3i Group PLC (LSE:III) has been hit with a downgrade from UBS, which reckons after the shares hit a five-year high recently have few catalysts to go higher still.
Since October 2022, shares in the private equity investment trust have trebled to 3,105p but following the recent financing for Dutch retailer Action, UBS says "what’s next?"
A valuation of 1.25 times forward price to book value "looks fair" for forecast 17-18% return on equity.
A new 3,400p target price, up from 3,200p previously, offers an 8% upside, said the Swiss bank, which had s downgraded its rating to 'hold' from 'buy'.
3i's rise has been driven by its hugely successful investment in discount chain Action, where it is set for another €1.1 billion windfall after the retailer recently announced a €2 billion share buyback.
The FT noted the deal is one of Europe’s largest so-called “dividend recapitalisations” of recent years.
This is where companies with strong debt ratings take on even more borrowing to pay cash to their shareholders.
A surge in demand for riskier debt from investors has reduced spreads on junk debt to their lowest level since 2018, making debt more attractive, and with the IPO route to crystalising an investment effectively shut down, dividend recaps have grown in popularity.
According to the FT, 3i’s acquisition of Action now ranks as one of the most successful leveraged buyouts ever with the private equity group paying just €130 million for a controlling stake in the retailer in 2011.
Since then it had returned £2.9bn to its majority shareholder over the years, even before the latest €1.1bn payout, which would be the eighth dividend recap since 3i’s takeover.
3i owns a 54.8% stake in Action and its share price has increased by more than 1,000% since the 2011 buyout, with the private equity firm’s stake in Action now making up more than 60% of its portfolio.