Lloyds Banking Group is negotiating a £400m acquisition of CPA Global, the patent and legal services group, underlining how the private equity arm of the partly state-owned bank now dominates the UK’s shrinking buy-out market.

Most private equity groups have been sidelined since the financial and economic crisis began. But LDC has completed 10 buy-outs this year, a sixth of all deals and three times more than any rival, according to Dealogic.

LDC invests directly from the balance sheet of Lloyds, which is 43.5 per cent owned by the government after a taxpayer-financed bail-out of the bank last year.

But the flurry of deals by LDC could prove be controversial. Politicians say banks should use their state bail-out money to support an economic recovery by lending more to homeowners and small businesses, rather than risky buy-out deals. However, LDC executives say that the buy-out arm has made the best return on risk-weighted capital of any part of Lloyds.

They argue that it has been supporting UK small businesses by investing more than £1bn in 68 companies since 2005.

It is currently in talks to invest in Manor Motorsport, one of three new teams due to join Formula One motor racing next season, and Martindale Pharmaceuticals, which controls about half the methadone market in the UK.

The auction of CPA, which was founded 40 years ago by UK law firms to manage the process of renewing patents, has come down to a contest between LDC and Intermediate Capital, the London-listed mezzanine investor.

Final bids are due next month for Jersey-based CPA, which employs 1,600 people and made £45m of earnings before interest, tax, depreciation and amortisation and £150m of revenues last year. BDO is running the auction.

CPA has about 300 shareholders, many of them partners at the founding law firms, who are reaching retirement age and looking to sell their stakes.

Bank financing has been lined up by both bidders for a deal, likely to be for a big minority stake in the company, valuing it at £400m-£450m.

LDC has spent about £200m on deals this year, including Cranswick Pet and Aquatics, the UK’s biggest wild bird food and tropical fish supplier; Orion Media, the Midlands radio broadcaster; and Modelzone, the retailer of model planes, boats and trains.

With 12 UK offices from Southampton to Aberdeen, LDC is seeking to take the place of 3i as the dominant investor in UK small and mid-market buy-outs.

It was allocated £250m of capital to invest by Lloyds at the start of the year, but this is likely to be increased.

The buy-out group raised eyebrows among UK rivals by expanding into China last year, when many others were retrenching.

It opened a Hong Kong office and invested $30m in China New Enterprise Investment Fund, a Beijing-based fund.