Investment opportunities exist for annuity providers and other investors with long term investment horizons, such as pension providers and sovereign wealth funds, to invest in real assets. Our 'slow' money projects, where we can invest for the long term, match our long liabilities and improve the risk-adjusted returns on the group's principal balance sheet.
Our strategy is to invest into businesses that require long term capital, thereby creating assets that can be invested in by the Group’s investment and retirement businesses. As a result these include providing assets with high returns for the shareholder funds, creating new LGIM client products and fee earning opportunities, and delivering assets suitable to back annuity new business. The multi-billion pound funding gap in the core sectors in which LGC selectively invests, housing, urban regeneration, alternative finance and clean energy, continue to provide significant opportunities for the medium term future.
Role and purpose: Our long term funds, especially our annuity book, can invest money over a very long time horizon, sometimes as much as 30, 40 or 50 years. This provides us with an opportunity to increase the returns on shareholder assets. This shareholder capital is currently invested mainly in traded assets such as equities, cash and bonds; however, there's significant scope to move this solvency margin into higher returning long term investments as we build our direct investment capability.
Our strategy is to gain attractive returns by investing in sectors vacated in recent years by banks, hedge funds and private equity. Areas such as housing and urban regeneration have the potential to give us stable revenues and good long term returns. This also supports competitive pricing for our customers and enables us to be economically and socially useful by providing infrastructure funds to rebuild Britain. Many regions outside London and the south need new investments in homes and infrastructure, creating new jobs and stimulating local business growth.
Our strength in origination and continued development of new asset classes is allowing us to mitigate the downward pressure on returns created by the increased demand for 'packaged' direct investment.
Percentage of 2015 divisional operating profit: 14% (£233m)
Where we operate: UK
MD: Paul Stanworth
Housing: In 2015, we partnered with PGGM, one of the largest Dutch pension managers, to form a £600m partnership to develop purpose-built private rental housing across the UK. We expect to play a significant role in this sector to form a new institutional asset class and are seeing a strong pipeline of opportunities. Additional investors will be introduced to the fund generating further fees for LGIM, as our build to rent portfolio grows in 2016 and beyond.
In the general housing sector, CALA Homes performed very well during the period with revenue growth up 79% to £512m driven by an increase in both home completions and the highest ever average selling price. This resulted in operating profit more than doubling to £73m.
LGC also launched a modular housing business, Legal & General Homes, which will seek to modernise the home building industry by providing modern, precision engineered factory manufactured houses through its new factory just outside Leeds.
Urban Regeneration: In January 2015, we jointly announced, together with the Government, a new £15 billion regeneration vehicle to provide investment into UK regeneration projects including housing and infrastructure, with Legal & General allocating £1.5 billion to it.
Following the investment into the world class media hub, MediaCityUK, in the first half of 2015, LGC invested in two new significant Urban Regeneration sites in Cardiff and Leeds. Cardiff Central Square is a £400m development in the centre of Cardiff. BBC Wales announced that it would be moving its HQ to the site and construction has started following the signing of its lease. In Leeds, LGC’s £162m investment in Thorpe Park will finance and build a multi-use commercial business park, incorporating retail, leisure and land.
LGC are partnering with the UK Government’s Regeneration Investment Organisation (RIO) to source further projects and attract foreign investment into the UK as co-investors.
Alternative Finance: LGC has a 40% stake in Pemberton Asset Management, an independent alternative asset management group providing loan finance to the European mid-market sector. Pemberton’s first fund, European Mid-Market Debt Strategy, started lending in July 2015 and is on target to hold a final close of the Fund in July 2016. As at 31 December 2015, it was 70% invested and had raised €492m.
The strategy is to capitalise on the significant opportunities presented by the large funding gap in Europe as a result of regulatory constraints on the banking sector. The fund is looking to build a diversified portfolio of directly originated private loans to market leading companies with turnover between €75m and €1bn. Pemberton was awarded Global Newcomer of Year 2015 by Private Debt Investor.
Clean Energy: The UK will require significant deployment of private long term capital in clean energy power generation to reach international 2020 and longer term emission standards. This will be delivered by both existing technologies that are already at scale in the UK, and newer clean energy technologies that should be developed to take advantage of the UK’s natural resources.
At the end of 2015 L&G Capital made an investment in NTR PLC, a company whose key aim is to secure a greener future with current focus on constructing and operating on-shore wind in the UK and Republic of Ireland. LGC committed up to 47.5% of a fund targeting €250m to invest in creating a portfolio of long term on-shore assets managed by NTR.
What we manage: LGC’s £0.9bn of direct investments, together with LGR’s £5.5bn and LGA’s £0.6bn, total to £7.0bn at the end of 2015. Our £7.0 billion of direct investments across the whole group equates to 10% of the group's principal balance sheet of £57.2 billion. Our stated target is to invest £15 billion or c25% of that balance sheet.
Source: Full Year Results Presentation 2015