The new boss of private equity firm 3i Group is mulling a 700-million-pound rights issue just three months after arriving to address concerns about its debt pile and create a warchest for new deals.

Britain's biggest listed private equity firm this week said it is weighing a range of financing options as it looks to halve its 2.1 billion pound debt burden over the next 12 to 15 months.

To improve its capital structure, 3i would have to raise at least 600 million pounds, bankers estimate, to cover $793 million of bonds and loans set to mature by 2010, according to Thomson Reuters data.

"It would... shift the debate decisively to where we believe it belongs -- 3i's ability to generate through-the-cycle returns," said Merrill Lynch analyst Philip Middleton in a note to investors.

"It would allow the company to invest materially in new deals were it to see attractive opportunities, whereas at present its ability to invest is constrained."

CEO Michael Queen has already pledged to step up the disposal of 3i's venture capital portfolio and exit its small minority investments, together valued at 883 million pounds last year.

The company last week sold a group of ten venture capital portfolio investments for just under 20 million euros but the rump of the portfolio, focused on healthcare and technology, remains on the market.

Private equity firm HarbourVest Partners, which announced the closing of a $2.9 billion secondaries fund last week, is among parties negotiating for the assets, a second source said.

Queen has generated about 170 million pounds from the sale of a 9.5 percent stake in sister company 3i Infrastructure Plc and a move to take control and gain access to the cash of affiliate 3i Quoted Private Equity.

A rights issue -- expected to be launched with results in mid-May -- would allow 3i to address its core debt position and position itself to take advantage of acquisition opportunities, analysts said.


A 1-for-1 rights issue at 175 pence would raise 738 million pounds, but net asset value would be diluted by 33 percent to 348 pence from 521 pence, according to Cazenove analysis.

"While a rights issue a few months back would have been highly dilutive and might not have received very much support, this sharp rise in price and the reduction in the net asset value since then have transformed the ... arithmetic," said Cazenove's Christopher Brown.

3i shares fell 8 percent to 290.5p on Tuesday to extend a 14 percent tumble on Monday due to the prospect of a potentially dilutive rights issue. The shares have rallied 45 percent in the last two months, but have tumbled from over 900p in September.

A 2-for-3 rights issue at 200p would raise around 500 million pounds and dilute estimated NAV by 25 percent, while a 2-for-3 at 250 pence would raise around 625 million and dilute NAV by just over 21 percent, Oriel analyst Iain Scouller estimated.

Scouller said the cash call should help narrow 3i shares' 35 to 40 percent discount to NAV by addressing balance sheet concerns: "If leverage is reduced through a rights issue we think that over time the discount will narrow on the post-rights NAV," he said.

Good investor responses to bumper financial sector rights issues from HSBC , Nordea  and Sweden's SEB  show the equity market is willing to still invest in the battered sector to provide firms with firepower to take advantage of the down cycle.

"People no longer consider companies raising money as a sign of weakness," an equity capital markets banker said.

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