Shares in 3i Group PLC (LSE:III) fell 3.5% after a report at the weekend that it is a target for renowned short seller Shadowfall Capital and Research.
The London-based hedge fund has taken a multimillion-pound short position against the blue-chip investment trust on the basis, according to the Sunday Times.
It told the newspaper that its rationale for taking out the short, which is in effect a bet that the shares of a company will fall, is that the largest holding in 3i's portfolio, European discount retailer Action, is significantly overvalued.
3i's shares have rocketed around 800% higher over the past decade thanks in large part to its majority stake held in Netherlands-headquartered Action, which has expanded to almost 3,000 stores across 12 countries, since 2011.
After first investing in Action via a €279 million (£233 million) leveraged buyout in 2011, 3i values its 57.6% stake at £14.8 billion.
Shadowfall is not the only one to lose faith in 3i's valuation, with analysts at UBS having downgraded the stock in June after the shares hit a five-year high.
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.
Shadowfall, founded by former equity analyst Matthew Earl, is best known for its role in exposing fraud at Wirecard (ETR:WDI), but has also made short bets against London-listed names including Future PLC (LSE:FUTR) in 2020 and Network International in the same year.