Gareth Mee - Chief Investment Officer, Private Markets, at Legal & General Capital

Colbert Cannon: Welcome back to Season 10 of the HPScast. I’m your host, Colbert Cannon. If you’re new to the pod, HPS is a global investment firm. We manage approximately $110 billion in assets for a broad range of institutional and retail investors. That capital is invested across private credit and public credit strategies.

Each week, I sit down with key relationships to, partners of, and friends of the firm to learn from their experience, ask how that experience shapes their current roles, and give insights into HPS and how we operate. So with that, let’s bring in our guest. Our guest this week is the Chief Investment Officer, Private Markets, of the investing arm of one of the UK’s largest insurance and asset management businesses.

After graduating from University College of London, he started his career at Ernst & Young, where he spent almost two decades as a consultant and later partner in its actuarial and investment advisory practices. In 2022, he came over to Legal & General Group, a UK FTSE 100 insurance business, becoming the CFO of L&G Capital, the balance sheet investing arm at the group.

This gent and his firm have been valued partners to HPS for years, and we greatly value our relationship with them. So, without any further ado, I’m happy to welcome in this week’s HPSCast guest, Gareth Mee, Chief Investment Officer, Private Markets, at Legal and General Capital. Gareth, welcome to the pod.

Gareth Mee: Thank you so much, Colbert. I’m very, very excited to be here, and thank you for that lovely introduction.

Colbert Cannon: All right, well, let’s start from the start, Gareth. Where’d you grow up? Where are you from originally?

Gareth Mee: I grew up in Manchester in the north of England. So, I’m a proud Mancunian. I spent the first 18 years there before coming down to London, and I’ve stayed here ever since.

Colbert Cannon: Well, tell me about the draw to London then and University College. What was the draw there for school?

Gareth Mee: I grew up in a small town outside of Manchester. It’s a bit quiet. The pace of life is different, but I knew that I wanted to come and work in financial services. I realized that, having grown up in Manchester and in Bolton, going to an all-boys school, I probably hadn’t seen the full, wide world and so, coming to London was going to help me with that. And having spent three years at university here, it was fantastic to learn that this is the place that I really wanted to build my career.

Colbert Cannon: What did you study undergrad, Gareth?

Gareth Mee: I studied maths.

Colbert Cannon: And you knew you wanted to be in, it sounds like, financial services. Why? What was the appeal of that for your career?

Gareth Mee: So, my dad is an entrepreneur. He still runs his own business now, and I am one of four, and so, we had largely bad times growing up and some good times. And I see the benefits of running your own business. It can be wonderful, but it also can be quite hard. And so, the idea of going into a world of work where you’ve got a level of stability, where you can use your brains, perhaps more stability than I had growing up, would be really appealing. And so, if you’re good at maths, if you like doing maths, then you apply yourself probably best in the world of financial services.

Colbert Cannon: Absolutely. So then, tell me about that first job. You started at EY as a consultant. What were you actually doing? What was that job?

Gareth Mee: So, if you divide consulting work into some buckets, I might divide it into into consulting and audit. I think it’s a good way to learn the ropes, to audit a financial services company, but really the fun is in consulting, where you get to solve some of their most interesting problems.

The other thing that you can do is you can divide between consulting and succumbents. And one of the models at Ernst & Young was that we used to succumb members of staff into insurance companies, and the great thing about that is that you can build long-term relationships with your clients and typically do some of the most interesting work that they were looking to do where they were looking to bring in an expert. And, of course, in the early years, that expert is perhaps not as expert as you might think.

Colbert Cannon: This is an audio medium, dear listener, but you would have seen Gareth just do air quotes around “experts” if you were watching him on video.

So, 20 years ago you did work with L&G, right, on a seconda. Was that your first exposure to L&G?

Gareth Mee: That was my first exposure to L&G. So, we weren’t in the office that we’re in now, but the senior manager on the project was our now group CFO, Jeff Davis. And so, he was responsible for helping me to get into Legal & General. I came and worked here for three months. I really enjoyed it, actually, and although it wasn’t as much of a significant client throughout the rest of my time, actually that time here was great. I met lots of the people who I now work with, some of whom have obviously therefore been here for the last 20 years, and it was a great exposure of some of the values that I now enjoy now that I work at L&G.

