VFEX and its possible growth opportunity from Special Purpose Acquisition Companies (SPACs) listings

Our Offshore Financial Services Centre (OFSC) that is the Victoria Falls Stock Exchange (VFEX) has been in operation since 2020. It currently boasts of 2 listed companies since its inception. That in itself is indicative of the environment the exchange is trying to grow in. It is early days but the bourse needs to be early too on some innovations necessary for it to grow in a very competitive market. As I had just finished framing my thoughts for the rest of this analysis, a few developments have been announced thick and fast.

1. Zimbabwe's Finance Minister announced a USD denominated bond being listed on the exchange in the future
2. The exchange signed a Memorandum of Understanding (MoU) with the Dubai Gold and Commodities Exchange
3. VFEX signed an MoU with the Tobacco Industries Marketing Board (TIMB) and the Zimbabwe Stock Exchange (ZSE)

Some progress beyond being a 2 counters bourse. VFEX is taking steps forward though it remains a short distance from the start in this, its marathon. 

Background and macro-environmental analysis:

Most local and international investors have associated equity investment in Zimbabwe with VFEX's parent company, the Zimbabwe Stock Exchange. Investors have also looked to take positions in Zimbabwe through convertible debt securities, corporate bonds, venture capital, private equity, investment banking, and direct partnerships with locals. Via these various investment routes, both local and foreign investors have become accustomed to some entry and exit methods on positions in Zimbabwe integrating a risk assessment of the risk level they are comfortable with as well as whether the return adequately matches this perceived risk. They have become used to certain tools in an environment claimed to be of very high risk to capital invested - maturity risk, income risk, inflation risk, event risks, credit default risks.

An analysis of the macro environment is necessary to identify key opportunities (O) and threats (T) that need addressing for the VFEX to thrive.

Economic situation {Threat (T) or Opportunity (O)}

1. It is undoubted that with a +13million population, Zimbabwe will have a lot of business to conduct. Equity in these businesses across all sectors should find interest from and be tradeable on exchanges far and wide. O
2. With the natural resources that Zimbabwe is endowed with, it is a major supply entity to both local and international businesses. Zimbabwe is positioned in the top quartile for some of the most coveted minerals. O
3. Zimbabwe's current formal employment rate is arguably low inversely with a high rate of informal employment. The government's drive (within Vision 2030 and the National Development Strategy-1) is towards upper middle income. Inherently, formalisation and development of industry and labour force is expected. It is recognisable in this, that more formalised businesses will emerge out of Zimbabwe. O
4. As more formalised businesses emerge, Zimbabwe and Zimbabweans' true buying power will also emerge. O
5. As more formalised businesses emerge, so should a more vivid development-to-maturing industry cycle transition  for SMEs. Some of the SMEs should become strong suppliers and service industries to the main agriculture, tourism and mining industries in Zimbabwe and later growing to compete in the regional markets. Our SMEs' valuations will start to have strong correlations to established players on the domestic and regional markets with participants seeing opportunity in investing in accelerating the growth. O
6. As businesses that have been in decline or that had stagnated recover and grow (growth rate as estimated by the Treasury is +7% this year), Zimbabwe's economic environment will start to provide significant data for the fundamentals investor as well as the economic policy makers. Measures on the population's income like the Marginal Propensity to Save, or the other - to Consume, will start further feeding the models and forecasts of economic growth and familial portfolios of wealth's trajectories. O   
7. Inflation rate reduction and control (which is already evident) will mean expected market returns will better support costs of borrowing and investment risk profile. Rating Agencies could soon be revising Zimbabwean companies' ratings upwards. O
8. Lower costs of borrowing for Zimbabwean companies mean better balance for raising capital through equity or shareholder funds. Weighted Average Cost of Capital has been very high owing to high rates on debt and lower returns on the market that in themselves were eaten into by inflation where trading was on the not so long ago pressured ZWL. O
9. Global money including Western money will always seek sustained high returns. Zimbabwe's economy with stable and clear policy implementation as proven through the Transition Stabilisation Programme and the NDS1 mean a more predictable and measurable environment. War no more! Different sources' inflation figures and exchange rates have had reasonable downward convergence. With the emergence of anti-establishment movements in the West like Reddit traders, who is not to say some of them might start pushing for access to our markets for returns and against their States' stipulated sanctions. O
10. The African Continental Free Trade Area (AfCFTA) will provide a growing market allowing for market penetration and scaling up of businesses. Economies of scale will improve margins and company growth. O 
11. The emergence of Cryptocurrencies, related speculation around the volatility will see earnings and capital diversions for a higher rate of return. T However, crypto currency could facilitate unsanctioned trade where there were hindrances to trade. A space to watch! T/O
12. Covid-19 has shored up unspent incomes especially amongst foreign domiciled investors. O
13. Zimbabwe's diaspora is perceived as growing fast in financial literacy, investment power and need to diversify portfolios. O
14. Any policy changes to domestic player participation in some key sectors will threaten SME industry cycle. The need for FDI has to be balanced to allow domestic industry growth. Any government that will seek quick wins by allowing bigger than optimum FDI inflows will only stiffen competition for our mining,  tourism and agricultural based SMEs that are only in nascent. Easing of sanctions as a potential eventuality will still require defensive tact to protect and further develop the entrepreneurs that represent the high informal employment rate. T
15. Any developments in solar, electricity, natural gas and oil will greatly lessen Zimbabwe's import bill if deals are/were struck well. This has downstream positives for market growth where energy becomes cheaper and is even exported! O   

