Lloyds to freeze private equity out of property

Lloyds Banking Group is close to "blocking" private equity groups from investing in its badly hit £50bn-plus property portfolio, as it prepares for a £15bn rights issue.

The part-state owned bank is trying to repair its balance sheet by finding joint venture partners to take big stakes in property assets and by raising cash from shareholders.

Major private equity players, such as Blackstone, Orion, and Apollo, are known to be interested in taking stakes or buying parts of Lloyds' real estate portfolio. At least one private equity group is believed to be looking at investing in the entire portfolio.

About 70 per cent of the assets, which include home loans and stakes in residential development companies, are understood to be in "distress" – either close to, or in, default.

Lloyds' business services unit (BSU), which is beefing up its team from 500 to more than 1,000 staff, is looking to get as many of the poorly performing assets off the balance sheet as possible. The bank would mainly do this by selling stakes to create joint ventures, as getting rid of the assets entirely could lead to huge losses.

However, senior figures within BSU are thought to be considering an option to work only with potential trade partners, such as Ftse 100 property developers Land Securities and British Land, in effect banishing private equity.

Some are said to fear that working with private equity could lead to negative publicity as the industry, rightly or wrongly, has a reputation for buying on the cheap and selling at vast profit. "The fear is that there will be headlines about selling taxpayer assets on the cheap," said a leading property figure. "The view is that the private equity boys won't be good to do business with. There is an increasingly high probability that they will be blocked out. Instead there could be two or three trusted trade joint venture partners."

A City source added that private equity companies would be looking to take stakes "on the cheap", to help make huge returns of around 25 per cent within two-to-three years. "A trade buyer will take a much longer term view and pay more than private equity," he added.

Private equity sources say the industry has already suffered one blow from Lloyds. It recently sold Insight Investment Management to Bank of New York Mellon for £235m. However, it is understood that a private equity group, thought to be the highly respected Hellman & Friedman, offered £250m. "Lloyds went for the lower offer as selling to a firm that would look to make a huge profit in a couple of years would have negative connotations from a PR perspective," he said.