LONDON, October 31, 2016 /PRNewswire/ --
Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment(i) of the main market of London Stock Exchange under ticker symbol "TFG.LN". In this report, we provide an update on TFG's results of operations for the period ending 30 September 2016.(ii)
This summary release should be read in conjunction with the full Q3 2016 Report which follows.
Key Metrics(iii)
- Annualised Fair Value Return on Equity ("RoE") year to date through Q3 of 6.4%(iv)
- Fair Value EPS of $1.02 year to date through Q3 2016
- Fair Value NAV Per Share Total Return of 7.8% year to date and Fully Diluted Fair Value NAV per Share of $20.05 at the end of Q3 2016
- Dividend Per Share for Q3 2016 of 16.75 cents (dividend yield of 6.3%)
Highlights During Q3 2016
- All asset classes were profitable during Q3 2016
- TFG became a member of the Association of Investment Companies
- TFG commissioned Edison Investment Research Limited to publish reports regarding the company
- TFG has a five-star Morningstar Rating'from Morningstar, Inc. as of 30 September 2016
- TFG intends to conduct at tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million
- TFG Asset Management's assets under management totaled approximately $18.6 billion at 30 September 2016
About TFG:
TFG is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment of the main market of the London Stock Exchange under ticker symbol "TFG.LN". TFG's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Company's investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure.
This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.
This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the US Securities Act of 1933, as amended, and may not be offered or sold in the United States or to US persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the US Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the Financial Markets Supervision Act as a collective investment scheme from a designated country.
________________________________
TFG's 'Home Member State' for the purposes of the EU Transparency Directive
(i) (Directive 2004/109/EC) is the Netherlands.
TFG invests substantially all its capital through a master fund, Tetragon
Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the
issued non-voting shares. In this report, unless otherwise stated, we report on
the consolidated business incorporating TFG and TFGMF. References to "we" are
to Tetragon Financial Management LP, TFG's investment manager (the "Investment
(ii) Manager").
Please refer to Figure 22 and related notes of the attached Q3 2016 Report for
full definitions of Fair Value RoE, Fair Value EPS and Fair Value NAV per
(iii) Share.
TFG seeks to deliver 10-15% Fair Value RoE per annum to shareholders. TFG's
returns will most likely fluctuate with LIBOR. LIBOR directly flows through
some of TFG's investments and, as it can be seen as the risk-free short-term
rate, it should affect all of TFG's investments. In high-LIBOR environments,
TFG should achieve higher sustainable returns; in low-LIBOR environments, TFG
(iv) should achieve lower sustainable returns.
Delivering Results Since 2005(1)(i)
Figure 1
TFG: Delivering Results Since 2005(1)(i)
Returns
ROE TARGET(ii) 10-15% Annualised Range
AVERAGE ROE(iii) 12.9% Since April 2007 IPO
2016 ANNUALISED ROE 6.4% 30 September 2016
Shareholder Returns(iv)
SHARE PRICE
ONE YEAR +18% To 30 September 2016;
FTSE: All-Share: +17%
THREE YEARS +8% Per annum to 30 September 2016;
FTSE: All-Share: +7%
FIVE YEARS +17% Per annum to 30 September 2016;
FTSE: All-Share: +11%
SINCE APRIL 2007 IPO +8% Per annum to 30 September 2016;
FTSE: All-Share: +5%
NAV PER SHARE TOTAL RETURN
ONE YEAR +12% To 30 September 2016
THREE YEARS +13% Annualised to 30 September 2016
FIVE YEARS +15% Annualised to 30 September 2016
SINCE APRIL 2007 IPO +12% Annualised to 30 September 2016
Returning Value
DIVIDEND YIELD 6.3% 30 September 2016
DIVIDEND COVER(v) 2X 30 September 2016
QUARTERLY DIVIDEND FIVE-YEAR CAGR 10.9% Per annum to 30 September 2016
Building Value
FAIR VALUE NAV(vi) $1.9B 30 September 2016
FULLY DILUTED FAIR VALUE NAV PER SHARE(vii) $20 30 September 2016
Alignment
PRINCIPAL & EMPLOYEE OWNERSHIP(viii) 24% 30 September 2016
(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Please refer to end notes for important disclosures.
Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment(2) of the main market of London Stock Exchange under ticker symbol "TFG.LN". In this report, we provide an update on TFG's results of operations for the period ending 30 September 2016.(3)
31 October 2016
EXECUTIVE SUMMARY
TFG generated Fair Value earnings of $49.7 million in Q3 2016, giving an annualised Fair Value Return on Equity ("RoE") for the first nine months of the year of 6.4%.(4)
Fair Value NAV Per Share Total Return ("NAV Total Return")(5) grew 1.3% in Q3 2016 and 7.8% year to date through 30 September 2016. As in the Half Yearly Report, we show a chart showing this metric since TFG's IPO at the end of this Executive Summary.
During Q3 2016, all asset classes were profitable. Noteworthy positive performers were: CLO 1.0 investments, which had Fair Value Net Income ("Net Income")(6) of $20.6 million; equities (European event-driven and mining strategies) which had Net Income of $20.3 million; and a distressed fund investment which had Net Income of $9.9 million.
The third quarter dividend was declared at 16.75 cents per share, giving a 12-month rolling dividend growth of 3.9%.
During the third quarter, TFG increased the size of its revolving credit facility (the "Revolving Credit Facility") from $75 million to $150 million with the addition of a second lender to the facility.
In September, TFG became a member of the Association of Investment Companies (AIC), the trade body for closed-ended investment companies.(7)
TFG also commissioned Edison Investment Research Limited to publish a report regarding the company, and we expect Edison to publish updates on a quarterly basis.(8)
In addition, TFG has a five-star Morningstar RatingTM from Morningstar, Inc. as of 30 September 2016. The five-star rating relates to TFG's overall performance, as well as over three years and over five years.(9)
TFG intends to conduct a tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million, to be held as treasury shares. Deutsche Bank AG, London Branch will act as dealer manager in the tender offer, which will use a modified Dutch auction structure. Details of this planned tender offer will be announced shortly. A repurchase of TFG shares at a price below NAV will be accretive to Fully Diluted Fair Value NAV Per Share ("NAV Per Share").
Finally, TFG's next Investor Day will follow the release of its full year 2016 results, and thus is scheduled for 8 March 2017 in London. More details on this event will follow in due course.
Figure 2
TFG Fair Value NAV Per Share Total Return Since April 2007 IPO(10)
Total Return 186.9%; 11.8% Annualised to 30 September 2016
TFG Fair Value NAV Per Share Total Return Since April 2007
IPO
Total Return Performance
YTD 1 Yr 3 Yr 5 Yr Since IPO
(April 2007)
TFG NAV Per Share Total Return 7.8% 12.3% 44.0% 97.9% 186.9%
MSCI ACWI 7.1% 12.6% 18.4% 70.6% 38.5%
TFG Hurdle 2.4% 3.2% 9.3% 16.2% 43.6%
TFG OVERVIEW
TFG is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment of the main market of the London Stock Exchange under ticker symbol "TFG.LN"(11).
TFG's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Company's investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure.
TFG's Fair Value Net Asset Value ("NAV") as of 30 September 2016 was approximately $1.9 billion. Figure 3 shows the Company's current net asset breakdown including TFG Asset Management at full estimated Fair Value.
Figure 3(i)(ii)
Fair Value Net Asset Breakdown at 30 September 2016
CLO Equity 24.2%
Equities 17.3%
Credit 8.5%
Real Estate 7.8%
TFG Asset Management (privately-held securities) 20.5%
Net Cash 21.7%
Total 100.0%
Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master
Fund Limited, (2) excess margin held by brokers associated with assets held
directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in
certain designated accounts related to TFG's investments, which may only be used
for designated purposes without incurring significant tax and transfer costs, net
(i) of "Other Net Assets and Liabilities."
Assets characterised as "Equities" consist of the Fair Value of investments in
Polygon-managed equity funds as well as the Fair Value of, or capital committed
to, equity assets (as applicable) held directly on TFG's balance sheet. Please
(ii) see Figure 12 for further details on asset composition.
To achieve TFG's investment objective of generating distributable income and capital appreciation, TFG's current investment strategy is:
- To identify attractive asset classes and investment strategies.
- To identify asset managers it believes to be superior.
- To use the market experience of TFM, TFG's investment manager, to negotiate favourable terms for its investments.
- Through TFG Asset Management, and where sensible, to seek to own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on its capital.
In addition, TFM's current investment strategy is to continue to grow TFG Asset Management - as TFG's diversified alternative asset management business - with a view to a possible initial public offering and listing of its shares.
As part of its investment strategy, TFM may employ hedging strategies and leverage in seeking to provide attractive returns while managing risk.
The Investment Manager seeks to identify asset classes that offer excess returns relative to their investment risk, or "intrinsic alpha." It analyses the risk/reward, correlation, duration and liquidity characteristics of each potential capital use to gauge its attractiveness and incremental impact on the Company.
The Investment Manager then seeks to find high-quality managers who invest in these asset classes; selects or structures suitable investment vehicles that optimise risk-adjusted returns for TFG's capital; and/or seeks for TFG (via TFG Asset Management) to own a share of the asset management company. TFG aims to not only produce asset level returns, but also aims to enhance these returns with capital appreciation and investment income from its investments in asset management businesses that derive income from external investors.
Certain considerations when evaluating the viability of a potential asset manager typically include: performance track records, reputation, regulatory requirements, infrastructure needs and asset gathering capacity. Potential profitability and scalability of the business are also important considerations. Additionally, the core capabilities, investment focus and strategy of any new business should offer a complementary operating income stream to TFG Asset Management's existing businesses. The Investment Manager looks to mitigate potential correlated risks across TFG Asset Management's investment managers by diversifying its exposure across asset classes, investment vehicles, durations, and investor types, among other factors.
TFG's asset management businesses can operate autonomously, or on the TFG Asset Management platform. In either case, the objective is for them to benefit from an established infrastructure, which can assist in critical business management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence.
Figure 4(12)
ASSETS UNDER HEADCOUNT OFFICES GLOBAL OPERATING
MANAGEMENT(i) PLATFORM
$19B CIRCA 250 London . New York
30 September 2016 Including GreenOak Plus GreenOak locations
LCM GreenOak Polygon
Real Estate Joint Hedge Funds & Private
Bank Loans Venture Equity
Approx AUM $6.2 billion(ii) $7.1 billion(iii) $1.6 billion(iv)
- LCM Currently - Japan Fund I - European Equity
manages 14 CLOs - Asia Fund II Opportunity Fund
- UK Debt Fund I - Convertible
- Europe Fund I Spain Opportunity Fund
- US Fund I - Mining Opportunity
- US Fund II Fund
- Global Advisory - Global Equities
- Grafton Advisors Fund
- Distressed
Opportunities Fund
- Recovery Fund
TCIP + TCICM
CLO Equity Bank Loans
$0.3 billion(vii) $0.9 billion(viii)
- Tetragon Credit
Income II L.P.
(table continued)
Equitix Hawke's Point
Infrastructure Mining Finance
Approx AUM $2.6 billion(v) Start up(vi)
- Fund I
- Fund II
- Fund III
- Fund IV
- Managed Account
- Energy Saving
Investments
- Energy Efficiency
Fund
(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Products/mandates listed are not necessarily open for new investment and are not an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction, but to illustrate the TFG Asset Management platform strategy.
TFG Asset Management consists of:
- LCM Asset Management(13) - a CLO loan manager.
- The GreenOak Real Estate(14) joint venture - a real estate-focused principal investing, lending and advisory firm.
- Polygon Global Partners(15) - a manager of open-ended hedge fund and private equity vehicles across a number of strategies.
- Equitix(16) - an integrated core infrastructure asset management and primary project platform.
- Hawke's Point(17) - a business that seeks to provide capital to companies in the mining and resource sectors.
- Tetragon Credit Income Partners (TCIP)(18) - TCIP acts as a general partner of a private equity vehicle that focuses on CLO investments relating to risk retention rules, including majority stakes in CLO equity tranches.
- TCI Capital Management LLC (TCICM)(19) - a CLO loan manager.
Assets under management ("AUM") for TFG Asset Management as of 30 September 2016 totalled approximately $18.6 billion.(20)
TFG's Board of Directors
TFG's Board of Directors is comprised of six members, four of whom are independent directors who have significant experience in asset management and financial markets. Biographies of the directors can be found in Appendix IX.
