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Tuesday, 24 January 2017
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Jul 1 2013 | 9:02am ET
LeapFrog, the private equity firm founded by Andrew Kuper and Jim Roth, raises money to invest in “purpose-driven” businesses—businesses that have a social impact as well as delivering healthy economic returns. The firm's chosen field is micro-insurance and its first fund, which closed in 2010, is now almost fully invested in companies “up the value chain” of the insurance industry in Asia and Africa.
Last year, LeapFrog’s portfolio companies saw an average revenue increase of almost 25%, while at the same time bringing financial services to 23.7 million people. The European Investment Bank is currently mulling a €20 million investment in a second LeapFrog fund, and although he declined to discuss plans for this new vehicle, Kuper was happy to discuss his experience with impact investing during a recent interview with FINalternatives' Senior Reporter Mary Campbell.
LeapFrog's portfolio companies saw an average revenue increase of 24.6% across the board in 2012, did those results surprise you?
It didn't surprise us, it pleased us, though it might have surprised some others who are used to seeing purpose as something that's soft and woolly. I've been arguing for sometime that there's a competitive advantage to purpose-driven businesses...in all sorts of respects. Purpose-driven businesses are able to attract better talent because they offer money and meaning instead of just money; they're able to align the organization more around the shared goals, which we know has powerful effects and reduces friction and all sorts of transaction costs; they're able to build better brand trust with customers; they're able to be more resilient.
Interestingly, [Indian financial services company] Shriram CCL, in the face of quite difficult market conditions in India last year, performed very well and outperformed its competitors quite significantly, partly because it's very aligned and organized and values-driven, and has a relationship with the customers where it could shift its product set.
Your first fund is 84% invested, are you looking at any further investments for this fund?
[Yes,] we are looking primarily at deals in Southeast Asia, but also considering a few in South Asia and Africa for this fund. We're only doing one or two more investments in this fund, because it's near to fully deployed and we're very heavily concentrating on portfolio management and helping our companies perform well.
We've been working with them on geographic expansion into new markets; product expansion, so if they were doing life and property, moving into health and the like; and then distribution expansion so, for example, getting Bima, our mobile insurance company, together with our insurance carriers, to reach new groups of people and to develop new products that are especially low-cost and have large reach.
You told a gathering of the Clinton Global Initiative that you would like to see the launch of '100 LeapFrogs.' It seems that your ambitions go beyond your own business—how would you like to see this field develop?
What we are trying to do is build an enduring institution that much like a McKinsey or a JPMorgan, that comes to be exemplary within that field,...that sets the gold standard for that field in several respects. And then we hope to help an industry grow up around us that is filled with intermediaries between the capital markets and pro-poor and purpose-driven [businesses]. And so when I stood with President Clinton and called for the launch of 100 LeapFrogs, that's what I was really calling for.
When I started LeapFrog, there was no term for impact investing, there was no defined notion of the continuum between, on the one hand, the strategic philanthropy that some players do and, on the other hand,...the sort of outsized returns and impact that LeapFrog is seeking. There was just a differentiated sense that sometimes it's nice to do good stuff with your investment [laughs]. And so I'm very pleased to see that five years later, really, a whole field has developed.
You were an invitee to the recent G8 Impact Investment Forum in London, what were your impressions?
[W]hat was interesting there was just how significant the roles are that different actors can play within the field. Government can enable things in all sorts of ways by creating various enabling regulations and by driving certain agendas and certain kinds of support for innovation and tax relief for certain kinds of companies and so on. But the other thing is you get is a sense of institutions doing social benefit bonds, you get a sense of institutions pursuing fund-of-fund strategies, private equity fund strategies within emerged markets and within emerging markets. You get a sense of institutions that are finding relatively small, early-stage players and backing them like venture capital, and institutions much more like growth capital helping businesses to reach millions of people. And so what really becomes clear is that there is an entire ecosystem that is rapidly developing, that is drawing in people of extraordinary caliber because so many people have...I think, been seeking purpose beyond profit.
Why focus on providing financial tools for the poor?
Muhammad Yunus said the poor are bankable, but we think it goes beyond that, we think the poor are money managers.
[P]eople have incredibly clever, innovative ways of managing their little bit of money...We're so used to seeing the Oxfam commercials, but if you look at a book like Portfolios of the Poor or a book like Poor Economics, what becomes apparent is that 15% of the poor are destitute or extreme poor, where aid and charity are essential and important, but 85% of the poor are potential consumers, are people who are looking to get quality services and goods and will pay for them if they're affordable.
When we first did the 100-country landscape study on insurance to low-income people, two of my partners worked on this study, we found that there was this billion-person market and people said 'Oh you mean need,' and we said, 'No, willingness and ability to pay.'...Once you flip it that way, you start to say...'These are agents, these are not beneficiaries. These are people where we've got to craft the right product and persuade them that they should buy it rather than feel we're giving them a gift.' And that fundamentally changes the value proposition that's developed.
I studied philosophy for a long time and the promise of the Enlightenment, the promise of the Industrial Revolution was agency, it was that people would have control over their own lives. And what we're seeing here is that that promise was realized only for the few, the relatively wealthy in developing societies and in developed societies; now, for the first time in history, you may be able to realize it for the majority of humanity.
We're also lucky to be at a moment where you don't have to choose between Mother Theresa or Donald Trump, because neither is a particularly attractive value proposition for a life, if you ask me [laughs]. I think you really can try to find something that is a hybrid of the things that are meaningful— building assets for your family and your life and at the same time helping others do the same. The people exiting from universities now have just a whole set of options that people didn't have 20 or 30 or 40 years ago, for a hybrid approach to their lives and careers. I think it's very exciting.