Leapfrog: 40% a year profit betting on an African financial services dream

Enjoyed the company of two really smart cookies during CNBC Africa Power Lunch today. Gary Herbert is the co-founder of Investment Solutions, a financial services pioneer that's now a key profit contributor at Alexander Forbes. His colleague Dominic Liber is an actuary, one of a dozen that work at Leapfrog, the $535m private equity fund targeting emerging financial companies in emerging markets. Their strategy is to get hands-on in mostly insurance-related partnerships in markets where the industry is in its infancy – and exit at a good profit once the business is on its way. More complex than it sounds, especially in places like Ghana and Nigeria, but the early returns have been excellent. With master investor George Soros among Leapfrog's backers, you can be sure the business model has withstood rigorous examination. US money advisor and author Doug Casey, now in his late 60s, wrote recently about what he considers the best place in the world to live (Argentina). Were he 30 years younger, Casey wrote, it would be Africa. Herbert, Liber and their Leapfrog colleagues are the right age. – AH

ALEC HOGG: LeapFrog is a company that was set up in 2008, by five South Africans, who focused on early stage investments in financial services businesses targeting emerging consumers here in Africa and in Asia. It is now the world's largest dedicated equity investor in emerging financial services. Well, we'll find out more about that from two of the partners in LeapFrog Investments, both based here, in Johannesburg, Gary Herbert, and Dominic Liber. Dominic let's kick off with you, the $400m that you've just raised, presumably you've been able to go to investors and say, 'here's the story, here's the successes of the first $130m that you raised first. What kind of returns did you achieve with the first stage?

DOMINIC LIBER: Over the last year, we saw across our portfolio, 40 percent growth in profitability of companies. We have done our first exit, from Fund Line, which is a life insurance business in Ghana that we bought as a small business and got very 'hands-on' as we do, and turned it around and then exited to Prudential for a great return.

ALEC HOGG: What does 'hands-on' in your context mean?

DOMINIC LIBER: Right, in LeapFrog we do a couple of things in particular. Emerging consumers, you've mentioned, so what people find compelling about the story is there's growth in emerging markets. Within those markets, there's growth in financial services. Within financial services, the emerging consumer is the one that is most underserved that is least penetrated and that's really the customer that LeapFrog is interested in targeting.

ALEC HOGG: It sounds a bit like Abil to me…?

DOMINIC LIBER: It's definitely not Abil. For many years there have been people running around with credit and billions of Dollars being poured into credit. The particular opportunity that we saw was going beyond credit, so we look at insurance, we look at pensions, and we look at broader financial services – beyond credit.

ALEC HOGG: I think that's the one part of Abil that actually did work, the insurance side, StanGen.

DOMINIC LIBER: Yes, absolutely.

ALEC HOGG: Gary Herbert, is also with us in the studio. Investment Solutions – interesting to see that you were one of the founders there.

GARY HERBERT: Yes, a long time ago.

ALEC HOGG: With Rael Gordon.

GARY HERBERT: Yes.

ALEC HOGG: You must be very proud of the way that that's turned out.

GARY HERBERT: Absolutely, it's a great business.

ALEC HOGG: Do you make so much money that you can retire and do good?

GARY HERBERT: I took a few years off and did a lot of non-profit work actually, before coming into LeapFrog.

ALEC HOGG: We did something last week about 'impact investing' and this seems to be very similar….

GARY HERBERT: It is 'impact investing'. It's a broad range of what would be termed 'impact investing'. Profit with Purpose is another label. It is really, what we do, and it's combining profitable businesses with businesses that make a difference in the markets they operate in.

ALEC HOGG: 40 percent return or growth-in-profit, as Dominic was saying a moment ago, is a little bit more than Profit with Purpose, one would think. That's super profit.

GARY HERBERT: No, it depends on how the profits are derived, so we measure whether the products that are being sold are fair products. It's really growing the base of consumers that generates the profits and we are very involved, in terms of quality of product that's offered to the consumer.

ALEC HOGG: Again, just going back to someone else we spoke to yesterday, Herman Bosman was in the studio, from RMBH, and he's been given a lot of ammunition by the founders of FirstRand to go out and find a 'fifth-leg' for his operation and he's also looking at financial services. He is also looking at the emerging market. Are you finding that this space is now getting a little bit crowded?

DOMINIC LIBER: It's interesting. We see competition from two sides and we have something particular that makes us unique on each front, so there are other Private Equity (PE) Funds, right. You find PE Funds out there, in Africa. They look at financial services. The particular thing that we have is that operational focus. We spoke about it a bit earlier, we have a very, deep financial services and insurance competent. We have four actuaries within the team, as an example and that is just one example. Able to get very 'hands-on' and involved with the companies and to build and transform them, so against the standard PE Funds, we have that advantage. The other competition that we see are the 'strategics', the big insurance groups, South African and multinational insurance groups, who are also out there looking at the kind of businesses we might invest in. There our key advantage is that we are not out there building our empire. We can go in-market. We can identify great businesses and we can partner with them to help them grow their business and take it to the next stage.

