Emerging consumer policies

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South Africa’s Leapfrog Investments, with its tagline “investing for the next billion”, has developed a ‘profit-with-purpose’ private equity model targeting emerging consumers earning between $1.25-10 a day with insurance and savings products.  

Why? Because consumption by the 1.9bn low-income consumers in LeapFrog’s target markets of sub-Saharan Africa, South Asia and Southeast Asia ex-China, is forecast to rise from $2trn (€1.5trn) in 2012 to $5trn in 2022.

LeapFrog, which sold its stake in Ghanaian insurer Express Life to Prudential in December 2013, says that less than 30% of emerging consumers have access to relevant and affordable financial tools. In the case of insurance, the figures are even lower – only 1.5% of target consumers hold insurance in Nigeria, 4.1% in Ghana and 6.8% in Kenya. A recent Swiss Re study suggested that as many as 3bn people are underserved by insurance.


“In developed markets the insurance market is saturated,” says Jim Roth, co-founder of LeapFrog Investments. “Contrast this with India, where health insurance has a 30% annual compound growth rate, or Ghana, where the rate is 40% because emerging consumers have begun purchasing safety nets that their parents were too poor to purchase.”

The average revenue growth across LeapFrog’s portfolio companies in 2012 was 24.6%.

There are few other firms operating in this sector. India-based Unitus Capital provides a range of investment banking services to entrepreneurial businesses and investors via private equity funds, including microfinance, education, healthcare and insurance.

International Finance Corporation (IFC) has started to get involved in the tailored emerging consumer insurance business through a project in mobile phone-delivered, index-based insurance products for small farmers in Africa, which should enable them to get paid automatically without having to supply proof of adverse weather patterns to back their claims.

“Insurance products have a strong impact on the ground whether it is risk mitigation, asset allocation, savings allocation or simply access to finance, especially for those in need,” says Kenroy Dowers, head of the retail products group for the financial markets department at IFC.“For us, the insurance business has been a true success story, not just in terms of the commercial viability or its development impact but because it has also created the opportunity for innovation and working together with the likes of Swiss Re and Munich Re. But there are many other areas that we have yet to think about, such as catastrophe insurance, which is especially important for the poor.”

LeapFrog’s portfolio company Bima also sells and administers insurance via mobiles, significantly reducing marketing costs and increasing premium collection. But technology is not the only enabler of low-cost and high-volume business models. Mahindra Insurance Brokers, another LeapFrog investee, has pioneered distribution to rural customers by leveraging the Mahindra Group’s vehicle distribution network. The company has grown to serve more than one million policyholders, protecting productive assets such as tractors, farm equipment and two-wheeler taxis for as little as $1 per month.

Roth is eager to stress that LeapFrog does not seek a trade off between profits and purpose. “Every investment that we do has to pass an expected internal rate of return (IRR) hurdle through a pure private-equity lens,” he says. “In addition, it has to have a positive social impact.”

LeapFrog believes that businesses that treat stakeholders fairly will be winners in the long term. It works to ensure that the clients of its portfolio companies are treated fairly, by examining changes in numbers of customer complaints, monitoring the speed with which claims are paid and key ratios like the percentage of premiums paid out as claims.

“We monitor these on a regular basis and if the ratios are low, we ask questions as to whether clients know that they are insured,” says Roth. “There have been scams in many countries where clients are not informed that they are insured, sometimes intentionally, sometimes unintentionally. Factors like claims payment speed are important because the more quickly claims

are paid, the less likely it is that emerging consumer households are going to fall back into poverty.”

LeapFrog also looks at whether its partners have positive discrimination policies, how those are implemented, and also whether the CEO’s remuneration is linked to that implementation.


As well as looking for ‘profit-with-purpose’ investments, LeapFrog also wants its partners to be among “the good guys” in business practice, as Roth puts.

“In private equity in emerging markets one spends a lot of time negotiating legal documents,” he says. “But if these have to be relied on you are in trouble. So finding a partner that you can trust to do the right thing goes to the heart of what we do.”

Due diligence involves intensive investigation of prospective partners’ relationships with other investors, stakeholders, customers and suppliers. IFC similarly selects partners according to their integrity, transparency and ownership structure.

“We have a metric for looking at their standards, not only in terms of how they conduct their business but also in terms of the objectives expected for the product that they are offering,” says Dowers. “But it is important to bear in mind that most companies that tend to go bad do so due to mistakes made in their asset allocation rather than their pure insurance or risk mitigation business.”

All of these are risk-mitigating practices. But, in any case, the risks of private equity investments in emerging or frontier markets are overstated, according to Andrew Slater, managing director at emerging market consultancy RisCura.

“Some investors look at the risk without considering the opportunity cost of doing nothing,” he says. “Private equity in these markets is old-fashioned, meaning low use of debt without any financial engineering, which is a lot easier to understand. The one caveat is the price at which investors are buying into that growth today.”

Private equity seems to be the most direct way to get exposure to the fast-growing emerging consumer insurance space, which perhaps explains the interest that LeapFrog has drummed up for its unusual strategies. Fund I had raised $135m by 2010, and seven investments have been made since, with the fund around 80-90% invested. Fund II reached first close in September 2013 at $204m, with investors including Swiss Re, PartnerRe, MetLife, Prudential (USA), XL Group and Achmea – and global banks and asset managers such as JPMorgan Chase & Co, Christian Super and TIAA-CREF.

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