RBS To Spin Off Remnants Of Investment Arm

By Mark Kleinman, City Editor

Royal Bank of Scotland (RBS) is in talks to spin off one of its last-remaining investment arms as the bank pares back its non-core activities amid Government pressure.

Sky News can reveal that the lender is at an advanced stage of discussions about handing control of a division called the RBS Special Opportunities Fund to its management team.

The deal, which could be finalised before the end of the year, reflects a growing trend among global banks to downsize their principal investment businesses because of more punitive capital treatment by international regulators.

In RBS's case, the outsourcing of its Special Opportunities Fund (SOF) is also a consequence of growing pressure from Chancellor George Osborne to focus on consumer and small business lending.

The bank's new chief executive, Ross McEwan, will outline a revised strategy for RBS at its full-year results in February.

There have been fresh calls this week for RBS to be broken up following the publication of two critical reports relating to its treatment of struggling small business (SME) customers.

RBS holds a 13.5% direct stake in the SOF, which describes itself as "a discreet £1.1bn third-party fund" but which has provoked occasional controversy since the bank's rescue in 2008 by continuing to make new investments.

The fund has been part of RBS's non-core division since 2008, and owns assets including Moneycorp, the currency provider, and Target, a financial services outsourcing provider.

Under the management of Lindsey McMurray, SOF has been shrinking its portfolio of investments through a series of asset sales and flotations.

These have included the recent stock market listing of Arrow Global, the debt collection agency which snapped up a £900m portfolio of student loans from the Government on Monday.

Among the other businesses it has been an investor in are Catalina, a Bermuda-based acquisition vehicle that is currently engaged in bidding for the insurance assets of the struggling Co-operative Group. RBS SOF sold its stake in Catalina to Apollo Management, another investment firm, earlier this year.

It was also a shareholder in Four Seasons, the nursing home group.

The deal being proposed is for Ms McMurray and her team, who manage the fund's investments on behalf of all investors, is understood to involve removing it from RBS's non-core arm.

This will allow it to raise new capital to invest although it is unclear whether RBS will retain its minority shareholding.

Ms McMurray joined RBS in 2002 from Cabot Square Capital, an investment firm which at the time was part of Credit Suisse First Boston.

Ms McMurray and RBS declined to comment.

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