May 8 (Bloomberg) -- 3i Group Plc plans to raise about 700 million pounds ($1.05 billion) in its first rights offering as a publicly traded company, after debt climbed and the value of investments slumped.

3i will sell 542 million new shares for 135 pence each, 60 percent less that yesterday’s closing price. Shareholders will be able to buy nine new shares for every seven they already own, London-based 3i said in a statement today. JPMorgan Cazenove Holdings and Merrill Lynch & Co. are underwriting the sale.

Michael Queen, a 3i veteran of two decades who replaced Philip Yea as chief executive officer in January, is selling assets and closing units to try and halve debt that totaled 1.9 billion pounds in March. The value of 3i’s holdings dropped by more than half in the fiscal year as stock markets tumbled

When the company sought to sell investments, “people perceived us as financially weak, and the offers we were getting were ridiculous,” Queen told reporters on a conference call today. “We had to take that perception off the table.”

3i dropped out of the benchmark FTSE 100 share index in March as its shares hit a record low of 174.5 pence. The stock has since more than doubled. The stock rose 14 percent to 387.75 pence in London trading today.

Net asset value a share fell to 496 pence at the end of March from 1,077 pence a year earlier, 3i said today. The company won’t pay a final dividend this year.

Private Equity Struggle

“The most rapid economic downturn in 3i’s history, the dislocation of capital markets and the collapse of mergers and acquisitions activity all undermined the value of our portfolio,” 3i said. “It also led to a significant increase in the leverage on our balance sheet, which itself magnified our negative return.”

Queen said he plans to return to a “more conservative financial structure,” and cut debt to 1 billion pounds in the next 12 months. That may be reduced in future years, he said. In February, Queen shut 3i Quoted Private Equity Plc, an investor in smaller publicly traded companies and is selling stakes in venture capital investments. The rights offer and the closure of the Quoted Private Equity fund will cut indebtedness to about 1.1 billion pounds.

“Queen has made good progress in terms of cutting costs,” Cazenove analyst Christopher Brown wrote in a note to clients today. “Some of the buyout investments have clearly suffered, but these have largely been written down or written off, so all that remains is upside potential.”

Private Equity Struggle

Private-equity firms are struggling as the global credit drought makes it tougher to buy or sell companies. Firms are writing down the value of some of the $1.6 trillion of takeovers they led in 2006 and 2007, and are also cutting funds and jobs. 3i has eliminated 100 jobs in the past year, Queen said today.

Kohlberg Kravis Roberts & Co. is asking investors in one of its European private equity funds for as much as 730 million euros ($952 million) of additional money to shore up at least six of the companies it already owns. Candover Investments Plc, a London-based leveraged buyout firm, is in talks to be bought after it was forced to cancel a pledge to invest 1 billion euros in its latest buyout fund.

3i reaped 340 million pounds more from asset sales than it spent on new investments in the year. Proceeds from asset sales, or so-called realizations, dropped to 1.3 billion pounds from 1.7 billion pounds. The firm spent 968 million pounds in the 12 months through March, less than half what it spent in the year- earlier period. Queen said he expects to invest a similar amount in the next 12 months as in 2008.

‘Huge Flexibility’

The rights offer “gives us huge flexibility,” he said. “I’m not sure when the upturn will come, but we need to be absolutely ready.”

The sale will raise 732 million pounds minus about 32 million pounds in fees and other expenses. The share sale will dilute asset value a share to 277 pence, according to Brown.

Separately, U.K. house builder Taylor Wimpey Plc said today it plans to raise 510 million pounds in a rights offer to pay down debt. In all, European companies have raised $41.1 billion pounds in rights offers this year, according to data compiled by Bloomberg.

To contact the reporter responsible for this story: Edward Evans at eevans3@bloomberg.net

Last Updated: May 8, 2009 11:39 EDT