Economic conditions specific to the establishment of the VFEX  are complemented by the following technological factors.

Technological 

1. High speed transactions in other markets make them more attractive to investors and day traders. T
2. Integration of crypto currencies in markets is making for more sophisticated securities. This is an opportunity for us to introduce more stable coins pegged to our primary industry outputs, especially minerals like gold, lithium or rare earth elements. O
3. Cryptology integration also provides mitigation to (1) as blockchain technology adoption can mean better settlement times on the VFEX exchange. O
4. Technological advancement pace is fast and requires investment capability that matches other exchanges. T. This however is an opportunity as the bourse grows as it drives the ZSE and Ministry of Finance to consider viable partnerships and/or private investment on the bourse itself whilst satisfying all State requirements. O 
5. FinTech is allowing global dominance for more advanced stockbrokers. Underlying the VFEX are associated Stockbrokers that imperatively have to also improve their technological capabilities. Capital was said to flow where it is comfortable. I say, capital also flows fast  and in heaps where better technology handles it! T  
6. With the best technology comes strong market strength. Information asymmetry and resultant market strength is an issue the VFEX needs to address and alley investor fears on. T 

Political and Legal

The political and legal environment is required to support adequate innovations and implementation of advanced processes. The analysis preceding this, and the monitoring or oversight requires amongst policy makers and stakeholder leadership groups, advanced capabilities in deciphering financial engineering and technology .

1. Governance and legislation needs to support the bourse to seek and conclude partnership agreements that support its technical soundness and sustainability. 
2. The stakeholders need to understand and study in detail all the types of securities that can be introduced to the exchange. This is important as we need to advance our equity markets whilst also needing to limit any undue influence on key economic measures such as inflation emanating from market behaviour due to unpoliced market weaknesses.

Where to for the VFEX?

From the above environmental analysis, there are key threats and opportunities that the VFEX needs to integrate in its strategy. In addressing these, the exchange is believed will find itself on a growth path towards regional and global competitiveness.
 

If there was a question we need to ask of our VFEX, this question would be; What do we need the VFEX to look and operate like for the wide world of investors to find it impossible to ignore?

 

Key issues to address

There is always the imperative of improving market strength. The solutions to this are both technological as well as utilising the best of our human resource capabilities. There is key investment required to bring even the website of the exchange to world-class status. We need not to kid ourselves here. The world's money is looking for world-class technology, world-class exchanges, world-class reputations, and world-class returns!
 