Colbert Cannon: So Gareth, I always think first jobs out of school are formative. Tell me about some lessons you learned from your early days as, you say, you’re trying to pretend you’re an expert. Obviously, you’re not an expert in everything yet. Tell me about the early lessons learned from your E& Y time.

Gareth Mee: One of the wonderful things I think about working in a consulting firm is you have access to all of these brilliant people around you – both those that work at the consulting firm that you work at and also your clients. And so, very quickly you realize what you’re good at and what you’re not good at.

One that really springs to mind is when I was seconded overseas to Belgium in some of the early forms of the risk-based capital regime. I did an okay job. I lasted about a year working with this firm, but it clearly was not my calling. And it was helpful for me just to see that I could go and do an adequate job. But I don’t want to do an adequate job. I want to do a top job. And so, it’s quite helpful to learn that you’re not going to be good at everything, and that you should really focus on your strengths. And consulting gives you lots of those opportunities,

Colbert Cannon: Yeah, not everybody’s good at everything, and being able to find people on the right track is always so important.

In 2012, you started working on a large case with Lloyds, and it was really important work. It set the blueprint for some similar cases with other companies. Tell us what you were engaged to help Lloyds do.

Gareth Mee: So, if we go back to post financial crisis, so we had the fallout, we had some pretty rocky years, and, of course, the regulators stepped in and started increasing the level of scrutiny on banks in particular but also insurance companies. And on banks, there was a mismatch between their liabilities and their assets – a really, really big duration mismatch. And so, what they started doing was punishing banks for holding very, very long-dated loans, in particular.

Now, on the contrary, insurance companies have very long-dated liabilities. They’re typically paying annuities or other insurance claims for a long period of time. And so, they really like those long-dated assets, and there aren’t really enough of them in the market. So, this engagement was to help Lloyds to understand whether some of the assets that were sitting on the bank balance sheet would be much better for the group sitting on the insurance company balance sheet. And so, some of this is looking at the regulations and the differences in those regulations. But a lot of it is just looking at where the right home is for some of these assets. And so, we started the process of transferring what turned out to be billions of dollars worth of loans from the bank’s balance sheet onto the insurance company balance sheet, creating a lot of capital for the group, allowing it to pay a big dividend which was really important post financial crisis but also really importantly finding a much better home for some of those loans – both for the customer and for the end investor.

Colbert Cannon: All right, Gareth. In 2017, you’re back to EY HQ to run the actuarial practice. Tell us about that group and how you spent your time in that job.

Gareth Mee: So, I spent quite a lot of time up until that point doing more of the investment work, so building on the Lloyds experience, doing similar sorts of projects for other insurance companies, which was really great. But one of the things that it took me a little bit away from was working with large teams. And if we go back to those early formative years at EY, you start working on big teams. The great thing about going and running actuarial teams is I had the opportunity to influence a team of, at that time, 100 people, and later on in my EY career, 250 people. And that’s a very different skill set. And so, for me, this was a really exciting part of my career that moved a little bit further away from some of the technical capabilities but into more of the leadership, managerial, and team management capabilities, which I really love.

Colbert Cannon: Well, tell us about that transition, because it is, as you say, very different being an on-the-ground consultant versus running a practice. Those skill sets are different, and not everybody’s great at both of them. How did you get up the curve to be successful in that part of your career?

Gareth Mee: Fortunately, I didn’t have to invent the methodology because there are loads of really, really good people managers out there. And people will always say that it’s great to spend time with people on the ground. And so, I was really fortunate throughout my career to work with great people and great mentors, and I saw the best of those people and the way that they worked with their teams.

And so, what I found really powerful was being able to interact with people at all levels. And ultimately, the conversation that you have with a new graduate in a part of the team that you’ve never worked in before is going to be really different than a conversation that you’re having with one of your fellow partners, and that was critical in understanding what’s going on in the market and what the word on the street. So, you’ve got to divide your team up into, kind of different groups: some that you’re going to be working with really closely on individual projects; some that are going to be much more similar to you in terms of capabilities; and some which actually have very little in common from an investment perspective, but you do need to understand what they’re going to be doing on a day-to-day basis.

Colbert Cannon: Yeah, I know it’s interesting.

Okay. So, it’s 2022, Gareth. You move over to L&G Group to become the CFO of L&G Capital. Before we talk about that decision, let’s first give our listeners some background. What is L&G Group, and what is L&G Capital within it?

