LeapFrog hits $400m target for Fund II

The firm’s second vehicle is three times the size of its debut fund

Profit-with-purpose investor LeapFrog Investments has closed its second fund on its target and hard-cap of $400 million, 12 months after its $204 million first close.

LeapFrog, which focuses on financial services investments in growth markets, raised three times the amount it collected for its debut fund. LeapFrog’s Fund II attracted capital from both new and existing investors, the firm’s co-founder Jim Roth told Private Equity International. Some existing investors doubled or tripled their commitments from the first fund, he added.

Investors in Fund II include a number of the world’s largest insurers and re-insurers, including SwissRe, PartnerRe, AIG, MetLife, Prudential Financial and AXA, along with Dutch development bank FMO, the European Investment Bank and DEG. J.P. Morgan and TIAA-CREF have also invested.

LeapFrog’s Fund II intends to make equity investments of between $10 million and $50 million in South Africa, Kenya, Ghana, Nigeria, India, Sri Lanka, Indonesia and the Philippines. The firm decided to increase its fund target because some of the deals it came across required more capital, Roth said. “Insurance is quite a capital-intensive business, so we saw bigger opportunities that we couldn’t necessarily take in the first fund.”

However, the larger size of the fund does not denote a change of strategy, Roth insisted. Although a small number of deals would likely be larger – between $40 million and $50 million – the majority would be in the same range as those made with the first fund, between $15 million and $20 million.

“It’s not a very fundamental change, because it’s same sector, same countries,” he said. “Often it’s just investing more in the same business, so where we could take a 20 percent stake, now we can take a 40 percent stake if it was a $100 million business. So it’s not a very big leap in that sense.”

The firm’s portfolio companies focus on customers who earn less than $10 per day, whose collective spending power is expected to rise to $5 trillion by 2022 from $2 trillion in 2012. The emerging consumer, moving out of poverty and into the middle class, is beginning to make purchases such as houses and cars that require financial services, for example mortgages, life insurance and car insurance, Roth said.

“There’s vast growth that’s being driven in these markets through this emerging consumer group,” Roth said, adding that there is very little growth left in the insurance industry in Europe and North America. “You’ve got people who never had insurance before, and so you’ve got vast growth.”

LeapFrog’s Fund II has already made its first investment, agreeing to invest $29 million for an undisclosed stake in India’s IFMR Capital, a financial services business operating across 24 Indian states, in March.

LeapFrog’s debut fund, a 2009 vintage, closed on $135 million and is now fully committed, according to Roth. The firm made its first exit from this fund at the end of last year, selling Ghanaian life insurer Express Life to UK-based insurance group Prudential in a deal that generated an internal rate of return of 82 percent. Even though investors only had one exit by which to judge LeapFrog, LPs were reassured by the firm’s hands-on experience in both Africa and Asia, along with the team’s specialisation in insurance, Roth said. In the first six months of 2014, LeapFrog’s entire portfolio posted a 46 percent revenue increase collectively, demonstrating the opportunity for growth, he added.