The Next Wave: Escaping the bog

There are two sides to this equation

There is a popular theory circulating at conferences, on Twitter, and in the group chats of well-meaning people across Africa’s investment ecosystem: that the primary obstacle to building deep, functional capital markets on the continent is a failure of local capital mobilisation. If only we could convince pension funds, family offices, and high-net-worth individuals to allocate more money to venture and SME finance, the thinking goes, the system would begin to work. This theory is half right—which is exactly what makes it dangerous.

Some people think we need to crowd more local capital in to support young, growing small businesses. Even though there is a disagreement about whether that potential local capital influx should focus on the young and growing (fast) segment versus the small, slow-growing segment. There is generally an agreement about the need to mobilise more local capital. So, the thinking goes, we can reduce dependency on foreign investors.

So everyone goes on a hunting spree to persuade, charm, debate, or, if all fails, shame the bastions of local capital—pension funds especially—into allocating more money to venture capital and small and medium enterprise (SME) finance fund managers.

It is a noble and needed advocacy. One that I fully support. Taking the larger share of the responsibility of investing in your growth industries and businesses is only prudent in all the best ways of self-interest.

But I must point out that not too long ago, we were focused on debating the merits and demerits of building out local IPO engines. Despite some noise here and there. Those efforts seem to have fizzled out, or at least out of view. My interpretation is that most of us have learned that the bill of the tradeoffs for absorbing a huge chunk (relatively speaking) of foreign venture dollars within the short 24-month span of 2021 and 2022, is simply too large.

And both we and the “foreign” venture dollar managers are reluctant to call for the bill. Both in terms of the valuation-to-reality adjustment and in terms of the narrative violation, we might incur.

As the local IPO and/or tech exchanges talk has cooled, it has given rise to the private “Secondary” market proposition. Never mind that public listings are the quintessential secondary market platform of the modern business era. That, too, has largely tapered off in terms of urgency. Perhaps because the strongest proponents are digging in their heels to push it through mountain and forest. But also likely because we are all confronting the inevitable bog of Illiquidity—a nasty 3km-wide pond of “not-enough” money to buy overpriced assets or rescue under-priced gems from going “the way of all flesh.”

The Bog of Illiquidity for private secondary markets in Africa is, incidentally, just an avatar of the same issue that local IPOs were proposed to fix. It’s also not the first time humans have encountered this apparition in capitalist and pre-capitalist societies. Let’s do some history.

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Pre-capitalist societies didn’t have secondary markets. They didn’t need them—or rather, they couldn’t conceive of them, because the problem they’d solve didn’t yet exist in a form anyone could articulate. But the underlying problem—you have wealth tied up in something and you need it to be somewhere else, right now, at a fair price—that problem is ancient.

These societies dealt with it in three ways, and each one eventually hit a ceiling.

The first was toleration.

In feudal Europe, pre-Meiji Japan, and much of pre-colonial Africa, wealth meant land, and land meant political identity. A Buganda chief’s holdings weren’t an “asset class.” They were him—his authority, his lineage, his obligations. You didn’t liquidate your land because that would mean liquidating yourself. This worked beautifully in a static, subsistence-oriented world. It broke the moment long-distance trade created a merchant class whose wealth was portable—goods, ships, gold—but whose legal and political environment was still built for dirt that doesn’t move.

The second was debt.

When toleration became impractical, people invented ways to move value through time. Medieval Italian merchants created bills of exchange. Islamic traders ran hawala networks. In West Africa, Hausa traders built sophisticated credit systems backed by kinship and reputation rather than courts. These instruments solved the timing problem: I need value now, I will repay you later.

But they could not solve the exit problem—at least not the systemic one. A bill of exchange settles. A loan matures. The lender gets repaid with interest and has technically exited. But the equity holders underneath—the founders, the partners, the people whose wealth is bound up in the ongoing enterprise—are no closer to liquidity because someone lent the company money and got paid back.

Debt instruments solve the capital deployment problem and the lender’s own return problem, but they contribute nothing to the broader question of secondary liquidity. In some cases, they make it worse, adding a senior claim ahead of equity and making the equity position even harder to sell.