- Rupert Dorey (Independent Director)
- Frederic Hervouet (Independent Director)
- David Jeffreys (Independent Director)
- William P. Rogers, Jr. (Independent Director)
- Reade Griffith
- Paddy Dear
KEY METRICS
The Company focuses on the following key metrics prepared on a Fair Value(21) basis, when assessing how value is being created for, and delivered to, TFG shareholders:
- Earnings: Fair Value Return on Equity and Fair Value EPS
- Fair Value NAV Per Share: NAV Per Share Total Return and NAV per share
- Dividends
EARNINGS - FAIR VALUE RETURN ON EQUITY
Annualised Fair Value RoE year to date through Q3 2016 was 6.4%.(22)
Although 2016 has so far proved to be a difficult environment in general for investment funds, TFG was pleased to continue to produce a positive set of results in the first three quarters, recording a Net Income(23) of $94.8 million. This resulted in an annualised RoE of 6.4% for the first nine months of the year, an increase on the annualised RoE of 4.5% for H1 2016.
On a year-to-date basis, all investment classes across the portfolio have positively contributed to TFG's RoE.
Figure 5(i)
Annual Fair Value Return on Equity 2012 - YTD 2016
2012 20.8%
2013 15.3%
2014 6.6%
2015 14.5%
2016 annualised 6.4%
Target RoE 10-15%
Average RoE 12.9%
Average RoE is calculated from TFG's IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset Management businesses, the value of which has accumulated over several years. Consequently, the full year return of 14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%.
FAIR VALUE EARNINGS PER SHARE ("EPS")
TFG generated a Fair Value EPS(24) of $1.02 year to date through Q3 2016
The Fair Value Net Income of $94.8 million resulted in an EPS of $1.02. The EPS of $0.55 generated in Q3 2016 represents a significant increase over the aggregate EPS result of $0.47 for the first two quarters of 2016. As detailed in last quarter's report, the 2016 EPS continues to significantly trail the results from the same period last year, reflecting not only the generally adverse and volatile conditions in 2016, but also some strong one-off contributions in 2015.(25)
Figure 6
Fair Value EPS Comparison
2012 - Q3 2016 (USD)
Q3 YTD Q4 Total Year
FY 2012 $1.77 $0.93 $2.70
FY 2013 $1.39 $1.13 $2.52
FY 2014 $0.98 $0.26 $1.24
FY 2015 $2.37 $0.35 $2.72
Q3 2016 $1.02
Further detailed information on the drivers of the Company's performance is provided later in this report. Please see the section "Q3 2016 In Review" for further detailed information on the drivers of the Company's performance.
FULLY DILUTED FAIR VALUE NAV PER SHARE
Fully Diluted Fair Value NAV Per Share ("NAV Per Share") is $20.05 at the end of Q3 2016. NAV Total Return is 7.8% year to date through Q3 2016.
- NAV Per Share increased significantly during the year as the positive impact from operating performance was boosted by an H1 2016 repurchase of 10 million shares for an all-in cost of $100.7 million.
- Although the share repurchase reduced net assets, by buying its shares at a discount to NAV, TFG increased the NAV Per Share by approximately $0.94. As noted in the Executive Summary, TFG intends to conduct another tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million.
Figure 7
Fair Value NAV Per Share Total Return
2012-Q3 2016 Q3 FY
2012 15.2% 19.0%
2013 8.6% 15.8%
2014 5.6% 8.1%
2015 11.3% 16.0%
2016 7.8%
Figure 8(i)
Fair Value NAV Per Share
Q3 2012 - Q3 2016
2012 $14.29
2013 $15.49
2014 $16.82
2015 $18.47
2016 $20.05
(i) Source: NAV Per Share based on TFG's financial statements as of 30 September of each of the years shown. Please see Figure 22 on page 27 for more details on the calculation of NAV Per Share.
DIVIDENDS PER SHARE ("DPS") (26)
TFG's quarterly dividend was 16.75 cents per share for Q3 2016.
- TFG declared a Q3 2016 dividend of $0.1675 per share, unchanged from Q2 2016. On a rolling 12-month basis, the dividend of $0.665 per share represents a 3.9% increase over the prior 12-month period and equates to an annualised dividend yield of 6.3% on the 30 September 2016 share price of $10.60.
- This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q3 2016 DPS of $0.1675 brings the cumulative DPS declared since TFG's IPO to $4.585.
Figure 9
Dividend per Share Comparison
2012 - Q3 2016 (USD)
Q3 YTD Q4 Total Year
2012 $0.3350 $0.1350 $0.4700
2013 $0.4150 $0.1500 $0.5650
2014 $0.4600 $0.1575 $0.6175
2015 $0.4825 $0.1650 $0.6475
2016 $0.5000 - -
Q3 2016 IN REVIEW
The figure below illustrates the composition of TFG's Fair Value Net Assets as of 30 September 2016 and 31 December 2015.
Figure 10: Fair Value Net Asset Composition Summary(i)(ii)
Fair Value Net Asset Composition Summary(i)(ii)
Fair Value Net
Asset Net Asset
Breakdown at Breakdown at
31 December 30 September
2015 2016
CLO Equity 30.2% 24.2%
Equities 14.5% 17.3%
Credit 7.2% 8.5%
Real Estate 7.1% 7.8%
Asset Managers:
TFG AM 21.2% 20.5%
Net Cash 19.8% 21.7%
Total 100.0% 100.0%
Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master
Fund Limited, (2) excess margin held by brokers associated with assets held
directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in
certain designated accounts related to TFG's investments, which may only be used
for designated purposes without incurring significant tax and transfer costs, net
(i) of "Other Net Assets and Liabilities."
Assets characterised as "Equities" consist of the Fair Value of investments in
Polygon-managed equity funds as well as the Fair Value of, or capital committed
to, equity assets (as applicable) held directly on TFG's balance sheet. Please
(ii) see Figures 11 and 12 for further details on asset composition.
Top 10 Holdings as of 30 September 2016
The table below highlights the fair value of TFG's ten top holdings as of 30 September 2016.
Figure 11
Top 10 Holdings at 30 September 2016
Holding Investment Type
1 Equitix (Manager) Privately-held securities in asset mgt business
2 Polygon European Equity Opportunity
Fund Fund Investment -Equity
3 Polygon Distressed Opportunities Fund Fund Investment - Credit
4 LCM (Manager) Privately-held securities in asset mgt business
5 GreenOak Real Estate (Manager) Privately-held securities in asset mgt business
6 Polygon (Manager) Privately-held securities in asset mgt business
7 Polygon Convertible Opportunity Fund Fund Investment - Credit
8 Polygon Mining Opportunities Fund Fund Investment - Equity
9 GreenOak US II Fund Real Estate
10 LCM XIX LP CLO Equity Investment
(table continued)
Fair % of Fair
Description Value $MM Value NAV
1 GBP2.0 Bn UK infrastructure fund asset manager 165.2 8.5%
2 European event driven equity hedge fund 162.7 8.4%
3 Distressed opportunities hedge fund 105.2 5.4%
4 $6.2 Bn CLO manager 104.0 5.3%
5 $7.1 Bn global real estate asset manager 66.0 3.4%
6 $1.6 Bn hedge fund manager 60.9 3.1%
7 Event driven credit hedge fund 49.5 2.5%
8 Mining-related equity hedge fund 44.0 2.3%
9 U.S. Real Estate fund 35.1 1.8%
10 U.S. broadly syndicated corporate loans (CLO) 33.4 1.7%
TOTAL 42.4%
Net Asset Breakdown and Income for Q3 2016
Figure 12
NET ASSET BREAKDOWN AND INCOME FOR Q3 2016
Q3 2016 Q3 YTD 2016 2015 2015
Fair Value Fair Value Fair Value Fair Value
Net Assets Net Income Net Assets Net Income
Asset Category Asset Subcategory ($MM) ($MM) ($MM) ($MM)
CLO Equity U.S. CLO 1.0(i) 159.1 33.1 260.6 55.7
CLO Equity U.S. CLO 2.0(i) 273.4 30.7 281.7 30.2
CLO Equity European CLOs 39.3 11.0 58.5 6.0
CLO Equity CLO Equity Fund 0.1 0.4 - -
Equities Equity Funds 226.5 21.3 198.3 15.3
Equities Other Equities(ii) 110.3 17.3 90.5 51.6
Credit Convertible Bond Fund 49.5 4.8 44.8 2.3
Credit Distressed Fund 105.2 10.1 95.1 (5.4)
Credit Direct Loans 10.2 0.8 3.0 1.0
Real Estate Real Estate 151.4 10.1 141.7 25.2
Private Equity/
Asset Mgt TFG Asset Management(iii) 398.2 1.9 422.1 185.2
Net Cash Net Cash 423.1 0.4 391.0 0.1
Net Cash Corporate Fees and Expenses NA (43.2) NA (92.2)
Net Cash Net Hedge PnL and Taxes NA (3.9) NA (11.1)
1,946.3 94.8 1,987.3 263.9
"U.S. CLO 1.0" refers to U.S. CLOs issued before or during 2008. "U.S. CLO 2.0"
refers to U.S. CLOs issued after 2008. The U.S. CLO 1.0 segment includes an
(i) investment in the BB tranche of a U.S. CLO 1.0 with Fair Value of $1.7 million.
Assets characterised as "Other Equities" consist of the Fair Value of, or
(ii) capital committed to, investment assets held directly on the balance sheet.
The TFG Asset Management net income figure for 2015 includes the consolidated
net income before tax of Polygon, LCM and Hawke's Point to 30 June 2015, and
changes in the Fair Value of those investments from 1 July to 31 December 2015.
The income relating to investments in Equitix and GreenOak reflects the changes
in the carrying value of these equity investments, and in the case of Equitix,
interest income and changes in Fair Value connected to the loans held. For Q3
2016 all calculations reflect the changes in fair value of all businesses owned
(iii) by TFG Asset Management, and any net distributions made from them to TFG.
Figure 12 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q3 2016 compared to 2015.
CLOs
- U.S. CLO 1.0: TFG's U.S. CLO 1.0 investments contributed $20.6 million in Fair Value Net Income over the third quarter of 2016, and $33.1 million year to date through the end of Q3 2016. We sold one position during Q3 2016 that generated $16.2 million in net income. The income on this U.S. CLO 1.0 investment was driven primarily by unrealised mark-to-market gains in equity assets received from various distressed workout securities reorganised during the 2008 credit crisis. We continue to monitor this amortizing segment of the portfolio for opportunities to monetise the Company's remaining investments. As of the end of Q3 2016, all of TFG's U.S. CLO 1.0 deals were passing their junior-most O/C tests.(27)
- U.S. CLO 2.0: TFG's U.S. CLO 2.0 investments produced $7.0 million in Fair Value Net Income during Q3 2016, and $30.7 million year to date through the end of Q3 2016. As stated in the past, we intend for our new issue CLO investment activity to occur primarily via the Tetragon Credit Income II L.P. ("TCI II") private equity vehicle, subject to market conditions and that vehicle's investment strategy. As of the end of Q3 2016, all of TFG's U.S. CLO 2.0 were in compliance with their junior-most O/C tests.(28)
- European CLOs: The European CLO segment of TFG's portfolio produced $2.3 million in Fair Value Net Income during Q3 2016, and $11.0 million year to date through the end of the quarter. Our European CLOs continue to amortise and the fair value of our positions have reduced by approximately 33% from the prior year-end. All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of Q3 2016.(29)
- CLO Equity - TCI II: The Company's investment in TCI II produced $0.2 million of Fair Value Net Income during Q3 2016, and $0.4 million year to date through the end of the quarter. TCI II had made, or committed to make, investments with a total cost of $150.1 million through the end of Q3 2016. TFG's available undrawn capital commitment totalled $62.0 million.
EQUITIES
- Equity Funds: Polygon's event-driven equity investments generated Fair Value Net Income of $9.0 million during Q3 2016 and $21.3 million year to date, with positive performance coming from investments in the Polygon European equity strategy, which was up 4.5% net during Q3, bringing year-to-date net performance to 9.8%. The Polygon mining equities fund was up 4.0% net in Q3 2016, and 16.7% net year to date. Please refer to page 23 for further details on the performance of the individual funds.
- Other Equities: These assets generated Fair Value Net Income of $11.3 million in Q3 2016 and $17.3 million year to date through the end of Q3 2016.
CREDIT
- Convertible Fund: The Polygon convertible fund investment contributed Fair Value Net Income of $2.7 million during Q3 2016, and $4.8 million year to date. The Polygon Convertible strategy returned 5.0% net during Q3 2016, bringing year-to-date net performance to 9.3%.
- Distressed Fund: The Polygon distressed fund investment generated $9.9 million of Fair Value Net Income during Q3 2016, bringing the total to $10.1 million through the end of Q3 2016. The fund returned 9.2% net in Q3, bringing year-to-date net performance to 11.5%.
REAL ESTATE
- Real Estate: TFG's investment in Real Estate contributed $4.3 million of Fair Value Net Income during Q3 2016, and $10.1 million year to date through the end of Q3 2016, reflecting a combination of realised and unrealised gains in certain investment vehicles.
