Do-Gooder LeapFrog Seeks Big Profits

Name: LeapFrog Investments

Offices: Incorporated in Mauritius with teams also in Johannesburg, Singapore, London, Sydney,and Edinburgh

Founder: Andrew Kuper. Co-Founder: Jim Roth

Strategy: A profit-with-purpose investor in financial services businesses in Africa and Asia. Targets products and markets with the largest potential for both financial returns and social impact.

Number of Professionals: 25

Latest Fund: $135 million fund closed in May 2010. Currently raising new fund with a target of 300 million euros ($397 million), according to the European Investment Bank.

Principal Backers in First Fund: Accion, Calvert, EIB, Flagstone Re, FMO, Haverford, International Finance Corporation, J.P. Morgan, KfW, Omidyar Network, Proparco, SCOR, Soros EDF,TIAA-CREF, Triodos, Waterloo Foundation

That’s a difficult concept for many people to grasp. Just ask LeapFrog founder Andy Kuper. He’s constantly battling this misperception in the marketplace that Mauritius-based LeapFrog, a growth equity specialist, is just another idealistic do-gooder, and not a real private equity firm concerned with profits and returns.

“We’re all used to choosing between Donald Trump and Mother Teresa,” said Kuper. But the two are not mutually exclusive, he said.

LeapFrog is a case in point. The firm’s investment thesis, dubbed ‘profit with purpose,’ suggests there’s big money to be made in emerging markets by dramatically improving the lives of billions of people who are just now rising out of poverty.

Leapfrog specializes in financial services beyond credit, with a particular focus on micro-insurance, savings, and pensions. The firm typically invests between $5 million and $20 million in target companies in its eight core markets: Indonesia, the Philippines, Sri Lanka, India, Kenya, Ghana, South Africa, and Nigeria.

LeapFrog has seven portfolio companies, including insurance company AllLife, the only South African insurer of people with HIV/AIDs. Another company, Apollo, provides life and non-life insurance products in Kenya, Tanzania, and Uganda.

The idea is that if, say, a farmer wants to plant a new crop that will triple his income, but fears flood or a drought would leave him destitute, he can now safely take the risk and rise out of poverty thanks to an affordable insurance policy.

Other investments include a $15 million stake in a unit of Shriram Group, an India-based financial services company targeting the lower-end of the consumer market, and a $15 million investment in Mahindra Insurance, a fast-growing, profitable company providing life, property, and health insurance to millions of people in rural and semi-urban India.

The firm’s most recent investment is BIMA, a company built on the idea of bringing more affordable insurance to people in emerging markets via their mobile phones.

LeapFrog officially closed its first fund in 2010, during the global economic meltdown, with $135 million from a range of institutional investors. They include JP Morgan, money managers TIAA-CREF and Calvert Investments, global insurance organizations SCOR and Flagstone Reinsurance, development finance institutions Accion Frontier Investments Group and the International Finance Corporation, and ultra-high net worth individuals like George Soros and eBay founder Pierre Omidyar.

“Looking at our current investor base, we have a nice mix ranging from those that are all about profit first to those all about purpose first,” said Kuper. But, like any investor, they still want to see a return on their investment.

On the social side of the equation, LeapFrog has delivered. Its portfolio companies offer a variety of financial products and services that now reach nearly 25 million low-income people.

“Governments and nonprofits are very important, but they have failed to solve the problem of global poverty,” said Kuper. “We have opened the capital markets to businesses that serve millions and millions of low-income people in just four years. I don’t think there has ever been a nonprofit that has equaled that.”

On the economic side, the story is a little fuzzier. As yet, there have been no exits for LeapFrog. Kuper says the firm has had opportunities to take money off the table, but rebuffed all acquisition offers—from the likes of larger insurance companies and private equity firms—because the growth curve of its portfolio companies is still very strong.

For instance, the valuation of AllLife has increased 50 percent, based on an external financing event, since LeapFrog became involved with the company. Across its entire portfolio, company revenues rose an average of 24.6 percent last year, says Kuper.

LeapFrog is raising a second fund with a target of 300 million euros ($397 million), according to the European Investment Bank. Kuper wouldn’t discuss the new fund. “What I can say is that we’ve seen a great deal of investor interest in the market for funds two and three from multiple players,” he said. “There are a number of players coming online with bigger funds, as well as major players moving into impact investing because they see it as a very appealing opportunity.”

Andrew Rothery, a founding partner of Archer Capital, the largest private equity firm in Australia, said he has no doubt that Leapfrog will meet its overall funding target and that the firm “will have a ‘profit with purpose’ fund that is an order of magnitude larger than anyone else in the marketplace.” Rothery is an investor in the new fund and says he is “blown away by the passion and focus” of the entire LeapFrog team.

Kuper said that once you look closely at impact investing—which is intended to generate social good as well as financial return—it quickly becomes less exotic and more logical. “It becomes clear that purpose-driven companies will outperform their peers,” said Kuper. “They are able to attract greater talent, greater customer trust, greater popularity in general, and that results in better performance and juiced returns for us as investors.”

Financial Returns

The social impact is all well and good, but it’s the financial impact that really matters. “There are hard-ass members of investment committees, and if the social returns are there in five or six years, but the financial returns are not what they need to be, you will find those institutions deserting the impact investing asset class,” said Rothery.

In general, Kuper sees impact investing gaining steam as a distinct category within private equity. A 2011 JP Morgan report predicted that by 2020 impact investing could reach $1 trillion, generating returns over ten years of between $183 billion and $667 billion. Indeed, there is increasing evidence that a firm like LeapFrog is on the vanguard of something very big.

But, of course, its investment approach is also fraught with peril. In India, for instance, sudden regulatory changes in the marketing of insurance products could have derailed LeapFrog’s investment in Shriram and Mahindra. But those companies were able to make the proper shift and quickly adjust to the new requirements. Meanwhile, election upheavals and surging violence in Kenya threatened LeapFrog’s investment in Apollo. That company was able to weather the storm and continue its growth, as more consumers turned to insurance in the face of uncertainty.

Going forward, LeapFrog will continue to look for high-growth businesses that can scale from tens of thousands of customer to millions of customers. It will also look for strong, ambitious management teams that can build great companies and guide them toward exit. For its part, LeapFrog will continue to take a very active role in its portfolio companies.

“We look for teams that want to partner with us in a strong way and are not just looking for a passive investor,” said Kuper. “We are very hands on with our companies with in-depth 100-day plans and strategic plans over three to five years. Our teams are on site at least one week a month so management feel like we are real partners lending genuine support. We don’t believe in empty promise of, ‘Oh yes, we are there for you,’ but really we are off doing the next deal.”

Besides Kuper, the LeapFrog team has seven other partners, including co-founder Jim Roth, a pioneer in commercial microinsurance, Doug Lacey, a former divisional chief executive at African Life, the largest insurance company in Africa, and Michael Fernandes, the former executive at Khazanah Nasional, the sovereign wealth fund of Malaysia.

“The quality of people that LeapFrog has been able to recruit is amazing,” said Archer Capital’s Rothery. “They have attracted people who were on the fast track to partnership at places like Goldman Sachs and McKinsey, but who ultimately wanted something more fulfilling. That is the power of impact investing.”

(Correction: One of the target markets for LeapFrog Investments is Ghana, not Guyana. Andy Kuper is the founder of the firm, not co-founder.)