Leapfrog’s general counsel Tom
Brunner explains best practice for investing in the
continent’s growing financial service sectors,
which risks are overhyped and how to best hedge against
Natural resources have triggered Africa's rise. But the
continent's expanding middle class will ensure its growth story
continues. Of the canny investors to have capitalised on the
increased demand for local financial services, Leapfrog
Investments is a pioneer.
The emerging market-focused investment firm has been active
in Africa since its inception in 2009. Reflecting on the last
five years, Leapfrog's general counsel Tom Brunner explains how
the investment climate has changed, dispels some some common
misconceptions and clarifies which risks can and can't be
In Africa, Leapfrog focuses its investments in the
insurance, pension and other financial industries. What are the
particular opportunities presented by these sectors?
What we have targeted is the emerging consumer. For the
hundreds of millions of people in Africa making their way out
of poverty and beginning to establish themselves, insurance and
other financial services are incredibly important ways to
secure and build upon their financial gains. This creates a
tremendous market opportunity for companies that are oriented
towards that category of consumers. At the same time, insurance
penetration is currently low in emerging markets. Insurance as
a percentage of GDP in emerging markets is at an average of
2.9% and the percentage of people benefiting from life, health,
accident and disability insurance is typically less than five
percent. This is in contrast to markedly higher averages in
developed markets. Consider that total life and non-life
penetration is 11.6% in the US, 13.4% in the UK and 8.3% in the
EU. Given the market's potential is almost unlimited in scale,
it is a very exciting opportunity.
Based on Leapfrog's experience, which countries' financial
services sectors are the easiest to gain a foothold and operate
The ones we have found to be relatively open and attractive are
Ghana, Kenya, South Africa and Nigeria, the last of which may
be a surprise to some. They are the four countries we have been
most involved with multiple times over the years.
macro risk is foreign exchange
Why would Nigeria surprise people?
There is a perception that because of Boko Haram, Nigeria is
a dangerous place. Certainly this has created terrible
problems, but our sense is that it's an indication of the
difficulty of modernization and rapid maturation. We still view
it as an exciting place.
Leapfrog has been active in Africa since 2009. How have you
seen the investment environment change over the last five
We have certainly seen much more interest in investment from
a variety of sources. Major global players in financial
services, and in particular private equity firms, are certainly
coming into Africa in a way they weren't in 2009. Five years
ago, they weren't remotely as interested. For us, this creates
possibilities for investment competition, but also very
attractive exit opportunities in years to come. Given exit
markets are less well established than in developed markets, we
need to be conscious of who are our realistic buyers.
We are also seeing bigger deals. In 2009, finding ways to
deploy $10 million in African financial services would have
been challenging. Today, we are looking at opportunities that
are many times that. I think that reflects the growing
sophistication in some of the categories of investment we are
looking at, and also the level of ambition and scale that
people are aspiring to.
For an investment firm focused on Africa, how important is
it to have operations on the ground?
It is very important to have your ears to the ground, and
with real expertise rather than just a shallow understanding of
the markets you are dealing with. But I think it is less
critical to have someone resident in, for example, Lagos as
opposed to Johannesburg or London. We have operated in many of
these countries drawing on people who have significant
experience in these markets. That is more important than having
people based in these cities.
From a legal perspective, what are the biggest challenges
for a foreign investor in Africa?
Certainly the biggest challenge is the potential for abrupt
changes in legal regimes. These are still relatively new
economies, with new governmental structures. So we would be
apprehensive about the possibility of radical change in, for
example, tax systems, throughout the course of an investment
that alters our basic equation. I think that today that is more
of a fear than expropriation or government seizure of
Second, there is always a concern about corruption. We have
a zero tolerance policy in this regard – we will not
ourselves participate in anything that smacks of corruption nor
knowingly invest in a company that is in any way dependent on
corruption. And we work very hard in due diligence to make sure
we are confident of that. But the concern is that it could
emerge further down the road, and that companies would be
pushed to the wall. That is something that we are very much
And for private equity firms, the third thing would be
ensuring a path to exit that is realistic and practical. That
is a central consideration from the very first conversation
when we are looking at a potential investment.
