NB Financial Innovation
NexThought Monday: Impact Investing ‘Skeptics Have Been Defeated’ – Our Q&A With LeapFrog CEO
Whereto next for the $1 Billion-plus impact Fund manager?
To many of us, insurance is, well, boring. There are two key reasons why. One, in developed markets anyway, many of us (but unfortunately far from all of us) just expect it to be there. Like roads, or plumbing, or air, insurance hovers in the background. You set it up, pay for it and then promptly forget about it – until you need it. The second reason is the perception that insurance can’t be innovative, let alone an exciting business or global development tool.
Disrupting those preconceptions is LeapFrog Investments. Operated principally as a private equity fund manager, LeapFrog’s portfolio of investment companies make insurance and financial services their business, and their clientele are those who earn $10 or less a day. Reaching those consumers has become an attractive investment and social development opportunity, both for global footprint insurers like Prudential Financial Inc. and major development organizations such as the Overseas Private Investment Corp. Together, these two entities have (in separate investments) supported LeapFrog to the tune of more than half a billion dollars in just the last two months. Each has entrusted LeapFrog to identify, invest in, mentor the management of and profitably exit insurance and financial service companies that place a premium on inclusion. (LeapFrog says it has successfully exited two of its investments).
I spoke with Andrew Kuper, the Sydney-based founder and CEO of LeapFrog, soon after OPIC announced a $200 million investment in LeapFrog’s Emerging Consumer Fund III, which will make investments in financial services and health care companies operating in South Asia, Southeast Asia and sub-Saharan Africa. We chatted back and forth over email about LeapFrog’s trajectory, the shakiness of emerging markets, and the challenges of reaching consumers for whom insurance can provide both a safety net and an economic springboard.
Scott Anderson: With the OPIC deal, LeapFrog Investments has now raised over a billion dollars in investment capital. What will the OPIC investment mean in terms of how LeapFrog will grow, your future potential investments and the ultimate impact you to make?
Andrew Kuper: LeapFrog is the first equity impact investor to cross the $1 billion mark. So OPIC’s approval on up to $200 million, which allowed us to cross this historic threshold, marks a transformative moment not just for the firm but for impact investing. The skeptics have been defeated, by emphatic demonstration of scale and commercial success.
The OPIC approval is also the largest single commitment in history to an impact fund manager. So it’s also an important signal for other major financial investors, about the potential of companies in Africa and Asia to serve billions of rising consumers, achieving what we call Profit with Purpose.
While we should celebrate these breakthroughs, we should also realize and be humbled by how much remains to be done. We need to be ready to answer more specific critiques of impact strategies, with robust data and a host of examples.
LeapFrog will invest the capital in financial services and health care companies. We will maintain our focus on high-growth and purpose-led companies that offer emerging consumers the essential tools they need to improve their lives. We just announced, for example, an investment by which we acquired a majority of UT Life in Ghana, which uses a bank distribution model to reach a large number of customers who are otherwise hard to reach. We think the business is poised to grow massively.
Ultimately, alongside top-tier returns, we aim to achieve financial services and health care coverage for tens of millions of underserved individuals – helping end cycles of poverty.
SA: LeapFrog began by focusing on insurance for low-income people and then moved into a number of adjacent financial services such as pensions, savings, credit and payments. With this recent investment announcement, LeapFrog said it would be exploring health care in addition to financial services. Why is this the natural next step for you? What does that mean in terms of the types of companies you might seek out for investment?
AK: Insurance and financial services were a natural place to start, because so few emerging consumers (those earning between $1.25 and $10 per day) have access to the financial tools needed to improve their standard of living. Today, our companies serve 51.8 million people, of whom more than 36 million are emerging consumers.
As we worked with portfolio companies, we found that health events and ongoing illnesses were major causes of hardship and suffering. As we acquired leading health insurers in markets such as Kenya, Thailand and Indonesia, we also saw that many of these challenges are avoidable or effectively treatable.
The logic then unfolded quite naturally: Our companies expanded health insurance coverage to millions of people, profitably. Our team became ever more expert on understanding the provider part of the equation, such as clinics. We also accessed unique data sets around morbidity and mortality in various markets, and saw both patterns and opportunities.
So, as you can see, health care was a natural extension for us. It enables us to leverage our specialist knowledge of the emerging consumer and our exposure to health insurance.
Finally, a deep bench of talent is always essential before we expand. As it happens, our team had decades of experience delivering health care solutions and investments in emerging markets. LeapFrog partner Michael Fernandes, for example, led Khazanah Nasional Berhad’s Health portfolio, which was rolled up into IHH Healthcare and an IPO executed for close on $7 billion.
From all this, you can tell that we will be seeking out opportunities where companies are serving many people, whether hospitals, pharmacy chains, medical equipment providers, or other essential goods and service providers. We will invest with particular enthusiasm where there is, or we can help create, a data or distribution edge.