The third was communal pooling.

Rotating savings groups, mutual aid networks, tributary redistribution. West African tontines, Southern African stokvels, the Incan mit’a. These solved the security problem—if your harvest fails, the group catches you—but through social obligation, not through markets. The “return” on your contribution was the right to draw on the collective when your turn came. You could not sell that right. And critically, these mechanisms could not scale.

A stokvel can fund a house. It cannot fund a fleet of merchant ships or a transcontinental mining operation. It is inherently local and relational.

Each of these three responses is alive and well in African markets today. Angel investors who can’t exit are tolerating illiquidity, hoping for an acquisition that may never come. Venture debt and revenue-based financing are the modern debt workaround, solving the lender’s return problem while leaving the systemic exit question untouched. And closer to the ground, chamas, syndicates, and cooperative investment clubs are communal pooling. They are powerful, trusted, and completely unable to absorb the scale of capital that us in “mobilise local capital” crowd like talking about.

Each of these responses will all hit the same ceiling now that they hit under our ancestors, hundreds of years ago.

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In 1602, Dutch merchants who were tired of the specific, practical stupidity that hampered their seafaring trade made an engineering decision.

Before the Dutch East India Company—the Vereenigde Oostindische Compagnie, or VOC—spice voyages were funded through temporary partnerships. You pooled capital, sent ships, sold the cargo when they returned, liquidated everything, divided the proceeds, and started over. Every voyage required re-raising capital from scratch. Ships could be sold between expeditions, and in such cases, institutional knowledge might evaporate. And if a merchant who’d committed funds to a three-year voyage suddenly needed cash—a death in the family, a warehouse fire, a better opportunity—he had no option except to beg the other partners or swallow a ruinous loss.

The Dutch East India Company solved this with three interlocking innovations, and the fact that they interlock matters more than any one of them individually.

First, capital lock-in. Investors could not withdraw their money from the company. The enterprise became permanent, decoupled from the personal timelines of its backers. Second, fractional transferable shares. Because you couldn’t get your money out of the company, you were given the right to sell your claim on the company’s profits to someone else. Ownership became abstract, standardised, and detachable from identity. Third, a centralised exchange. Buyers and sellers needed a place to find each other cheaply, with enough participants to narrow the gap between what sellers wanted and what buyers would pay.

If you removed any one of these, the system could collapse into itself. Capital lock-in without transferability is a trap—you’ve just imprisoned investors. Transferability without a centralised marketplace is a scavenger hunt—you can theoretically sell, but good luck finding a buyer at a fair price before your warehouse burns down. And an exchange without standardised, transferable shares is just a building with nice furniture and no business being conducted inside it.

This is the exact structural equation that African capital markets are failing to solve today—not because people haven’t thought about it, but because the discourse insists on solving one variable at a time while treating the others as someone else’s problem.

A sustainable capital ecosystem must balance a simple identity:

Total System Liquidity = Capital Inflow × Velocity of Exits

Where Capital Inflow is local capital plus foreign capital, and Velocity of Exits is the speed and ease with which an investor can convert shares back into cash at something resembling a fair price.

It is simple arithmetic that if you multiply any amount of mobilised capital by a near-zero velocity of exit, the product is zero liquidity. Capital enters the system, gets stuck, investors learn a painful lesson, and they never come back. The pension fund manager who allocated to venture and got burned becomes the cautionary tale that keeps the next ten pension fund managers in government bonds for a decade.

And here is the part that should alarm anyone paying attention: we have already run this experiment. The 2021–2022 venture influx was, in miniature, a capital mobilisation success. Money flowed in. What didn’t exist—what still doesn’t exist—is a functioning mechanism for it to flow back out. The “bill” I mentioned earlier is partly a liquidity bill. Those valuations can’t be realised because there is no market deep enough to realise them in.

And my point is that we all need to take the design and engineering part of this work seriously and systematically, beyond searching for the short-term secondary offloading fix.

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Astro Teller, who runs Alphabet’s moonshot X lab, has a useful way of thinking about hard problems. After learning about it a while back, while trying to build a commodities data product. I frequently offer it up as unpaid advice to builders that I genuinely want to see succeed.