TFG ASSET MANAGEMENT (privately-held securities in asset management business)
- TFG Asset Management: TFG's investment in TFG Asset Management comprises a diverse portfolio of alternative asset managers. TFG Asset Management recorded Fair Value Net Income of $3.8 million during Q3 2016, and $1.9 million year to date through the end of Q3. After adjusting for FX hedging, TFG's investment in Equitix made a positive contribution year to date of approximately $14.0 million, reflecting the performance of this business. The value of TFG's investment in TCIP has also increased during the year as it continues to deliver against its business plan for its first vehicle, TCI II. TFG's investments in Polygon, GreenOak and LCM have all recorded unrealised losses during 2016, reflecting a combination of factors, including, in some cases, the application of less favourable market multiples or discount rates, and a more conservative view on elements of projected performance this year. We continue to believe that the underlying economics and momentum of these businesses remain positive, as measured by, among other things, EBITDA and AUM growth, as described in the TFG Asset Management section in this report. Please see Appendix IV for further information on the basis for determining the Fair Value of the TFG Asset Management investment. Additionally, please see Figure 16 for TFG Asset Management's pro forma operating results.
Figure 13
TFG Asset Management - Net Income Q3 2016
Fair Value Q3 2016 Fair Value Q4 2015 FV Movement
Business ($MM) ($MM) ($MM)
Equitix 165.2 173.9 (8.7)
GreenOak Joint Venture 66.0 70.0 (4.0)
Hawke's Point 0.8 0.8 0.0
TCIP 1.3 0.3 1.0
LCM 104.0 110.2 (6.2)
Polygon 60.9 67.0 (6.1)
Change in Fair Value 398.2 422.1 (23.9)
Other TFGAM investment income and impact of currency hedge on Equitix 25.8
Total Capital Appreciation and Investment Income 1.9
CASH AND BORROWINGS
- Net Cash: TFG held $423.1 million of Fair Value net cash at 30 September 2016. The Company actively manages its cash levels to cover future commitments and to enable it to capitalise on opportunistic investments.
- Borrowings: As previously reported, in April 2016 TFG obtained its Revolving Credit Facility for an initial maximum facility amount of $75 million, with a stated maturity date of 1 April 2019. In August 2016, with the addition of a second lender to the facility, the maximum facility amount increased to $150 million. The drawdown as of quarter-end was $38.0 million and this is reflected as an adjustment to the net cash number disclosed above.(30)
Q3 2016 Major New Investments
- CLO Equity - TCI II: During the third quarter, TFG made an additional capital commitment of $12.0 million to TCI II, bringing TFG's total capital commitments to $62.0 million. There have been no capital calls as of the end of Q3 2016.
- Real Estate: TFG made some additional capital contributions to existing investment programs across Europe, the U.S. and Asia.
- Equity Funds: In September, an additional $7.0 million subscription was made into the Polygon European Equity Fund.
- Direct Loans: A £3.0 million loan was made to GreenOak in connection with its acquisition of Grafton Advisors, a UK property adviser. See page 21 for further details.
Q3 2016 Major Asset Sales and Optional Redemptions
- U.S. CLOs: As mentioned above, TFG sold one U.S. CLO 1.0 equity investment during Q3 2016 realising gross proceeds of $33.0 million. Shortly after the end of the quarter, TFG initiated an optional early redemption of another U.S. CLO 1.0.
- Real Estate: During the third quarter, TFG realised $20.4 million in capital and income through distributions from a number of GreenOak managed investment programs, across Europe, the U.S. and Asia.
TFG Asset Management Overview
One of TFG's significant investments is TFG Asset Management, a diversified alternative asset management business that owns majority and minority stakes in asset managers. At 30 September 2016, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke's Point, TCIPandTCICM (please see Figure 14 for the breakdown of AUM and Fair Value by business line). TFG Asset Management has approximately $18.6 billion of assets under management(31) and approximately 250 employees globally. Figure 15 depicts the growth of that AUM over the last five years. Each of the asset management businesses on the platform is privately-held.
Figure 14(32)
TFG AM AUM by Business Line at 30 September 2016 ($BN)
LCM: U.S. CLOs $6.2
GreenOak: Global Commercial Real Estate $7.1
Polygon: Hedge Funds $1.6
Equitix: UK Infrastructure $2.6
TCIP: CLO Equity $0.3
TCICM: Bank Loans $0.9
TFG AM Fair Value by Business Line at 30 September 2016 ($MM)
Equitix $165.2
GreenOak Joint Venture(i) $66.0
Hawke's Point $0.8
TCIP $1.3
LCM $104.0
Polygon $60.9
(i)The Fair Value of TFG's 23% stake.
Figure 15(33)
TFG AM Assets Under Management at 30 September 2012-2016 ($BN)
Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016
LCM: U.S. CLOs $3.9 $4.3 $4.9 $5.9 $6.2
GreenOak: Global Commercial Real Estate $1.9 $3.0 $4.2 $5.6 $7.1
Polygon: Hedge Funds $1.2 $1.5 $1.5 $1.6
Equitix: UK Infrastructure $2.6 $2.6
TCIP: CLO Equity $0.3
TCICM: Bank Loans $0.9
Total Reportable AUM $5.8 $8.5 $10.6 $15.5 $18.6
TFG Asset Management Pro Forma EBITDA (Excluding GreenOak)
Figure 16
TETRAGON FINANCIAL GROUP
TFG Asset Management Pro Forma Statement of Operations (excluding
GreenOak)
YTD Q3 2016 YTD Q3 2015(i) YTD Q3 2014
$MM $MM $MM
Management fee income 48.4 39.9 32.3
Performance and success fees(ii) 37.3 28.9 13.1
Other fee income 10.8 16.5 10.6
Interest income 0.8 0.7 0.2
Total income 97.3 86.0 56.2
Operating, employee and administrative
expenses (61.8) (46.9) (32.8)
Minority Interest (5.1) (4.7) -
Net income - "EBITDA equivalent" 30.4 34.4 23.4
This table includes the income and expenses attributable to TFG's majority owned
businesses, Polygon, LCM and Equitix during that period. In the case of Equitix
this only covers the period from 2 February 2015, the date of the closing of
TFG's acquisition of Equitix. Although TFG currently has an 85% effective
economic share of its business, 100% of Equitix's income and expenses are
reflected with the 15% not attributable to TFG backed out through the minority
interest line. GreenOak is not included. The EBITDA equivalent is a non-GAAP
measure and is designed to reflect the operating performance of the TFG Asset
Management businesses rather than what is reflected in TFG's U.S. GAAP financial
(i) statements.
The performance and success fees include some realised and unrealised Polygon
performance fees. These represent the fees calculated by the applicable
administrator of the relevant Polygon funds, in accordance with the applicable
fund constitutional documents, when determining NAV at the reporting date.
Similar amounts, if any, from LCM are recognised when received. TFG is generally
able to invest at a preferred level of fees. Success fees also include fees
earned by Equitix on successfully completing certain primary projects and
delivering de-risked investments into their secondary funds; these are recognised
(ii) once they are entitled to recover them.
- Overview: Figure 16 shows a pro forma statement of operations that reflects the operating performance of the majority-owned asset management companies within TFG Asset Management. Although, under U.S. GAAP, they are currently reported partially at Fair Value and partially on a consolidated basis, the aim of also presenting the underlying performance in this way is to give investors insight into a key driver behind that valuation. GreenOak, in which TFG holds a minority interest, is not currently included in the calculation of pro forma EBITDA.
- EBITDA: During Q3 2016, TFG Asset Management's EBITDA was $12.8 million, resulting in a year-to-date 2016 EBITDA equivalent of $30.4 million. Whilst tracking below EBITDA for the equivalent period in 2015, the shortfall in 2016 has decreased from over $10.0 million at the end of H1 2016 to $3.5 million at the end of Q3 2016, with growth in performance and success fees driving this change. In addition, as was observed in the Half Yearly Report, management fees in 2016 now account for a greater percentage of total income than they did in the prior year. We believe that this is an indication of an improvement in the quality of the earnings year on year.
- Management fee income: Management fee income continued to increase year on year as shown in Figure 16. In particular, fee income generated in the Equitix business grew as capital was put to work (thereby earning full fees) and fee-paying AUM was increased in new fund vehicles.
- Performance and success fees: Performance and success fees have grown period on period, primarily reflecting the positive performance across the Polygon hedge funds, which has led to a marked increase in unrealised performance fees. The other main component of this category is primary fee income from the Equitix business, which is close to, but slightly behind the equivalent period in 2015.
- Other fee income: This category includes a number of different income streams, including third- party CLO management fee income relating to certain U.S. CLO 1.0 transactions. This stream continued to decline as expected as these transactions amortised down. In addition, this category includes certain cost recoveries from TFG relating to seeded Polygon hedge funds. The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report, decreased year on year, although the teams supporting those seeded funds continued to grow. As these businesses mature and build third-party capital, we expect that such cost recoveries should decrease. The other fee income category also includes fee income generated by Equitix on certain management services contracts, which grew year on year.
- Operating expenses: This category of expenses was $14.9 million higher than the equivalent period in 2015, reflecting a number of different factors. Firstly, TCIP is a new and growing business which was not recording any material level of expenses during the comparable period in 2015. Secondly, Equitix continues to grow its business, including the management services segment, resulting in an increase in both costs as and revenues. Finally, TFG Asset Management continued to invest by increasing headcount in a number of areas, which will support any continued growth of the platform.
BUSINESS OVERVIEWS
The following pages provide a summary of each asset management business and a review of AUM growth and underlying strategy / investment vehicle performance during Q3 2016.
All data is at 30 September 2016, unless otherwise stated.
LCM
- LCM is a specialist in below-investment grade U.S.
broadly-syndicated leveraged loans.
- The business was established in 2001 and has offices
in New York and London.
- TFG owns 100% of LCM.
- Currently, LCM manages loan assets exclusively through
CLOs, which are long-term, multi-year investment
vehicles. The typical duration of a CLO, and thus LCM's
management fee stream, depends on, among other things,
the term of its reinvestment period (currently typically
four to five years for a new issue CLO), the prepayment
rate of the underlying loan assets, as well as
post-reinvestment period reinvestment flexibility and
weighted average life constraints.
- CLO managers typically earn a management fee of up to
0.50% of total assets, and a performance fee of 20% over
a CLO equity IRR hurdle.
Description - Further information on LCM is available at
of www.lcmam.com.
Business:
$217.2 million.
TFG held CLO equity investments with total fair value of
$210.9 million (all in U.S. CLO 2.0 deals) in LCM-managed
CLOs.
Amount of
TFG's LCM provides expertise to the management of a portfolio of
Investment U.S. broadly-syndicated leveraged loans held directly on
in TFG's balance sheet. At the end of Q3 2016, the fair value
Products: of these loans was $6.3 million.
AUM: Figure 17(i)
LCM AUM
History
($BN)
Total
YE2012 $4.3
YE2013 $4.2
YE2014 $5.3
YE2015 $6.1
Q32016 $6.2
LCM's AUM was $6.2 billion at 30 September 2016. LCM
manages 14 CLOs as of the end of Q3 2016. One new issue
LCM-managed CLO, LCM XXII, priced in mid-September and
closed after quarter-end in October.
(i) Includes, where relevant, investments from Tetragon
Financial Group Master Fund Limited and TCI II.
LCM CLOs performed well year to date through Q3 2016, with
all of those that were effective and still within their
Performance reinvestment periods continuing to pay senior and
in Q3 2016: subordinated management fees.
GREENOAK
- GreenOak is a real estate-focused principal
investing, lending and advisory firm that seeks
to create long-term value for its investors and
provide strategic advice to its clients.
- The business was established in 2010 as a
joint venture with TFG and has a presence in New
York, London, Tokyo, Los Angeles, Madrid, and
Seoul.
- TFG owns 23% of the business.
- GreenOak currently has funds with investments
focused on the United States, Japan, Spain, and
the United Kingdom.
- Funds are typically structured with management
fees of 1.5%-2.0% and carried interest over a
preferred return. The funds generally have a
multi-year investment period, with a fund term
of seven years after the final close, with
possible extensions subject to certain
approvals.
- On 20 July 2016, GreenOak announced its
acquisition of Grafton Advisors from Quintain
Limited. Grafton is the property adviser to the
West End of London Property Unit Trust.
Description - Further information on GreenOak is available
of at www.greenoakrealestate.com.
Business:
Amount of
TFG's
Investment
in
Products: $124.2 million.
AUM: Figure 18
GreenOak AUM History(i)($BN)
YE 2012 2.3
YE 2013 3.6
YE 2014 4.4
YE 2015 6.6
Q3 2016 7.1
(i) Includes investment funds and advisory assets
managed by GreenOak at 30 September 2016. TFG owns
a 23% stake in GreenOak. AUM includes all
third-party interests and total projected capital
investment costs.
