To illustrate, here is our base case for the PNC warrants (PNC
): The Fund purchased the warrants for approximately $11 each. Each warrant provides the Fund with the right to purchase one share of PNC Common stock at $67.33 per share at any time through December 31, 2018. PNC's book value is currently $68 per share, which we conservatively estimate will increase by 8% per year (net of dividends paid). At April 30, 2013, PNC Common traded at $67.88 per share (1 times book value). Simply compounding book value at 8% per year would result in a book value of about $105 per share at the end of 2018. We assume that PNC Common will continue to trade at1timesbookvalue,or$105pershare at expiration, resulting in each warrant having an intrinsic value of approximately $38 ($105 minus $67.33). Our base case would result in a 25% IRR over the life of the investment, or a 3.5 times multiple on the original $11 invested.
We believe our base case assumptions are fairly conservative in that we do not project increasing ROE or the common stock trading in excess of 1 times book value. It seems likely that if banking profits improve (higher ROE), stock prices could trade at 1.5 to 2 times book value, which would result in an exceptional return on the warrants. For example, if book value per share is $125 and PNC Common trades at 1.5 times book value at the end of 2018, each warrant would have an intrinsic value of about $120, or nearly an 11 times multiple on the original $11 investment (41% IRR over 5+ years). Continue Reading »