Britain's oldest private equity company had its credit rating cut on Monday, despite a move to cut debt by buying back its cash-rich publicly quoted fund.

3i spent £110 million to buy out its Quoted Private Equity (QPE) fund in a move that gives it access to £240 million of cash that QPE had not yet invested. Shareholders in QPE, of which 3i owned nearly 45 per cent, will get the rest of the £240 million purchase price in 3i shares.

The deal will give the heavily indebted buyout house access to much-needed cash, but the announcement failed to stop its shares falling further. They closed at a record low of 202p.

Moreover, the QPE move failed to prevent Standard & Poor's from cutting 3i's credit rating a notch from A- to BBB plus and put the company on a “negative” outlook.

The ratings agency said in a note: “In our view, the operating environment for private equity firms is difficult and we believe that this may linger. Our analysis of 3i's leverage is linked to our view of its liquidity and financial flexibility.

“Not only have 3i's leverage ratios risen sharply over the past year, we believe that the liquidity of 3i's assets has reduced. This is because tough market conditions render successful investment exits more challenging.”

3i QPE was set up in early 2007 with £400 million to buy minority positions in smaller quoted companies, but it struggled to find targets as the economic climate deteriorated. It made only five investments, including Salamander, the oil and gas exploration company, and Character, the toy producer, which will be incorporated into the buyout house's portfolio.

Candover PLC, the listed unit of Candover, and SVG Capital, Permira's listed feeder fund, have also been forced into raising fresh cash. SVG launched a deeply discounted rights issue and Candover is considering similar moves while renegotiating its banking covenants. So far 3i has resisted raising equity, attempting instead to reduce its £2.1 billion debt mountain by selling assets.

The buyout house raised about £60 million last week by selling off a chunk of its 3i Infrastructure fund, taking total disposals to about £100 million since the end of January. 3i also announced that Baroness Hogg, its chairman, would step down next year. Philip Yea, the private equity fund's former chief executive, quit abruptly last month as the group reported a £682 million fall in the value of its top 50 investments. Mr Yea was replaced by Michael Queen, the head of its infrastructure fund.

Some analysts expressed support for the QPE buyback. Christopher Brown, the head of investment companies research at Cazenove, said: “Overall, we believe this is a positive move for 3i. While there will be some dilution to net asset value per share, the market is much more concerned about the gearing.

“As we have seen, this has come down almost ten percentage points in pretty short order, putting 3i on a stronger footing and demonstrating that Michael Queen is tackling the issues head on.”

Guy Hands has bought out three of his cash-strapped Terra Firma investors for £25 million. Mr Hands wrote to investors this year to ask whether they were able to meet commitments to make payments into Terra Firma's fund. It is believed that Mr Hands, whose biggest investment, EMI, is still struggling, paid investors a fraction of the money that they had put into Terra Firm to take their stakes.

3i disposals since January

— 48 per cent stake in DIAB Group, the core materials manufacturer, to Ratos, the private equity company, for £32.5 million

— 9.5 per cent stake in 3i Infrastructure privately placed for £60 million

— Minority stake in Insensys, the wind-energy business, to Moog, in an acquisition that valued Insensys at £16 million

— 15 per cent stake in Morse, the IT consultancy, making a profit of £1 million

Buyout

3i spent £110 million in cash to buy out its Quoted Private Equity (QPE) fund. The move gives 3i access to £240 million that QPE had not yet invested

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