Protecting the Poor with Private Equity

Microinsurance injects public interest into carried interest

Private equity has not been treated kindly in the press lately (see Private Equity under Pressure), but there is one new development of which the industry can be proud. It’s called microinsurance.

Microinsurance covers people in developing countries who are too poor to own health insurance, life insurance or property & casualty insurance. If any of those people suffer a personal or business setback, he, she or the business will probably not survive.

The world is full of such situations, but one professional money manager – LeapFrog Investments – is doing something about it. LeapFrog is now in its third year of managing the first and only profit-making, private equity fund in the world dedicated to microinsurance. The prime purpose of the fund is to finance established local insurers in Africa and Asia to cover the indigenous poor. The fund operates on terms much like other private equity vehicles and expects to generate above-market, private equity returns for its investors. Its motto is “profit with purpose.”
The fund was formed in 2009 and raised $135 million from private investors and financial institutions such as JPMorgan, TIAA CREF and the European Investment Bank. Since then, LeapFrog’s portfolio managers – Andrew Kuper in South Africa and Jim Roth in Australia – have deployed about 40% of their capital acquiring minority stakes in four investee companies. The fund’s investments range in size from $5 to $20 million. Like other PE managers, LeapFrog’s team of entrepreneurs, investors and insurance professionals sit on the boards of their investee companies to make sure that the insurance products offered to the poor are relevant, well-designed and affordable. The fund’s investments are expected to be harvested in 4-7 years, and one of them is already anticipating a profitable exit.

LeapFrog’s first investment was in a South African firm that provides life insurance to HIV/AIDS victims. The company’s comforting message to prospective clients is: ‘we’re so certain you’ll live long, productive lives, we’re willing to insure them.’ The only condition in its insurance policy is for the insured to prove they are taking their anti-retroviral drugs by submitting to regular blood tests, thus protecting their health as well as the economics of the policy.

The fund’s second investment was in a company whose businesses include providing agricultural and livestock insurance to a target market of 8 million self-employed farmers in Kenya, Tanzania and Uganda.

LeapFrog’s third investment was to an Indian firm planning to bring life insurance to a target market of 10 million whose average annual income is $2,500. Microinsurance premiums in this market can be as low as 1-2% of the insured’s income and can command as much as 50 times that amount in term life coverage. Someone who makes $2,500 a year could therefore pay as little as $50 a year for as much as $2,500 in life insurance to protect his or her family in the event of death.

LeapFrog is currently committed to a fourth investment in Ghana and is sourcing additional investments in Nigeria, Indonesia and the Philippines. As a matter of policy, it will only enter countries with active microinsurance markets, substantial social investments and stable governments. LeapFrog prides itself on being an “impact investor” with “a double bottom line”: an attractive financial return for its investors coupled with a broader benefit to society. Lloyd’s estimates that there are as many as 3 billion vulnerable people around the world who could afford to pay for microinsurance. In India, for example, only 2% of the poor own life insurance. Swiss Re values the global microinsurance market at $40 billion.

LeapFrog Investments got its first big boost in 2008 when Bill Clinton promoted its “profit with purpose” concept to supporters of his Clinton Global Initiative. A year later, George Soros and eBay founder Pierre Omidyar contributed the seed capital for LeapFrog’s first fund and, in so doing, enabled Andrew Kuper and Jim Roth to show the world that private equity can provide a safety net for the poor as well as line the pockets of the rich.