SA: You and your colleagues at LeapFrog often refer to “emerging consumers” or those people generally making less than $10 a day, who are purchasing financial services from investee companies, often for the very first time. But 2015 was a very tough year for emerging economies, in terms of both equity markets and consumer spending, trends that affect those emerging consumers. How does LeapFrog evaluate companies in the midst of some fairly challenging macro-economic trends?
AK: LeapFrog focuses on a market of some 2 billion people across Africa and Asia, who are chronically under-served. They are rising toward the middle class, but lack access to essential services to rapidly improve their lives. Market fluctuations may mildly slow down or speed up that long-term trend. But demography is destiny.
The facts remain: Emerging markets are growing far faster than developed markets, and will continue to do so. Hundreds of millions of hard-working and aspirational consumers and producers in the likes of Indonesia, India, Kenya and Nigeria are not going to vanish. They are shaping the future.
The companies we look for are those that are tapping this opportunity, at significant scale, or at least have the potential to do so rapidly. Take our current investee companies. Yes, they reach 51.8 million people. But equally strikingly, these companies are growing at a tremendous pace: on average, they bumped up their top-line by 60 percent in 2014 and 40 percent in 2013. These are rates that the vast majority of businesses in developed markets can only dream of.
Each of these companies is an innovator with core competitive advantages. It might be data analytics, mobile distribution, retail distribution partnerships, high-quality governance and management teams, or something else. Part of the skill is picking and partnering well with the right co-owners and managers.
We also find that purpose-led companies that operate ethically, have exceptional governance, and are focused on achieving both social and financial impact, are more resilient in the face of any macroeconomic headwinds. This is common sense, not grand theory: shareholders, staff, suppliers and customers are “stickier” when they believe in and trust the company.
In short, market fluctuations are realities to be confronted and managed; but their impacts are mitigated and overcome by strong partner selection, portfolio diversification (our investments currently operate across 21 markets), high growth rates and intrinsic resilience built on Profit with Purpose strategies.
SA: When LeapFrog first launched in 2008, the notion of designing products and services for the base of the pyramid was fairly novel. But now, especially with the proliferation of mobile technology, the marketplace is more competitive. How has that affected what you do? Can you provide a few regional examples perhaps?
AK: Scale matters so mobile technology matters – billions of people have joined the grid, as consumers and producers, who are seriously under-served, and mobile is the fastest way to reach them.
Our portfolio company BIMA, one of the world’s leading mobile insurers, is a prime example of this. By working through low-cost mobile channels, BIMA offers insurance policies for as little as 24 cents per month. BIMA bridges the gap between insurers and mobile phone providers: It helps insurers gain access to low-cost and vast mobile distribution networks, and helps mobile phone companies increase customer loyalty through the addition of a value-added product that keeps customers coming back. In little over 5 years, BIMA has signed up some 20 million subscribers across 14 markets. It’s also growing by some 500,000 subscribers per month. Almost 97 percent of BIMA’s customer base is accessing insurance for the very first time.
This kind of business model is exciting both financially and socially. The scale and gravity of the problem can now be matched by the scale and speed of the solution.
We need many such businesses, and many investors, working in the space, and that’s something we’ve encouraged from day one. When we launched LeapFrog with President Clinton in 2008, we called for the emergence of “a hundred LeapFrogs” and “a hundred partnerships with LeapFrog.” The more activity there is in the market, the better for all participants, especially the leaders and market-builders.
SA: LeapFrog uses its own, proprietary impact metrics toolset: FIIRM (Financial, Impact, Innovation and Risk Management). How does FIIRM differ from some of the other impact metrics tools out there?
AK: LeapFrog sees measurement as a critical enabler to achieving top-tier financial and social returns. So, early on, we developed FIIRM, the leading Profit with Purpose measurement framework for insurance and related financial services. The framework uniquely combines social, financial, innovation and governance KPIs (key performance indicators) to measure and drive company performance.
Driving performance, not only measuring it, is the critical point here. We don’t believe in social, innovation and governance factors being tick-box matters for after-the-fact reporting. We believe they can empower management, as part of a dashboard for understanding the key drivers of enterprise success.
We believe this is so fundamental that we use the FIIRM framework across the entire investment lifecycle – for due diligence when assessing a potential investment, to drive value during the life of that investment, and to ensure a responsible exit when the company graduates on to its next owners.
FIIRM has certainly informed broader industry developments: Its KPIs were used as a foundational frame of reference for the Impact Reporting and Investment Standards (IRIS) for insurance. And the focus on driving-beyond-reporting has become a mainstay of the industry.
All that said, we would never claim a monopoly on metrics that matter. We are eager to learn from others and share our thinking. Our Head of Impact, Sam Duncan, collaborates extensively with top impact investors, IRIS, the UN PRI and others. We want, in many ways and with many partners, to build the field on which we all leap.
Scott Anderson is the managing editor of NextBillion.
Top image: A BIMA customer in Ghana. Images courtesy of LeapFrog Investments.