The leaders of Leapfrog Investments are out to prove those who doubt that impact investing can scale and attract big dollar figures wrong. Last week, with a big commitment from the Overseas Private Investment Corp., it took a step in that direction as it became the first billion dollar equity impact investing firm.
Leapfrog, which invests primarily in African and emerging Asian countries, has always been “obsessed with scale,” according to CEO Andy Kuper. Since then the obsession has grown both because scale matters in financial markets but also because the scale of the need from the poor is immense. It’s a balance he describes as “scale for profit and purpose.”
Leapfrog’s strategy has been to have development finance institutions anchor each of their fund raises, but the bulk of the capital is coming from major private sector investors, including Zurich, Swiss Re, TIAA-CREF and AXA.
Leapfrog’s current funds reach 51.8 million people, the majority of which are low income and emerging customers in Africa, Asia and Latin America, who live on less than $10 a day. The company makes private equity investments of between $10 million and $50 million primarily to businesses in the financial services, insurance and healthcare industries. It then provides a lot of technical support from experts on staff to those companies to support their growth.
Devex talked to Kuper to learn more about how Leapfrog reached this milestone and what it means for the company and the industry.
Impact investing skeptics have often questioned the industry’s ability to scale. This is a pretty significant landmark for Leapfrog. What do you think it says about the broader impact investing market?
We’re at a transformational moment in the history of impact investing. I should say that the skepticism on scale and commerciality have been there from the start. When I started leapfrog in 2007 many people thought you couldn’t raise an impact fund of more than $100 million and you couldn’t do an impact deal of more than $3 million. Here you see Leapfrog with over $1 billion in approved commitments and doing investments that range up to $50 million.
So the perception that the field is uncommercial or is not at scale is no longer correct. Reality has proved the skeptics wrong. None of that is to say that there isn’t a spectrum in impact investing. There are people making very small investments, there are people making big investments. There are people doing impact investments instead of philanthropy and there are people who are trying to outperform KKR, Carlyle and TPG ... It is that combination of profit with purpose, of not compromising or considering it a trade off between profit and purpose but rather seeking the synergy of profit and purpose that’s been so appealing to so many investors, so many team members and so many companies where we’re now invested.
Within impact investing, players that offer truly commercial or indeed market-beating returns will achieve very significant scale in the years ahead and we will see many more billion dollar impact investors in the years ahead, we’re just the first.
What’s worked for you? What do you think others can learn from your experience?
A few things. The first thing is to focus on building an extraordinary team with an exceptional track record in the market. That team then needs to collaborate powerfully to find great deals, execute those deals, really add a lot of value and take them from cradle to graduation, which is exit. What we’ve really learned along the way is there is no substitute for that quality of team and high level of excellence and collaboration.
Then the second thing is they have to be enormously disciplined. Disciplined in focusing on what is truly material, what are the best transactions to get done, where do you really focus your value creation efforts. People do a lot of things for their portfolio companies that are nice to do and the key thing is to focus on the few truly needle moving interventions, whether they’re transforming the governance of the company, whether it’s around product design or distribution or regulatory management or expansion into other markets. But one has to decide what are those needle moving interventions and then make sure that you have the world’s best specialists in those areas to help the portfolio companies succeed.
And the third thing really is to measure your impact not primarily or purely for reporting purposes by ticking boxes at the end of each quarter but rather measuring your impacts so you can drive outcomes successfully. And that is drive impact outcomes, but also drive innovation and positive investment outcomes using that measurement.
And then I think the last thing is learning to tell the story in powerful ways, not simply in terms of the impact on people, on emerging consumers, but also in terms of the transformation of these businesses and the high returns achieved for investments.
One of the common hesitations among investors is the viability of an exit in emerging markets. What has your experience been and how do you help facilitate that process?
People don’t talk enough about exits. People don’t think enough about exits, which you should think about from the moment you source a company before you originate a company and before you buy into it until the company graduates.
We’ve had very successful exits. Just last year we sold Express Life in Ghana to Prudential in the U.K. and we sold Apollo in East Africa to Swiss Re.
The view we have is very heavily influenced by a basic idea, which is responsible excellence. We don’t believe that you just get someone to sign a piece of paper to say don’t worry we’ll look after the company. … What we have done is said at exit we need to be convinced that we’ve built a company that has in its DNA purpose, that its competitive advantage is serving low income and emerging consumers and the new owners would be severely damaging their asset to do something fundamentally different.
So the first thing we try to do is bake purpose into the DNA, the second, when we come to exit we actually evaluate whether will be a net positive for several different stakeholders. We look at emerging consumers, customers, first, we look at management next and then we look at shareholders and co-owners. And only if we can make the case to ourselves and to others that the exit is positive for all those stakeholders do we pursue the exit.
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