Mutual attraction

In the early part of the 20th century, mutuals were a significant part of the business community. But most of the large ones such as AMP, National Mutual and NRMA are now either all or partially listed. During most of the 20th century the Royal Automotive Club of Victoria – RACV – like most of its state counterparts was a small mutual. But in the 21st century it has shown that the old 'discredited' mutual structure can work to drive dramatic expansion.

RACV is now the largest mutual in Australia and a world leader in its field. And so while listed companies are divesting assets, RACV has made three major real estate purchases in the past 12 months and has spent large sums revamping two of its facilities.

RACV's stated members' equity is $1 billion but the actual equity maybe closer to $2 billion. It has no real debt except that it runs a finance company that borrows mostly from RACV members. RACV Finance is one of the very few non bank finance companies in Australia where depositors regard the name of the parent organisation as being as good as any government guarantee.

There has been no run on funds. Each of the states has their own motoring organisation and in former years the New South Wales based NRMA was the largest. Then NRMA de-mutualised its insurance business and suffered a series of board splits. It is now a fraction of the size of RACV, which ironically owns 30 per cent of the best parts of the former NRMA Insurance operation, now called IAG.

With around $2 billion in assets and only token borrowings, RACV has taken the opportunity presented by the depressed real estate market to substantially expand its network of holiday facilities for club members. First it bought Royal Pines in Queensland for $60 million – it was an absolute steal because the replacement cost would be well in excess of $300 million.

The Torquay Golf Club on Victoria's Great Ocean Road was in trouble so RACV acquired prime real estate in exchange for providing benefits to Torquay golf club members and the undertaking to build a new $50-$70 million Torquay resort.

RACV built a new, large, lavish Melbourne city club several years ago which seemed likely to be too big. However, partly because rival clubs like The Australian and The Athenaeum do not allow women members equal standing to men, the RACV city club membership was rushed. RACV was forced to substantially expand the city facilities soon after the official opening.

At the same time, the RACV has just paid $40 million to buy the neighbouring Australian Eagle House. These additional new facilities add to the RACV network of holiday/conference resorts which include Cape Shank, Inverloch and Healesville.

How does an organisation that is a mutual develop such a rapid growth pattern? The most important force driving the RACV growth is that it understands what drove the old style mutual organisations – providing member benefits. Second the board of RACV recruited former VicRoads chief executive Colin Jordan as CEO back in 2001.

Jordan brought a team around him including many former VicRoads people who then transformed the management of the rather sleepy RACV organisation into a dynamic mutual group.

No other motoring organisation understood the latent power they had. RACV's joint venture with IAG is worth about half of the IAG capitalisation, so the RACV's 30 per cent is worth in the vicinity of $1 billion.

The insurance joint venture has generated enormous profits for the RACV but the group also operates a very efficient and highly profitable motoring organisation and the resorts also generate considerable cash. The RACV member base totals some 2 million people or 70 per cent of Victorian families, which gives it unparalleled power in the insurance and resort markets.

Many past mutuals were not efficiently managed which led to huge pressure to de-mutualise them. This represents a significant long term challenge for RACV. Because there is no mutual of similar size in Australia, it is not easy to find senior staff who understand the mutual philosophy and the need to give benefits to members.

The rapidly expanded organisation will face a big test when the 60-year-old Jordan decides to retire. A series of raiders have looked at the RACV wealth but have decided that it was too hard to tap because about half the board members are elected by the city club.

I should declare that myself and my wife are members of the RACV city club and I am fascinated every time the group RACV balance sheet is presented. There is nothing like it in Australia and probably in the world.