Gareth Mee: So, Legal and General Group is a business that is 185 years old. We have historically offered a wide range of insurance products, but right now, we focus on retail, retirement annuities, and investments. And investments include both my business, which is where we’re investing our own balance sheet to generate long-term returns for shareholders, and also our very large global investment manager, which has over a $1 trillion of assets under management. So, we cover a wide range of insurance and investment products. We are very focused here in the UK but with ambitions to grow internationally.

Colbert Cannon: So Gareth, you’re a partner at E& Y. It’s a great job. Why move over to the operating executive side? Tell me about that first call and what got you excited about it.

Gareth Mee: I think every consultant receives lots of phone calls from recruitment consultants over the years, particularly somebody in my position. I was hiring people all the time. You needed to have great relationships with recruitment consultants, but normally, they’re not phoning up to talk to you about a job. Sometimes they are. They were early on in my career, and then they realized I was going to be at EY for the whole of my career or so that’s what my clients thought. And to be honest, that’s what I thought.

But then there’s this other point that, as you become more senior within a consulting firm, I think you potentially become less relevant to your clients. And so, there comes this opportunity where you’re still just about relevant enough, but you’re also senior enough that you can potentially go into an interesting role. And when the headhunter phoned me to talk about this role, they left me a message, and I couldn’t not phone them back. It was too interesting and too big a role. I had the opportunity to go back and work with Jeff Davis, who I mentioned earlier on, who’d been a longtime mentor of mine for over 20 years.

And the CEO of Legal & General Capital, Laura Mason, who is my boss, again somebody I’d encountered over 20 years ago but somebody that I thought was doing really interesting things with the Legal & General balance sheet. And so, it basically became too good of an opportunity to not consider.

And then there’s the real risk moment, which is, I’ve worked all of my career to become a partner. I love the role that I’m doing. Am I about to give this up? And maybe I could go back, but you never go back to the same role, do you? It’s not going to be the same once you’ve left. If you were to come back, you know, that’s gone. But how can you not look at this amazing opportunity to go and be an executive in the UK’s largest insurance company with the ambitions that Legal & General has? And so, in the end, obviously it was that, that won out.

Colbert Cannon: What is the job responsibility of the CFO at an institution like yours? How do you spend your time? What are the key parts of your business that you focus on?

Gareth Mee: A CFO’s got its day job to do which, in my case, involves overseeing the production of 85 sets of accounts, monthly financial reporting, all of the things that you expect a CFO to do. And, if I can say this, it’s really super important, but it’s not the most exciting part of a CFO’s job in my opinion.

And so, one of the great things about this particular role is it’s a much more commercial role than many other CFOs. I get the opportunity to sit on a range of boards. We work with partners. As you know, one of my roles is to help work with broader Legal and General Group partners like yourselves. This is something that I think is really, really important for a CFO.

And also, I sit on the Investment Committee. So, all of the investment decisions that we make within Legal and General Capital run through the committee, and I have a say in whether we want to progress some of those investments. So, it is a more commercial, more investment focused version of a CFO role with the bits of the CFO role that you would expect.

Colbert Cannon: Yeah, as you say, that part is, sort of, table stakes. You’ve got to get all that right, but your job is much bigger than that, and I would imagine, therefore, it can be much more intellectually stimulating at times.

All right, you mentioned this earlier, actually, right? So, insurance companies obviously have long-dated liabilities and need long duration assets to satisfy them. L&G has been investing in private credit for some time. Why? Why does private credit make sense for L&G?

Gareth Mee: There is a limited universe of corporate bonds, particularly here in the UK market, once you start getting out to 10, 15 years or even actually beyond seven years. And we’ve got them all, and all of our competitors have got them all. So, you run out of diversification on those long-dated corporate bonds, and we have an insatiable appetite for assets that back our long-dated liabilities.

So, first of all we need a bigger pool to be able to fish in. Secondly, the returns on these corporate bonds vary, and the returns on the liabilities that we’re out there pricing also vary. In some cases, not as significantly. but one of the features throughout my career that has made a difference in the insurance products that we work in here at Legal & General is the ability to find the best assets. And so, it has been really important, and at various points in the cycle, then we’ve had to use different mechanisms. But, over the last 10 years, an ability to originate the best private credit in the market, in the most capital efficient way, has become something that has been a differentiator for Legal & General and some of our peers. And we hope and believe, at this moment, that we’re doing it ever so slightly better than some of our peers, but we also know that they’re hot on our tails. And so, we’ve always got to make sure that we stay at the pinnacle of innovation. And it’s for those reasons that we have needed to diversify the types of assets that we invest in, including private credit.

