UPDATE 1-3i grows infrastructure arm with Barclays fund purchase

Fri May 24, 2013 7:13am EDT

* 3i hopes to raise new infrastructure funds

* Assets include hospitals, schools, transport

LONDON May 24 (Reuters) - 3i Group PLC is to buy the European infrastructure fund management business of British bank Barclays as part of a drive to boost its fee income from public-private partnerships and renewable energy projects.

The private equity firm, aiming to become one of Europe's biggest investors in the infrastructure sector, said on Friday the deal would help it to raise new funds and source new investment opportunities for its 3i Infrastructure business.

Financial terms of the transaction were not disclosed.

With yields on staple investments like UK Gilts and German Bunds hovering around record lows, pension funds are bankrolling more government-backed projects to build new roads, bridges and public buildings in the hope these will deliver higher, inflation-protected returns.

3i has been undergoing a restructuring following shareholder frustration at weak results from its buyout business, moving away from just private equity to balance this better with its infrastructure and debt-management businesses.

"This is in our view a transformational deal for the existing infrastructure business line. Not only does it improve its profitability, but it will result in improved deal flow and provide a platform for future fund raising opportunities," JP Morgan analyst Christopher Brown said in a note.

Barclays Infrastructure Funds Management Limited (BIFM) has around 780 million pounds ($1.2 billion) of assets under management and is run by an investment team based in London and Paris. Since its launch in 1996, the business has invested 1.7 billion pounds across six funds.

The assets include hospitals, schools, water treatment facilities, local government buildings and transport schemes, which typically generate inflation-linked cash flows based on 25-30 year operating concessions offered by the government.

Barclays has been weighing up options for its future involvement in BIFM for about a year since it became clear that new regulation on bank capital reserves would render its risk-weighted returns less attractive than before, one industry source, who declined to be named, told Reuters.

The bank is currently a limited partner in the funds managed by BIFM and is keen to retain an interest in their performance following the proposed sale to 3i, which has more cost-effective access to capital for new buys, the source said.

Both 3i and Barclays declined to comment on the financial terms of the deal but the annual asset management fees earned by BIFM are expected to cover its operating costs, 3i said.

At 1045 GMT, 3i shares were down 1.3 percent at 357.9 pence, while Barclays' were down 0.9 percent at 318.65 pence in a lower overall UK market.

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