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Since its inception, Investisseurs & Partenaires (I&P) has worked alongside key stakeholders such as the Dutch Good Growth Fund, managed by Triple Jump, to make the ecosystem around local small and medium enterprises (SMEs) in African emerging markets more conducive to their growth. Both organizations are publishing important research in 2025 based on data they’ve collected over the past 10 years, aiming to shed light on what makes SME finance work across emerging markets, and in Africa in particular. The outcomes of these research efforts will be featured in a series of articles published on NextBillion over the remainder of the year — and the article below is the first in this series.

I&P’s research and knowledge hub, I&P Ecosystems, leverages data and experience to generate evidence-based insights and showcase innovative best practices in SME investing. Earlier this year, it published a new report exploring the current SME fund investment landscape in Africa, with the goal of addressing critical data gaps identified by local fund managers  — i.e., General Partners (GPs) and their investors, Limited Partners (LPs). This report gathers insights from pioneering fund managers who are reimagining fund models, and highlights actionable trends and key recommendations. A common thread in these findings is that SME fund managers are increasingly finding innovative solutions to overcome difficult market constraints.

Below, we’ll share some of these findings, and discuss their implications for fund managers working with African SMEs.

How African SME fund managers are innovating to overcome market constraints

Over the past decade, African SME fund managers have experienced remarkable growth, diversifying geographically, across asset classes and in fund structures. Significantly, most funds are now managed by African or mixed African-foreign teams (representing 71% of the funds in the sample I&P Ecosystems analysed). However, SME investing remains challenging, plagued by limited data, arduous fundraising processes (45% of emerging managers in the sample analysed never even reached their first close), and structural barriers that often impede market-rate returns.

As explained in the report, emerging fund managers are measured against benchmarks they cannot meet. Traditional LP investment criteria frequently exclude emerging fund managers — which often have African and female-led teams — due to their inability to fulfil stringent conditions that include: large fund sizes; closed-ended structures; track records of roughly 10 years of prior investment experience across the entire investment cycle, from sourcing to exit; and alignment with the fund’s investment strategy. This leads to a situation where only one type of fund manager background is rewarded in a fundraise, resulting in a vicious circle where only the managers with a prior track record are able to raise funds, allowing them to further increase their track record while other managers never get a chance to build one.

Nevertheless, the newer generation of emerging SME funds are delivering improved gross and net returns, frequently surpassing traditional benchmarks.

Finding shortcuts around the above-mentioned constraints is a daily task for SME fund managers. A good example is liquidity: Liquidity management is one of the most pressing issues in SME investing, due to the inherent mismatch between SMEs’ needs for patient capital and LPs’ expectations for quicker liquidity. African SME funds have improved their liquidity profiles by employing self-liquidating financial instruments such as revenue-based financing, redeemable equity and quasi-equity instruments. These approaches offer predictable liquidity events sooner than traditional exits, aligning investor expectations more closely with SME business realities.

Progressive fundraising techniques — e.g., starting small, demonstrating a solid track record and partnering with a sponsor — are another approach that can significantly boost a fund’s success rates. Specialized capital pools, including African sovereign wealth funds, family offices and catalytic funders, are playing an increasingly pivotal role by being the early backers of new fund managers.

Another major innovation is in fund structuring. As highlighted in a previous I&P report, an analysis of the economics behind small SME funds shows that the traditional 10-year, closed-ended model rarely aligns with SME growth patterns and equity investing.

Additionally, some funds have developed liquidity matching mechanisms like sidecar vehicles and warehousing facilities. These allow fund managers to pilot investment theses and establish early portfolio track records, significantly enhancing investor confidence and accelerating subsequent fundraising rounds.

Fund domiciliation and regulatory alignment have also played a role in improving liquidity. SME fund managers are increasingly tailoring the fund’s legal structure, currency exposure and domicile location to investor expectations. This includes choosing jurisdictions with better legal clarity for hybrid and self-liquidating instruments, and employing frameworks that support longer-dated or perpetual fund structures.

Trends in African investing show that fund managers are more proactive in engaging LPs early to negotiate terms, such as management fees and hurdle rates, that better reflect the realities of SME investing. These negotiations are helping to recalibrate LP expectations towards sustainable and impact-aligned liquidity paths.

The potential emergence of a robust secondary market for SME fund investments, although still nascent, could also greatly improve liquidity, allowing LPs to achieve early exits by selling their stake to another LP, without pushing the GP to prematurely exit the entire SME portfolio. Collectively, these innovations demonstrate that effective SME investment models can align investor expectations with the practical realities of African SMEs.

SME fund managers are supported by catalytic funders – but we need more of them

While SME fund managers in Africa are working hard to deconstruct traditional models, the I&P report also highlights the positive role a few catalytic funders have played in de-risking SME financing in recent years. Catalytic capital accepts disproportionate risk and/or concessionary returns compared to a conventional investment, with the goal of generating positive impact and enabling third-party investment that would not otherwise be possible.

Over the past decade, a new generation of catalytic funders — including philanthropic foundations, international donors, development finance institutions and impact-driven funds-of-funds — has significantly shaped the African investing landscape by supporting emerging SME fund managers. Key actors, like the Argidius Foundation, FSD Africa, the Dutch Good Growth Fund, Mastercard Foundation Africa Growth Fund, IPDEV, Ceniarth, FASA and Small Foundation, have done more than just provide financial resources: They have anchored new funds, funded operational and design costs, supplied working or warehousing capital, and offered junior tranches to absorb initial losses and de-risk investments for other LPs. In doing so, they have helped early-stage and country-focused funds — particularly those led by African or female fund managers — to overcome structural fundraising barriers and gain credibility among more risk-averse investors. This support has been central to emerging fund managers’ ability to reach first close, build a track record and validate new fund models.

Yet despite these successes, catalytic capital’s full potential remains vastly underdeveloped, all the more so considering how much these initiatives, rare as they have been, have advanced the sector. Efforts are often fragmented, leading to inefficiencies and duplication, while the overall supply of catalytic funding fails to meet the rapidly growing demand. Catalytic initiatives represent a small handful of investments in the SME sector, and a few initiatives are nearing the end of their investment period (e.g., Mastercard Foundation Africa Growth Fund and Nyala). Others are still actively fundraising (e.g., Oryx Impact, Moremi Fund and Ci-Gaba), but only one new large-scale initiative has been made operational so far this year (the FASA fund-of-funds financed by NORAD, USAID, FCDO and KOICA).

In emerging markets where such catalytic financing can have an outsized impact, there is an urgent need for greater collaboration among catalytic actors to maximize efficiency and scale. Their efforts to team up must not be limited to co-investment opportunities: These actors must also collaborate to make further investment in research, improve data transparency and engage in deeper exploration of impact-return dynamics. These efforts are essential if investors hope to mobilize more capital, including locally, and strengthen Africa’s SME investment ecosystem overall.

We are seeing the early foundations of change — but the journey toward a fully functional and equitable SME investment ecosystem is far from complete. This series of articles aims to contribute to accelerating this journey: We will publish the next article in the series later this summer, so stay tuned.

Marianne Vidal-Marin is the Director of I&P Ecosystems, the knowledge hub of Investisseurs & Partenaires (I&P); Julia Kho is a Knowledge Manager at Triple Jump.

Photo credit: UK Black Tech