Gross AUM is $7.1 billion at 30 September 2016. In
July, GreenOak acquired Grafton Partners, the
property advisor to the West End of London
Property Unit Trust (WELPUT). WELPUT was
established in 2001 in partnership with Schroder
Real Estate and at 30 September 2016 is the
top-performing fund in the Association of Real
Estate Funds Index over the past 10 years.
GreenOak-managed vehicles continued to perform
Performance well across their European, U.S. and Asian
in Q3 2016: businesses.
POLYGON
- Polygon manages open-ended hedge fund and private equity vehicles across
a number of strategies.
- Polygon was established in 2002 and has offices in New York and London.
- TFG owns 100% of the business.
- Fees in these products include a management fee that is generally between
1.5% and 2.0% and the typical performance fee or carried interest is 20%.
Description
of - Further information on Polygon is available at www.polygoninv.com.
Business:
Amount of
TFG's
Investment
in
Products: $381.2 million.
AUM: Figure 19(i)
Polygon Hedge Funds AUM History ($MM)
(Convertibles, European Event-Driven Equity, Mining Equities, Distressed,
Other Equity)
YE 2012 529
YE 2013 855
YE 2014 1,113
YE 2015 1,248
Q3 2016 1,376
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon
European Equity Opportunity Master Fund and associated managed account,
Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund
and Polygon Distressed Opportunities Master Fund, as calculated by the
applicable fund administrator at 31 December 2012, 2013, 2014, 2015, and 30
September 2016. Includes, where relevant, investments by Tetragon Financial
Group Master Fund Limited.
AUM is $1.6 billion for all funds; and $1.3 billion for open strategies.
Performance Polygon's various strategies all posted positive net returns both during Q3
in Q3 2016: and year to date through 30 September 2016. In most cases, the funds
outperformed similar strategy index benchmarks: the HFRI and HFRX Event Driven
Indices respectively returned 4.48% and 3.79% during Q3; the HFRI and HFRX
Convertible Arbitrage Indices respectively returned 3.55% and 3.64%;
The HFRI and HFRX Distressed Indices respectively returned 5.46% and 5.75%;
and the GDXJ Market Vectors Junior Gold Miners
Index returned 3.97%.(34)
Figure 20(35)
Polygon Funds Summary
AUM at
30 Sep 2016 Q3 2016 Net YTD Net Annualised Net
Fund ($MM) Performance Performance LTD Performance
Convertibles(35.i) $ 466.9 5.0% 9.3% 16.6%
European Event-Driven Equity(35.ii) $ 690.1 4.5% 9.8% 11.4%
Mining Equities(35.iii) $ 83.2 4.0% 16.7% 6.4%
Distressed Opportunities(35.iv) $ 113.5 9.2% 11.5% 6.9%
Other Equity(35.v) $ 22.5 0.7% 2.6% 14.1%
Total AUM - Open Funds $ 1,376.3 Estimated approx.
LTD Multiple
Private Equity Vehicle(35.vi) $ 191.8 N/A N/A 1.82x
Total AUM $ 1,568.1
Note: The AUM noted above includes investments in the relevant strategies by TFG, other than in respect of the Private Equity Vehicle, where there is no such investment. The Private Equity vehicle, at the time of the Polygon transaction and currently, remains a closed investment strategy. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Except as otherwise noted, all performance numbers provided herein reflect the actual net performance of the funds net of management and performance fees, as well as any commissions and direct expenses incurred by the funds, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. P&L YTD in 2016 for the Private Equity Vehicle was Ë-$32.6 million through to 30 September 2016 before FX movements of +$1.9 million. P&L is +$119.9 million from closing date net asset value before FX movements of Ë-$37.3 million. The fund is generally precluded from hedging FX exposure. The fund has made life to date distributions of $605 million to its partners. The estimated approximate LTD multiple is based on the fund's quarter end net asset value and historical distributions and other returns over an original aggregate purchase price for the fund's initial assets of approximately $459 million and excludes the effects of FX and certain assets purchased through recycled capital. The estimated approximate LTD multiple including those two items (FX and recycled capital) would be 1.82 x. Each of these multiples will be different from the multiples reflected for specific limited partners in the fund, which would be calculated with respect to relevant class of partners in accordance with the fund's limited partnership agreement. EQUITIX
- Equitix is an integrated core infrastructure
asset management and primary project platform.
- Equitix was established in 2007 and is based in
London.
- TFG owns 85% of the business; over time, TFG's
economic interest is expected to decline to
approximately 74.8%. Equitix management owns the
balance.
- Equitix typically invests in infrastructure
projects in the United Kingdom with long-term
revenue streams across the healthcare, education,
social housing, highways & street lighting,
offshore transmission and renewable and waste
sectors.
- Fees in this product include a management fee
and a carry interest fee that is over a hurdle
currently set at 7.5%. The carried interest fee
is typically 20% over the hurdle, and the
management fee after the investment period is
typically between 1.25% and 1.65%; during the
investment period it ranges between 0.95% and
2.0% on invested capital. The core funds also
have an additional fee on committed capital of
approximately 0.30%.
Description - Further information on Equitix is available at
of www.equitix.co.uk.
Business:
TFG has exposure to the performance of Equitix
Amount of funds indirectly through its ownership of the
TFG's company as Equitix holds certain GP interests in
Investment the funds it manages. As at 30 September 2016,
in these interests were valued at GBP14.3 million
Products: ($18.5 million).
AUM: Figure 21
Equitix AUM History (GBPMM)
YE 2012 493
YE 2013 1,027
YE 2014 1,328
YE 2015 1,880
Q3 2016 1,983
(i)USD-GBP exchange rate at 30
September 2016.
AUM is GBP2.0 billion ($2.6 billion)(i)at 30
September 2016.
Equitix Funds I-III are cash generative and fully
invested or committed. Equitix Fund IV has exceeded
its target of GBP500 million, achieving total
commitments of GBP523 million at 30 September 2016.
Equitix Fund IV has not yet reached final closing
and has a hard cap of GBP750 million. As at 30
September 2016, Equitix Fund IV has deployed over
Performance GBP230 million of capital across 14 infrastructure
in Q3 2016: assets.
HAWKE'S POINT
- Hawke's Point is a mining finance company
established by TFG Asset Management in Q4
2014 that seeks to provide capital to
companies in the mining and resource
sectors.
- TFG Asset Management owns 100% of the
business.
- Hawke's Point is currently actively
evaluating a range of mine financing
opportunities.
Description of Business:
As of 30 September 2016, there were no
Amount of TFG's Investment in Products: investments on which to report.
AUM: Not applicable.
TCIP and TCICM
- TCIP acts as a general partner of a
private equity vehicle that, among other
things, makes investments in CLOs relating
to risk retention rules.(36)
- The business was established at the end of
2015 and is managed out of New York and
London.
- TFG owns 100% of the business.
- TCIP currently acts as general partner of
Tetragon Credit Income II L.P. ("TCI II"),
which focuses on CLO investments relating to
risk retention rules, including majority
stakes in CLO equity tranches of
transactions managed by LCM or sub-advised
by third-party CLO managers. TCI II is
structured with a management fee and carried
interest over a preferred return (each on
non-LCM investments). It has a multi-year
investment period and a term of seven years
(subject to potential extensions and
otherwise as required by applicable
regulatory requirements).
- TCI Capital Management LLC ("TCICM") is a
specialist in below-investment grade U.S.
broadly-syndicated leveraged loans. TCICM
was established as a Delaware limited
liability company in November 2015 and is a
subsidiary of Tetragon Credit Income II L.P
and recently commenced operations. It acts
as a CLO collateral manager and sponsor for
certain CLO investments. It utilises, and
has access to, the TFG Asset Management
platform, including personnel from Polygon
Global Partners and LCM Asset Management
LLC.
- Currently, TCICM manages loan assets
exclusively through CLOs (which includes
warehouse vehicles created in anticipation
of future CLOs), which are long-term,
multi-year investment vehicles. At this
time, TCICM utilises, and expects to
continue to utilise, the investment
expertise of certain third-party
sub-advisors to assist in the management of
its CLOs. Such sub-advisors will typically
earn a substantial portion of the management
fees from the CLOs.
- CLO managers typically earn a management
fee of up to 0.50% of total assets, and a
performance fee of 20% over a CLO equity IRR
hurdle.
- Further information on TCIP and TCICM is
available at www.tetragoninv.com.
Description of Business:
Amount of TFG's Investment in Products: $62.0 million of committed capital in TCI II.
TCI II had a third close in August 2016,
bringing its total committed capital to $253.4
million.
TCI II invests in CLOs managed by LCM and
TCICM.
As of 30 September 2016, TCICM had assets
under management of $901.3 million.
(i) Includes, where relevant, investments from
TCI II. TCICM utilises, and expects to
continue to utilise, the investment expertise
of certain third-party sub-advisors to assist
in the management of its CLOs. Such
sub-advisors will typically earn a substantial
Committed Capital and AUM: portion of the management fees from the CLOs.
During Q3 2016, TCI II made an investment in a
majority stake in the equity tranche of
TCI-Symphony CLO 2016-1 Ltd, a U.S. CLO
managed by TCICM and sub-advised by a third
party. Additionally, TCI II made an initial
commitment to invest in a majority stake in
the equity tranche of LCM XXII Ltd, a U.S. CLO
managed by LCM. TCIP continues to evaluate
investment opportunities for TCI II during its
investment period. Including a distribution
made shortly after the end of Q3 2016, TCI II
had made distributions of income of
approximately $1.7 million to its limited
Performance in Q3 2016: partners.
Q3 2016 FINANCIAL REVIEW This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), adjusted from Q3 2015 to reflect the Fair Value of TFG Asset Management's businesses that are consolidated under U.S. GAAP, and provides comparative data where applicable. Comparative data presented for periods prior to Q3 2015 are disclosed as they were reported at the time and have not been adjusted retrospectively to be presented on a Fair Value basis. FINANCIAL HIGHLIGHTS Figure 22
TETRAGON FINANCIAL GROUP
Financial Highlights Through Q3 2014 - Q3 2016
YTD Q3 2016 YTD Q3 2015 YTD Q3 2014
U.S. GAAP Net income ($MM) $84.1 $103.3 $74.4
Fair Value Net income ($MM) $94.8 $228.4 $93.9
U.S. GAAP EPS $0.90 $1.07 $0.78
Fair Value EPS $1.02 $2.37 $0.98
Fair Value Return on Equity 4.8% 12.6% 5.2%
Fair Value Net Assets ($MM) $1,946.3 $2,025.4 $1,804.4
U.S. GAAP number of shares outstanding (MM) 87.8 97.1 94.5
Fair Value NAV per share $22.16 $20.87 $19.10
Fully diluted shares outstanding (MM) 97.1 109.6 107.2
Fully diluted Fair Value NAV per share $20.05 $18.47 $16.82
Fair Value NAV per share total return 7.8% 11.3% 5.6%
DPS $0.5000 $0.4825 $0.460
TFG uses, among others, the following metrics to understand the progress and performance of the business:
- Fair Value Net Income ($94.8 million): Please see Appendix IV for reconciliation to U.S. GAAP net income.
- Fair Value Return on Equity (4.8%): Fair Value Net Income ($94.8 million) divided by Net Assets at the start of the year ($1,987.3 million).
- Fully Diluted Shares Outstanding (97.1 million): Adjusts the U.S. GAAP shares(i) outstanding (87.8 million) for various dilutive factors (9.3 million shares). Please see Figure 35 for more details.
- Fair Value EPS ($1.02): Calculated as Fair Value Net Income ($94.8 million) divided by weighted-average U.S. GAAP shares(i) during the period (93.0 million).
- Fully Diluted Fair Value NAV Per Share ($20.05): Calculated as Fair Value Net Assets ($1,946.3 million) divided by Fully Diluted Shares Outstanding (97.1 million).