The lack of listings at this early stage is slightly forgivable. However, as shown within the economic environment analysis above; Zimbabwe provides an opportunity of investing in business environment of high growth rates. Investors can find projects with future cash flows that provide positive Net Present Values. It is upon these conditions that our human resources capabilities need to be deployed.
 
The human resources capabilities need not be within the exchange personnel, but these are human resource capabilities that can be found within the SMEs sector itself and within captains of industry for well established companies - especially those that have had experience with being listed on the main bourse in the domestic market or on stock exchanges in other countries.
 

The idea here is; Zimbabweans at different levels of the industry need to work together towards bringing stations of value to the capital raising opportunity that is provided by an exchange such as the VFEX.

 

Experienced industry players who have worked in procurement, as executives and as market analysts provide Zimbabwe with an opportunity to grow our SMEs. Some of them have made a name for themselves and are very likely to find themselves with both power and legitimacy when it comes to who investors are going to listen to. It is this point that provides such key players with an opportunity to form Special Purpose Acquisition Companies (SPACs).

 
SPACs have been listed in countries that have more advanced markets such as Singapore .

 
Whilst these entities face critique and suspicion in other advanced markets, we still need to analyse how they are suitable for our own environment - especially around the small to medium sized enterprises that have not yet developed their governance, digitalisation and investor information provision to an advanced level. Our local experienced managers and strategists who have worked with some of these growing companies will be able to identify and select companies that are on a growth trajectory as they start to be contracted as suppliers or support services to more established companies in an economic environment with growing demand from a population with increasing income and government policy targeting upper middle income in a period of under 10 years. SPACs could list on the VFEX with seasoned managers and business people having better understanding of other businesses they have come across as suppliers, competitors, nascent players, buyers or substitutes in markets they are specialists. The SMEs players will have adequate support to meet the discipline requirements of the covenants that might come with the much needed capital injections.

 
The formation of these acquisition companies will therefore provide the governance and company development oversight that is required by investors to mitigate against maturity risk on their investments. We do have enough of this experienced human resource which with resources can then target promising SMEs to inject both capital and mentorship support in the early stages of development of these companies. Were it their choice and financial capacity, these experienced managers would be engaging in venture capital or private equity investments. Where they are not, this is where their capability should be deployed and start to attract investment whilst providing the guarantee of  adequate governance where investors might have been worried. Governance responsibility will initially be weighted more on seasoned SPAC managers before transfer to then developed managers at exit or equity buyback.

For our SMEs, Zimbabwe requires a mix of building product and service brand attractions and adding a  level of trust by bringing management brands. If one asks who has adequate investment information in Zimbabwe that can be used for due diligence on investment opportunities, experienced managers and advisors come up together with market analysts. All of them with their different talents, history and networks make management brands that if delegated to acquire or invest in SMEs make SPACs attractive on a bourse such as the VFEX. We need to build names like other countries have for their fund managers and executives. 

Policymakers in the country need to continue debating and travelling the learning curve such that they can make country-benefitting policy conclusions on such an opportunity. They have to ensure adequate legal frameworks are there to protect all stakeholders. Parliament as well as financial intelligence units will need to continue analysing such opportunities in order to timely introduce innovations that elevate SMEs, communities, families, and the country at large through VFEX as an unmissable opportunity for investors.

The VFEX has to uplift its market capitalisation. SPACs and not just listed single companies is argued to be a viable option. There are not many Padenga's or Seed Co's at the moment. SPACs bring more investment traffic as they have the ability to combine a capital raising opportunity for  disaggregated small entities which otherwise miss out on investment due to a lack of structural engineering of securities on the exchanges.   

There are risks. 

Exchanges in small markets can become centres of craft and graft that does not benefit host countries and the wider stakeholders. SPACs could anchor a bourse as a credible investment centre rather than a hot bed of speculation and questionable company information. Legislature and Executive have to execute framework building for facilitation of  investment as the dominant activity and the greater good for the country coming out from an exchange as VFEX. All stakeholders must work hard and harder for VFEX's opportunities to be fully utilised.