3i Group shares dropped 3.7% after RBC Capital Markets downgraded the investment firm to Underperform. Analysts cite overvaluation of its key portfolio company, Action, a discount retailer trading at a high 28 times CY26 expected earnings. The bank also cut its price target to £30 per share.

RBC argues Action faces diminishing returns due to macro pressures on its low-income customers and rising competition, particularly from online Chinese retailers like Temu. The broader discount sector's growth is slowing, with Euromonitor forecasting a moderation to 4-5% annually from 6-7% in recent years.

France, Action's largest market, presents a tough environment with weak consumer confidence and wage growth. While RBC views 3i as a quality business, the downgrade suggests investors should seek more compelling valuations elsewhere in the sector. The move highlights growing scrutiny on private equity portfolio valuations.