It’s an almost inconceivable scenario for a company in the saturated insurance markets of Europe or the US, but one mobile insurance platform working in developing countries wants to grow its customer base by 750,000 people a month.
Bima, which means “insurance” in Swahili, has reached around 18 million customers in Asia, Africa and Latin America since it was set up five years ago. It works by selling life insurance through mobile phone network operators – a kind of loyalty scheme that delivers gains for the operator, and an insurance safety net for people long locked out of financial services but now redefined as “emerging consumers”.
Jim Roth co-founded the private equity firm LeapFrog Investments, which has a stake in Sweden-based Bima. For him, this is a perfect example of how “profit with purpose” works.
LeapFrog is an impact investor – its investments have a social or environmental benefit while also turning a profit. LeapFrog invests more than $500m in companies that have a positive social impact delivering financial services, such as insurance, in high-growth markets where the number of emerging consumers is rising each year. It reckons this market amounts to 4 billion people, who are moving out of absolute poverty and seeking goods and services.
“They get insurance and credit and savings and mortgages and pensions. There’s a huge opportunity to provide them with these tools that make their lives better,” said Roth, who said insurance was both a safety net – preventing people from slipping back into poverty – and a springboard, allowing new consumers to take more risks with their businesses or other activities, such as farming.
Roth says LeapFrog’s investments also benefit its core investors, who include insurers Axa, Zurich and Swiss Re, JP Morgan, the World Bank’s investment arm IFC, and Britain’s CDC Group, the UK’s development finance institution.
“If you look at growth in the insurance market in Europe and the US, it’s very saturated but in Africa and Asia, very, very small percentages of the population have any kind of insurance,” Roth said. “There’s an extraordinary commercial opportunity and we think this supplements the other tools in the development toolbox. This is a very powerful tool because it can bring a lot of money behind it to provide quality, relevant and affordable goods and services to low-income people.”
However, this mix of private finance and money funnelled through multilateral or government bodies to support private businesses can be controversial. Companies that do not benefit from this mix of funds are also competing in the burgeoning insurance market.
Then there is the aid industry perspective: private equity firms looking to invest in developing countries have long been a bete noire for many humanitarians – their motives are questioned regularly amid fears that their models ultimately aim to exploit poorer consumers.
According to Nicholas Hildyard of research and solidarity group the Corner House, the main objective for private equity funds is to make profits, which then often leave the country where the money has been made.
“You are putting money in to extract money out,” he said. “The whole thing is about development aid as financial extraction … The people who are making hand-over-fist profits from this are the private equity fund managers,” he said. “Much of what is coming in through private equity is short-term capital. It goes in and out of countries quickly; it doesn’t build mutualistic social networks – in fact, it actively undermines them.”
Despite misgivings in some quarters, the private sector is being called upon increasingly to do more as the UN prepares to adopt an ambitious post-2015 development agenda. In July, at a financing for development summit in Ethiopia, UN member states promised to work for “full and equal access to formal financial services for all” and called on the private sector to be part of the solution.
“We encourage impact investing, which combines a return on investment with non-financial impacts. We will promote sustainable corporate practices, including integrating environmental, social and governance factors into company reporting as appropriate, with countries deciding on the appropriate balance of voluntary and mandatory rules,” said the resulting deal.
While partnership, including between governments and businesses, is a buzzword among proponents of the SDG agenda, anxiety remains about how best to exercise control over the private sector.
Alex Evans, a senior fellow at New York University’s Center on International Cooperation, said in a paper for the OECD’s Development Cooperation Report that the private sector would have to create most of the 670m jobs needed over the next 15 years to keep up with the growth of the labour force.
“There is, nonetheless, much unease and wariness about this new partnership agenda. Many developing country governments fear – with some justification – that the enthusiasm of some developed country governments for partnerships is a figleaf to cover their under-achievement on official development assistance (ODA) spending targets,” he said.
However, LeapFrog’s Roth believes that because the needs are so great, there is room for all actors. He says ideological positions, such as arguing that only the state can do development, or only NGOs or the private sector, are not helpful.
“For me, that is one of the central tragedies of development: not being open to the idea that in each of these there’s good and bad and we’ve got to figure out what is good and work hard to maximise it,” he said. “If we really want to reach our development goals, we have to employ every single tool in the development toolbox.”
The private sector is already a key development player: foreign direct investment to developing countries in 2013 totalled $758.2 bn, compared to $134.5bn in total global flows of official development assistance (ODA). Global equity markets are estimated to be worth around $50trn.
Roth said LeapFrog’s aim is to unlock this capital. “We established ourselves to have a positive social impact and to open up the gates of the capital markets, to work to intermediate the trillions of dollars that are in London and New York, and to put that capital to work for positive social ends,” he said.
But some critics ask how private equity funds can guarantee the sustainability of businesses after they sell their stake. “The whole point of private equity funds is to flog off their stakes. That’s how they make their money,” said Hildyard. “They say they are bringing in a new business model – if they are, it’s one that exacerbates inequality and frays those social relationships needed to build a fairer society in the longer term.”
Stephen Bowey, a partner at LeapFrog, said the firm works hard to ensure that gains are built upon. “When we exit, we look at the exit partner. Is their strategy aligned with ours? What is the impact for the customers and staff?” he said.
A report last year by JP Morgan and the Global Impact Investing Network estimated the market size of impact investments at around $46bn in 2013. For Roth, the broad, global trend underlying impact investment is irreversible.
“Demographics is destiny. Ultimately, this vast movement of people out of absolute poverty heading towards the middle class … this is what is going to drive the business, and yes, you have to manage the risks day-to-day but the broad story is a positive one because that group is currently driving a lot of global growth.”