Legal & General: Inside the UK’s largest impact investor
Across the UK, Legal & General has invested over £22 billion in affordable housing, homes for the homeless, clean energy, life sciences, creative industries, and technology and infrastructure. Is this the institutional-scale impact model we have been waiting for?
Base Red at Manchester Science Park
In the middle of an industrial park outside Leeds on a typically British cold and grey winter day, Euromoney arrives at a factory emblazoned with the colourful umbrella that is the logo of insurer and asset manager, Legal & General (L&G).
Miles from its headquarters in London, one might assume this is a call centre or perhaps a very large storage site, but it’s not. Rather it is a modular housing factory, and when it’s fully operational it will be manufacturing 3,000 UK homes a year.
“We’re the biggest UK housing developer you’ve never heard of,” says Rosie Toogood, chief executive of the operation standing in a hard hat in the middle of a hanger the size of seven football pitches. Indeed, L&G owns five housing businesses.
Real estate has long been the domain of insurers and pension funds, but what is unusual about L&G, however, is that its investment in housing comes with a mission – one painted on the wall of the factory; it reads: ‘Making the housing market fairer for all.’
“The UK needs 300,000 homes a year, yet only 150,000 are being produced,” says Toogood. “As an industry, we’re still using methods from the Victorian age in building. With a large baby-boomer population staying longer in their family homes, the inventory is low; as prices have increased, key workers are struggling to find affordable homes – as are first-time buyers. We need a lot more homes.”
Modular homes that are quicker and can be cheaper to build than traditional homes, as well as being more energy efficient, are part of the solution.
L&G is working with local authorities to tailor modular housing developments to their needs.
But modular homes are only part of a much broader ambition at L&G – one that started a decade ago when current chief executive, Nigel Wilson, was chief financial officer. The ambition was and is, where possible, to use the firm’s multiple pools of capital to invest in socially and environmentally positive projects, as well as companies that will help the UK thrive.
Funds are sourced from L&G Capital (LGC), which invests the group’s principal balance sheet; L&G Retirement, the £60 billion annuity fund that invests assets from pension risk transfer deals; and from the £1.14 trillion of assets of L&G Investment Management (LGIM).
It’s a powerful combination. LGIM Real Assets – the firm’s real estate investment division, which manages £34 billion – works with the principal and investment arms to create and structure assets that ensure the most effective deployment of different types of capital.
It’s not environmental, social and governance investing – buying into funds or stocks (although LGIM does that) – but rather it is the more resource-heavy and unglamorous commitment of traveling around the UK meeting with local authorities, universities and businesses and determining what L&G can offer in terms of capital and expertise that will have the biggest impact.
That part of the business is called Future Cities – a plan to ensure the UK’s cities are “great places to work, live and play for people of all incomes, all ages,” says Wilson.
It’s enlightened self-interest – we want a successful British economy. If we have to prime it, that’s fine with us - Nigel Wilson, L&G
It is a project that requires many moving parts in addition to affordable housing, such as the financing of innovation centres and science parks, data centres, commercial buildings, clean energy and technology, creative industries, retail and entertainment, and retirement homes. L&G has already invested over £22 billion in these components in 20 different cities across the UK. In total, the firm is committed to invest £60 billion.
“The world is long of liabilities – climate change, urban population growth, longevity – and that requires long-term investment and the creation of long-term assets,” says Wilson.
“We also have a responsibility. There’s been a severe lack of investment in the UK, but we can point fingers or we can step up and commit long-term capital, as well as being able to use our balance sheet to take on riskier investments. Given our size, that will have an immediate material impact on GDP.”
Wilson makes clear that he thinks pension funds, institutional investment managers and insurance companies should be following in L&G’s footsteps.
“Globally, the OECD estimates there is $27 trillion of pension savings,” he says. “We have to gather that, handle it, invest it and administer it. The pensions and insurance industry is long of liabilities and short of assets and returns on those assets.
“If our sector can’t play its part in solving society’s challenges at a time when interest rates are bobbing around either side of zero, then history will judge us badly.”