(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year. FAIR VALUE EPS ANALYSIS Q3 2014 - Q3 2016 Figure 23
TETRAGON FINANCIAL GROUP
TFG Fair Value Earnings per Share Analysis Through Q3 2014 - Q3 2016
YTD Q3 2016 YTD Q3 2015 YTD Q3 2014
Investment portfolio segment
U.S. CLO 1.0 $0.36 $0.43 $1.04
U.S CLO 2.0 $0.33 $0.30 $0.19
European CLOs $0.12 $0.05 $0.24
Equity Funds $0.23 $0.06 $0.03
Other Equities $0.19 $0.49 ($0.25)
Convertible Bond Fund $0.05 $0.02 $0.05
Distressed Fund $0.11 ($0.05) $0.07
Direct Loans $0.01 $0.01 $0.01
Real Estate $0.11 $0.29 $0.11
TFG Asset Management $0.02 $1.65 $0.22
Corporate Expenses ($0.47) ($0.78) ($0.54)
Net Hedge PnL and taxes ($0.04) ($0.10) ($0.19)
Fair Value EPS $1.02 $2.37 $0.98
Weighted Average Shares (MM) 93.0 96.5 95.4
STATEMENT OF OPERATIONS (FAIR VALUE BASIS) Figure 24
TETRAGON FINANCIAL GROUP
Fair Value Statement of Operations Through Q3 2014 - Q3 2016
YTD Q3 2016 YTD Q3 2015 YTD Q3 2014
$MM $MM $MM
Interest income 81.8 101.7 120.1
Fee income 2.2 32.4 51.9
Unrealised Polygon performance fees - - 4.1
Other income - cost recovery 0.1 9.9 17.1
Insurance Recovery - 9.8 1.0
Dividend income 2.3 0.1 -
Investment income 86.4 153.9 194.2
Management and performance fees (37.7) (77.7) (39.7)
Other operating and administrative expenses (5.2) (41.0) (64.4)
Interest expense (0.8) - -
Amortisation of intangible assets - (29.7) (5.1)
Total operating expenses (43.7) (148.4) (109.2)
Net Investment income 42.7 5.5 85.0
Net change in unrealised appreciation /
(depreciation) in investments 29.8 169.4 (60.7)
Realised gain on investments 26.1 58.9 85.3
Realised and unrealised losses from hedging
and fx (2.3) (5.9) (8.8)
Net realised and unrealised gains from
investments and fx 53.6 222.4 15.8
Net income before tax 96.3 227.9 100.8
Income tax (1.5) 0.5 (6.9)
Net income 94.8 228.4 93.9
Performance Fee A performance fee of $10.8 million was accrued in Q3 2016 in accordance with TFG's investment management agreement. The hurdle rate for the Q4 2016 incentive fee has been reset at 3.505748% (Q3 2016: 3.301208%) as per the process outlined in TFG's 2015 audited financial statements and in accordance with TFG's investment management agreement. Please see TFG's website, www.tetragoninv.com, and the 2015 TFG audited financial statements for more details on the calculation of this fee. BALANCE SHEET (FAIR VALUE BASIS) Figure 25
TETRAGON FINANCIAL GROUP
Fair Value Balance Sheet as at 31 December 2014, 2015, and 30 September 2016
Q3 2016 Q3 2015 Q3 2014
$MM $MM $MM
Assets
Investments 1,459.0 1,543.0 1,356.2
Intangible assets - - 29.7
Cash and cash equivalents 461.7 402.7 402.0
Amounts due from brokers 46.1 59.9 52.1
Derivative financial assets 33.0 19.4 19.2
Fixed Assets - - 0.1
Deferred tax asset and income tax receivable - - 10.0
Other receivables 33.4 3.1 33.4
Total assets 2,033.3 2,028.1 1,902.7
Liabilities
Other payables and accrued expenses 40.9 36.0 54.5
Loans and Borrowings 38.0 - -
Amounts payable on share options - - 12.3
Deferred tax liability and income tax payable 2.7 4.1 11.5
Derivative financial liabilities 5.4 0.7 5.9
Total liabilities 87.0 40.8 84.2
Net assets 1,946.3 1,987.3 1,818.5
Please see Appendix IV for the reconciliation between the U.S. GAAP consolidated balance sheet and the balance sheet prepared on a Fair Value basis. STATEMENT OF CASH FLOWS (FAIR VALUE BASIS)(i) Figure 26
TETRAGON FINANCIAL GROUP
Fair Value Statement of Cash Flows Through Q3 2014 - Q3 2016
Q3 2016 Q3 2015 Q3 2014
$MM $MM $MM
Operating Activities
Operating cash flows after incentive fees and before movements
in working capital 156.8 197.1 205.2
Purchase of fixed assets - (0.1) (0.1)
Amounts due (to) / from broker 13.8 (13.7) (12.6)
Decrease in net receivables 2.6 (20.4) 7.9
Cash flows from operating activities 173.2 162.9 200.4
Investment Activities
Proceeds on sales of investments
- Net proceeds from derivative financial instruments 11.1 4.4 -
- Proceeds from investments 6.9 68.0 14.6
- Proceeds from realisation of real estate investments 30.5 25.5 29.4
- Proceeds from GreenOak working capital repayment - 6.4 2.6
Purchase of investments
- Purchase of CLOs (12.7) (62.4) (63.6)
- Purchase of loans (8.3) - (1.4)
- Purchase of real estate investments (30.8) (67.9) (68.5)
- Investments in asset managers - (133.1) -
- Investments in Equity Funds (7.0) - -
- Investments in Convertible Bond Fund - - (15.0)
- Investments in Distressed Fund - (5.0) (10.0)
- Investments in Other (6.0) (22.1) (45.6)
Cash flows from operating and investing activities 156.9 (16.8) 196.0
Proceeds from issue of Shares 0.1 0.1 -
Net purchase of shares (100.7) - (51.0)
Dividends paid to shareholders (35.2) (37.7) (39.6)
Borrowings 38.0 - -
Cash flows from financing activities (97.8) (37.6) (90.6)
Net increase in cash and cash equivalents 59.0 (54.4) 105.4
Cash and cash equivalents at beginning of period 402.7 402.0 245.9
Effect of exchange rate fluctuations on cash and cash
equivalents - 0.4 (1.0)
Cash and cash equivalents at end of period 461.7 340.4 350.3
The gross dividend payable to shareholders was $48.2 million (YTD Q3 2015: $46.1
million, YTD Q3 2014: $43.6 million) with a value equivalent to $13.0 million (YTD
Q3 2015: $8.4 million, YTD Q3 2014: $4.0 million) elected to be taken by the
dividend recipient in shares rather than cash, pursuant to the TFG Optional Stock
(i) Dividend Plan.
FAIR VALUE NET INCOME TO U.S. GAAP RECONCILIATION Figure 27
Fair Value Net Income to U.S. GAAP Reconciliation
YTD Q3 2016
$MM
Fair Value Net Income 94.8
Fair Value Adjustments 6.8
Share-based compensation (17.5)
U.S. GAAP net income 84.1
TFG is primarily reporting earnings through a non-GAAP measurement called Fair Value Net Income. The reconciliation on the table above shows the adjustments required to get from this measure of earnings to U.S. GAAP net income.
- Adjustment one takes into account a Fair Value adjustment of $6.8 million for Polygon, LCM, Hawke's Point and TCIP as if they were de-consolidated and held at Fair Value rather than consolidated as they currently are for U.S. GAAP purposes. Further details are provided in Appendix IV.
- Adjustment two removes share-based compensation of $17.5 million as, under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting, as well as in relation to certain long-term compensation plans. This mechanism and the future vesting schedule for all share-based compensation related shares are described in more detail in the 2016 TFG unaudited interim financial statements. The long-term compensation plans are also detailed in Appendix VII.
APPENDICES APPENDIX I CERTAIN REGULATORY INFORMATION This Performance Report is made public by means of a press release, which contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation, and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiele Markten). In addition, this report is also made available to the public by way of publication on the TFG website (www.tetragoninv.com). An investment in TFG involves substantial risks. Please refer to the Company's website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG. This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the FMSA as a collective investment scheme from a designated country. This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation. TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFS trading markets are less liquid than other major exchanges, which could affect the price of the Shares. There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a "Qualified Purchaser" or a "Knowledgeable Employee" (each as defined in the Investment Company Act of 1940), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a "Qualified Purchaser" or a "Knowledgeable Employee" under the Investment Company Act of 1940. These restrictions may adversely affect overall liquidity of the Shares. APPENDIX II FAIR VALUE DETERMINATION OF CLO EQUITY INVESTMENTS In accordance with the valuation policies set forth on TFG's website, the values of TFG's CLO equity investments are determined using a third-party cash flow modelling tool. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined through, for example, forward- looking observable data) might impact the performance of TFG's CLO equity investments. Since this involves modelling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter's historical data. Subject to the foregoing, when determining the U.S. GAAP-compliant Fair Value of TFG's portfolio, the Company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark the model inputs and resulting outputs to observable market data when available and appropriate. The below modelling assumptions are unchanged from last quarter. Figure 28 U.S. CLOs modelling assumption
U.S. CLOs Modelling Assumption
Variable Year Current Assumptions
CADR Until deal maturity 1.0x WARF-implied default rate (2.2%)
Recovery Rate Until deal maturity 73%
Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price Until deal maturity 100%
Figure 29 European CLOs modelling assumption
European CLOs Modelling Assumption
Variable Year Current Assumptions
CADR Until deal maturity 1.0x WARF-implied default rate (2.1%)
Recovery Rate Until deal maturity 67%
Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price Until deal maturity 100%
Figure 30 Discount Rates
Discount Rates
CLO Type Q3 2016 Q4 2015
U.S. 1.0 12.0% 12.0%
European 1.0 13.0% 13.0%
U.S. 2.0 - seasoned 11.0% 11.0%
U.S. 2.0 - less than 12 months old Deal IRR Deal IRR
APPENDIX III FAIR VALUE DETERMINATION OF TFG ASSET MANAGEMENT In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies (the "Guide"), as an Investment Company, TFG carries all of its investments at Fair Value. However, as outlined in section 7.10 of the Guide, operating entities should be consolidated where TFG (i) has an economic interest in excess of 50%; (ii) is deemed to have control over the significant operational and financial decisions of the entity; and (iii) where the purpose of the operating entity is to provide services to the Investment Company (i.e., TFG) rather than realise a gain on the sale of the investment. As at 30 September 2016, this consolidation exemption was applied to TFG's holdings in Polygon, LCM, Hawke's Point and TCIP (the "Consolidated Businesses") because these businesses were managing some of TFG's investment capital and thus could be deemed to be providing services to TFG. In contrast, Equitix is not managing TFG's capital so is not subject to point (iii) above, and GreenOak is minority-owned so is not subject to points (i) or (ii) above. The resultant inconsistency of treatment under U.S. GAAP of the businesses in TFG Asset Management is potentially confusing to the reader of TFG's financial statements, particularly since the determination and articulation in Q3 2015 of the "IPO Strategy"(37) for TFG Asset Management, which confirmed that the primary commercial purpose for TFG Asset Management, including the Consolidated Businesses, is to be held as an investment for capital appreciation, in line with TFG's investment objective. Consequently, from Q3 2015, TFG has prepared and presented its non-GAAP financial metrics and performance information using a consistent Fair Value basis for all of TFG Asset Management. Some of the differences resulting from the presentation of non-GAAP metrics are reconciled in Appendix IV. TFG's investments in the TFG Asset Management businesses are considered to be "Level 3" investments in the U.S. GAAP valuation hierarchy and the Audit Committee of TFG, comprising the Independent Directors, has engaged third-party valuation specialists to determine an indicative valuation for each of these businesses. These valuations have been adopted for the purposes of reporting the Fair Value impact in TFG's non-GAAP metrics as at 30 September 2016. Figure 31 sets out the valuation approach utilised for each of the businesses as well as the range of market metrics utilised in determining Fair Value. Both management and performance fees (collectively, the "Fees") continue to be calculated based on the U.S. GAAP measure of Net Asset Value and thus the non-GAAP adjustments do not currently impact the Fees payable to the Investment Manager. Figure 31
Valuation approach to TFG's investments in TFG Asset Management
Investment TFG holding Fair Value Valuation approach
($MM)
Discounted cash flow analysis
and cross-check to quoted
market multiples. Debt at par
Equitix 75% & Debt 165.2 + accrued interest
Quoted market multiples and
cross-check using blended
EBITDA and quoted market
GreenOak 23% 66.0 multiples
Discounted cash flow
analysis, cross checked to
