The $200bn US investor Oaktree Capital has left talks to fund a takeover of The Telegraph by a little-known entrepreneur.
The firm, which specialises in providing costly debt, had been lined up as part of a bid of more then £500m by Dovid Efune, the British publisher of The New York Sun.
Oaktree was among the potential financial backers of Mr Efune to attend an investment presentation as part of the sale process last month.
Its exit, confirmed by City sources, raises questions about how the deal will be financed.
Mr Efune, advised by the investment bank LionTree, has been in exclusive talks to acquire The Telegraph since mid-October. Insiders said they remained confident that the takeover would be completed.
A spokesman for Mr Efune said that the firm had not submitted a competitive bid.
“We can confirm that Oaktree submitted a preliminary proposal for debt financing related to the Telegraph acquisition,” the spokesman said.
“Their proposal was not competitive, so we have decided not to proceed with them and we are progressing on debt financing with a number of reputable institutions and have high confidence in our financing path.”
The Telegraph is being sold by the Abu Dhabi-backed fund RedBird IMI, which failed in its own takeover attempt when new legislation banned state ownership of newspapers over fears for press freedom.
RedBird IMI has been seeking to recoup its outlay via an onward sale. Mr Efune last month emerged as comfortably the highest bidder after two rounds of an auction, and the only party to offer enough for RedBird IMI to get its money back.
The fund paid £600m for The Telegraph and The Spectator magazine in a complex debt deal with the Barclay family in December last year.
Redbird IMI, which is backed by Abu Dhabi royal Sheikh Mansour bin Zayed Al Nahyan and led by the former CNN boss Jeff Zucker, completed the transaction without normal due diligence.
That deal, which was brokered by the former cabinet minister Nadhim Zahawi, is thought to have increased the pressure on RedBird IMI to get its money back.
Mr Efune and LionTree have appeared to offer an escape route. The entrepreneur is relying largely on outside funders to support the deal, and has held discussions with a variety of potential backers.
Oaktree, co-founded by the billionaire Howard Marks and majority owned by the Canadian investment giant Brookfield, was seen as one of the leading potential investors.
Others have included Stand Together, a non-profit funded by the billionaire Koch family, and the US philanthropist Michael Leffell. Another potential backer, Hudson Bay, backed out of discussions last month.
Mr Efune is approaching the final two weeks of a six-week exclusivity window in which to negotiate a deal.
The 39-year-old currently owns the New York Sun, an online publication, and previously edited Jewish news outlet The Algemeiner. When entering exclusivity talks last month, he said: “The Daily Telegraph and Sunday Telegraph symbolise the very best of world-class, independent journalism and a commitment to relentlessly seeking the public interest.”
Mr Efune easily outbid rivals including National World, the local newspaper group run by David Montgomery.
Redbird IMI last month separately sold The Spectator to the hedge fund entrepreneur Sir Paul Marshall for around £100m. Michael Gove, the former Conservative Cabinet minister, has since been appointed as its editor.
Oaktree and Redbird IMI did not comment.