Wilson is also clear that returns are essential: it is pension fund money and shareholder money the firm is investing after all.
“We’re in the business of making returns – and we have to make that clear in all our investments,” he says. “I call it ‘inclusive capitalism’.”
It sounds a lot like scaled up impact investment. Is L&G’s model what the world has been waiting for?
One might imagine that the UK in a post-Brexit world would be the last place in which to make investments, but Wilson’s view is quite the opposite.
“We’ve been out there in the UK’s cities since the financial crisis, and we have seen a different scenario to many who were focused only on London,” he says.
It is a vantage point with many benefits. Wilson, for example, was on former Conservative prime minister David Cameron’s advisory committee before Brexit with other heads of large financial institutions in the UK.
“I think we were the only company there that predicted which way the referendum would go, because we were out there seeing how people felt,” Wilson says. “They were tired of disinvestment, the rich getting richer and decisions being made by London elites while the working classes were suffering.”
But that vantage point also gave Wilson the confidence that the UK economy would not be brought to a standstill by a vote to leave the EU – and that there was a large investment opportunity.
Indeed, while UK GDP growth has slowed the last three years (as investment has slowed), the UK’s unemployment rate is currently 3.8% – the lowest it has been since the 1970s and almost one percentage point lower than 2016 when the referendum took place.
“We knew Brexit wasn’t going to be a problem for the economy or for the UK financial services sector,” says Wilson. “There is plenty of opportunity for growth and the skill set to grow in cities around the UK. Also the job rate should ensure consumption will stay high, and government expenditure is going up this year, so the need for investment is even higher. That will hopefully drive real-wage increases and lead to real exports.”
Platform in Leeds
Rather than be paralyzed by Brexit, Wilson says the firm’s maxim was: “We are neither ‘Leave’ nor ‘Remain’ but ‘Do’.”
It was a phrase that former Conservative prime minister Theresa May adopted – John Godfrey, L&G’s corporate director and Wilson’s right-hand man, had a brief stint out of the firm to work in May’s policy unit.
Wilson has refreshingly down-to-earth attitude. His personal understanding of the plight of British cities outside London and the effects of investment on improving social mobility is born of direct experience.
He lived in a council estate in the 1960s outside Newcastle until he was 12, before moving to a new town where, he says, he was fortunate to attend a good school and meet the first of many mentors – among them Dennis Stevenson who, well before his downfall as the chairman of beleaguered HBOS, was chair of that new town’s development corporation.
Now renting part-time in London when not at his family home, Wilson doesn’t own a car and takes public transport to work (it’s quicker, he explains) and flies budget airlines for business when he can.
“You can’t expect to relate to people and win their trust if you’re acting like the elite,” he says.
And L&G has had to work hard to win the trust of people.
Wilson says when the firm first started approaching councils and local authorities, the financial crisis was in full flow: “We’d go out and make our presentations to perhaps a crowd of two or three. Some would think we’d got the wrong room, but gradually more and more people came out to hear what we had to say – that we wanted to work with them and invest our capital in their cities.”
It’s not new, nor is it rocket science, he points out, it just “hasn’t been done in Britain for 40-odd years”. Outside Wilson’s office hangs a framed 1860 L&G balance sheet that is a reminder that the firm was investing in real assets more than 150 years ago.
Tom Warburton is director of Newcastle City Council’s City Futures and has worked with L&G on a £65 million investment within a larger regeneration of a 24-acre site that used to be home to the Newcastle Brown Ale Brewery. The site is now known as Newcastle Helix. L&G is investing in two large office buildings on the new site.
“There are various models of funding for us – we can borrow from the government and build ourselves, but we’re not development experts,” says Warburton. “We could also go into a development agreement with a private-sector developer who then goes to find the money, but the margins are so low it can be hard to close a deal. But L&G had the money to invest over the long term and had the internal development team through LGIM Real Assets.”
