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Substantial Returns

19 July 2019 by Anthony Hilton

Substantial Returns

Patient capital is about producing long-term assets with long-term funds

Britain needs to find the next Google or Facebook to be at the forefront of technology in the world to come, the Chancellor Phillip Hammond said at his last Budget. Britain has a lot of good ideas, and a high rate of business formation, but not enough of these come to fruition. Hammond’s big idea was to set up a pool of like-minded pension funds and have them start and scale up new and emerging companies.

The British Business Bank was charged with seeing if this was feasible, and it seems to be. Legal & General, Nest, The People’s Pension and the Tesco Pension Fund among others have agreed to explore the possibility.

There are some obstacles to pension funds holding illiquid investments though none of these should be a problem.

More pressing is the wall of money piling up in pension funds because of the growth of auto enrolment. By 2026 total defined contribution assets are expected to rise to £1 trillion, being £871 billion of contributions and £169 billion of investment return. A lot of this is and will be invested in the stock market but Legal & General is one of those who plans to widen its scope.

Hot on the heels of a £150 million charitable donation to Oxford University by BlackRock’s Stephen Schwarzman, late June saw a £4 billion commitment to Oxford from Legal & General to launch a 50:50 partnership with the university.

L&G expects a return on its money – but it is still probably the first recent commitment by a City institution to fund science parks, world class research and laboratory facilities, office space and housing for staff and students on this scale. The aim is to develop the infrastructure of Oxford so that it can maintain its status as a world leading university.

Currently, Oxford has much of the same problems as London in terms of affordability of housing – or lack of it. If the University is to continue to attract research staff, as well as supporting spinout businesses, something has to be done. Affordable residential and commercial space is a key component of the partnership. Indeed as John Cummins, L&G’s head of its Future City’s Business said: “each groundbreaking discovery depends not just on the academics but on the infrastructure supporting them”.

L&G first uses its balance sheet in the Future Cities fund to buy the infrastructure. These will then become assets for the annuity book to help back pension deals and for the investment management arm for other pension-centric investments in LGIM.

Thus they have a three legged structure of asset funding, asset management and
asset creation.

That is not the only example. L&G has got involved with long-term regeneration projects in Manchester, in collaboration with councils and other bodies, to develop commercial, residential, leisure and infrastructure properties involving £3 billion worth of space.

Likewise in Leeds, there is a £642 million investment programme involving the councils, the university, hospital and social housing, while in Newcastle, the council, the university and L&G are developing the only city centre quarter of its kind in the UK. It is a 24 acre testbed where hundreds of researchers, businesses and progressive home owners will live and work side by side.

It is also involved, as of last autumn, with Bruntwood SciTech, which is the largest property platform dedicated to science and technology businesses. Their 50:50 joint venture envisages property assets going from 1.6 million square feet to 7.2 million square feet over 10 years. A part of this is to change Alderley Park, which was formerly Astra Zeneca’s HQ, into a diverse life sciences hub.

The other thing is that many people do want to invest in small growing companies but cannot get access to them. This is particularly true of millennials who don’t have the guaranteed pensions of baby boomers, nor the property assets of their parents. This ‘exclusivity gap’ has become more and more marked in recent years as private companies stay private for longer – indeed they can have several rounds of funding without having the need to go public.

The unicorns, which are private companies often in high tech, with a value of £1 billion or more, are a case in point. They almost always have equity and debt finance as they expand, but often retail investors are not allowed to participate. Instead they are funded by venture capitalists or some other bodies which exclude small investors. But if things were different and pensions could participate, a beneficiary’s retirement income could be increased substantially with just a moderate allocation to private markets.

Pension funds are patient capital holding for the long-term. L&G is one of the pioneers investing in property, housing and infrastructure for the very long-term. Investing in start-ups and scale-ups seems a natural next step.

Anthony Hilton is Financial E£ditor of the London Evening Standard

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