LCM 100% 104.0 market multiples
Discounted cash flow analysis
and cross-check to quoted
Polygon 100% 60.9 market multiples
Hawke's Point 100% 0.8 Replacement cost approach
TCIP 100% 1.3 Discounted cash flow analysis
(table continued)
Valuation approach to TFG's investments in TFG Asset Management
Investment Ranges utilised
Discount Rate Multiple Value as % of AUM
Equitix 9.5%
15% Discount for Lack 5.5 x - 6.5 x EBITDA N/A
of Liquidity ("DLOL") DLOL built-in
GreenOak 12.0 x
Adjusted EBITDA N/A
LCM 10.5%-12.5%
15% Discount for Lack 1.4% -1.9%
of Liquidity ("DLOL") N/A DLOL built-in
Polygon 12.0-14.0% 6.3 x - 7.1 x EBITDA 3.3 x - 3.8 x
20% DLOL DLOL built-in DLOL built-in
Hawke's Point N/A N/A N/A
TCIP 11.5%-13.5%
15% Discount for Lack
of Liquidity ("DLOL") N/A N/A
APPENDIX IV RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS This section describes how the non-GAAP Fair Value adjustments relating to LCM, Polygon, Hawke's Point and TCIP have been made to the U.S. GAAP financials to arrive at the Key Performance Metrics. Figure 32 details the impact of such a change in accounting treatment for LCM, Polygon, Hawke's Point and TCIP in terms of carrying value and performance fees. In arriving at the imputed performance fee, the change in NAV is adjusted by the full amortisation of the remaining base cost ($27.7 million) of the purchase of 25% of LCM in 2012. Previously, this was being amortised on a straight-line basis over 10 years, and each quarter an applicable adjustment is made to reduce the performance fees payable to the investment manager. Figure 32
TFG Asset Management - Impact of Use of Fair Value Metrics on Consolidated
Businesses
U.S. GAAP
Fair Value Consolidated Value
30 Sep 16 30 Sep 16 Change
($MM) ($MM) ($MM)
Polygon 60.9 20.9 40.0
LCM 104.0 - 104.0
Hawke's Point 0.8 - 0.8
TCIP 1.3 - 1.3
Net assets of consolidated businesses - 16.5 (16.5)
Deferred tax liability re intangible assets - (5.2) 5.2
Fair Value impact gross of imputed performance
fee 167.0 32.2 134.8
$MM
Gross change in NAV for purposes of incentive
fee calculation 134.8
Full amortisation of LCM base cost (26.6)
NAV for purposes of incentive fee calculation 108.2
Imputed performance fee 27.1
Fair Value impact net of imputed performance
fee 107.7
APPENDIX IV RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS (continued) Figure 33 shows a reconciliation between the Statement of Operations prepared on a full Fair Value basis and on a U.S. GAAP basis. In addition to adding in the unrealised Fair Value as detailed in Figure 32, the reconciliation shows the removal of the operating P&L for H1 2016, and the reversal of certain balance sheet items relating to Polygon, LCM, Hawke's Point or TCIP. Such items include the remaining intangible asset balance relating to Polygon's management contracts and a reversal of a deferred tax liability. We adjust for change in notional performance fees as calculated in Figure 32. In addition, as in prior periods, we back out share-based compensation of $11.5 million as, under ASC 805, TFG is recognising the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting. This mechanic and future vesting schedule for share-based compensation are described in more detail in the 2016 Interim Master Fund unaudited financial statements. Figure 33
Fair Value to U.S. GAAP Statement of Operations Reconciliation Through Q3 2016
Fair Value Fair Value Share Based
Net Income Adjustments Compensation U.S. GAAP
$MM $MM $MM $MM
Interest income 81.8 - - 81.8
Fee income 2.2 38.5 - 40.7
Other income - cost recovery 0.1 12.2 - 12.3
Dividend income 2.3 - - 2.3
Investment income 86.4 50.7 - 137.1
Management and performance fees (37.7) (1.2) - (38.9)
Other operating and administrative
expenses (5.2) (54.6) (17.5) (77.3)
Interest expense (0.8) - - (0.8)
Amortisation of intangible assets - (2.6) - (2.6)
Total operating expenses (43.7) (58.4) (17.5) (119.6)
Net Investment income 42.7 (7.7) (17.5) 17.5
Net change in unrealised appreciation in
investments 29.8 13.0 - 42.8
Realised gain on investments 26.1 - - 26.1
Realised and unrealised losses from
hedging and fx (2.3) - - (2.3)
Net realised and unrealised gains from
investments and fx 53.6 13.0 - 66.6
Net income before tax 96.3 5.3 (17.5) 84.1
Income tax (1.5) 1.5 - -
Net income 94.8 6.8 (17.5) 84.1
RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS (continued) Figure 34 shows a reconciliation between the Balance Sheet prepared on a full Fair Value basis and on a U.S. GAAP basis. In addition to adding in the unrealised Fair Value of $167.0 million as detailed in Figure 32, the reconciliation shows the removal of certain balance sheet items relating to Polygon, LCM, Hawke's Point and TCIP, including the value of Polygon's un-amortised management contracts ($20.9 million), cash of $36.8 million held in TFG Asset Management, a small amount of fixed assets, a deferred tax asset and receivables, which mainly relate to cost recoveries. On the liability side, we reverse certain accrued expenses including compensation and add back a notional performance fee of $27.1 million relating to the Fair Value adjustment as detailed in Figure 32.
TETRAGON FINANCIAL GROUP
Fair Value to U.S. GAAP Balance Sheet Reconciliation as at 30 September 2016
Fair Value
Fair Value Adjustments U.S. GAAP
$MM $MM $MM
Assets
Investments 1,459.0 (167.0) 1,292.1
Intangible assets - 20.9 20.9
Cash and cash equivalents 461.7 36.8 498.5
Amounts due from brokers 46.1 - 46.1
Derivative financial assets 33.0 - 33.0
Fixed Assets - 0.4 0.4
Deferred tax asset and income tax receivable - 9.6 9.6
Other receivables 33.4 13.0 46.4
Total assets 2,033.3 (86.3) 1,947.0
Liabilities
Other payables and accrued expenses 40.9 14.6 55.5
Loans and borrowings 38.0 - 38.0
Deferred tax liability and income tax payable 2.7 6.9 9.6
Derivative financial liabilities 5.4 - 5.4
Total liabilities 87.0 21.5 108.5
Net assets 1,946.3 (107.7) 1,838.5
Figure 34
The U.S. GAAP net assets of Tetragon Financial Group Master Fund are $1,849.3
million, which are calculated by adding back the incentive fee of $10.8 million
accrued at Tetragon Financial Group Limited to its U.S. GAAP net assets of
(i) $1,838.5 million.
APPENDIX V SHARE RECONCILIATION AND SHAREHOLDINGS Figure 35(38)
U.S. GAAP to Fully Diluted Shares Reconciliation
Q3 2016 Shares
(MM)
Legal Shares Issued and Outstanding 139.7
Less: Shares Held in Subsidiary (27.0)
Less: Shares Held in Treasury (12.0)
Less: Total Escrow Shares(38.i) (12.9)
U.S. GAAP Shares Outstanding 87.8
Add: Dilution for Share Options(38.ii) 1.7
Add: Certain Escrow Shares(38.iii) 6.9
Add: Dilution for equity-based awards(38.iv) 0.7
Fully Diluted Shares Outstanding 97.1
SHAREHOLDINGS Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 30 September 2016, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:
Mr. Reade Griffith* 10,626,107
Mr. Paddy Dear* 3,541,730
Mr. David Wishnow 342,119
Mr. Jeff Herlyn 170,904
Mr. Rupert Dorey 142,262
Mr. Michael Rosenberg 172,981
Mr. Frederic Hervouet 27,883
Mr. William Rogers 1,000
Equity-based awards(39) 5,430,325
*The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares. In addition to the foregoing, as of 30 September 2016, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.4 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees. As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the "Vested Shares")) that were issued pursuant to TFG's acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the "Polygon Transaction") have vested with certain persons (other than Messrs. Griffith and Dear), all of whom are employees or partners of TFG-owned or affiliated entities, pursuant to the Polygon Transaction. Certain of these persons may from time to time enter into purchases or sales trading plans (each a, "Fixed Trading Plan") providing for the sale of Vested Shares or the purchase of TFG shares in the market, or may otherwise sell their Vested Shares or purchase TFG shares, subject to applicable compliance policies. Applicable brokerage firms may be authorised to purchase or sell TFG shares under the relevant Fixed Trading Plan pursuant to certain irrevocable instructions. Each Fixed Trading Plan is intended to comply with Rule 10b5-1 under the United States Securities Exchange Act of 1934, as amended. Each Fixed Trading Plan has been or will be approved by TFG in accordance with its applicable compliance policies. For additional information regarding the Polygon Transaction and the future vesting schedule for shares issued thereunder, see Note 22 to the 2015 Tetragon Financial Group Master Fund Limited audited financial statements. Rule 10b5-1 provides a "safe harbor" that is designed to permit individuals to establish a pre-arranged plan to buy or sell company stock if, at the time such plan is adopted, the individuals are not in possession of material, non-public information. Prior to publicly announcing their tender offer, TFG (through TFGMF) entered into an agreement to repurchase approximately 593,653 non-voting shares of TFG (plus scrip dividend shares payable in respect of the Q3 2016 dividend) held by Michael Humphries, a manager of certain Polygon funds, in connection with the winding up of a swap transaction between the Master Fund and Michael Humphries with respect to the relative values of TFG shares and interests in the Polygon funds following the acquisition of Polygon in 2012. The purchase price for these shares will be determined on the basis of the volume-weighted average price per share for the first 10 trading days in November 2016. APPENDIX VI HISTORICAL SHARE REPURCHASES Figure 36
Historical Share Repurchases
TFG Share Repurchase History
Cumulative No. of Shares Cumulative
No. of Shares
Year $MM $MM (MM) (MM)
2007 $2.2 $2.2 0.3 0.3
2008 $12.4 $14.5 2.6 2.9
2009 $6.6 $21.2 2.4 5.3
2010 $25.5 $46.7 5.7 11.0
2011 $35.2 $81.9 5.1 16.1
2012 $175.6 $257.5 18.7 34.8
2013 $16.1 $273.6 1.4 36.2
2014 $50.9 $324.5 4.9 41.1
2015 $60.9 $385.4 6.0 47.1
2016 $100.7 $486.2 10.0 57.1
TOTAL $486.2 57.1
Figure 37
Cumulative TFG Share Repurchases ($MM)
$
Inception - 2013 $273.6
2014 $324.5
2015 $385.4
2016 $486.2
Share Repurchases:
The above graph shows historical share repurchases by
TFG from inception to 30 September 2016.(40)
APPENDIX VII
EQUITY-BASED COMPENSATION
PLANS
In Q1 2016, TFG implemented an equity-based long-term
incentive plan for certain senior employees of TFG Asset Management (excluding
the principals of TFM).
Awards under the long-term incentive plan, along with
other equity-based awards, are typically spread over multiple vesting dates up
to 2024 which may vary for each employee and are subject to forfeiture
provisions. The arrangements may also include additional periods, beyond
the vesting dates, during which employees gain exposure to the performance of
the TFG shares, but the shares are not issued to the employees. Such
periods may range from one to five years beyond the vesting dates. The
shares underlying these equity-based incentive programs typically will be held
in escrow until they vest and will be eligible to receive shares under the TFG
Optional Stock Dividend Plan ("DRIP Shares").
Where grants under these equity-based incentive programs
will only be settled through the issuance of shares rather than through cash,
and in accordance with U.S. GAAP rules for share-based compensation, TFG has
elected to account for equity-based plans under ASC 718 - Equity-based payments
to employees - and is applying the straight-line method for expense recognition
and for calculating the share dilution effect. This means that the total
expense of the initial awards is determined at the award date, or at the date
that the award becomes eligible to be settled only in shares ("Award Date"), by
applying a reference share price on the Award Date to the shares awarded.
Taking into account all equity-based awards granted to TFG Asset Management
employees, including the Q1 2016 LTIP awards, approximately 5.1 million shares
have been awarded at a weighted average reference share price of $8.76 per
share, implying a total share-based compensation charge of approximately $45
million spread over a period of up to eight years, excluding employer-related
taxes.
The dilutive effect of the equity-based compensation
plans will be reflected increasingly in TFG's fully diluted share count over the
life of the plans. Such dilution will include, among other things and in
addition to the award shares, any DRIP Shares and shares that will be required
to cover employer taxes. At the end of Q3 2016, approximately 0.7 million
shares were included in the fully diluted share count.
