There are profits to be made by investing in companies that serve the needs of some two billion consumers coming into the middle class in emerging markets, says Dr. Andrew Kuper, Founder & President of LeapFrog Investments, who argues that his firm’s “Profit with Purpose” investment strategy in insurance and related financial services can change lives as well as deliver returns.
Profit With a Purpose
A Privcap Conversation with Dr. Andrew Kuper of LeapFrog Investments
David Snow, Privcap: We’re joined today by Andy Kuper of Leapfrog Investments. Andy, welcome to PrivCap today. Thanks for being here.
Kuper: Thank you.
Snow: Your firm invests across the emerging markets; I’m interested in learning all about it and the strategy. You also coined a term for your objectives with Leapfrog and that is Profit with Purpose, so clearly you are an investor that wants to make money, but there’s also some other considerations that take place when you deploy capital. Can you talk about what Profit with Purpose is?
Kuper: Sure. So we are an emerging market investor in financial services businesses, and particularly in insurance, which we think of as an especially exciting market that’s very untapped. But beyond that, we focus on emerging consumers, so the billion or two billion people in some views, rising out of low income into the middle class. So they’re still below the middle class, but they’re emerging consumers, increasingly looking for financial safety nets and springboards.
We think that the companies that serve those consumers are going to have an enormous competitive advantage and that’s because they’re capturing a large untapped market as it’s surging. They are serving a purpose, which is helping people who typically had not had access to financial tools, to gain that kind of access. And in so doing, those companies attract fantastic opportunities, talent, trust from customers, all sorts of assets that are going to stand them in good stead in terms of long term value creation.
So as a private equity investor, we think that companies that are purpose-driven, in other words, that are driven by serving that next billion consumers, actually are able to attract greater opportunities, greater talent, greater customer awareness, greater popularity in general, and that results in better performance and higher premiums on exit for us as an investor.
Snow: What countries have you been spending the most time in lately, or what regions?
Kuper: So we focus exclusively on emerging Africa and Asia, and we’re particularly excited by, and own assets, in South Africa, Kenya, Ghana, Nigeria and our companies also cover other countries, such as Tanzania and Uganda in Africa, and then in Asia, we’re focused on India, Sri Lanka, Indonesia and the Philippines.
We had particular luck in places like India, say, where we’ve partnered with two of the leading business houses in the country, Mahindra and Shriram, both of which have long histories of serving very large numbers of low income people in tier three, tier four towns and in rural areas.
And so, with that kind of traction we’ve found that we’ve been able to attract particular attention in the likes of South Asia, as a value add investor to those kinds of players.
Snow: So are you creating new companies and then you kind of go find management to fulfill a business plan, or are you backing pre-existing companies with pre-existing entrepreneurs?
Kuper: We’re growth capital, so we typically find businesses that are of some scale, where they have hundreds of thousands – or millions – of customers and then increase the size of those companies fairly dramatically. We also help with diversifying the revenue stream, because we have a lot of actuaries on our team who are expert on both product design and distribution. We also have leading lawyers, who are experts on regulatory management and so forth, so we really help those companies to scale in a way that is sustainable, but also that adopts best practice internationally, and that diversifies in significant ways so as to reduce risk and increase returns.
And by doing all of those as a very, very active investor, supporting the management, but below the board, not just at the board, we find that we’re able to get outsize company performance.
Snow: Can you talk about the creation of Leapfrog itself; who are your backers, how did it come about?
Kuper: So we saw… we did a hundred country landscape study on insurance to low income consumers and we estimated it was a billion person market; in fact, it turned out to be more. Lloyds and Swiss Re subsequently said it was a 1.5 to 3 billion-person market.
We then went around and collected the best people in the world in our views, on investing and insurance and related financial services to low-income consumers. And we came together and launched a fund at a spectacularly bad time; in fact, President Clinton launched the fund a week after Lehman collapsed.
So you can imagine saying to people here’s this distinctive, highly-differentiated strategy, this new team that’s come together, and we’re going to execute on this in the face of the global financial crisis. We said we were going to target $100 million; in the end we raised $135 million and the book-end of the close was, it was May 6th 2010, was the final close, which is the day the markets dropped a thousand points – it was Black Thursday.
Now in that time, we were able to attract players that were quite diverse, so ranging from Scor, Haverford and Flagstone, you know, major reinsurers, through to the likes of TIAA-CREF and JP Morgan, right through to the development finance institutions like EIB and FMO, who were very interested in what we were doing in terms of Profit with Purpose.
And how we were able to do that was by saying, there is no trade-off between profit and purpose, and in fact, we can see how the two can work synergistically so that you can achieve outsize profits and outsize impact.
Snow: Would you say that some of your investors – or your backers – also might be acquirers of some of these businesses that you back?
Kuper: Absolutely. One of the things we’ve seen develop in the market is that a number of not just our investors, but strategic players in other private equity firms are starting to realize that everybody running after the same bank and driving up competitive prices rapidly, is not necessarily a good model for investing in Africa or Asia.
What we’re ab le to do as a specialist investor, is first of all to have pattern recognition; secondly to quantify liabilities; thirdly to add a distinctive kind of value to the companies, so we’re often… you know, 70% of our deals currently are proprietary. So we’re able to get in… get in at a price that is reasonable and then add very significant value to the companies.
By doing that, we achieve something that I think is quite difficult for more conventional players to do, where they’re competing in already heavily-competed spaces. And I think as we look at the future of Asia and Africa, specialist funds like Leapfrog are going to play an increasing role, because you’re not only able to get into assets that are at a more reasonable level and add more value to them, but you're able to see patterns and work across markets, drawing on best practice from other markets, in a fundamentally better and different way.
So I think the era of the generalist fund is not over, but the era of the specialist fund is really coming into its own.