ALEC HOGG: Like you did in Ghana?

DOMINIC LIBER: Precisely, like we did in Ghana.

ALEC HOGG: How many other businesses have you invested in?

DOMINIC LIBER: We've invested in a total of eight, nine including the Ghana business, so we're in South Africa, Kenya, Ghana, and Nigeria, and then three businesses in India.

ALEC HOGG: Gary, do you get around to those areas much?

GARY HERBERT: Yes, so we've got about a dozen people in Johannesburg and we're in Kenya, Ghana, Nigeria, for a couple of weeks every month.

ALEC HOGG: So you are on the ground?

GARY HERBERT: Yes, absolutely.

ALEC HOGG: And India?

GARY HERBERT: Yes.

DOMINIC LIBER: Our team in Singapore looks after India but there's quite a lot of cross-pollination between the two teams, so we've got people in Johannesburg who will go across to Asia regularly and similarly in reverse.

ALEC HOGG: How do you find the attitude? How welcoming is the business environment outside of South Africa's border, relative to what's happening here?

GARY HERBERT: We've found it to be very welcoming. You've got to, obviously build relationships, you've got to get people to know who you are, and what it is you do but, because of the partnership approach we take, we actually find people are very open to chatting to us.

ALEC HOGG: And the regulations, clearly they would be a little bit behind in a place, well certainly Nigeria is a long way behind South Africa.

DOMINIC LIBER: Yes, so the regulatory environments are something we have to understand and deal with, but that's just part of our business.

ALEC HOGG: That is what actuaries do.

DOMINIC LIBER: Exactly, that's what we are there to deal with.

ALEC HOGG: So you're the smart guys, aren't you?

GARY HERBERT: Yes, in fact often the Regulators suggest opportunities to us, within a market, where people might be looking for capital, looking to build their businesses.

ALEC HOGG: So, typically, where would you start investing and how long would you stay with the partner?

GARY HERBERT: Where would we start?

ALEC HOGG: What size would your partner need to be and how long would you stay with them?

DOMINIC LIBER: We look at a variety of sizes. We are able to do anything from minority to majority. Typically the way that we were getting such outsize returns is that a number of the businesses are, really at 'growth stage', so we don't look really look at venture stage. We don't do angel funding or pure start-ups, so once the business has got to a stage, where there is a proven business model and it is really looking to scale and to ramp-up. That's ideally when we come in.

ALEC HOGG: How many years, down the line, would that be for a business?

DOMINIC LIBER: That really varies. We have some that we came in when they were only two-years old, but then there were other businesses that we've invested in, like some of the Indian businesses, that had been going for many years already. There they were looking more to partner with us for the specific expertise that we could bring, to take the business to the next level.

ALEC HOGG: So, there's a bit of mentorship involved as well, as well as investing?

DOMINIC LIBER: Yes, mentorship and really bringing a deep understanding of product distribution, and emerging consumer. In India, for example, we're invested with the Mahindra Group, in their distribution business. Now, Mahindra is a multi-billion Dollar business. They did not really need our $15m, but they chose to partner with us in their insurance distribution business because of the understanding and the depth that we could bring.

ALEC HOGG: Who else are they involved with, Mahindra, from South Africa? Do they not have a relationship with Sanlam?

DOMINIC LIBER: No, that's Shriram. The Shriram Group has a relationship with Sanlam and that's in the 'risk carrier',  we're in, similarly with Shriram, we're invested in the distributor, the insurance distributor.

ALEC HOGG: Raising the money is the interesting part as well, $400m is not a drop in the ocean, even for the kind of names that you are talking about. Your first round with George Soros, Pierre Omidyar from eBay as well. How do you get into the offices of these guys in the first place before you even convince them to give you money?

GARY HERBERT: Sure, it's a long haul. We raise mainly in Europe and the U.S. and you're on the road. Unless you show up, you are not going to raise money and be offered it multiple times.

ALEC HOGG: How do you get into George Soros' diary?

DOMINIC LIBER: I haven't met George Soros yet.

ALEC HOGG: So who did, from your team?

GARY HERBERT: Andy Kuper, who founded LeapFrog. Andy spent a number of years running a group called Ashoka, in the non-profit space. He built up some very strong relationships during that time.

ALEC HOGG: So he knows George Soros. He said 'give us some money, George'…

GARY HERBERT: No, those people in the Soros Foundation.

