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Will Kent Reliance members get a fair deal?

Saving | Savings Accounts Helpful? 22

Asked by honorius, submitted 12 October 2010.

Open Quote Kent Reliance Building Society is hoping to receive investment from a private equity source. In return this investor will own most of the equity in the enterprise. Current members have been told that they will continue to be members of a mutual society. Can this be so, or are members being deprived of their fair share of the society's value?End Quote

Answered by Justin on 13 October 2010

My initial reaction is one of caution. Venture capitalists are usually a pretty mercenary bunch who focus primarily on how much money they can make by growing a company's value over 4-5 years before selling out and banking their profit. The welfare of customers only tends to be on their agenda in so far as unhappy customers may affect profitability.

So make no bones about it, JC Flowers would be entering into any deal primarily to make money for themselves. I believe member's welfare would be very much a secondary concern.

And why does the board of Kent Reliance want to strike a deal? It seems they want capital to grow the business and, I suspect, there'll be healthy financial incentives via the venture capitalists to do so (not that they're impoverished at present, chief executive Mike Lazenby enjoyed total remuneration of around half a million pounds last year).

There's nothing wrong with Kent Reliance's desire to grow, but there's no guarantee it'll have a happy ending - Northern Rock grew ambitiously for several years until its house of cards collapsed...

Of course, all that really matters to existing Kent Reliance customers is whether the interest on their savings/borrowing remains competitive and whether they'll benefit from a fair share in the business.

It's too soon to tell how private equity investment will affect interest rates. I'd guess there'll be some very competitive 'best buys' as a carrot to attract new customers and some downright awful rates on older accounts to boost profits. But then this is pretty much the norm for banks and building societies anyway.

Whether members will get their fair share of the business (via an eventual windfall) is difficult to determine. There'll be no windfall at outset if the investment goes ahead as Kent Reliance will remain mutual. Customers will be hived off into 'Kent Reliance Provident Society' while their assets (i.e. savings and mortgages) will be placed into a new bank in which JC Flowers will hold a stake believed to be around 40% and Kent Reliance (hence it's members) 60%.

So in theory members share of the business will shrink to 60%, but it's a slice of a potentially bigger pie. If the business grows successfully and is either floated or sold in future, so JC Flowers can take their profits, then a decent windfall might follow. But if the business struggles then the prospects of any windfall would be slim.

Bear in mind that venture capitalists usually fund their investments with borrowed money. So the new bank could suddenly find itself paying a hefty interest bill on the £50 million investment, a potentially large drag on profits. And if things turn sour on a venture capital deal the debt usually ends up being the straw that breaks the camel's back.

The deal might work. But if it does the big winners are likely to be JC Flowers and the Kent Reliance board. While members may eventually enjoy a windfall, there's no guarantee their share will be fair compared to present - that will depend on business performance and whether their share is further diluted in future (perhaps following other acquisitions).

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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