APPENDIX VIII
ADDITIONAL CLO PORTFOLIO STATISTICS
Figure 38
Tetragon Financial Group Limited (TFG)
CLO Equity Portfolio Details
As of 30 September 2016
Original
Primary or Invest. Deal End of
Secondary Cost Closing Year of Reinv
Transaction Deal Type Status Investment) ($MM USD Date Maturity Period
(i) (ii) (iii) (iv)
Transaction 1 EUR CLO Outstanding Primary 37.5 2007 2024 2014
Transaction 2 EUR CLO Outstanding Primary 29.7 2006 2023 2013
Transaction 5 EUR CLO Outstanding Primary 36.9 2007 2022 2014
Transaction 8 EUR CLO Wound Down Primary 26.9 2005 2021 2011
Transaction 10 EUR CLO Outstanding Primary 27.0 2006 2022 2012
Transaction 86 EUR CLO Outstanding Secondary 3.6 2006 2022 2012
EUR CLO Subtotal: 161.6
Transaction 13 U.S. CLO Outstanding Primary 15.2 2006 2018 2012
Transaction 14 U.S. CLO Outstanding Primary 26.0 2007 2021 2014
Transaction 15 U.S. CLO Outstanding Primary 28.1 2007 2021 2014
Transaction 16 U.S. CLO Outstanding Primary 23.5 2006 2020 2013
Transaction 17 U.S. CLO Sold Primary 26.0 2007 2021 2014
Transaction 22 U.S. CLO Outstanding Primary 37.4 2007 2021 2014
Transaction 32 U.S. CLO Outstanding Primary 24.0 2007 2021 2014
Transaction 34 U.S. CLO Outstanding Primary 22.2 2006 2020 2012
Transaction 36 U.S. CLO Outstanding Primary 28.4 2007 2021 2013
Transaction 47 U.S. CLO Outstanding Primary 28.3 2006 2021 2013
Transaction 61 U.S. CLO Outstanding Primary 29.1 2007 2021 2014
Transaction 63 U.S. CLO Outstanding Primary 27.3 2007 2021 2013
Transaction 64 U.S. CLO Outstanding Primary 15.4 2007 2021 2013
Transaction 66 U.S. CLO Outstanding Primary 21.3 2006 2020 2013
Transaction 68 U.S. CLO Outstanding Primary 19.3 2006 2020 2013
Transaction 69 U.S. CLO Outstanding Primary 28.2 2007 2019 2013
Transaction 75 U.S. CLO Outstanding Primary 32.7 2011 2022 2014
Transaction 77 U.S. CLO Outstanding Primary 14.5 2011 2023 2016
Transaction 78 U.S. CLO Outstanding Primary 22.9 2012 2023 2015
Transaction 79 U.S. CLO Outstanding Primary 19.4 2012 2022 2015
Transaction 80 U.S. CLO Outstanding Primary 22.7 2012 2022 2016
Transaction 81 U.S. CLO Outstanding Primary 21.7 2012 2024 2016
Transaction 82 U.S. CLO Outstanding Primary 25.4 2012 2022 2016
Transaction 83 U.S. CLO Outstanding Primary 20.8 2013 2025 2017
Transaction 84 U.S. CLO Outstanding Primary 24.6 2013 2023 2017
Transaction 85 U.S. CLO Outstanding Primary 1.0 2013 2025 2017
Transaction 87 U.S. CLO Outstanding Primary 23.0 2013 2026 2018
Transaction 88 U.S. CLO Outstanding Primary 30.1 2014 2024 2018
Transaction 89 U.S. CLO Outstanding Primary 33.6 2014 2026 2018
Transaction 90 U.S. CLO Outstanding Primary 20.7 2014 2026 2018
Transaction 91 U.S. CLO Outstanding Primary 27.8 2015 2027 2019
Transaction 92 U.S. CLO Outstanding Primary 34.6 2015 2027 2020
Transaction 93 U.S. CLO Outstanding Secondary 6.1 2015 2027 2019
Transaction 94 U.S. CLO Outstanding Secondary 6.6 2014 2026 2018
US CLO Subtotal: 787.8
Total CLO Portfolio: 949.4
CLO Equity Portfolio Details (continued)
As of 30 September 2016
Wtd Avg Original Current Current Jr-
Spread Cost of Funds Cost of Funds Most O/C
Transaction(i) (bps)(v) (bps)(vi) (bps)(vii) Cushion(viii)
Transaction 1 352 55 171 10.2%
Transaction 2 368 52 123 8.4%
Transaction 5 405 60 72 5.9%
Transaction 8 NA 53 NA NA
Transaction 10 365 50 165 19.0%
Transaction 86 365 50 165 19.0%
EUR CLO Subtotal: 373 54 132 10.6%
Transaction 13 311 47 96 19.1%
Transaction 14 342 49 104 5.2%
Transaction 15 377 52 80 5.5%
Transaction 16 353 46 86 10.8%
Transaction 17 NA 40 NA NA
Transaction 22 368 53 111 10.6%
Transaction 32 316 59 87 6.1%
Transaction 34 385 50 229 21.6%
Transaction 36 314 46 109 5.3%
Transaction 47 349 47 67 2.0%
Transaction 61 350 45 71 4.5%
Transaction 63 335 53 170 14.7%
Transaction 64 342 38 76 NA
Transaction 66 304 49 87 7.3%
Transaction 68 308 48 58 10.3%
Transaction 69 308 44 73 22.7%
Transaction 75 406 168 223 12.2%
Transaction 77 357 212 233 9.7%
Transaction 78 362 217 178 6.1%
Transaction 79 351 215 199 5.0%
Transaction 80 361 185 192 3.7%
Transaction 81 374 216 193 4.3%
Transaction 82 369 206 173 3.0%
Transaction 83 414 193 193 5.1%
Transaction 84 367 183 184 3.3%
Transaction 85 366 170 171 4.9%
Transaction 87 375 199 199 3.2%
Transaction 88 356 199 200 3.1%
Transaction 89 374 195 195 3.2%
Transaction 90 383 203 200 3.8%
Transaction 91 381 215 212 3.2%
Transaction 92 385 199 199 3.7%
Transaction 93 381 215 212 3.2%
Transaction 94 374 215 195 3.2%
US CLO Subtotal: 358 123 150 7.3%
Total CLO Portfolio: 360 111 148 7.8%
(table continued)
CLO Equity Portfolio Details (continued)
As of 30 September 2016
Jr-Most O/C Annualized ITD Cash
Cushion at (Loss) Gain Received as
Transaction(i) Close(ix) of Cushion(x) IRR(xi) % of Cost(xii)
Transaction 1 3.9% 0.7% - 53.2%
Transaction 2 3.6% 0.5% 10.3% 143.7%
Transaction 5 5.7% 0.0% 11.6% 140.5%
Transaction 8 5.0% NA 8.8% 158.2%
Transaction 10 4.5% 1.4% 1.0% 60.8%
Transaction 86 3.1% 1.6% 9.0% 51.1%
EUR CLO Subtotal: 4.5% 0.6% 6.4% 108.5%
Transaction 13 4.8% 1.4% 21.9% 242.5%
Transaction 14 5.6% (0.0%) 19.2% 231.7%
Transaction 15 4.2% 0.1% 29.8% 307.4%
Transaction 16 4.4% 0.6% 21.1% 247.3%
Transaction 17 4.2% NA 28.7% 395.7%
Transaction 22 5.0% 0.6% 21.9% 237.4%
Transaction 32 5.6% 0.1% 22.2% 243.2%
Transaction 34 6.7% 1.5% 18.6% 211.4%
Transaction 36 5.2% 0.0% 18.9% 204.5%
Transaction 47 4.3% (0.2%) 22.7% 251.9%
Transaction 61 4.0% 0.0% 17.8% 201.7%
Transaction 63 4.8% 1.1% 19.3% 214.3%
Transaction 64 NA NA 23.1% 258.5%
Transaction 66 4.0% 0.3% 22.9% 252.8%
Transaction 68 4.4% 0.6% 28.3% 311.1%
Transaction 69 5.6% 1.8% 27.0% 284.8%
Transaction 75 4.0% 1.6% 13.6% 89.5%
Transaction 77 5.0% 1.0% 12.8% 78.4%
Transaction 78 4.0% 0.4% 16.8% 107.1%
Transaction 79 4.0% 0.2% 7.9% 75.8%
Transaction 80 4.2% (0.1%) 9.8% 80.7%
Transaction 81 4.0% 0.1% 7.7% 63.4%
Transaction 82 4.0% (0.2%) 9.3% 65.2%
Transaction 83 6.2% (0.3%) 13.0% 73.1%
Transaction 84 4.0% (0.2%) 16.9% 84.9%
Transaction 85 5.0% (0.0%) 10.5% 68.6%
Transaction 87 4.0% (0.3%) 5.1% 51.4%
Transaction 88 4.0% (0.3%) 11.2% 55.8%
Transaction 89 4.0% (0.3%) 13.4% 52.9%
Transaction 90 4.0% (0.1%) 12.9% 40.5%
Transaction 91 4.0% (0.5%) 13.0% 32.9%
Transaction 92 4.0% (0.2%) 14.8% 29.4%
Transaction 93 3.6% (0.2%) 14.5% 12.7%
Transaction 94 3.3% (0.0%) 12.8% 12.7%
US CLO Subtotal: 4.5% 0.3% 17.5% 159.9%
Total CLO Portfolio: 4.5% 0.3% 15.6% 151.2%
Notes
Transactions are investments made on a particular investment date. Multiple
transactions may be associated with the same tranche of the same CLO deal.
Note that certain transactions may have been removed from the table above, as
the remaining value of the assets of those CLOs is immaterial. The
(i) transactions continue to be held as of the date of this report.
"Outstanding" refers to investments in CLOs which have not yet been
optionally redeemed, sold, or wound down to less-than-material remaining
expected value. "Called" refers to investments in CLOs where TFG initiated or
approved an optional redemption, and "wound down" refers to CLOs which have
amortised or repaid without an optional redemption, in both cases with
(ii) less-than-material remaining expected value.
"Primary" refers to investments made in the new issuance CLO market, whereas
"Secondary" refers to investments made after the original issue date of the
(iii) CLO.
The USD investment cost reflects a USD-EUR exchange rate fixed at a single
historical rate to avoid the impact of skewed weightings and FX volatility
over time. As such, the investment costs of European CLOs as shown in this
table may not be comparable to the investments costs as shown in TFG's
(iv) financial statements.
Par weighted average spread over LIBOR or EURIBOR (as appropriate) of the
(v) underlying loan assets in each CLO's portfolio.
Notional weighted average spread over LIBOR or EURIBOR (as appropriate) of
the debt tranches issued by each CLO, as of the closing date of each
(vi) transaction.
Notional weighted average spread over LIBOR or EURIBOR (as appropriate) of
the debt tranches issued by each CLO, as of the most recent trustee report
(vii) date.
The current junior-most O/C cushion is the excess (or deficit) of the
junior-most O/C test ratio over the test requirement, as of the latest
(viii) trustee report available as of the report date.
The junior-most O/C cushion at close is the excess (or deficit) of the
junior-most O/C test ratio over the test requirement that was expected on
each deal's closing date (or date of purchase, if later). Please note that
two of TFG's investments are so called "par structures" which don't include a
junior O/C test. They have been marked by an "N/A" in the relevant
(ix) junior-most O/C test columns.
Calculated by annualizing the change from the expected closing date
(x) junior-most O/C cushion to the current junior-most O/C cushion.
Calculated from TFG's investment date. For outstanding investments, includes
both historical cash flows received to-date and prospective cash flows
expected to be received, based on TFG's base case modelling assumptions.
Refer to www.tetragoninv.com for more information on TFG's modelling
assumptions and methodology. For all other investments, includes only
(xi) historical realised cash flows received to-date.
Inception to report date cash flow received on each transaction as a
(xii) percentage of its original cost.
