L&G Modular’s closure shows there’s a limit to the patience of slow capital

Legal & General announced its withdrawal from the UK offsite housing market earlier this month. The company will continue to develop housing in collaboration with public and private sector partners but, from now on, delivery of its complete programme will be based on third-party supply chains rather than an in-house MMC capability.

By contrast, Ilke Homes and Top Hat have both recently announced successful rounds of refinancing worth over £170 million and Vistry will be reopening its mothballed housing factory in Leicestershire. The drip-feed of good news demonstrates that there is a continued investor and client interest in MMC solutions for housing, even as costs of finance balloon.

What caught my eye about the L&G announcement was that it had been made by an institutional investor, representing the “slow capital” that our politicians like to tell us is the answer to the UK’s infrastructure investment needs. Labour’s pledge to invest £28 billion per annum on energy transition and infrastructure is reliant to a significant degree on this same source of capital.

Readers with a long memory might remember an MMC-inspired column that I wrote after the collapse of Katerra, the $1bn Softbank funded “build-tech” start-up that set out to disrupt the construction supply chain. At the time, my reading was that the “build fast, fail fast” ethos of Katerra had neglected to recognise and capitalise on the inherent value in construction supply-chains and in the skills required to deliver high-quality construction projects.

The same analysis does not apply to L&G, which has delivered over 15,000 homes over the past three years and includes well known housebuilding brands such as Cala Homes within its portfolio. However, L&G clearly faced challenges utilising capacity to manufacture over 3,000 homes per annum, in part due to planning issues as well as the wider disruption to housing markets. L&G’s inability to deploy its capital effectively is what should concern us most about this particular MMC saga.

Infrastructure capital comes in two forms. Most is locked up in existing “brownfield” assets with a known income stream. This is the kind of infrastructure capital that is invested in operating assets like wind farms, water companies and airports.

One of the functions of slow capital is to provide the equity needed to get complex infrastructure schemes off the ground

This capital likes to be fairly liquid, so it is typically deployed in infrastructure funds with a portfolio of assets that have an investment horizon of five years or so. Although a company part-owned by a fund will invest in capital programmes, it is hard for this low-risk capital to be deployed directly in longer-term ventures such as an MMC business or a Small Modular Reactor development.

This brings us to the second type of capital – patient or slow capital. One of the functions of slow capital is to provide the equity needed to get complex infrastructure schemes off the ground – reducing dependence on expensive loans from banks and funds. One of the reasons why the Tideway project is being delivered at an affordable cost to Londoners is that the consortium behind the infrastructure provider, Bazelgette Tunnel Limited, includes pension funds and other long-term investors that can deploy capital at a low cost.

Low-cost capital funding works if the returns from the investment match long-term liabilities – typically pension and life assurance payments. The Tideway funding model was designed to facilitate this, with the government holding some of the development risk. If that outcome cannot be assured, then the fiduciary duty of the institution requires it to put its money elsewhere.

So, the story behind L&G’s withdrawal from the MMC market is not really about the merits of MMC – it is about the investability of UK infrastructure. L&G has assets under management worth over £1.1 trillion. In recent years, it has successfully invested over £20 billion in the UK on assets as diverse as TV studios, sports grounds, laboratories and homes, and continues to do so.

In this context, the fate of a 3,000 unit per annum MMC housebuilder will not affect L&G’s overall performance but it should worry the policy makers as well as the employees and supply chain directly affected by the closure.

Firstly, and very importantly in the run-up to the next election, no party can afford to misrepresent the role of patient capital in investing in the UK’s future. Yes, there is plenty of capital that could potentially be deployed, but the target programmes must be investable and, crucially, must not put the future income streams at too great a risk. Sometimes “institutional investment” is presented as free money. It isn’t – it is someone’s money.

Secondly, we need to be thinking about infrastructure investability in the context of interconnected systems. Forthcoming planning reforms might unblock one part of the housing logjam but, if grid connections are not available or land value does not deliver much-needed social infrastructure, developments will still be stuck.

The consequences could be that more long-term investments like L&G’s offsite factory will suffer – in part because the complexity of the demand-side is under-estimated and, to an extent, ignored.

Many countries are on the brink of a huge pivot towards private investment in infrastructure as the energy transition accelerates and transport programmes slow

So, my final point is that UK plc needs to make sure that it is ready before we pull the trigger of an “investment revolution”. We have a lot of the parts already in place – good processes such as the Construction Playbook and a capable and global supply chain. But we are resource constrained and in need of further reform, particularly around planning. Let’s fix that before we place both taxpayers’ money and the lifesavings of pensioners at too much risk.

Many countries are on the brink of a huge pivot towards private investment in infrastructure as the energy transition accelerates and transport programmes slow. Investors in the US and Europe are likely to face similar challenges and frustrations associated with planning, incomplete networks and uninvestable programmes as are faced in the UK.

We are all in the same boat, fighting for the interests of the same investors. We should learn from L&G’s withdrawal from MMC, taking steps to make the UK the natural home for slow capital – and making sure that its patience does not wear thin.

Simon Rawlinson is a partner at Arcadis and a member of the Construction Leadership Council