Regarding the risk of abrupt legal changes, is there any
way to mitigate this or is it something that must be accepted
when making an investment?
There are two levels to that question. First, it is
important to really understand the countries you are investing
in and put a lot of effort in assessing whether the situation
is stable and is likely to be stable over an extended period.
That is something we pay a lot of attention to. But on a more
technical level, it is possible to take out insurance against
certain kinds of regulatory risks. Political risk or tax
liability insurance, for example, from the London or New York
insurance markets can help.
And what are the most important soft considerations to take
into account when investing in Africa?
Number one is governance. The quality of governance in
companies that we invest in is absolutely critical in terms of
our confidence in the integrity of the investment, and our
ability to work with the management and exit the company in
time. We will only invest in companies where we think the
governance is good, and then we make a big effort to work
collaboratively with management to maintain and improve those
Second is social alignment. We are an impact investment fund
and are very much concerned with the social progress that can
result from the investments that we are making. That
complements, rather than clashes with, the financial gains. It
is important that company's management and other owners share
The notion that
these are countries that investors have to be uniformly
nervous about is overstated
Finally, openness to genuine collaboration is important.
Foreign investors need to be partners; they won't come into
companies with all of the answers, or think all the answers are
necessarily importable from previous investments. But at the
same time we need management that are open to working with us,
and want to find imaginative ways to strengthen their products
Which macro risks are the hardest to accept or
The biggest macro risk is foreign exchange. We can't control
it. And over the periods of time we are invested – and
given it is an equity investment – we can't really
hedge it. That is just part of the risk profile of these type
So it's a risk that must just be accepted?
What makes a difference for Leapfrog is that we don't target
just one or two countries. We invest in a large number of
markets which, in effect, creates a type of de facto
hedge. These countries' currencies are not particularly
synchronised so if one appreciates, others are likely to be
dropping. And over the five years we have been in business, we
have found that to work imperfectly but very substantially.
What about political risk?
I wouldn't put that at the top of the list. I would actually
say that motivating and keeping your key personnel on board is
probably a bigger challenge in these markets. For an investor
coming in it is critical to give a lot of thought to who are
the people who are the key building blocks of the enterprise
and how are they going to be retained and motivated. For a
company that is well run, and in a market with a skills
shortage of people at that level, the top people can be offered
jobs. So that is a significant challenge which has nothing to
do with the political environment.
So do you think the notion of political risk's prevalence
in Africa is overhyped?
I do. I'm not saying it isn't there, but I think the notion
that these are countries that investors have to be uniformly
nervous about is overstated. While there are countries that
remain failed and minimally functional, I think others that are
increasingly attractive are sometimes tarred with the same
What is your top piece of advice regarding investing in
You cannot overestimate the importance of local expertise.
It is not possible to come in and invest in these countries
without a genuine depth of understanding of how their economies
operate, and of the political, regulatory and tax environment.
It's challenging as the number of people providing that
expertise is not huge, but getting it is not just invaluable,
but a basic entrance requirement.
Partner and general counsel, Leapfrog Investments
Tom Brunner is partner and general counsel at
LeapFrog Investments, the world's largest dedicated
investor in emerging markets financial services. With
LeapFrog since 2009, Tom oversees the firm's legal and
compliance functions and also plays a lead role on the
South Asia team. He has been recognised as one of
'America's Leading Business Lawyers' (Chambers USA;
Best Lawyers in America; Lawdragon; Who's Who) and the
'World's Leading Insurance and Reinsurance Lawyers'
(Legal Media Group; International Who's Who of Business
Lawyers). Tom previously served as the founder and
chair of Wiley Rein's insurance practice, representing
American and international insurance carriers. Tom has
been founding counsel for several industry groups and
was recently awarded the Wiley A Branton Award for
Civil Rights Advocacy in recognition of his commitment
to the pro bono civil rights legal community. He holds
a JD from Yale and an AB cum laude from Columbia