RI Interview: Leapfrog: Investing in financial inclusion in Africa and Asia

When you are fundraising, it should help to have President Bill Clinton announce your arrival.

But, the global financial crisis hit one week after LeapFrog Investments launched in September 2008 at the Clinton Global Initiative foundation annual meeting.

It was a difficult start but early support from high profile names such as Pierre Omidyar, founder of Ebay, and the George Soros Foundation have helped LeapFrog grow into a $1bn business today.

The private equity firm focuses on financial inclusion in Africa and Asia and claims to be the first billion-dollar group of its kind dedicated to impact investing.

It centres on the philosophy that you can build big for-profit businesses that nonetheless tackle some of the world’s most pressing problems, says partner Stewart Langdon.

It recently sold a major stake in emerging markets mobile insurer BIMA to Allianz Group as part of a $96.6m transaction.

LeapFrog has backed 23 companies focused on providing insurance, savings and increasingly healthcare in 33 countries. It estimates that its services reach 140m people.

Langdon says it has a very distinctive strategy on impact focused on the ‘emerging consumer’.

“Emerging consumers who are living on over $10 per day are rising towards the middle class, meaning they are starting to enjoy some discretionary income.”

Langdon says that as part of this journey access to credit is vital to manage volatility in income. “You can start to acquire assets, savings or insurance. People get really bored when you talk about insurance, as it sounds unglamorous, but the protection element if a breadwinner dies or a family loses an asset is really important.”

On the commercial side, Langdon said the ‘emerging consumer’ is a very attractive business opportunity. “The tailwinds behind this are so profound. If you look in population terms the world in 2050 will have eight billion of its 10bn people in Asia and Africa. And you have the technology element. A lot of these people are on the mobile network and getting smart phones which makes for a big business opportunity and an important social mission.”

LeapFrog does not disclose the returns of it funds but investors include Australian super fund Hesta, IFC, AXA, JP Morgan, Prudential and Morgan Stanley.Langdon says its lens on impact investing is fully commercial, though admits misconceptions still exist in the market about the impact investment space.

“Our investors see it as a commercial activity. But they really like that they can deliver on the impact side without having to compromise their fiduciary duty. I don’t think we would be able to get that capital from so many mainstream investors if we didn’t have this very commercial approach to what were are doing.”

In recent years, a number of private equity firms are identifying impact as a big opportunity. The industry as a whole is growing as investors seek to generate higher returns in a low-yield environment, with an all-time high of $2.83trn private equity assets under management as at June 2017, according to data provider Preqin. It estimates that 53% of investors plan to increase their allocation to private equity over the longer term, calling it a “record proportion”.

Alongside this, interest in impact investing is burgeoning. Barclays’ latest Impact Investing Report, surveying 2,000 investors, finds almost half of respondents under 40 had made an impact investment.

Private equity giant KKR is reported to be fundraising for a $1bn impact fund, Bain Capital Double Impact Fund has $390m under management and TPG Growth’s Rise Fund, with U2’s Bono and Jeff Skoll as founders, has raised $2bn.

“People are seeing the returns that are generated,” says Langdon. “And on some level people think it is the right thing to direct more capital to solving the world’s problems. Also young entrepreneurs increasingly want to build mission-driven organisations and as a company, to access young talent, you need this philosophy.

Langdon says Leapfrog welcomes more players in the space. “It may surprise some people that I have this view but it provides a lot of credibility. To see such big-name fund managers getting involved in impact shows what a serious industry it is. I hope they are successful as with more credibility more money will come in.”

Alongside its focus on the commercial side, LeapFrog takes impact measurement just as seriously, says Langdon. Portfolio companies report on impact quarterly. It has developed a proprietary in-house measurement framework, FIIRM, which incorporates financial, impact, innovation and risk management factors.

On impact it looks at three metrics, says Langdon – quality, relevance and affordability of products.

He explains: “I always use insurance as an example. If you look at affordability, that is a very easy measure because you know how much of a premium you are charging each quarter. You determine relevance by looking at the claims ratio; if people are not claiming insurance it means the product is not relevant. To determine quality, we look at the level of renewals.”

Langdon says the litmus test for any impact investment fund is measuring regularly enough and rigorously enough. “We think our framework is up there with anything else in the world.”One issue identified with private equity impact funds is the challenge of exits and whether the new owners will abandon the approach.

Landon admits it is a big challenge: “We’ve taken the view that the best thing to protect yourself around this risk is simply build a great business which is growing quickly, profitability. Then whoever is buying is going to be interested in continuing with that.”

Langdon does say LeapFrog would refuse a sale if they felt the new owner would be unethical. But issue has never arisen.

“You can’t stipulate in the purchase agreement with the next owner what they have to do. When you sell the business it’s theirs. I think the fact we don’t compromise on commercial returns really helps a lot.”