Pete Gladwell, head of public partnerships at L&G, says: “If we hadn’t financed the deal, then it’s possible it would have been done by private developers backed by private equity. They would have needed higher returns, and if sales values had taken a dip would have stopped the project.”
At the Helix, the council will lease one of the L&G’s properties for 35 years, but the second building is being taken on fully at risk.
“It’s a win-win. As we de-risked their investment a little, that has enabled them to invest more capital than they might have done,” says Warburton.
It’s still a level of risk for L&G that not many insurance companies would take on.
“That’s our own balance sheet we’re committing to fund new offices in Newcastle,” says Gladwell.
But, he points out, the long-term and deep relationships with Newcastle Council and Newcastle University, which is also overseeing the £400 million regeneration project, mean that L&G was able to get comfortable with the deal and the opportunities for leasing.
“It’s a lot more resource-intensive to develop relationships with the public sector,” points out Gladwell, “and work collaboratively with them to develop projects that meet their needs but that also match our return expectations. And there can be dead-ends where we just can’t reach a comfort level on an investment.”
And some local authorities move faster than others, he adds.
Nor is it a glamorous lifestyle. In keeping with Wilson’s down-to-earth attitude and the firm’s responsibility to pension-fund owners, Gladwell and his colleagues spend much time traveling around the UK by train and staying in budget hotels. There are easier ways to invest.
“We could have simply bought shares in a large oil company,” says Gladwell. “But if you are stewarding £1 trillion, it will do good or bad. We would rather it did good. The best way to help it do good is to work collaboratively with those who know what the need is locally; no one knows that better than the local communities, authorities and mayors.”
We try not to get too focused on everything having to work out perfectly, but we also have to have the integrity to turn down profitable deals if we don’t think they’re right for the public sector - Pete Gladwell, L&G
It’s not without its challenges, even aside from the time involved.
“These are very long-term investments, and trying to make decisions over a 40-year period will always have an element of risk,” says Gladwell. “We take real care to make sure deals are structured in a way that doesn’t expose the public sector to undue risk, but the hard question we make sure we ask ourselves is: should the public sector take on the risk?
“If it’s a lease to the British government for offices, then we can say with certainty they will be around in 40 years, or for homeless housing in Croydon, then sadly yes, there will likely still be a need for decades to come. But some deals we have walked away from as we thought the local authority was taking on too much risk.
“We try not to get too focused on everything having to work out perfectly, but we also have to have the integrity to turn down profitable deals if we don’t think they’re right for the public sector.”
The breadth of deals already done is impressive: a 40-year £35 million investment in Headingly Cricket Stadium in Leeds; £1.5 billion investment for the UK’s Cabinet Office to develop new hubs for civil servants in cities outside London; a £44.6 million investment in homeless housing in Croydon; a £162 million investment in a retail and business park in East Leeds; the development of 1,000 homes in Salford; £285 million to help Glasgow city provide equal pay to its female employees; and a programme that will deliver £4 billion of housing and science park investment in Oxford over the next 10 years.
There's a clear method to investing – being part of a broader collaborative investment strategy for a city and choosing industries that have potential.
“Priming the pump,” for other investors as well says Wilson.
His time on a PhD scholarship at MIT in the US taught him the power of venture capital, where he also saw how universities can be anchors for a city’s economy and attract investment.
The Helix in Newcastle, for example, includes a university institute for data analysis, the national innovation centre for data and an innovation centre for ageing analytics – Newcastle University is a leader in both big data and research into ageing.
In Manchester, through its 50:50 joint venture with Bruntwood, L&G is invested in the Manchester Science Park that is located next to the city’s university, as well as Manchester Metropolitan University and Manchester University NHS Foundation Trust.
The tech incubator at Manchester
The park is home to over 150 fast-growth science and digital technology businesses that are fed by the universities’ talent.
The University of Manchester ranks 11th in the world for pharmacy and pharmacology, for example, while over half of all Manchester’s higher-education graduates stay to work in Manchester. The plan is to grow the campus to a million square feet within the next decade with funding from the local council and the EU.
