A dollar fund to unlock investments in Africa
The creation of a permanent dollar-denominated fund within the Victoria Falls Stock Exchange (VFEX), funded by African and US investors, could represent a turning point for the exit market in Africa. This mechanism, which aims to acquire the shares of investors seeking to exit their holdings, offers the United States a unique opportunity to strengthen economic ties with the continent.
Quick Answer
The Victoria Falls Stock Exchange (VFEX) is a stock market in Zimbabwe that operates in US dollars. A permanent fund listed on this platform could facilitate exits for African private equity investors, offering liquidity and transparency. The US International Development Finance Corporation (DFC) could support this fund, mobilizing US and African private capital.
The problem of exits in African private equity
Over the past two decades, European and multilateral financial institutions have supported funds that have acquired and restructured African companies, bringing them to institutional standards. However, many of these funds are aging, and their investors require distributions. The main problem is the lack of efficient exit routes: according to a study by Boston Consulting Group, from 2000 to 2023, only 47% of private equity exits in Africa occurred through sales to third parties, compared to about 45% in mature markets.
Limitations of current exit routes
Current alternatives are limited. The secondary market and continuation vehicles are still in development, and financial development institutions (DFIs) often trade among themselves. Stock listings are even more restricted: Johannesburg and Nairobi offer depth but in local currencies, while London, although offering liquidity in dollars, does not contribute to developing African market infrastructure. There is currently no platform where a strong currency buyer and a private equity seller can meet on terms acceptable to both.
The solution offered by VFEX
The Victoria Falls Stock Exchange (VFEX), within the Victoria Falls International Financial Centre in Zimbabwe, represents a promising solution. This platform, led by American Marc Holtzman, offers a dedicated regime for banks, securities, funds, and insurance, with regulations that will come into force in 2026. VFEX stands out for its US dollar settlement system and exemption from foreign exchange control on distributions and dividends. It is the only platform that combines dollar settlement, statutory dollar repatriation, an African venue that attracts African institutions to co-own the platform, and a listing regime accessible to medium-sized vehicles.
The role of DFC in the new fund
The US International Development Finance Corporation (DFC) could play a key role in supporting a permanent capital vehicle listed on VFEX. This fund would acquire shares from funds that need to exit aging holdings, using newly issued capital rather than relying on exchange turnover. The DFC could anchor a minority stake with a well-defined sales path, mobilizing US and African private capital far beyond its own stake. This approach aligns with the DFC's mandate to mobilize capital that would otherwise not deploy.
Strategic benefits for the United States
In addition to providing a scalable path for US investors to mature African companies, this structure could strengthen trade ties between the United States and Africa. Once the effectiveness of the model is demonstrated, it could be replicated in vehicles targeted at critical sectors such as strategic minerals, infrastructure, agriculture, financial services, and healthcare. This approach would offer US institutional investors transparent, daily-valued exposure, countering the influence of state-directed capital.
The challenges and risks
Despite the potential, VFEX remains a shallow market, with a market capitalization of about $8.3 billion and fewer than twenty listed securities. Liquidity is limited, making it easier to build positions than to unwind them. However, paying for exits through primary capital, rather than through secondary turnover, mitigates this problem. Other risks include exchange rate volatility and restrictions on foreign currencies, although the treatment of "free funds" under the VFEX regime offers some protection. Additionally, US sanctions, now targeted rather than general, require careful due diligence.
Building a market for ownership transfer
The real obstacle is no longer the quality of African companies, but the lack of a market where ownership can change hands efficiently, transparently, and on an institutional scale. This project requires collaboration between African pension funds, sovereign investors, and US financial institutions. While the first decade of the century was dedicated to building African companies, the next could be defined by the joint development of robust and inclusive African markets.
Frequently Asked Questions
What is the role of DFC in this project?
The DFC could anchor a minority stake in a permanent capital vehicle listed on VFEX, mobilizing US and African private capital. This approach aligns with the DFC's mandate to mobilize capital that would otherwise not deploy.
What are the main risks associated with this model?
The main risks include the limited liquidity of VFEX, exchange rate volatility, and potential restrictions on foreign currencies. However, the treatment of "free funds" under the VFEX regime offers some protection against these risks.
