Global impact fund manager LeapFrog Investments saw a record year of deployment in 2020 and expects this year to be another bumper season amid growing investor interest in impact investing.
LeapFrog invests growth equity in digital financial services and healthcare companies across Asia and Africa.
LeapFrog’s partner in Singapore Fernanda Lima told DealStreetAsia in an interview that while the COVID-19 pandemic has accelerated trends conducive to investments in digital businesses, it has also exacerbated the economic hardships of many people.
“What we see is that there are more emerging consumers for us to serve,” Lima said.
LeapFrog recently reported a 22% rise in the value of its portfolios in 2020, as companies in its portfolio recorded average revenue growth of 26% over the year before.
As a measure of impact, insurance companies in LeapFrog’s portfolio paid claims totalling $629 million, 37% more than the year before. Remittances grew 55%, to a record value of more than $6 billion, or an average of $500 million a month that was being sent.
At the same time, the number of healthcare services – from medication to medical equipment, consults and diagnostics – that portfolio companies provided more than doubled to 21,700.
LeapFrog’s portfolio companies include Indian microfinance platform Fincare, and Indonesian insurtech startup Pasarpolis.
LeapFrog, which started in 2007, has raised more than $2 billion across four private equity funds from institutional investors. Earlier this year it secured $500 million from Singapore state investor Temasek, which will become an anchor investor in its funds.
The market for impact investments grew to $715 billion in 2019, from $502 billion a year earlier, according to the Global Impact Investing Network.
The sector, which raised more than $76 billion across more than 90 funds globally in 2019, has also drawn in global buyout firms. KKR, which closed a $1.3-billion global impact fund last year, is said to be in the market to raise a second fund. Rivals TPG and Bain Capital have each raised two funds, totalling more than $4 billion, and nearly $1.2 billion, respectively.
Still, there is room for more funds and managers to come on, Lima said.
“The problem is so big, right? We’re talking about 4 billion people in our markets, of which 2 billion don’t have access to healthcare. So, the opportunities are huge too.”
Edited excerpts of the interview with Lima:
How do you assess the pace of fund deployment over the last year in the backdrop of the pandemic? What is the opportunity set that you are seeing?
2020 has been a record year for us in terms of deployment. And this year is going to be even better with what we are seeing.
Obviously, the pandemic has affected different economies in a different way, not only in terms of the health crisis, and how they manage it, but also how the economies have reacted to lockdowns and isolation, and what would be the impact in those countries.
But overall, I think the region has performed reasonably well. Our investment thesis and appetite for deploying in the region haven’t changed. What we see is that there are more emerging consumers for us to serve.
You’ve probably seen the reports coming from the United Nations, that the pandemic has increased inequality, has brought people back into poverty in large numbers, and has affected the income of the families.
It is even more important now that we actually distribute healthcare and financial services to this population.
The pandemic has actually accelerated some of the megatrends that we invest behind. We clearly saw an accelerated rate for digitalisation. We invest in digital businesses or mainstream businesses that are investing in digitalisation, and we are seeing the potential of reach [in terms of emerging consumers] actually increase.
Which are the key focus markets for LeapFrog?
We don’t have fixed allocations, but typically, we would deploy a third [of our funds] each in Africa, India, and Southeast Asia.
[Within Asia] our key markets would be India, Indonesia, and Vietnam. Opportunistically, we look at Sri Lanka – where we made a significant investment in the third-largest life insurer Softlogic Life. And we look for opportunities in Bangladesh, Thailand and the Philippines.
Typically, we invest between $40 million and $70 million for a potential majority or larger minority stakes. We always take board representation and because we are specialist investors in financial services and healthcare, we tend to be quite active in portfolio companies.
So due to a combination of the size and maturity of the companies and especially because of exit opportunities, we tend to focus on these markets. Vietnam in particular has been an economy that has performed quite well, while levels of penetration of insurance are extremely low.
So when we look at target markets, it’s not only a combination of the macroeconomic situation, but also what’s the opportunity for emerging consumers in financial services and healthcare, and the companies that are operating in this sector at a scale we require.
