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

* 3i hopes to raise new infrastructure funds

* Assets include hospitals, schools, transport

LONDON, May 24 (Reuters) - 3i Group PLC is to buythe European infrastructure fund management business of Britishbank Barclays as part of a drive to boost its feeincome from public-private partnerships and renewable energyprojects.

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

Financial terms of the transaction were not disclosed.

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

3i has been undergoing a restructuring following shareholderfrustration at weak results from its buyout business, movingaway from just private equity to balance this better with itsinfrastructure and debt-management businesses.

"This is in our view a transformational deal for theexisting infrastructure business line. Not only does it improveits profitability, but it will result in improved deal flow andprovide a platform for future fund raising opportunities," JPMorgan analyst Christopher Brown said in a note.

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

The assets include hospitals, schools, water treatmentfacilities, local government buildings and transport schemes,which typically generate inflation-linked cash flows based on25-30 year operating concessions offered by the government.

Barclays has been weighing up options for its futureinvolvement in BIFM for about a year since it became clear thatnew regulation on bank capital reserves would render itsrisk-weighted returns less attractive than before, one industrysource, who declined to be named, told Reuters.

The bank is currently a limited partner in the funds managedby BIFM and is keen to retain an interest in their performancefollowing the proposed sale to 3i, which has more cost-effectiveaccess to capital for new buys, the source said.

Both 3i and Barclays declined to comment on the financialterms of the deal but the annual asset management fees earned byBIFM 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 loweroverall UK market.