3i warns credit freeze will run into 2008

3i warned yesterday that debt market turmoil would be a drag on private equity deals for at least the rest of this year as banks hold on to their money.

Banks will be wary of lending for leveraged buyouts until they have reported their annual results early next year, the buyout firm said. But 3i said its mid-sized deals would be less affected by the credit freeze than the bumper takeovers done by rivals in the buyout boom.

The credit crunch has left the world's banks with nearly £200bn of buyout debt on their balance sheets that they would normally have sold on to investors.

Simon Ball, 3i's finance director, said the banks were wary about the effect unsyndicated debt would have on their balance sheets. "I don't think that will really become clear until the early part of next year."

Mr Ball made his comments as 3i released an upbeat trading statement for the five months to the end of August. The firm more than doubled its investments to £1bn, and boosted income from selling businesses by 61 per cent to £1bn as it sold Care Principals, a nursing home chain, and Aibel, a Norwegian offshore oil and gas service business.

The company said prices of leveraged buyouts would be lower because of rising credit costs, but that values of mid-sized businesses would hold up better than for big companies. There are plenty of corporate buyers for companies 3i has invested in, even if there are fewer sales to other buyout firms, it added.

Private-equity firms have ridden the wave of cheap debt in recent years, doing bigger and bigger deals and becoming the driving force of the market for mergers.

3i has boosted investment in growing private businesses and illiquid quoted companies and sees growth in those markets.

There was good news at the jumbo end of the buyout market. Bloomberg reported that banks financing Kohlberg Kravis Roberts' acquisition of First Data were selling up to $10bn of loans.