How are the impact investment opportunities evolving in Southeast Asia?
We invest in companies that have a positive social impact. However, we also filter for profit. So we are looking for companies that are well-governed, well-managed and growing.
We are specialist, private equity growth investors in two industries that typically will grow two times, sometimes three times the GDP of the country. Financial services and healthcare will grow at a rate of over 10%, so double or triple the growth of the economy in general. And then within financial services and healthcare, we will focus on companies that are serving emerging consumers. And because they are serving this large segment that has very low penetration of the products, there is huge demand, and so the growth of these companies tends to be [even stronger].
If you think of how impact investment is evolving in Southeast Asia, we can look at it in two dimensions.
One, how investors are interested in Southeast Asia in general. We see that not only in family offices that we have as our LPs but also in institutional investors and large firms such as Temasek. The Temasek investment was the largest allocation for impact investments; it’s a milestone and leading the way among institutional investors.
Two, the opportunity set because of the lack of penetration. The penetration is extremely low for pensions, investments, insurance, and formal credit. All Southeast Asian markets offer a tremendous opportunity for the distribution of financial services and healthcare in general. And as this economy is growing, plus the impact of the pandemic increasing poverty, unfortunately, and increasing the [adoption of] digitalisation, we see our role here even larger than before.
What’s driving increasing interest in impact investment?
For LeapFrog’s Fund 1 and 2, the main source of capital has come from Europe and the US. This has changed with Fund 3, and obviously, with the partnership with Temasek.
We are seeing more [interest from] governments, development finance institutions and institutional investors in general, as well as family offices. We see a lot of generational change in the family offices, younger members of the family deciding on the rotation for their family offices; people are much more attuned to ESG and impact represent, and the opportunities. And now with some products that are at scale – LeapFrog has roughly $2 billion under management – it’s not a niche investment product.
Impact [investing] is actually mainstream, offering opportunities for family offices, institutional investors to invest the way they like with the controls they like.
The pandemic acts as a bit of an accelerator. We’re seeing where the needs are, not only on the environmental issues but on the social aspects as well. So I think there’s awareness in general, but the industry has also matured and is now able to offer products with authentic impact, at scale.
In Europe, there are certain government incentives, for example, for funds that are quantified as impact investment funds.
So there is a combination of governments taking the initiative, as well as the second generation family offices with a different level of understanding, interest, missions and personalities.
How do you measure profits and impact?
We have two dimensions to how we measure positive social impact. One is the number of what we call emerging consumers who are served by our portfolio companies. We use the World Bank definition of up to $10 a day, income per capita in the family.
We estimate the number of emerging consumers our portfolio companies are serving with financial services or healthcare services.
Two, we look at the quality of the products, and how meaningful they are. In insurance, for example, we look at how affordable the premiums are; if the product is being sold in a fair and transparent way; if claims are being paid properly. We track claims ratio – if there’s an insurance company that has a zero claims ratio, maybe the profit is great, but the purpose is not great, right? Because the products are not meaningful to the individuals and families that are buying their policies.
With every fund we launch we have obviously our financial goals, which are very much market, private equity, growth stage returns; and we have our impact goals that are typically measured in the number of emerging consumers.
For us, the choice of healthcare and financial services is very much related to the theory of change, providing safety nets for emerging consumers. We started with micro-insurance, which was non-existent, distributing insurance through mobile phones.
We support them with springboards, which we’ll call credit and products that they don’t have access to, to build their wealth. [Financial products such as] home financing, health insurance, life insurance, pensions, investments, savings deposits.
What about returns? There is still scepticism about the ability of impact funds to generate market-rate returns for investors.
If you look at the industry, you see a wide spectrum of impact investors.
We are not giving up on financial returns, we are not giving up on the stringent Investment Committee discussions. We want to profit with purpose. Then there is impact investment all the way to grant-giving – you invest your capital, but you don’t expect to get anything back.
So it also depends on what the LPs are interested in, and where they fall into the spectrum. There are foundations, family offices, or even institutional investors that perhaps have an allocation for lower returns within the impact spectrum.