How could this model be replicated in other sectors?
The strategic importance of critical minerals
One of the most promising sectors for the application of this model is that of critical minerals, fundamental for technological and military value chains. The United States has already begun to take ownership positions in this sector, but through closed private consortia. A stock exchange solution would offer broader and more transparent access to these strategic assets, allowing a greater number of US institutional investors to participate. This approach would counter the growing influence of state-directed capital, such as Chinese capital, in sectors key to American national security.
The role of African financial institutions
For the success of this model, it is crucial to involve African financial institutions, including pension funds, insurance companies, and sovereign funds. These local players can provide not only capital but also an in-depth understanding of the continent's economic and political context. For example, the South African National Pension Fund has already shown interest in investments in infrastructure and productive sectors. Their participation could help mitigate risks related to the volatility of African markets and improve the perception of stability among international investors.
The impact on infrastructure development
A permanent fund listed on VFEX could also catalyze significant investments in African infrastructure, a sector that requires long-term capital and stability. According to the African Development Bank, the continent needs infrastructure investments of at least $130-170 billion per year. A well-structured investment vehicle could attract private capital to high-impact projects, such as transport networks, renewable energy, and telecommunications, thereby improving the quality of life and economic opportunities for the local population.
Opportunities for US institutional investors
US institutional investors, such as pension funds, endowments, and insurance companies, could benefit from diversified and transparent exposure to African companies. Currently, many of these investors are cautious about allocating capital in Africa due to the lack of liquidity and the complexity of local markets. A fund listed on VFEX would offer daily valuation and a more efficient exit mechanism, making investments in Africa more attractive. This could also stimulate an increase in direct American investments in Africa, further strengthening economic ties between the two continents.
Regulatory and tax challenges
To ensure the success of the fund, it is essential to address regulatory and tax challenges. For example, regulations on foreign currencies and restrictions on profit repatriation could influence the fund's liquidity. Additionally, differences in tax regimes across various African countries could complicate fund management. However, VFEX already offers some advantages in terms of regulation and treatment of foreign currencies, which could be further strengthened through bilateral and multilateral agreements.
The need for robust governance
Another critical aspect is the governance of the fund. To attract institutional investors, it is fundamental to ensure high standards of transparency, reporting, and compliance. This includes adopting robust risk management practices, compliance with international regulations, and creating clear reporting mechanisms. The participation of African and US financial institutions could help establish solid governance, improving investor confidence and facilitating capital attractiveness.
The future prospects of the exit market in Africa
If implemented successfully, the model of a permanent fund listed on VFEX could revolutionize the exit market in Africa. It could not only facilitate exits for existing investors but also attract new capital to the continent. This approach could be replicated in other emerging markets, offering a scalable and transparent solution to the problem of exits in private equity. Ultimately, it could contribute to creating a more mature and inclusive investment ecosystem in Africa, supporting the continent's economic growth and development.
The potential replicability of the model
The experience of VFEX could serve as a model for other stock exchanges in Africa and other emerging markets. The creation of specialized trading platforms, with clear regulations and effective liquidity mechanisms, could attract international investors and facilitate the transfer of ownership of companies. This approach could be particularly useful in sectors such as agribusiness, financial services, and healthcare, where the need for long-term capital is high. Additionally, it could stimulate the creation of more developed secondary markets, improving the liquidity and transparency of investments.
Implications for US foreign policy
From a foreign policy perspective, the adoption of this model could strengthen the United States' economic presence in Africa, countering the influence of other powers such as China. The United States could position itself as a strategic partner for Africa's economic development, offering innovative and sustainable investment solutions. This approach could also contribute to promoting political and economic stability in Africa, aligning with the strategic interests of the United States.
An opportunity for a shared economic future
The creation of a permanent fund listed on VFEX represents a unique opportunity to unlock investments in Africa and strengthen economic ties between the continent and the United States. This model could not only solve the problem of exits in African private equity but also stimulate investments in critical sectors such as strategic minerals, infrastructure, and agribusiness. Through collaboration between African and US financial institutions, it may be possible to build a more mature and inclusive investment ecosystem, supporting the continent's economic growth and development. Ultimately, this approach could contribute to creating a shared economic future, based on equitable partnerships and mutual benefits.
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