An overwhelming need to address lifestyle diseases in emerging markets offers impact funds the opportunity to invest in healthcare technologies by creating lean business models that can scale fast, according to executives speaking at a panel at LeapFrog Investment’s annual LEAP event in London last week.

Impact investing, which aims to generate financial returns through positive social or environmental impact, is most amenable to emerging market’s underserviced healthcare sector, they said.

Providing people with access to healthcare services in rural areas or empowering people to understand and manage conditions such as diabetes, obesity, or infertility, requires a multidisciplinary approach. This is where impact funds can play a major role, for the way to disrupt the delivery of healthcare in emerging markets is to use digital technologies to have substantial impact, panelists agreed.

Impact funds such as South Africa’s emerging markets-focused LeapFrog Investments, whose portfolio includes companies such as Indian mobile health and digital wellness platform HealthifyMe and at-home diagnostics provider Redcliffe Lifetech, is a pioneer in the sector, Dr. Biju Mohandas, Partner and Global Co-Leader for Health Investments at LeapFrog told this news service on the sidelines of the panel.

The proliferation of new funds coming into the market, either as independent managers or with existing GPs such as Apax Partners [LON: APAX], Agilitas and KKR [NYSE: KKR] forming new impact strategies is welcome, Mohandas said.

The fund is “encouraged” by new players creating their own impact funds, or seeking to team up with established impact funds such as LeapFrog, he said, as was the case with Singaporean Temasek’s USD 500m minority investment and partnership agreement earlier this year.

“Our partnership with Temasek grew from their initial interest in impact investing and especially our focus on emerging consumers,” Mohandas said.

Temasek recognises the opportunity for both impact and returns, and the partnership will seek to deploy more capital toward this pursuit, not just within the funds’ own portfolios but for the industry more broadly, he said.

Data deep dive

One way to have an impact on healthcare services is to accelerate the establishment of affordable and convenient omni-channel diagnostics services such as Redcliffe Lifetech. The company sources its medical equipment from big players such as Abbott [NYSE: ABT], Roche [SWX:ROG], Thermo Fisher [NYSE:TMO] or Danaher’s [NYSE: DHR] Beckman Coulter, which give its laboratories the necessary accreditation that is trusted by doctors and ultimately, patients, one of the panel speakers said.

Differently to standard pathology laboratories, Redcliffe Lifetech was able to accelerate the establishment of laboratories that offer research capabilities while also capturing data points and genes that identify diseases early. This enabled consistent quality of services that are personalised to the patient beyond a standard pathology lab service, the panelist said.

Gathering data points using AI-enabled technologies in emerging markets gives awareness of population diseases which can help balance inequality, two panelists agreed. In such scenarios, impact investors are most aware that companies have to hold patients’ and consumers’ trust while scaling, several panelists agreed.

Impact funds can ensure, through the companies they back, that customers are empowered and in charge of their data, so that they can decide what they want to share, one panelist said. Placing the customer at the forefront of the service calls for companies to manage concerns related to privacy issues. The use of apps and subscription models is one way to ensure that consumer data is not sold, one panellist said.

Impact with distinction

While every impact fund has its own strategy, LeapFrog Investments creates distinctiveness from other players through intentionality, depth of impact and expertise, Mohandas told Mergermarket. Just as companies measure internal rate of returns (IRRs), LeapFrog uses standard matrices to measure impact.

It has also contributed to creating broader industry metrics which are industry standard, and which measure not only output but also outcomes through impact multiples, Mohandas said.

LeapFrog Investment’s metrics have value and impact, as shown by its portfolio company HealthifyMe, he added. The wellness app measures how a user’s life has changed as a result of using the technology.

The HealthifyMe app, which is the largest health and fitness app outside US and China, has 32m users of which 80% are in emerging markets, according to company data. Its active users experience on average 1.4kg in weight loss per week, while over 50% of users see a 15% reduction in metabolic markers such as Hba1c and Cholesterol levels, he said. This data is based on 1bn+ foods and exercises tracked over the last 10 years, he said, with 21 million kg lost over the course of 10 years.

Inversion of M&A

Strategic players in mature markets have been approaching impact funds to understand how their portfolio companies are able to scale at an accelerated pace in emerging markets, one of the panellists said.

In regions where [healthcare provision] is driven by out-of-pocket payments with limited insurance, companies have to be more cost-efficient than in established markets, Tushar Vashisht, cofounder and CEO of HealthifyMe told this news service on the sidelines of the panel.

“We have been able to scale extremely quickly, which drives efficiency and solutions,” he added.

Emerging market players have become proficient at dealing with challenges such as consistently high inflation, Vashisht explained. This is why digitally enabled healthcare businesses in these regions are disruptors and early-movers even in an unfriendly macroeconomic environment.

Such capabilities are expected to create an inversion in M&A activity so that outbound cross-border deals will come from emerging markets, Vashisht suggested. This will be geared at established players that are looking to understand how to create a low-cost, high margin model without losing the quality, he said.

Established market players will need to learn accelerated scale-up techniques from emerging market players, and the best way to do this is to belong to a company that is proficient in the skill. An M&A transaction brings with it all the required experience and expertise, and accelerates the process.

Companies backed by impact or PE funds in emerging markets will engage in outbound M&A activity, making even large acquisitions of depressed assets in established markets, Vashisht suggested.

HealthifyMe told this news service in August last year that it was looking at M&A in India, Southeast Asia and North America to drive growth, having secured USD 75m in a Series C financing at a USD 1bn valuation, led by LeapFrog alongside other investors. The company is now reportedly looking to raise up to USD 150m in fresh funding.

According to sister publication Unquote, European GPs raised EUR 4.1bn across 17 first and final closes in 2021 for vehicles focusing on impact-driven investments, with EUR 2.56bn raised in January 2022 alone.

Among LeapFrog’s investments in healthcare services is its USD 22m majority stake acquisition in Kenya’s GoodLife Pharmacies in 2016. It recently sold a 30% stake in the pan-African pharmacy chain to CFAO Group’s Eurapharma for an undisclosed amount, while still maintaining a majority stake.

In May this year LeapFrog lead a USD 61m funding round in India-based diagnostics platform Redcliffe Lifetech.

Others substantial players that have raised impact funds include UK-headquartered Apax Partners, which registered Apax Global Impact in September 2021; EQT raised an "impact-driven" Future Fund, which was announced in October 2021 with a EUR 4bn target, while Apollo Global Management launched its first USD 1bn Impact Fund in 2020, according to the same Unquote report.

Among its efforts, LeaFrog helped to articulate the vocabulary for the IRIS metrics, which are designed to measure the social, environmental, and financial performance of an investment.

The resulting IRIS framework, part of the Global Impact Investing Network, aims to provide a level playing field for investors to evaluate fund performance across these segments, Mohandas said.

In this macroeconomic environment, it is the right time for emerging market companies to have impact, Vashisht said.