LeapFrog Investments Ltd. plans to raise $800 million for its latest fund as the private-equity firm seeks stakes in African banks, insurance brokers and payment companies to tap into rising demand among low-income consumers.
Overseas Private Investment Corp., the Washington-based development financing unit of the U.S. government, has approved an investment of as much as $200 million in the fund, the buyout company’s third, said Karima Olokun-Ola, a partner at LeapFrog in London. Billionaire George Soros invested in LeapFrog’s first fund through his Soros Economic Development Fund because the financial-services market is under-served, she said.
LeapFrog is betting there’s greater scope for investments among companies that target Africa’s emerging consumers because they are more than four times the size of the continent’s middle class. New regulations requiring insurance companies in Kenya to hold more cash will create buyout opportunities, while the continent’s largest population in Nigeria and more sophisticated consumers in Ghana make those markets attractive, Olokun-Ola said.
“We are speaking to insurance companies, ones that are looking for capital and those ones with sufficient capital but are looking to take advantage of consolidation and grow market share” in Kenya, she said by phone from Nairobi last week. “We’re looking at payment companies because it’s becoming a popular tool that just offers much cheaper ways of doing business” across the continent.
The company’s previous fund, the $400 million LeapFrog Financial Inclusion Fund II, still has some money to spend, Olokun-Ola said. It also has a $350 million joint venture with Newark-based Prudential Financial Inc., which is focused on similar assets, she said. The company’s first fund raised $135 million.
Kenya has 49 insurers, five re-insurers and almost 200 brokers in a country where about 3 percent of the population has cover, according to the Association of Kenya Insurers. The market is also overbanked, with 41 lenders serving 44 million people, creating opportunities for mergers and takeovers because of new interest-rate caps that are squeezing profit margins, according to Nairobi-based Cytonn Investments Management Ltd., which oversees 73 billion shillings ($716 million)
“The more prudent insurers will be fine,” Olokun-Ola said. “The ones that need to go and raise two to three times as much capital as they have now, they’re either going to be taken over or they’ll go out of business.”
Emerging consumers earn between $2 and $10 a day and make up about two-thirds of Africa’s population of more than 1.2 billion people, while the continent’s middle class is less than 15 percent, she said.
Olokun-Ola couldn’t say how much Soros invested and his fund didn’t immediately reply to e-mailed requests for comment. While OPIC has agreed to support LeapFrog’s fund it hasn’t made any commitments, the company said in an e-mail. The fund forms part of OPIC’s efforts to support investments into high-growth companies that reach low-income consumers.
LeapFrog’s investments average $30 million and generate internal rates of return of 25 percent, or three times the money invested, Olokun-Ola said. The company has made two sales so far out of eight investments in its first fund, and both have met targets, she said. The Prudential vehicle has a larger mandate and may invest as much as $200 million in one company, she said.
A third of the company’s new fund will be invested in health-care delivery and health insurance, Olokun-Ola said, describing it as the next step beyond financial services to help low-income Africans.
“Like an insurable catastrophe that can wipe out the consumer, so can a health emergency,” she said.