DOMINIC LIBER: I think there was something particularly compelling about the story. The second fund, I think, has been a different fund raising story but in the first fund, we raised it at the height of the financial crisis, right. We were targeting 100, and we raised 135, I think a day or two after Lehman collapsed. It was really that kind of timing. It wasn't good but the particular opportunity that we saw, and that was so untapped, I think was very compelling and the team that we had pulled together. It is one of the things we've done, from the beginning is really focus on getting in place people with…'the leaders' in their spaces, with critical expertise, to be able to go in.

ALEC HOGG: Do they, because this is 'impact investing', are they prepared to take a lower return?

DOMINIC LIBER: I'm so glad you asked that question, so we talk about Profit With Purpose and, as Gary said, there's a whole range of impact investing, and from something that is little more than philanthropy to reach something that is very commercial, and LeapFrog is fully on the commercial side of it. So because of the growth opportunity, as I described earlier (the under-served markets) at this point the purpose of giving people access to financial services that have a positive impact on their lives, and doing so through a good business. There is just no conflict between profit and purpose, so we can build great businesses, without compromising on the…

ALEC HOGG: I'll bring you back to Abil…they said the same thing. They said they were doing good. They said that 'we're aren't loan sharks'. If we don't give the money to people at 30 percent interest rates, well the 'loan sharks' are going to give it to them. Yet, that ended up very sticky.

DOMINIC LIBER: There's a discipline that we have to bring to our companies and in insurance, it's a different story to credit. Insurance, in some ways, you get the money in first and then you pay the claims, so on the insurance side of things it's really all about building trust.

ALEC HOGG: So would the insurance companies that you get involved with, have a different rating structure to the ones that we've been hearing so much about, when this micro lending collapsed?

DOMINIC LIBER: Yes, it can well be, so in each market we look…

ALEC HOGG: But you say Profit with Purpose, so I would assume that you are also looking at reasonable profit margins and not the kinds of things that we are seeing elsewhere.

DOMINIC LIBER: Exactly, so it is very easy to design an insurance product that will never pay a claim, so we have metrics. We've actually designed a whole metrics system that monitors how our companies are performing in terms of things like honouring claims, and times to settle claims…

ALEC HOGG: Pricing?

DOMINIC LIBER: Pricing, profit margin, so I can give you a very specific example, in Ghana, right. When we first went in there in Ghana the company was selling a policy and we redesigned a funeral-type policy and we actually reduced the price because we knew that we could provide better value than was being provided to the customers at the time.

ALEC HOGG: Gary, of all the investments, nearly ten investments you have, which is the most exciting one for you right now?

GARY HERBERT: Probably the one I am mostly closely involved in and it's a business called All Life. It's a South African business. It's the only specialist insurer -people with HIV) that offers life insurance to people who are HIV positive and just a really dynamic, creative team that have turned insurance 180-degrees from the way typical insurers approach insurance.

ALEC HOGG: Are there any requirements that these people take their ARV's?

GARY HERBERT: Absolutely, so part of the process is actually ongoing, underwriting, and in fact, the adherence rates are way higher than medical schemes for instance, because of the processes they built in.

ALEC HOGG: Do you have any insight into why Aspen had this 30 percent drop in their ARV's uptake from Government? That was the big story of the week, was that Aspen had a problem in its South African operations because of the capacity of the orders that came through from Government. They were down 30 percent in the past year. Somebody is not taking their muti, or maybe there was a plug in the system. Do you have any insight on that?

GARY HERBERT: No.

ALEC HOGG: Would you see that with claims?  How do you monitor or how are you sure…?

GARY HERBERT: We don't have lots of claims because people who are taking ARV's, live for long and…

ALEC HOGG: How do you know that…it's an insurance company, some people die and how do you know if they haven't been taking their ARV's? Is there a way of checking it?

GARY HERBERT: Yes, there's a viral blood test you take and it can tell you if somebody is taking their ARV's.

ALEC HOGG: But what you've done here is that people who might not have been insurable in the past, are now insured through this company.

GARY HERBERT: Absolutely.

ALEC HOGG: Dominic, to close off with, your most interesting and exciting investment?

DOMINIC LIBER: Most exciting investment…gosh, that's a question. I think Beamer is a very exciting investment in our portfolio. It's a business that is distributing insurance through the mobile phone. Technology is obviously a key enabler of financial services, in many of these markets. We've seen the spread of the mobile phone through Africa and Asia, in remarkable ways and Beamer has engineered some astonishing ways of distributing product, collecting product and, to the point we were making earlier, we actually did a study as to how the customers were aware of their coverage and if they knew how to claim. They've been remarkable, in terms of educating people about the coverage that they have.