Warrants in private debt: pricing the kicker without inflating MoIC

A private debt fund holds a 3M€ unitranche ticket with an attached warrant — the right to subscribe 2% of the borrower's capital at a strike fixed at origination. At quarter-end, the analyst preparing the file has to assign a fair value to that warrant. Three answers circulate internally: leave it at zero because it is out of the money, fold it into the ticket's value, or apply an option formula without being quite sure why. None of the three is neutral: each one moves the line's MoIC — by more than ten points in the example below.

A warrant is not a coupon bonus

A warrant is granted in exchange for a coupon lower than what the market would require for the same credit risk without that upside. It is a standalone instrument, not an ancillary clause of the loan: it carries a claim on the borrower's capital, independent of debt repayment. Treating it as a coupon bonus ignores that it carries its own fair value, its own trajectory, and its own risk — equity risk, not credit risk.

The practical consequence is that a ticket with a warrant must be split into two components from origination: the debt, valued by discounting contractual cash flows on a rate curve and a credit spread; and the warrant, valued as an option on the borrower's equity. The IPEV Valuation Guidelines (December 2025 edition, §5.6) say so explicitly: warrants attached to mezzanine loans are considered separately from the loan. Folding the two together hides the actual performance of each leg and makes the line's MoIC unreadable to a committee or an auditor.

Intrinsic value: simple, but misleading early in the warrant's life

Intrinsic value — the gap between the current share value and the strike, multiplied by the number of shares, floored at zero — is the fastest method to apply. It has a structural flaw: a warrant issued with a strike close to the share price at issuance is, by construction, at the money or slightly out of the money. Its intrinsic value is nil for a good part of its life, even though the time remaining to expiry and the volatility of the underlying give it real value — the value any buyer of the instrument would pay for it on a secondary market.

Marking a warrant at zero simply because it is out of the money ignores its time value: an option pricing model reflects "both the time value and the intrinsic value of an option" (IFRS 13, paragraph B11). The IPEV Guidelines (§5.6) accept an approach based on the ownership percentage that exercise would confer, and point to option pricing models where the position is significant. A committee that relies on intrinsic value alone undervalues the line until the borrower has seen strong appreciation.

Option pricing: the volatility proxy matters more than the formula

Once the position is significant, an option model becomes the appropriate tool — Black-Scholes for a plain warrant, a binomial model if vesting clauses or anti-dilution ratchets make exercise path-dependent. The formula itself is not the hard part: four of the five inputs are straightforward to document (underlying price, strike, risk-free rate, contractual maturity), plus expected dividends where relevant. The parameter that actually drives the result is volatility, since the borrower's equity is unlisted.

In practice, two routes: an equity volatility derived from a peer set of listed comparables with a close economic profile, or a volatility consistent with the method already used to value the company (for instance, the volatility of the earnings or cash flows underlying the DCF), converted to equity volatility given leverage. Whichever is chosen should be documented and held stable quarter to quarter — it is a model parameter, not a lever to tune toward a desired outcome.

Isolating the kicker to keep the line's MoIC honest

The last step, often skipped, is allocating the entry cost between the two components at origination. If the ticket is issued at 3M€ but the debt alone, discounted at the market spread without the warrant benefit, would only be worth 2.85M€, the 150K€ gap is the cost attributed to the warrant. That cost basis, not the full ticket amount, is what the equity leg's MoIC should be measured against.

Take a worked example. Two years after issuance, a Series C round values the company at a level that still leaves the warrant out of the money on strict intrinsic value — the strike remains above the implied share price. But with a 55% volatility assumption, four years left to expiry, and an underlying near the money, the option model gives a fair value of 340K€ for the 2% stake reserved. Over the same period, the debt component, repriced at the current spread, is worth 2.95M€.

These multiples compare fair value alone with the cost basis; they exclude the interest collected over the two years, which the line's full MoIC includes.

A fund that had marked the warrant at zero would show a total fair value of 2,950K€, an unrealised multiple of 0.98x — a line that appears to be below cost when its fair value is in fact 9.7% above it. The gap comes from no error on the debt side: it comes from a warrant treated as if it did not exist.

In Jolv's private debt valuation module, the fair value of the debt component and that of the optionality component are computed separately: a Black-Scholes model for warrants, an option pricing model for convertibles with a fixed conversion ratio; for warrants, a volatility drawn from the sector reference dataset keeps a record of its source. The methods applied to each instrument family are detailed on the valuation methods page, and the symmetric issue on capitalized interest — another case where exposure and cash actually diverge — is covered in PIK interest and IRR: why capitalized interest is never a cash flow. Access terms for the private debt module are on the pricing page.

Sources

• IPEV Board, International Private Equity and Venture Capital Valuation Guidelines, December 2025 edition, §2.4, §5.6 and §5.20
• Commission Regulation (EU) 2023/1803 of 13 August 2023, IFRS 13 Fair Value Measurement, OJ L 237, 26.9.2023, §B11
• Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU, OJ L 83, 22.3.2013, Articles 68 and 69