In June 2019, L&G also announced a 50:50 partnership with Oxford University to develop homes for university staff and students, as well as science and innovation districts in and around Oxford. Over the next 10 years, £4 billion of funding will be allocated from L&G’s shareholder, annuity and LGIM-managed funds.
In the case of Oxford, it’s less about regeneration and more about affordability, provision of housing and continued growth, says Rachel Dickie, who is interim chief executive of Oxford University Property Development.
Oxford property prices have increased in tandem with local population growth of 11% since 2004, pricing out many university workers, students and key workers. Affordable residential and commercial space will be essential for the university to continue to attract research graduates and to support spin-out and scale-up businesses.
Innovation has been a key part of L&G’s investment strategy.
“We always have had a view that technology, innovation and demographics will have a bigger impact than Brexit on the UK economy,” says Wilson.
The modular housing business is a way of innovating house building in the UK. Toogood, who runs the business, was formerly the business development director for Rolls Royce’s civil aerospace business. She says the housing industry can learn how to improve processes from other engineering and manufacturing industries.
Innovation is also exemplified in L&G’s partnership with Bruntwood. Its £2 billion investment over 10 years in science and technology assets across the UK will disrupt what it sees as a stagnant model.
“Science parks are typically under-scaled, loss-making or barely breaking even – but we believe that’s because the models do not support the companies and their own growth trajectory,” says Phil Kemp, chief executive of Bruntwood SciTech.
He adds that partners such as L&G are preferable to private equity firms that “simply aren’t there for the long term and also don’t have the same commitment to the larger social investment aims.”
These companies need capex and we have the mission and risk appetite to provide the cash flow for that - John Bromley, L&G
Manchester Science Park, for example, is a modern take on a traditional science park: there is a range of space available for different types of businesses, from two people sharing a desk in a co-working space to businesses being able to lease an entire building.
To take one: Cubic Motion is a world leader in performance-driven facial animation for the global video games market. It started as five friends at Manchester Science Park and is now a 70-person team.
One building is dedicated to a shared working space with a community feel. There is a café, a gym, an open space for networking events and seminars, as well as a post accelerator programme with Cisco. Not far away is Media City at Salford Quays, in which LGC has a 50% stake. It is the largest purpose-built creative, digital and technology community in Europe, and the UK’s first media campus.
L&G has also announced it will be a funder of Sky’s new 32-acre TV and film studio at Elstree, north London.
The value of creative industries to the UK GDP has risen from £94.8 billion in 2016 to £101.5 billion, and has grown at nearly twice the rate of the economy since 2010.
“The expansion of television to a global audience via streaming has meant the UK creative industry is thriving,” says Wilson. “Growing at twice the speed of the economy as a whole and accounting for over two million jobs, our creative industries are a key component of Britain’s bright future and a great match for backing our UK pension promises.”
He points to shows such as ‘Game of Thrones’ and ‘Chernobyl’ as boosting confidence in UK creative industry. It’s hoped the Sky studio will create 20,000 jobs – again an industry that should be unaffected by Brexit, as should the science parks.
L&G is also bringing innovation to housing for those of retirement age.
In 2017, it created Inspired Villages – formed by the acquisition of the assets of two joint ventures between English Care Villages and Places for People for around £40 million. Inspired Villages provides high-end housing and facilities for baby boomers who are looking to be part of a supported community.
Drawing from the model of retirement communities in the US, Inspired Villages fills an important gap in the UK, where the population aged 85 and over is expected to double over the next 25 years.
“Very slowly, other sectors are waking up to the simple fact that the old are growing in numbers and that they have more money,” says Wilson. “By 2024, the global over-50s spend will have grown from $26 trillion to $37 trillion.”
Tom Lord is COO at Inspired Villages Group, which includes a new community on the outskirts of Warwick. There, apartments go for between £280,000 for a one-bedroom unit and £900,000 for a three-bedroom penthouse.
It’s an entirely new proposition for the UK elderly.