Colbert Cannon: So, as you say, lots of private credit has been raised in the last 10 years. How do you differentiate among providers when you’re identifying the right partner? What matters to L&G?

Gareth Mee: We need a provider that can originate in volume. That’s really important. We’re writing $10+ billion of new premiums per year. We need to spend those premiums on interesting assets. We can’t do that many $10 million and $20 million transactions. So, we need something of scale, but, of course, it doesn’t really work if you’re buying lots of assets of scale that you don’t like. So, they need to be assets which offer interesting spreads, and importantly, they need to be competitive against our peers.

Equally, we have a very tight capital regime here in in the UK. And so, we have to have very sophisticated models in understanding the way that private credit and other assets will behave in a default event, and before even a default event, what would happen in a high spread environment. And so, we need a provider that can ultimately provide us lots of assets with high spread, better than average default rates and also protections in the event of a default.

So, you need to work with a provider that knows what they’re doing, has had experience of working out and making good economic returns. So, I apologize, because I know that the bar is really high, therefore, for what we’re looking for in a provider, but it does then mean that a provider that can meet those very high hurdles is likely to be a good partner for Legal & General.

Colbert Cannon: That makes all the sense in the world.

Okay, we’re recording this in the Spring of 2024. Credit markets remain somewhat unsettled. We’ve got stubborn inflation keeping rates higher for longer than expected. What’s your perspective on private credit at this point in the market cycle? What opportunities, risks, or what are you thinking about for your book?

Gareth Mee: Well, I’m going to add another item to this, which is that the insurance market remains really competitive. So, some of those things you could deal with if, in fact, pension schemes were happy to pay more to insure their business, or if retail customers were happy to pay more for their insurance premiums, or if shareholders were happy to have lower returns. It would make our life easier if we could just manage all of those risks. But sadly, none of those things are true, particularly in the UK market, and so, therefore, we need to be able to go and buy the best assets. And so ultimately, we’re a long-dated liability writer. We need long-dated assets to sit alongside that.

And so, we do look at other assets. As you know, my business, Colbert, we also invest in real estate, in particular. We invest in some long-dated equity type investments as well, but ultimately, we need to have a good allocation to private credit.  And so, at the moment, for the right type of assets, this has got to be a buying opportunity. Right now, there isn’t a load of capital around. And so, for those players that are able to access really interesting opportunities that have got funding sitting behind them, we actually think there’s really good buying opportunities in the market at the moment.

Colbert Cannon: So, you mentioned it’s a competitive market and you mentioned you need to be ahead of that competition. How do you do that, Gareth? Tell me a little bit about the future, and what you’re excited about at L& G to keep the lead that you guys have.

Gareth Mee: My bit of the business is focused on doing things largely that other people are not doing. So, we are aiming to take very long-dated bets where we’ll put our own balance sheet up. We’ll hold a level of equity capital to be able to then go and ideally manufacture long-dated debt or work with partners to provide long-dated private credit assets that can then mean we have got a business that is sustainable over the long term.

This isn’t something that you can just do overnight. And one of the key reasons I wanted to join Legal & General Capital is because we are prepared to put our balance sheet up and take some risks. They don’t all work out, but over time, they have worked out really well. We’ve made $600 million dollars of profit in my bit of the business for the last two years running. You only do that by starting 10 years ago and building this diversified portfolio of business.

So, I think it’s really critical to have your own origination, to have origination through partners, and play a very long-term game. If you’re too transactional in a market where you’re trying to write stable $10+ billion a year of premiums, then with shareholder demands, you can’t do that unless you’ve got a diversified pipeline and something that you’re building for the long term. You can’t just keep being very short-term focused and very transactional focused.

Colbert Cannon: Yeah, your point about the long-term thinking on this is so important. That doesn’t happen without the investment and the structuring. I’d also say your ability and your firm’s ability to be dynamic and thoughtful, and maintain both your own origination, external partners, et cetera is crucial in a market like this.

Anything else in the future? What else should we be looking for out of L&G that gets you excited when you walk in, in the morning?

