M&G, an arm of Prudential, the huge insurer, is moving into the corporate lending market with a multibillion-pound fund designed to exploit the gap left by banks in their retreat from the business of lending to companies.

The investment manager wants to relaunch the private placement market for corporate debt with a fund of about £3billion backed by pension funds. M&G has already secured £500million from Prudential and is raising the remainder. The UK Companies Financing Fund will target medium-sized listed companies, which are suffering from a funding drought because of the evaporation of the syndicated loan market operated by the banks.

Simon Pilcher, head of fixed income for M&G, said that the fund would move into a space previously occupied by international banking syndicates, providing senior unlisted and unsecured debt. “There is a dearth of capital,” Mr Pilcher said. “We started getting worried about companies in the FTSE 50 to 350 level in September and October last year.”

Talks with bankers and corporate treasurers confirmed that there was a gap in the market for lending to mid-tier listed companies. The UK Companies Financing Fund will not lend to companies that are struggling or in difficult sectors. Mr Pilcher said: “This is for strong companies that have been let down by failings in the banking market.”

The private placement debt market is well established in the United States, where companies can arrange long-term loans from insurance

companies. The institutional lending market has attracted Associated British Foods, which once boasted a substantial cash position but must now raise funds. ABF plans to raise $600million (£415million) in a private placement. John Bason, the ABF finance director, said that there would be a sterling component and that one UK institution would be a substantial investor.

M&G is hoping to restore a market that existed in Britain in the 1960s. “There was a much closer relationship then between companies and institutions,” Mr Pilcher said. “Smaller companies would raise debt finance through unsecured loan stock.” The lending market then became dominated by banking syndicates. Typically, a group of ten banks would provide the funds but loan losses, a diminished appetite for risk and a withdrawal by international banks to their domestic markets have reduced the pool of capital available to lend to companies.

According to a survey by the Association of Corporate Treasurers, the contraction in the banking market has reduced available funds and pushed up costs. “As a rule of thumb, margins will be up by a factor of five times from the previous lows,” the association said. “A retreat from these extreme levels is not expected until 2010 or later, and even then margins will not reach the very low 2007 levels.”

Such high margins are one of the attractions for the Prudential/M&G fund. “The returns generally available for those willing to lend are higher than they have ever been in my lifetime,” Mr Pilcher said.

The fund will lend on terms of between three and ten years and the lenders will expect to rank on a par with the company's lead bankers. Borrowers will be expected to provide covenants on gearing and asset disposal that will give comfort to the pension schemes backing the fund.

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