I decided to buy the 124,000 IPE shares available at $1.00 each via my IPEO options. This will mean that my total holding of ING Private Equity is around 130,000 shares with a total cost base around $132,600 (I haven't worked out the exact cost based on my previous IPE stock purchases and IPEO option purchases. Based on the current annual dividend of 7c per share, and the max and min stock price for IPE over the past 12 months, I estimate my range of likely outcomes over the next 12 months lies between:
max $145,600 (130,000 shares @ $1.12) + $9100 dividend = $154,700 16.7% ROI
min $118,300 (130,000 shares @ $0.91) + $9100 dividend = $127,400 -3.9% ROI
The average of these extremes is an ROI of 6.4%, slightly less than the interest rate on the $124,000 I borrowed using my St George "Portfolio Loan" to pay for the IPEO stock issue. There is a dividend of 5.4c already declared that will be paid on 22 Nov, so I think there is upside potential to the dividend payment over the next 12 months. As the NAV of IPE is around $1.18 (if all options are taken up) there is also a good chance of the stock going above $1.10 in 12 months time (when any capital gain would be taxed at 50% of my marginal income tax rate, rather than 100%).
As the IPE stock price is currently around $1.01 I suspect that there may be less than 100% take up of stock available via the IPEO options. If so, the dilution of NAV will be reduced, supporting the stock price. In the short term there might be some weakness in the stock price as any "stags" of the IPEO stock issue cash out their short term gains. There might also be some short term investors who hold on until the 5.4c dividend is paid out on 22 Nov. The stock price at the end of November should give a good indication if $1.00 per IPE share was expensive or a bargain.
My 12 months target for this investment is total dividend income of 7.5c (I'm not sure how much franking credit will apply) and a stock price in Nov '08 of $1.15. This would give me a total ROI of 22.5% on my $124,000 investment, and a profit of around $18,000 after interest on the borrowed funds is deducted. After 12 months I will review whether I should sell this holding or retain it as a medium term investment. Having around 10% of my Net Worth invested in a private equity "fund of funds" would be a reasonable asset allocation.
Aside from my existing investment in CDF (Commonwealth Bank Diversified Share Fund - which in invests in around 200 Australian stocks in order to closely replicate the All Ords Index) this is now my largest single stock holding. If all IPEO options are paid up I will own around 0.328% of IPE, which is a significant position for a small investor. My overall portfolio performance over the coming year will be greatly influenced by how well this particular stock performs.
Copyright Enough Wealth 2007