“The boomer generation doesn’t want to be a burden and they want to be in a safe, secure and social group where they can keep their independence but downsize to something smaller and that will work for them as they age. They want a lifestyle that is rich up to the end of their life,” says Lord. “It’s so new still that local councils don’t know quite how to place it within their planning strategies yet.”
The plan is to build 50 such villages across the UK that will host 12,000 residents. The impact will also be that housing stock is freed up as that generation leaves family homes.
Energy and climate
L&G’s involvement is perhaps most unexpected in clean energy and climate-related solutions. John Bromley is the director of clean-energy strategy at L&G. He gives Euromoney a tour of two Oxford-based companies in which the firm has made investments.
In November 2016, LGC invested £2.5 million in Oxford Photovoltaics (Oxford PV), a spin-off from the University of Oxford, to commercialize perovskite, a low-cost, highly efficient solar cell absorber material that can improve a solar panel’s ability to convert sunlight into electricity.
The second firm is Tokomak Energy, which has a five-stage plan towards producing fusion power within the next decade.
Nuclear fusion involves hydrogen atoms combining to make helium, releasing huge amounts of energy in the process – without radiation – and has the possibility of being a cheap and limitless clean energy source.
“These companies need capex and we have the mission and risk appetite to provide the cash flow for that,” says Bromley.
He joined L&G in 2015 to develop the firm’s clean energy business.
“Even before the Paris Agreement [of 2016], we had determined we should be a 100% focused on decarbonization and commit to a net zero compliant portfolio,” he says. “If a long-term insurance institution doesn’t back clean energy, one would have to wonder about their strategy.”
Since 2015 the firm has also made investments in offshore wind and has been a cornerstone investor in two funds.
LGC has acquired a 13% stake in Pod Point, one of the UK’s largest electric vehicle charging infrastructure providers, with more than 3,000 charging points across the UK. L&G’s investment will help with strategic expansion.
Wilson says: “There is such a huge opportunity to create new industries of cleaner and greener energy, and these technologies will lead to transformations in other industries – like electric cars. Energy production requires large up-front capital expenses but then produces long-term predictable cash flows, which works for us.”
The beauty of all these investments is seeing how they will interact. The solar panels are a natural fit for L&G’s housing developments. Pod Point charging points are already found in L&G’s retail outlet investment in East Leeds, in Manchester Science Park and in Salford. Similarly the ageing research and technology happening in Newcastle will feed into the development of retirement housing. It’s not just a city-by-city investment strategy that L&G has, it is a national one.
Such an approach sheds light on the phrase ‘impact investing’.
Gladwell says he takes issue with how some are interpreting that phrase: “There are funds that sell themselves as impact funds, but they are looking for a double-digit return over seven years – that profile just isn’t aligned with societal needs.”
The most obvious partners for those needs are long-term investors.
“You could say what we’re doing is unique – but it’s very replicable,” says Gladwell. “It would be great if our peers were doing this too.”
He says pressure may come from pension fund holders to convince peers to follow suit: “There’s more movement from people in my generation to say: ‘I want my pension fund doing good and not invested in an oil company IPO’. That gives me hope.”
He adds that a mindset shift is needed for large-scale impact investment to take off, however.
“There is still a discomfort felt that private capital shouldn’t be taking profit for providing homeless housing for example – it’s still not clear to people that if they want a pension paid, then a return needs to be made. It’s a debate we all need to keep having: what is the appropriate return, and is your pension fund the right money?”
The debate is clearly taking hold as it becomes clearer that much more capital needs to be channelled into long-term investments for society.
Wilson says L&G has even looked at replicating its future cities strategy in the US, but has as yet to feel confident enough that the interest is there for capital – particularly around clean energy.
Above all, Wilson says L&G is hoping to light a spark – even if that means greater competition on deals.
“We want others to follow us,” he says. “We have seen in some places, like Salford, that we have won some deals, and other insurance companies then have come in and won others. What we really want is to create markets that did not exist before. It’s enlightened self-interest – we want a successful British economy. If we have to prime it, that’s fine with us.”