Five minutes with LeapFrog's David Steel

In Asia, it's less common to find fund managers with responsible or social investment policies than in Europe or the US; do you find that your financial and social goals clash?

LeapFrog Investments does not, because we only make investments where we’re achieving comparable returns to what other emerging market developing country private equity funds target.

One of our screening criteria is whether we can make those kinds of returns – we do not want to trade off returns for social impact, because we feel it’s critical to demonstrate to the broader business community, investment community, that it is possible to find socially impactful businesses that are profitable. And I think there are a lot of trends, particularly in our area of focus (financial services) that demonstrate that [such investments] can probably be more profitable than other emerging market private equity investments.

Our whole fund was predicated on that idea. For example, when you drill down deeper to look at the vast emerging consumer segments, there’s a huge number of people who are not being offered the products and who are underserved. I think about things like, how many people have bank accounts? In the Philippines, it’s 27 percent of the population above 15; in Indonesia it’s only 20 percent. Also, in the Philippines, only 13 percent of those over 15 have debit cards, and in Indonesia it’s less than that. And so in financial services, the opportunity there is just tremendous.

Some of the underserved population you talk about is wary of scams or being taken advantage of ; how do you get those people to trust your companies?

Trust is a huge issue in financial services, particularly in insurance, because the product is sold and not bought. And in order to develop that trust, you have to think very creatively about the way in which you design your product, the way in which you administer your product, and the way in which you pay claims. An example of that is when designing traditional insurance products for people who are lower down in the socioeconomic scale, oftentimes insurers have a very structured process for making claims payments. However, the best players in this emerging consumer space instead think creatively about claims. These people who have had the loss of a family member, they need some cash immediately. So [the firm] may not pay out 100 percent of the benefit right away, but they pay out some material portion of the benefit immediately, even without the full documentation needed for a claim. And they take that into account in the pricing, but by making that payment immediate, the person really sees the value in the product. Another thing that is often done is that the payment of the claim is made into an event – it’s not just money coming through the door, but it’s a payment delivered to their home, or in a public setting, maybe through the village head – so other people can see it.

What are the attributes you're looking for in potential portfolio companies?

Our best partners are businesses that see the potential of this vast emerging consumer class, and really believe that they have the potential to differentiate themselves from everyone else by aggressively pursuing that opportunity.

A second attribute we really look for is a partner that is looking for more than just capital – a partner that is really looking to have a thought partner go on the journey with them. We’re looking for somebody who wants to have that ability to pick up the phone at a particular challenge and say, “LeapFrog, have you ever experienced something like this in another market? Can you share your insights from that market, so that I can make more informed decisions?” Or alternatively, “Can you come over and sit with me and my team and brainstorm?”

So we really look for companies that thirst for knowledge and are open to input. My experience is 180 degrees opposed to [the idea that Indonesian companies don’t want experience, only capital] – not all are open, but there are a lot companies out there that have deep interest in getting that expertise, from the biggest to the smallest.