Buyout firms swoop to buy hedge fund’s stake in Co-operative Bank

The private equity group which led the demutualisation of one of Britain’s biggest building societies is close to buying a stake in the Co-operative Bank in the most significant shake-up of its ownership since it was rescued in 2017.

Sky News has learnt that JC Flowers and Bain Capital Credit are in advanced talks to acquire the roughly 10% shareholding in the embattled lender held by BlueMountain Capital, a US-based hedge fund.

The price that JC Flowers and Bain Capital Credit have agreed to pay for the stake was unclear on Thursday, and one person close to the situation cautioned that the deal had yet to be signed.

It nevertheless heralds a potentially important moment for the ownership of the self-styled ‘ethical lender’, which has endured a torrid decade during which it twice had to be bailed out from the brink of collapse.

JC Flowers is one of the most prominent private equity investors globally in banking and financial services, with notable UK deals including providing capital to enable the demutualisation and stabilisation of the Kent Reliance Building Society after the 2008 crash.

Bain Capital, the buyout firm, recently struck a deal to acquire LV=, one of the UK’s oldest financial services mutuals.

Banking sources said the alliance formed between the two firms to buy BlueMountain’s stake in the Co-operative Bank suggested that they were unlikely to be passive investors in the company.

One said they were expected to play a role in further consolidation of Britain’s mid-tier banking sector, a development that many analysts and industry executives believe is long overdue.

Sainsbury’s has put its banking unit up for sale, while TSB’s owner, Sabadell, has signalled that an auction of the British lender is likely at some point.

The combined firepower of JC Flowers and Bain Capital’s credit arm mean that the Co-op Bank could be more effectively positioned to lead that eventual consolidation.

Under its new chief executive, Nick Slape, the Co-operative Bank is also expected to continue investing in improvements to legacy IT systems which have been at the root of many of its recent problems.

In January, the syndicate of US investors which control the Co-operative Bank appointed two board nominees, just weeks after talks about a sale of the company were abandoned.

The group of hedge funds, which includes GoldenTree Asset Management and Silver Point Capital, named Sebastian Grigg, a former Credit Suisse banker, and Richard Slimmon, a partner at the independent advisory firm Gleacher Shacklock, as non-executive directors.

The Co-operative Bank, which still boasts well over three million retail customers, received a takeover approach from Cerberus Capital Management before Christmas, but discussions failed to progress.

A further sale process is expected to be launched in the next 12 months.

Mr Slape, who was appointed as the Co-operative Bank’s sixth chief executive in a decade, has overseen a successful effort to issue £200m of loss-absorbing capital.

The bank also has a relatively new finance chief, while chairman Bob Dench has been in place since 2018.

In 2013, it almost collapsed after trying to buy more than 630 branches from Lloyds Banking Group, only to discover a £1.5bn hole in its finances that had to be plugged by the hedge funds and the Co-op Group.

Subsequent investigations by the Treasury Select Committee and the City watchdog exposed a string of failings in management, corporate governance and regulatory supervision – including, infamously, the exposure of its chairman Paul Flowers’ private life, which led to him being dubbed “the crystal methodist”.

Four years later, it was forced to turn to its owners again for £700m in new funding that saw retail investors swallowing heavy losses.

The Co-op Group subsequently sold its 20% stake in the bank.

Bain Capital Credit, JC Flowers and the Co-operative Bank all declined to comment.

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