HOUSE_OVERSIGHT_014387.jpg

We use an equal weighted, three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $14. We assigned a 1.2x multiple to 2Q17E TBV and a 12x multiple on 2017E EPS, with lower PTBV/PE multiple than peers assigned due to the higher perceived risk of their lending model. Our DCF assumes a two-stage cost of capital of 9.4% and 11.5% and a terminal growth rate of 2%.

Upside risk to our price objective is a less onerous residential real estate cycle favorably benefiting credit provision forecasts. Downside risks are a double dip in home prices and a prolonged low rate environment.

Texas Capital Bancshares Inc. (TCBI)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $74 price objective and assign a 1.7x multiple to our 2Q17E TBV, below high growth peers due to possible losses as a result of the downturn in energy prices. We place a 17x multiple on our 2017E EPS, below TCBI's historical pre-crisis P/E multiple based on possible EPS headwinds from their energy exposures. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 4%.

Downside risks to our price objective are lower than expected oil prices and a slowdown in economic activity in Texas. Upside risk to our price objective is better than expected ramp up in MCA business, and sooner than expected hike in rates, faster than expected recovery in oil prices.

The Blackstone Group (BX)
Our price objective (PO) for Blackstone is $29, which results in a target price-to-ENI (P/ENI or P/E) multiple of 12x our 2017 ENI estimate. Our price objective is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following components: a target multiple on fee related earnings (16x - roughly in line with or a premium to top tier asset manager multiples given healthy growth and sticky assets), book value for the balance sheet investments and accrued carry, and a discounted value on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value the fee related earnings at $14/unit, the balance sheet (principal investments and accrued carry) at $6/unit, and the discounted value of future carry income and investment income at $9/unit, which equates to a total value of $29, in line with our price objective.

Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax laws related to carried interest and partnerships, legal and political risk, increased regulation, poor performance, weak fundraising, expansion risk, key person and talent risk, competition, and a unique corporate structure that limits unitholder control.

The Carlyle Group (CG)
Our price objective (PO) for Carlyle is $18, which implies a target price-to-ENI (P/ENI or P/E) multiple of 13x our 2017 ENI estimate. Our price objective is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following components: a target multiple on fee-related earnings (16x, roughly in line with or a premium to asset manager multiples given growth outlook), book value for the balance sheet investments and accrued carry, and a discounted value on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value the fee-related earnings at $4 share, the balance sheet at $5 share, and incentive upside at $9 share, which equates to a total value of $18, in line with our price objective.

Risks to our PO: a weak macro and capital markets backdrop, potential changes in carried interest and partnership tax laws, regulatory and political risk, poor performance, weak fundraising, expansion risk, key person and talent risk, competition, a unique corporate structure that limits shareholder control, a limited float, and share lock-ups that could weigh on the stock.

Bank of America
Merrill Lynch

2016 Future of Financials Conference | 17 November 2016 73

HOUSE_OVERSIGHT_014387