A syndicate of banks will own 75% of New Star, which intends to delist and go private following the restructure if shareholders approve.
The move will result in £240m of the group’s £260m gross debt being converted to equity in the business.
The value of the company now stands at under £20m as its share price has plummeted to 4.75p.
In a statement to the stock exchange, the group said it would retain its fund managers through an incentive scheme for senior management. It will issue a new class of ordinary shares comprising 5% of of share capital, as well as £6m of preference shares.
John Duffield, the group’s chairman, said in a statement: “The board recognised the concerns of our clients regarding the level of our debt during these difficult times. We have therefore taken this radical step to address these concerns completely and with one stroke.
“We are now free to focus all our attention on improving our investment performance. Our existing share-based bonus scheme will be replaced by a newscheme to ensure our key people are locked in.
“The cost of this restructuring is regrettably a substantial dilution for ordinary shareholders, including me. However in current market conditions, we have to recognise that there is no other option to ensure the stability of the business.”