How A Small Division Of A Pension Fund Giant Grew Into A £600M Profit Powerhouse

In 2013, UK pensions giant Legal & General spent about £70M, plus £35M of debt, buying a half share of Cala, a housebuilder that emerged from the financial crisis in decent shape, but in need of more capital.

It was an interesting purchase, but not a hugely notable one, other than being the first deal for a new division, Legal & General Capital. The intent was to invest directly in companies and assets it thought would provide good returns because there wasn’t enough money in certain sectors of the economy. Legal & General said at the time it saw this direct investment as a good area for growth.

That turned out to be quite the understatement.


In the past decade, Legal & General Capital has grown into a business that controls £3.7B of the firm’s money, manages almost £16B of external client money and was the second-largest part of Legal & General’s business last year, turning a profit of more than £450M.

Its aim today is to grow that profit to £600M-£700M a year by 2025 and manage £25B-£30B a year in third-party client money. LGC is doing so by using its balance sheet in a different way to many other pension fund managers — in many cases, building its own assets, which are then being bought by other funds it manages, as a way of creating profit in other parts of its business. 

In trying to funnel capital to sectors and areas of the economy that lack access to finance, it is also looking to create social value. 

“Routes of financing are changing; there is a lack of government finance and banks are pulling out of the areas we’re focusing on,” Legal & General Capital CEO Laura Mason told Bisnow. “The need for capital in these areas isn’t going to go away quickly. We can bring long-term capital and create assets, which are then owned by our annuity business and third-party clients.”

Mason was one of the directors involved in creating the division and became CEO in 2018, when it ramped up the amount of capital it was investing in its four areas of specialisation: specialist commercial property, housing, clean energy technology and small business finance, particularly venture capital investment in growing businesses.

The division invested £5B in 2022, including funding the delivery of 17,000 homes in housing sectors like affordable housing, single-family rental and build-to-rent, and building or refurbishing new life sciences real estate in a joint venture with Bruntwood.

In life sciences, it expanded to the U.S. for the first time, setting up a $4B joint venture with sector-specialist Ancora to build real estate in the sector.


In the areas it focuses on, LGC has teamed up with some big-name public sector and academic bodies, like Oxford University, in a £4B housing and life sciences joint venture, and the West Midlands Combined Authority, in a £4B joint venture to build new housing and regenerate brownfield sites.

As the world looks to clean energy technology, it aims to use the innovations of companies in which it has invested to help decarbonise its own assets. Examples include Sero Technologies, which provides data on carbon emissions from residential properties that has been deployed in some of its housing assets. It also bought a stake in electric vehicle charging point business Pod Point, installing the systems in its residential and commercial properties. 

Part of the rationale for creating LGC was to use Legal & General’s balance sheet capital more efficiently. The regulations that govern pension fund managers mean that they have to keep a certain amount of capital on their sheets to give them a buffer against future losses. 

But they don’t necessarily have to keep it as cash. Legal & General decided to use it to make investments in sectors of the economy that are socially important, yet often lack access to capital, like housing development or green technology, as well as to stabilise assets that can be bought by funds in other divisions such as Legal & General Investment management. 

Examples include developing a rented residential scheme, leasing it up, then selling it to one of its funds, or the life sciences building it is developing in Oxford, which will have a 40-year lease to Oxford University.

“We can take the development risk and then a long-term income fund from LGIM becomes the owner,” Mason said. “It means you are creating your own assets rather than having to buy them on market, and all parts of the business can profit.”

LGC also looks to get involved in areas of real estate that might be complex or slightly unglamorous, but have an important social utility. 


“We want to use our capital to catalyse change in areas like sustainability,” Mason said.

An example would be working with a local authority to provide capital and technological expertise to retrofit social housing stock and make it more energy-efficient, a financial and strategic challenge for many municipalities. It is working on several such pilots with different authorities, she said. 

In 2021, LGC was the second-most-profitable division in Legal & General behind only its giant business managing pension plans for UK companies, making a £461M profit. It aims to have £5B of Legal & General’s balance sheet money under management by 2025, alongside £25-£30B of third-party client money, making a return of 10%-12% as well as providing social value. 

The company is confident of hitting that target of £600M-£700M of profit by 2025 even as property and financial markets enter a much more volatile period, Mason said.

“Housing still looks very attractive, there is still that long-term need, which isn’t being met,” she said. “Values should adjust and that should feed back into an adjustment in the cost of land, which could provide some opportunities for us.”

Housing of all stripes is a major part of LGC’s operations: It develops urban build-to-rent assets, single-family rental in the suburbs, has a modular housing business and is building more than 2,500 affordable homes in a joint venture with Metropolitan Thames Valley Housing. It also develops affordable housing directly. Then there are the joint ventures with Oxford University and WCMA that have huge housing components. 

Next up, following its U.S. life sciences debut, LGC has plans to invest in U.S. SFR, taking its housing expertise across the pond.

“The U.S. is a competitive market with plenty of investors, but we think we can use what we’ve learned about working with the right partners and making great places to live and apply it in the U.S., too,” Mason said.

LGC took full control of Cala, the housebuilder that kick-started LGC’s growth in 2018,  in a deal that valued the company at £605M, almost three times the 2013 value. Since then, LGC has grown faster still.

Written by Mark Phillips, Bisnow London

Originally published by Bisnow, January 23rd 2023.