Doubts over Invista future after Lloyds pulls plug on key contract

Lloyds Banking Group is to end a key contract with its 55 per cent-owned Invista Real Estate Investment Management, which might trigger a sale of the property fund manager and its assets.

Shares in Invista slumped 9 per cent yesterday after the group said that Lloyds, which inherited the stake after it bought HBOS in 2009, will end Invista's management of its Clerical Medical UK funds in October 2011. They will transfer to Lloyds' Edinburgh-based Scottish Widows Investment Partnership (Swip) subsidiary.

Invista said that it had looked at options when the future of the HBOS contracts were being discussed with Lloyds over the summer.

In a statement, it said: "The board's conclusions following this initial review are that without the revenue generated from the HBOS contracts, the interests of both clients and shareholders of Invista would be best served through an orderly realisation of value from Invista's assets, including its asset management business, with the proceeds of such realisations returned to Invista shareholders in due course."

The HBOS funds total nearly half of Invista's 5.4 billion of assets under management. Duncan Owen, chief executive, said losing the key contract with Lloyds meant Invista was now under pressure to sell down its balance sheet of 130 million.

"With the benefit of the HBOS funds, we had a size and critical mass that enabled us to have a balance sheet which didn't look terribly big," noted Owen. "Without the HBOS funds, the assets on the balance sheet look significant in size."

Owen said those assets included cash, a residential portfolio, and co-investments in funds, and would be sold over the next year. "That will leave us with an asset management business without a balance sheet … it may well be that there is ultimately an alternative owner for the residual business once we've sold the assets," he added.

Owen said the decision for the asset sales was made by Invista's board, with the support of Lloyds as its biggest shareholder.

Invista reported asset management revenue of 13.7m in the first half of 2010, of which the HBOS funds contributed revenues of 5.3m, and 2.4bn of Invista's assets under management.

A Lloyds' spokesman said a review by the bank's insurance division had decided to restructure the management of the Clerical Medical property funds "based on an analysis of what approach was best for our customers".

He said that, as a result, notice had been served on Invista and that the 12-month notice period would ensure a controlled transition.

"We believe Swip has a strong track record of performance and has the infrastructure and capability in place to support future growth," the spokesman said.

Lloyds said the strategy for its European property assets was to move them from direct holdings to indirect holdings. Invista's shares closed down 3.5p at 35p.