Kensington has been battling rising competition in the mortgage market

Kensington said it hoped the all-share deal would allow it to get access to funds that would allow it to grow.

In a trading update, issued as the deal was announced, the sub-prime lender also warned revenues for the current year would be significantly below 2006.

Sub-prime lenders provide mortgages for people with lower credit ratings and tend to charge higher interest rates.

Under the terms of the deal, investors will get 0.7 Investec shares and a special dividend of 26 pence from Kensington for each Kensington share - the equivalent of 519.5p a share.

Finance worries

The offer came as Kensington admitted it was no longer able to raise long-term financing to support its business. As a result it put itself up for sale in February.

Sub-prime lenders have been going through a tough patch in the US as a results of problems sparked by a rise in defaults and bad loans.

Kensington has previously warned that the problems in the US had made it more difficult for it to sell its own loans. Rising competition from more established lenders such as Northern Rock has also eaten into its markets.

"Kensington does not need a working capital injection in the short-term but it does in the long-term to grow," said Investec chief executive Stephen Koseff.

"We believe this is an attractive franchise play, though Kensington has been under a fair amount of pressure we are pretty familiar with what is in their trading update and the price of the transaction took that fully into account."

The takeover is expected to be completed by the end of August and Kensington will delist from the London market when it goes through.

Mr Koseff added that integrating Kensington's 300 staff into the enlarged firm should be relatively simple, although he added that the deal would lead to some job cuts.