Deal focus: Temasek supports impact’s giant leap

With each jump in fund size, LeapFrog Investments has broadened its mandate. The Asia and Africa-focused firm raised $135 million for its first vehicle in 2010, which was restricted to backing microinsurance businesses. Four years later, it returned with a $400 million fund and started investing in the broader financial services space. Fund III closed at $700 million in 2019 and signaled a concerted push into healthcare.

Michael Fernandes, a partner at LeapFrog, places Temasek Holdings’ recent $500 million commitment to the firm – one of the largest-ever made in the impact space globally – in this context. The Singapore government-controlled investment fund will participate as an anchor LP in future funds, but also provide growth capital to support an expansion of LeapFrog’s capabilities.

“It means we can add new sectors and enter new areas, and we are working on both those dimensions,” he says. “Our approach to investing is typically with sector specialist teams and each fund has a reasonably tightly defined central space. We will continue in that fashion, but with more sectors and broader geographic remits.”

When LeapFrog moved into healthcare, it built up a team of nine investment professionals, although some are recent hires. Biju Mohandas joined only last month as global co-lead for healthcare. He works alongside Felix Olale, the other healthcare co-lead, and Fernandes, who is the only team member to span financial services and healthcare. LeapFrog has approximately 40 investment professionals in total.

Additional target sectors have yet to be identified. Fernandes says this is currently under discussion with Temasek, noting that the two parties have common areas of interest and common issues they want to address. Temasek established an impact investment arm – ABC World Asia – two years ago through Temasek Trust. Key themes include financial and digital inclusion, improved healthcare and education, climate and water-related solutions, sustainable food and agriculture, and livable smart cities.

Last year, it served as a cornerstone investor for a $100 million global water impact fund launched by Emerald Technology Ventures. The vehicle backs early- to growth-stage companies driving technological innovation in water.

“Temasek is ready to deploy more capital into funds and companies that achieve positive social impact while achieving strong financial returns,” says a spokesperson for the fund. “We take a long-term view of our investments and measure the performance of our portfolio as a whole. We are driven by bottom-up intrinsic value tests for each opportunity, with returns tracked against a risk-adjusted cost of capital.”

Temasek describes LeapFrog and ABC World Asia as the two core pillars of its impact investment strategy. It is not an LP in any of LeapFrog’s previous funds. Temasek is the first Asia-based sovereign investor to back the firm and one of the first globally that is not classified as a development finance institution. Temasek’s commitment is relatively flexible, according to Fernandes. It envisages a minimum percentage allocation to each new fund but is not tied to a specific number of funds.

One of the reasons for this flexibility is that LeapFrog has yet to decide how it will be set up in the next vintage. One option under consideration is raising separate healthcare and financial services funds. There will continue to be a lot of crossover between the two sectors, given insurance companies are the biggest payers for healthcare services in numerous markets.

Fernandes prefers to define LeapFrog by its goals rather than by assets under management. The firm currently delivers essential products and services to 212 million emerging market consumers, and it wants to reach one billion by the end of the decade. Temasek was brought in partly because LeapFrog “would need to invest beyond what organic means would allow to serve the impact market at scale,” he says. “We could do it organically, but it would be slow.”

Meanwhile, Temasek’s commitment extends a broader institutional investor awakening with regards to impact. “There is a need to overlay raw capital with a real sense of purpose,” Fernandes adds. “Investors want that at the retail level, and institutions want that. We were able to add that mandate explicitly, so people are comfortable with what we are trying to do and that we are doing it in a way that limits commercial returns.”

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• Topics
• Expansion
• South Asia
• Southeast Asia
• GPs
• Temasek Holdings
• LeapFrog Investments
• Impact investment
• Africa
• Asia