Gareth Mee: I’d like to extend that transactional point, because it goes beyond just thinking about businesses. So, we think about the ecosystems that we work with, whether it be universities, pension schemes, managers. Again, if we do one deal with any of these players, then that can be great, and you can make money. Everybody can be very happy with the deal that they do. But ultimately, if you have to do that every single time, when you’ve got a business the size of ours or of HPSs, then you’ve got to do a lot of small transactions. And so, my favorite type of relationships are the ones where you build these long-term relationships.

And so, if we think about relationships we have with Oxford University, we made a $4 billion commitment to work with them over the next decades to help to rebuild some of their science and technology suite and buildings in and around those new areas. When we think about work with our councils, we think about very long-term relationships with councils. And when we think about working with partners, again, it’s great to do a single deal, but it’s even better if you find an aligned partner where you know that there’s lots of different areas of overlap and can potentially be working together for many years in different parts of the business.

And so, I think all of those are really critical in long-term thinking.

Colbert Cannon: Makes complete sense. Gareth, I appreciate all those insights. It’s always a pleasure to catch up and thank you for the thoughtful insights today.

With that, I want to move to the last segment of the pod. It’s something we like to call “Best Ideas.” We’re going to offer up something that’s added value in our lives, recently. It’s “Best Ideas” because it’s our goal, as investors, to maximize exposure to those.

Gareth, as our guest, I’m going to ask you to go first today. What is your best idea?

Gareth Mee: Colbert, you and I, I think, both share a love of eating good food. I certainly love eating good food. And one of the challenges, of course, with eating good food is, as you get older, that starts to catch up with you, and so, you have to have something to offset it. And in between my time working at EY and Legal & General – this was just towards the end of some of the real restrictions around Covid, so there wasn’t a lot of different things that one could do – I chose to go on a boot camp in the south of Spain. It was recommended to me by a friend. It was genuinely life changing. It showed you what you could do if you put your mind to it. I’ve been again twice, most recently a couple of months ago.

The way I positioned it two months ago was that the deal here is that we all come to work for 35 hours, or in many cases, more than 35 hours of work a week. What if you took those 35 hours and instead didn’t go to work but exercised? And that’s basically the deal on the boot camp. And my experience is that, over a one-week period, you can withstand that amount of exercise in the hands of the right trainer with the right mental attitude. And you get the benefits for that week, but the benefits continue thereafter because it helps you with your mindset. It’s as much mental as it is physical. And so, the bootcamp that I go to is in Marbella. It’s Bootcamp Marbella, very creatively called. I mean, I’ve been blown away by that experience, and I would recommend it to anyone.

Colbert: I love that recommendation, and Gareth, let me suggest that’s a much healthier week in Marbella than many spend in my experience. That’s great, and as you correctly point out, I do enjoy a good meal. And as you get older, it turns out you can’t just eat whatever you want anymore.

All right. Love it, Gareth.

So then, for my best idea this week, as people know, I like to be inspired by the guests of the week. Gareth is obviously British, and he applies his trade in the insurance industry, as discussed. And I’ll come back to this, but working with Lloyds early in his career, those two facts led me to one of my favorite TV shows I watched last year, which tells the incredible true story of the biggest robbery in British history.

My best idea this week is the TV show called “The Gold,” streaming on Paramount+ or BBC, depending on where you live. “The Gold” re-creates the actual events told all through one season around the Brink’s-Mat robbery of 1983, when thieves made off with what would be worth today 110 million pounds of gold from a warehouse near Heathrow Airport.

The story is wild. They thought there would be a million pounds of foreign currency locked away, opened up this vault, found out that there was a stunning amount of gold bars, but they were wrong. The show dives into the criminals’ attempt to launder their unexpected stolen gold and the Herculean efforts of law enforcement to track them down.

The cast is stacked with British acting royalty, including Hugh Bonneville, probably best known as Lord Crowley from Downton Abbey, Dominic Cooper, and Jack Loudon. And the story is incredibly compelling, fast-paced, and all completely and insanely true.

So, in honor of my British guest, and in honor of a man who would have had a very bad day in 1983, as it was in fact his former client Lloyds who was on the hook for a then record 26 million pound insurance payout, let me recommend the show “The Gold,” streaming now.

Colbert Cannon: With that, Gareth, it’s time to wrap up for the week. Thank you for the thoughts today. Again, we appreciate you and your firm’s partnership with HPS and appreciate you coming on.

Gareth Mee: Wonderful. Thank you so much.