions, which has helped us a lot in creating one source of information, making it possible to have one location where everyone – regardless of where they are based – can just log in and easily update and view the details of a company and find its status.

Did you have any concerns before you adopted this new system?

Our initial question mark was over whether it would work in markets where the Internet may be slower, so we ran tests, but it was not an issue.

In terms of the functionality of Preqin Solutions, what are the features that you or your teams like the most?

When making comparisons with other systems, I found the navigability so much easier from the start, i.e. how easy it is to drill down from an overview into more detail, to move from a tearsheet where you have the summary of the company to the financials, valuations, etc., at different depths. This also helps to focus our attention; by having everything in one system, it made it easier to have one source of truth because everything is standardized. There is not one forecast that looks different from another, even though the content per company of course is different.


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