JC Flowers will inject £50 million (€60 million; $80 million) of capital into Kent Reliance Building Society for a 40 percent stake in the mutual lender.
New York-based JC Flowers, which focuses on investments in the financial services sector, could potentially take a majority stake should it choose to exercise the unspecified amount in convertible preference shares it will receive as part of the transaction.
With £2.2 billion in assets, Kent Reliance is the UK’s 12th-largest building society.
The deal represents the first time a private equity firm has invested in a building society, which unlike most banks, is managed by its members. It is not the first time JC Flowers has attempted to acquire a mutual lender; in 2007 it notably bid for Northern Rock, which was instead nationalised by the UK government in 2008.
Post-transaction, which is expected to complete in 2011, Kent Reliance will be reclassified as an “industrial and provident society”. The reclassification will result in less regulatory oversight due to the society being run for the mutual benefit of its members.
“We firmly believe that businesses based on mutuality have a major role to play in protecting and promoting consumer interests, but, to play this role to the full, we now need to bring fresh capital into the business to take us forward into the future,” commented Mike Lazenby, chief executive of the society.
Kent Reliance noted it was in need of additional capital to support its business, and as a mutual organisation, had been limited in its ability to raise the core Tier 1 capital required by the FSA.
Unlike banks, which are able to raise Tier 1 capital through the issue of ordinary shares, building societies can only generate Tier 1 capital by earning and retaining profits. As a result, the switch in status will allow the society to remain a mutual while also being able to raise Tier 1 capital as a bank.
The society will be renamed Kent Reliance Provident Society (KRPS) and will transfer its business, assets and liabilities to a new subsidiary bank of KRPS.
As of 2009, the UK had 50 building societies with total assets of £335 billion, according to the Building Societies Association.