Never before has a private equity firm taken a stake in a British mutual lender and, with JC Flowers’ £50m investment garnering it a 40.1% share and Kent Reliance’s core business set to transform into a bank, the “hybrid mutual” has caused many raised eyebrows.
JC Flowers is a name that has become increasingly well known in the UK since it attempted to buy the stricken bank Northern Rock in late 2007. While that bid fell through and the bank was part-nationalised, JC Flowers has remained an active presence in the British financial markets, with its determination to gain a foothold culminating in the Kent Reliance deal this summer.
JC Flowers has a spectacular record for turning around failing companies and Kent Reliance is haemorrhaging money. It states frankly to its members that its mortgage book is “suffering losses and is expected to do so for the foreseeable future unless [the Society] can raise new capital”.
While the aggressive nature of private equity and the “friendly” mutual sector may not seem natural bedfellows, it offers a valuable potential route to investment for building societies. Regulatory requirements for core tier one capital are increasing and building societies are severely limited in their ability to raise capital as competition for customer deposits becomes fierce.
Yet, JC Flowers UK managing director Tim Hanford maintains that the two sectors are not as different as they may first appear.
He explained: “The building society sector has always benefited from a strong customer franchise and the way that private equity looks at a business is to see whether it has a strong customer base.
“The focus we have is on sustainable earnings from a loyal, strong consumer base and mutuals are focused on building their membership. To put customers at the heart of everything you think about is sensible. It is different to a listed company that is focused on results.”
Nevertheless, the response of the sector to the tie-up has been cautious.
Adrian Coles, director-general of the BSA, said: “The Kent Reliance directors are recommending the deal to their members and I am prepared to take their word that it is right for the business. I don’t necessarily see it as a template for the rest of the sector. It may not be right for other mutuals, as there are a lot of other business models within the building society sector.
“It is very much a Kent Reliance solution and they will want to make sure it works for them.”
Certainly, the mutual sector has no intention of openly criticising another company’s plans as it waits to see how it works. As one industry member said: “We are in an ever-changing landscape, not just for building societies but business as a whole. Every sector is having to adapt, so it’s not a surprise that a building society would take a creative solution. Nothing is surprising in the current times.”
Of course, JC Flowers’ aggressive acquisitive nature has got people speculating that this deal is merely a platform to greater things – a UK “supermutual” no less, in the vein of France’s Crédit Agricole, which Hanford himself says is a model Britain needs.
However, further building societies put in the frame, namely Norwich & Peterborough, Skipton, West Bromwich and Principality, have all flatly denied talks with JC Flowers.
Indeed, Hanford said the reports were merely “absurd” speculation and that all its attention is focused on getting the Kent Reliance deal completed and returning the firm to lending: “We have no time scale on further expansion after Kent Reliance. With mergers, you never want to write that into a plan, as you never know what will happen.”
Nevertheless, Hanford added: “The structure is designed so that if consolidation starts to happen in the mutual sector, then we can and would look to participate.”
However, while Coles accepts that further mergers are likely to happen in the sector, albeit at a slower pace, he said: “We have to get away from the idea that the sector is struggling. There are a lot of societies that are very successful and making significant profits. There were only six societies that made a loss last year, so let’s not over dramatise this.”
The next hurdle JC Flowers and Kent Reliance have to clear is the members vote on 19 November. If the deal is turned down, Kent Reliance has nowhere to go and it told its members: “Action needs to be taken now.”
Whatever happens, there is no doubt that JC Flowers intends to be an inherent part of the UK mortgage market. Every financial deal that arises is considered, according to Hanford, and that will include Northern Rock if it comes on the market again.
How the mutual sector as a whole develops and what JC Flowers involvement will be is up for debate.
For now, people will continue to watch the Kent Reliance deal very closely as it progresses and JC Flowers’ movements will be increasingly scrutinised.
