“I was the weird guy at the side of the room when I started,” Andy Kuper, founder and chief executive of impact firm LeapFrog Investments, tells New Private Markets. “Now, 10 of the 20 largest insurance companies in the world are LeapFrog investors or acquirers of our companies.”
LeapFrog has just launched its fourth pooled fund, Emerging Consumer IV, for which the firm is targeting $1 billion. This will be no small challenge: while multi-billion generalist funds are increasingly common in private equity, only a handful of impact funds have raised more than $1 billion, with KKR, Brookfield, Goldman Sachs and TPG among them. Kuper declines to speak about Fund IV in an interview with New Private Markets and affiliate publication Private Equity International’s Carmela Mendoza, but he does tell us why the firm is continuing to focus on social impact in an era of multi-billion-dollar climate funds.
LeapFrog is one of the impact investment pioneers: emerging markets-focused firms with a mission to tackle the world’s most pressing social problems. LeapFrog was founded with a “profit with purpose” slogan in 2007, the same year the Rockefeller Foundation hosted a gala that is reputed to have originated the term “impact investing”.
The firm has since established itself as a pack leader among impact investing’s old guard. Prior to Fund IV, it had raised over $2 billion over three pooled funds and separately mandated accounts, pushing the firm up to sixth place in 2021’s Impact 20, New Private Markets’ ranking of the biggest private markets impact managers by five-year fundraising total. It also secured a landmark $500 million partnership with Singapore’s state-backed investor Temasek last year. Earlier this month, Kuper was awarded officer of the Order of Australia in the UK Queen’s birthday honours list “for distinguished service to the impact investing industry, to global business leadership, and to financial inclusion”.
Fund IV will invest in financial inclusion and healthcare in Africa, South Asia and Southeast Asia, according to a announcement by the International Finance Corporation – which has committed $50 million to the fund and earmarked a further $50 million for co-investments. LeapFrog’s first two funds, which raised $135 million and $400 million respectively, focused exclusively on financial inclusion. For Fund III, which raised $744 million, the firm added healthcare access to its mandate. For Fund IV, Leapfrog aims to make 18 to 20 majority or significant minority equity investments in growth-stage companies, according to the IFC’s filing.
The impact investing market has seen a wave of entrants focused on climate over the past year. Many recent climate-only funds dwarf LeapFrog’s $1 billion target for Fund IV.
“Climate is like the internet in the 90s. It’s just so massive that if you compare anything to it, you’re going to come up short,” says Kuper. “There are many instances where people commit to climate funds before they commit to other impact funds.”
Will Kuper become the “weird guy” in the room, trying to raise social impact funds while investors crowd into climate funds? He doesn’t think so:
“The social impact space is getting more and more commitments. Much bigger cheques are being written. Fundraising for social impact over the past three years dwarfs everything raised previously. Historically, the E is ahead of the S and G by a few years. But climate impact also gets investors thinking about the dual objects of impact as well as returns.
“Social themes are not going to go away. Billions of people are adopting cheaper and cheaper technologies for healthcare and finance. Financial inclusion isn’t going to go away.”
Moreover, financial inclusion – facilitating payment methods, loans, insurance and savings in low-income communities in emerging markets – is critical to achieving a global climate transition, says Kuper. “You can’t upgrade to an electric vehicle as a low-income person. It’s impossible to create customers for renewables unless they’re part of a system in which they can pay for it. Billions of people can’t become customers because of the administrative costs of switching to electrical utilities. If we don’t help the four billion people to rise [out of low-income status] to adopt non carbon intensive technologies, you can forget about a 1.5- or even 2-degree rise.”
Ensuring financial inclusion investments have an authentically positive impact can be a complicated undertaking. How do you ensure, for example, a financial services company does not subject customers to unfair conditions or obligations, or impossible-to-repay debt?
“The way we measure impact is by asking: ‘Is this a low income emerging consumer? Are they getting a quality, affordable and relevant service? Is this company or service reducing the cost for the consumer?’
“What I think has been lost in the financial inclusion space is that this is a whole set of subsectors. It’s best executed by sub-sectoral experts,” says Kuper. “People talk about credit, which is incredibly important, but I feel financial inclusion starts with people being able to take worthwhile risks and having safety nets. LeapFrog started by investing in protective financial services – insurance and pensions and savings companies. From Fund II, we moved into things like remittances, payments and credit.
“The remittances opportunity is just massive. People are being totally ripped off. People were being charged between nine and 15 percent to send money back home in a number of emerging markets. So if you sent $100 home, $80 goes in necessaries for the family. The bank takes $15 and that leaves $5 for your daughter’s education, your grandmother’s healthcare, a new appliance. The bank is taking your disposable income. Our company, WorldRemit, charges between two and three percent. That triples your disposable income.”
Digitalisation is another “green flag” Leapfrog looks for in financial services investments. “Ease, speed and affordability of access are the big factors [driving] scale,” says Kuper. “There are a bunch of people raising money just because they say magic words like ‘tech enabled’. You do have to have a healthy scepticism and ask questions.”
But digitalisation can reduce a financial services company’s overheads, allowing it to scale and drop its costs. “Scale meant [portfolio company] Mahindra could provide a whole family with a health insurance policy for $2 a month, because if you’re making $0.50 of profit but you’re serving 20 million people, that’s still a fantastic profit.”
Evolving investor base
LeapFrog’s focus on financial inclusion has, since Fund II, drawn investments from insurance companies and banks, which are eyeing emerging markets for their future customer bases and “can see very clearly that four billion people will become a huge part of the economy within the next 10, 20 or 30 years,” says Kuper.
“The LP market has evolved. Ebay founder Pierre Omidyar and Kelvit were among our earliest backers, as well as the big development finance institutions, the IFC and the European Investment Bank. By Fund II, I started to get a few pension funds and family offices, but it’s only when we got to Fund III that we saw more pension funds and a tripling of family office interest.”
There is still some way to go on drawing investors to impact, says Kuper. “Endowments and foundations haven’t opened up much yet. We’re backed by Ford and Rockefeller and so on, but the big university endowments haven’t opened up yet. The big pension funds are doing more sustainability and so on, but outside of the Netherlands, they’re not making significant commitments to impact. But it’s going to happen in the next two to three years. And some of the sovereign-backed institutions are starting to step in.”
One such sovereign is LeapFrog’s partner Temasek. As part of a $500 million investment, Temasek acquired a minority stake in the firm, allocated capital to support expansion of LeapFrog’s offices in Asia and Africa and committed to anchor future funds.
“One of the first meetings I had with Dilhan [Pillay, chief executive of Temasek], I went in saying: ‘I’m creating an enduring institution. I don’t want to be managed by quarter.’ And he said: ‘Are you looking for a 10-year partnership or a 100-year relationship?’”
Kuper describes Temasek as “true partners with the courage to differ” and having “an impact soul”. “They have been exceptional partners. They have referred in top talents to us, they have worked with us on impact metrics, they have emphasised distinctiveness and performance and impact over immediate profits in AUM, and they have been genuine thought partners.”
Moreover, after 15 years at the helm of the old guard, this Temasek-LeapFrog partnership heralds “a new era for impact investing” for Kuper.