Demutualise John Lewis? It’s a better idea to enable capital and growth for co-ops and mutuals

19 March 2023 | News

The news that John Lewis may seek to partly demutualise in order to raise over £1 billion for investment is of course shocking. But it focuses us yet again on the fundamental problem that many co-operatives and mutuals face. Too often they are at a disadvantage to their proprietary competitors in raising investment capital.

It doesn’t need to be like this.  Small changes to legislation can fix this imbalance permanently. Co-operatives and mutuals should be able to issue investment capital that does not demutualise them or alter their core business purpose. Maintaining one vote per member and separating investors from control defuses the risk of external capital in mutuals.

In the UK, since 2013, building societies have been able to issue core capital deferred shares, from Nationwide to Ecology Building Societies, over £1.3 bn has been invested to strengthen the sector.

In Australia, new legislation created Mutual Capital Instruments (MCIs) for the sector, permitting nearly $400 million of new investment already, enabling mutuals to fulfil their cooperative purpose whilst attracting sustainable investment from pension funds and others. MCIs work for all companies with a mutual constitution – John Lewis please note.

Across the world, Rabobank has similarly raised over €8bn and Desjardins Group in Canada over $4bn CA. These capital instruments are designed to fit the nations and sectors they are issued from. It works. There is a market for it, and it is the future for socially active investment in co-operatives and mutuals.

Yet in the UK, there has been stalled progress on developing these instruments. Government has shown no urgency in dealing with the remaining sector and now we have the spectre of a possible demutualisation at John Lewis.

Since 2015, Mutual insurers and friendly societies have been waiting for their Mutuals Deferred Shares Act to be put in effect. As Government stood by, we all had to watch the battle for the soul of LV= as we fought off the raid by Bain Capital, which would not have happened had there been more capital options.

Similarly, retail co-operatives are hamstrung  in highly competitive markets which, like at John Lewis, need constant investment for long term growth. We calculate that a small legislative change to introduce co-operative permanent shares would open up in the region of £1.2 billion in that part of the sector alone.

Agricultural co-ops would also benefit, offering new opportunities to invest in the environmental future of the UK. Allowing co-investment could unlock a further £2 billion in the short term.

This would be just the beginning of a new class of ESG investment in the original sustainable businesses. New projects for social value would be enabled in renewables, utilities and social care.

Housing Associations are also registered under the creaking Co-operatives and Community Benefit Societies Act. A new share option to invest in their social housing mission could be transformative.

They face major costs over the coming years on building safety, environmental standards, and new developments.

According to S&P, housing association debt will shortly reach £107 billion. If just 10% of this sum could be raised through new permanent co-operative shares, over £10 billion more could be invested to improve the lives of huge numbers of people. Pension funds are hungry for quality long term sustainability funds and this would meet that need.

We cannot be bystanders as great mutuals like LV=, John Lewis and others face existential challenges brought about merely because their options are limited.

Government can act quickly. The legislation for co-operatives is drafted and ready to go.  Mutual insurers and friendly societies could also quickly take advantage from swift engagement from government.

Mutuo has been at the centre of the progress made so far, and we stand ready to help facilitate new partnerships.