Teller’s principle is simple. If your goal is to train a monkey to stand on a pedestal and recite Shakespeare, you should start with the monkey. The pedestal is easy. Anyone can build a pedestal. But if you build the pedestal first, you create an intoxicating illusion of progress. You can host a press conference, unveil the pedestal, invite journalists, and demonstrate what a fine platform it is. You have, however, made exactly zero progress on the actual hard part.

The current campaign to mobilise local capital is becoming too performative and too close to pedestal construction for my comfort.

Let me be precise about what I mean by that, because I don’t want this to be mistaken for opposition to local capital mobilisation. I said at the start: it is noble, needed, and prudent. I have and support friends who advocate it, as I do myself. Iyin and a host of other enterprising leaders have proven it is doable. And at Norrsken East Africa, we’re working on one such vehicle from a credit philosophy. So I am a bona fide local capital mobilisation supporter.

But it is the tractable side of the problem. It is the part that fits on a conference stage, that lends itself to panels and policy papers and impassioned LinkedIn posts. Mobilising capital is legible. It is morally intuitive. “Invest in your own continent” is a sentence that needs no footnotes.

The monkey is everything else. Reforming pension fund mandates so that allocating to alternatives doesn’t get a fund manager fired. Building the legal infrastructure for transferable equity stakes across jurisdictions that don’t currently recognise each other’s securities frameworks. Creating clearing and settlement mechanisms that work across currencies and regulatory regimes. Establishing the market-making function—someone willing to be the buyer when everyone else is selling—without which any exchange, public or private, is just a listing board with pretensions. And generating the data transparency and accounting standards that let any buyer trust a price, whether in private or in public.

None of this is conference material. None of it fits in a tweet. All of it is necessary before a single shilling of mobilised local capital can do what us mobilisers promise it will do.

Without the monkey, the pedestal is a decoration. The capital might arrive, but so long as it finds no functioning exit architecture, it will sink into the bog. The people who mobilised it may declare victory. But the people whose money it is discover, slowly and then all at once, that they are the 21st century equivalent of the 1580 commenda partner who can’t sell his share of the voyage.

The equation must balance on both sides, and the sequencing matters.

We may need to urgently (re)take up the task of building the exit architecture and the capital mobilisation advocacy at the same time. But ahead of the platforms. Platforms are pedestals and easy to construct.

What is more important are the conditions that make platforms functional. Legal transferability. Regulatory frameworks that protect investors without strangling participation. Regional harmonisation so that a Kenyan pension fund can hold a Nigerian equity stake without navigating seven layers of currency controls. Price discovery mechanisms that give buyers and sellers enough information to agree on a number.

Then mobilise capital into an ecosystem that can actually metabolise it.

Oh, and this goes without saying, that we cannot afford to ignore foreign capital in the process. Local capital may be persuaded to be catalytic (although it is often hesitant to take losses), but on its own, it is rarely deep enough to fund late-stage growth. It also has other priorities—building roads, bridges, hospitals, schools, and funding factories, security, and so forth.

A more practical model, perhaps, is a conveyor belt: local capital de-risks companies early, proving the model and building the track record. Foreign capital enters later, at scale, to buy out local early-stage positions. That buyout is the exit. It is the liquidity event that rewards the local investor who took the early risk, and it only works if the legal and institutional infrastructure exists to make the transfer clean, fast, and enforceable.

This is not a call to slow down. It is a call to work on both sides of the equation simultaneously, with an honest acknowledgment that some sides are much harder than the other—and that the hard bits are exactly the parts being neglected while we build ever more elaborate pedestals.

In this (rare) case, we can train the monkey or monkeys while building the pedestal in parallel.

Abraham Augustine

Abraham Augustine is the Principal Consultant at Aperçu Holdings, a boutique advisory firm for private technology firms and fund managers in Africa. He also serves as Ecosystem & Marketing manager at Norrsken House Kigali, the main East Africa hub of Norrsken, a global community of founders, funders, thinkers, and advocates united by a shared belief in innovation and entrepreneurship as powerful tools for positive change.

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