Figure 39 [Figure 39 cannot be reproduced] APPENDIX IX BOARD OF DIRECTORS The Board of Directors currently comprises six directors, of which four are Independent Directors. Rupert Dorey is a member of the TFG Board of Directors and Audit Committee. Mr. Dorey has over 30 years of experience in financial markets. Mr. Dorey was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt. He held a number of senior positions at CSFB, including establishing CSFB's high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales. Since 2005, he has been acting in a Non-Executive Directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles. Mr. Dorey is a former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors. Mr. Dorey is based in Guernsey. Frederic Hervouet is a member of the TFG Board of Directors and Audit Committee. Mr. Hervouet has over 17 years of experience in financial markets and hedge funds, including in multi-asset class investment and risk management, structured products and structured finance. Until September 2013, Mr. Hervouet was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales. Previously, Mr. Hervouet was a Director and Global Head of Sales at Diapason Commodities Management SA, a partner at Systeia Capital Management, which is now part of Amundi Asset Management, and a Director and Head of European Market Distribution at BAREP Asset Management, the hedge fund management subsidiary of Société Générale. Mr. Hervouet has a MSc in Applied Mathematics and International Finance and a Master's Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the Université Paris Dauphine. He is a member of the Institute of Directors (IoD) and of the Guernsey Chamber of Commerce. Mr. Hervouet is based in Guernsey. David Jeffreys is a member of the TFG Board of Directors and Audit Committee. Mr. Jeffreys provides directorship services to a small number of fund groups. From 1995 until 2010 Mr. Jeffreys worked with EQT, a Scandinavian based private equity group, acting as a director of each of its Fund general partners and, from 2006, establishing and serving as Managing Director of EQT Funds Management Limited, its Guernsey based management and administration office. Between 1993 and June 2004, Mr. Jeffreys was managing director of Abacus Fund Managers (Guernsey) Limited, where he was involved with private client trust arrangements, corporate administration, pension schemes and fund administration. He was a board member of Abacus' principal administration operating companies and served on the boards of various administrated client companies. Previously, Mr. Jeffreys worked as an auditor and accountant for 12 years with Coopers & Lybrand (and its predecessor firms). He has an undergraduate degree in Economics and Accounting from the University of Bristol and is a fellow of the Institute of Chartered Accountants in England and Wales. Mr. Jeffreys is based in Guernsey. William P. Rogers, Jr. is a member of the TFG Board of Directors and Audit Committee. Mr. Rogers retired from the Corporate Department of Cravath, Swaine & Moore LLP in December 2015 after 36 years at the firm. His practice encompassed the representation of both corporate and financial institution clients in a wide variety of matters, including international securities offerings, corporate governance and SEC compliance matters, mergers and acquisitions, and derivative financial products. He was repeatedly cited as one of the United States' leading practitioners in capital markets by, among others, Chambers USA: America's Leading Lawyers for Business; Chambers Global: The World's Leading Lawyers for Business; The Legal 500; and IFLR1000. Mr. Rogers regularly advised a wide variety of clients, including Royal Dutch Shell plc, Bacardi Limited, Time Warner Inc., Northrop Grumman Corporation, CBS Corporation, INEOS Group Limited, Tetragon Financial Group Limited, Costamare Inc., priceline.com Incorporated, FactSet Research Systems Inc., Morgan Stanley, Citigroup, GasLog Ltd. and Goldman Sachs. He also regularly advised corporate clients on derivatives matters, including the implications of the new Dodd-Frank swaps regulation. He was involved in the formation of the International Swaps and Derivatives Association (ISDA) and, prior to his move to London, regularly represented ISDA on legislative, regulatory and documentation matters. Mr. Rogers was born in Bronxville, New York. He received a B.A. from Union College in 1972 and a J.D. from Case Western Reserve School of Law in 1978. From 1998 to 2001, he served as the Managing Partner of Cravath's Corporate Department and, from 2001 to 2007, headed the firm's London office. Mr. Rogers is based in New York. Reade Griffith co-founded Polygon in 2002 and TFM, the investment manager of TFG, in 2005. He is a Principal of TFM, a member of the TFG Board of Directors, the Head of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, the CIO of Polygon's European Event Driven Equities strategy, a member of the Investment & Management Committee of TCIP and Tetragon Credit Income II L.P. He was previously the founder and chief executive officer of the European office of Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998. He was a partner and senior managing director responsible for running the Global Event Driven arbitrage team in Tokyo, London and Chicago for the firm. He was previously with Baker, Nye, where he was an analyst working on an arbitrage and special situations portfolio. Mr. Griffith holds a JD degree from Harvard Law School and an undergraduate degree in Economics from Harvard College. He also served as an officer in the U.S. Marine Corps and left as a Captain following the 1991 Gulf War. Mr. Griffith is based in London. Paddy Dear co-founded Polygon in 2002 and TFM, the investment manager of TFG, in 2005. He is a Principal of TFM, a member of the TFG Board of Directors, the Co-Head of TFG Asset Management, a member of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, a member of the Investment & Management Committee of TCIP and Tetragon Credit Income II L.P. Mr. Dear was previously a Managing Director and the Global Head of Hedge Fund Coverage for UBS Warburg Equities. Prior to this, he was co-head of European sales trading, execution, arbitrage sales and flow derivatives. He had been with UBS since 1988, including six years in New York. Mr. Dear was in equity sales at Prudential Bache before joining UBS and started his career as a petroleum engineer with Marathon Oil Co. Mr. Dear holds a BSc degree in Petroleum Engineering from Imperial College in London. Mr. Dear is based in London. FURTHER SHAREHOLDER INFORMATION
Sub-Registrar and CREST Transfer Agent
Computershare Investor Services
(Guernsey) Limited
1st Floor, Tudor House
Le Bordage
St Peter Port, Guernsey
Registered Office of TFG and the Channel Islands GY1 1DB
Master Fund
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
1st Floor Dorey Court Legal Advisor (as to U.S. law)
Admiral Park Cravath, Swaine & Moore LLP
St. Peter Port, Guernsey Worldwide Plaza
Channel Islands GY1 6HJ 825 Eighth Avenue
New York, NY 10019
United States of America
Investment Manager
Tetragon Financial Management LP
399 Park Avenue, 22nd Floor Legal Advisor (as to Guernsey law)
New York, NY 10022 Ogier
United States of America Redwood House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GY1 1WA
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022 Legal Advisor (as to Dutch law)
United States of America De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam
The Netherlands
Investor Relations
David Wishnow / Greg Wadsworth
ir@tetragoninv.com
Stock Listing
Euronext Amsterdam N.V.
Press Inquiries
Prosek Partners
Andy Merrill / Ryan Fitzgibbon London Stock Exchange (Specialist Fund
pro-tetragon@prosek.com Segment)
Auditors Administrator and Registrar
KPMG Channel Islands Ltd. State Street (Guernsey) Limited
Glategny Court, 1st Floor Dorey Court
Glategny Esplanade Admiral Park
St. Peter Port, Guernsey St. Peter Port, Guernsey
Channel Islands GY1 1WR Channel Islands GY1 6HJ
Statement Regarding Non-Mainstream Pooled Investments
(NMPI)
TFG notes the UK Financial Conduct Authority ("FCA")
rules relating to the restrictions on the retail distribution of unregulated
collective investment schemes and close substitutes (referred to as
"non-mainstream pooled investments"), which came into effect on 1 January
2014.
TFG has received appropriate legal advice that confirms
that TFG's shares do not constitute NMPI under the FCA's rules and are,
therefore, excluded from the FCA's restrictions that apply to non-mainstream
pooled investment products.
TFG expects that it will continue to conduct its affairs
in such a manner that TFG's shares will continue to be excluded from the FCA's
rules relating to NMPI.
END NOTES
TFG is not responsible for the contents of any third-party website noted in this report.
_____________________________
TFG: Delivering Results Since 2005
(i) TFG commenced investing as an open-ended investment company in 2005,
(1) before its IPO in April 2007.
(ii) TFG seeks to deliver 10-15% Fair Value Return on Equity ("RoE") per annum
to shareholders. TFG's returns will most likely fluctuate with LIBOR. LIBOR
directly flows through some of TFG's investments and, as it can be seen as the
risk-free short-term rate, it should affect all of TFG's investments. In
high-LIBOR environments, TFG should achieve higher sustainable returns; in
low-LIBOR environments, TFG should achieve lower sustainable returns.
(iii) RoE is calculated from TFG's IPO in 2007. 2015 RoE includes a fair value
adjustment for certain TFG Asset Management businesses, the value of which has
accumulated over several years. Consequently the full year return of 14.5% is
not prepared on a like for like basis with prior years. Like for like
performance for 2015 was 8.2%. Please see Appendix III and Appendix IV for a
definition of Fair Value RoE and Appendix IV for other details.
(iv) Annualised total shareholder return to 30 September 2016, defined as
share price appreciation including dividends reinvested, for the last year,
the last three years, the last five years, and since TFG's initial public
offering in April 2007, and annualised Fair Value NAV Per Share Total Return
("NAV Total Return") to 30 September 2016, for the last year, the last three
years, the last five years, and since TFG's initial public offering in April
2007 as sourced from Bloomberg. NAV Total Return is determined in accordance
with the "NAV total return performance" calculation as set forth on the
Association of Investment Companies ("AIC") website. TFG's NAV Total Return is
determined for any period by calculating, as a percentage return on the Fully
Diluted Fair Value NAV per Share ("NAV Per Share") at the start of such
period, (i) the change in NAV Per Share over such period, plus (ii) the
aggregate amount of any dividends per share paid during such period, with any
dividend deemed reinvested at the NAV Per Share at the month end date closest
to the applicable ex-dividend date (i.e., so that the amount of any dividend
is increased or decreased by the same percentage increase or decrease in NAV
Per Share from such ex-dividend date through to the end of the applicable
period).
(v) Fair Value EPS ("EPS") divided by Dividends per Share at 30 September
2016.
(vi) As an "investment company" under U.S. GAAP, the vast majority of TFG's
investments are held at fair value, while certain TFG Asset Management
businesses are consolidated if they are deemed to be "service providers" to
TFG. For the quarter ending 30 September 2015, TFG began reporting its key
performance metrics on a fair value basis that adjusts U.S. GAAP metrics to
include the fair value of the TFG Asset Management businesses that are
currently consolidated under U.S. GAAP. The fair values used are as determined
by TFG's Audit Committee based on information provided by an independent
valuation specialist, prepared in accordance with ASC 820. The consistent use
of fair value across all investments is referred to in this report as "Fair
Value". Fair Value Key Metrics such as Fair Value NAV Per Share Total Return,
Fair Value RoE and Fair Value NAV are calculated in a way that reflects the
incentive fees that would otherwise have arisen if these Fair Values were
actually reflected in the U.S. GAAP investment company accounting for TFG's
financial statements and used as the basis for the calculation of fees. Please
refer to Appendices III and IV for further details. During the third quarter
of 2016, TFG determined, in consultation with its auditors and non-audit
accounting advisors, that, based on the relative growth of its investments in
TFG Asset Management businesses, TFG may be unable to continue satisfying the
requirements for "investment company" reporting under U.S. GAAP for future
reporting periods (including, potentially, with respect to the current
reporting year) which would result in significantly more investments being
consolidated under U.S. GAAP and, over time, a greater disparity between the
U.S. GAAP and Fair Value performance metrics. However, TFG has further
determined, in consultation with its auditors and non-audit accounting
advisors, that TFG would satisfy the requirements for "investment entity"
reporting under the International Financial Reporting Standards ("IFRS"), a
change to which would result in all, or substantially all, of TFG's
investments being held at fair value, such that the disparity between IFRS and
Fair Value performance metrics would be significantly less than the expected
disparity between U.S. GAAP and Fair Value performance metrics for future
periods. As such, TFG is actively considering a potential change in its
accounting principles from U.S. GAAP to IFRS, with any such change being
initially reflected in our annual report for 2016 and requiring the
restatement of certain reports for prior periods to IFRS. Any change in
accounting principles could result in differences in the presentation and
basis of reporting between TFG's reporting for future periods under IFRS and
its reporting for prior periods under U.S. GAAP, limiting the comparability of
reports for these periods, and may also result in the accrual and payment of
the incentive fees described above that are included in the calculations of
the Fair Value Key Metrics, but have not yet arisen under the current U.S.
GAAP investment company accounting for TFG's financial statements. TFG's
assessment of this potential change in accounting principles is ongoing and
there can be no assurance as to what, if any, change will ultimately be made.
(vii) NAV Per Share based on TFG's financial statements as of 30 September
2016. Please note that the reported NAV Per Share excludes any shares held in
treasury or in a subsidiary as of that date, but includes shares held in
escrow which are expected to be released and incorporated into the U.S. GAAP
NAV per Share over a five-year period and the number of shares corresponding
to the applicable intrinsic value of the options issued to the Investment
Manager at the time of the Company's IPO. Please see Figure 22 for more
details.
(viii) Partner & Employee shareholdings at 30 September 2016, including all
deferred compensation arrangements. Please refer to the 2015 Audited Tetragon
Financial Group Master Fund Limited financial statements for more details of
these arrangements.
Executive Summary
TFG's 'Home Member State' for the purposes of the EU Transparency Directive
(2) (Directive 2004/109/EC) is the Netherlands.
TFG invests substantially all its capital through a master fund, Tetragon
Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the
issued non-voting shares. In this report, unless otherwise stated, we report
on the consolidated business incorporating TFG and TFGMF. References to "we"
are to Tetragon Financial Management LP, TFG's investment manager (the
(3) "Investment Manager").
(4) Please see Note (1)(ii).
Fair Value NAV Per Share Total Return ("NAV Total Return") to 30 September
2016, for the last year, the last three years, the last five years, and since
TFG's initial public offering in April 2007 as sourced from Bloomberg. NAV
Total Return is determined in accordance with the "NAV total return
performance" calculation as set forth on the Association of Investment
Companies ("AIC") website. TFG's NAV Total Return is determined for any period
by calculating, as a percentage return on the Fully Diluted Fair Value NAV per
Share ("NAV Per Share") at the start of such period, (i) the change in NAV Per
Share over such period, plus (ii) the aggregate amount of any dividends per
share paid during such period, with any dividend deemed reinvested at the NAV
Per Share at the month end date closest to the applicable ex-dividend date
(i.e., so that the amount of any dividend is increased or decreased by the
same percentage increase or decrease in NAV Per Share from such ex-dividend
(5) date through to the end of the applicable period).
Please refer to Financial Highlights on page 27 of this report for the
(6) definition of Fair Value Net Income.
Founded in 1932, the AIC represents approximately 350 members across a broad
range of closed-ended investment companies, incorporating investment trusts
and other closed ended investment companies. TFG is classified by the AIC in
its Flexible Investment sector as a company whose policy allows it to invest
in a range of asset types. The AIC has indicated that the sector may assist
investors and advisers to more easily find and compare those investment
companies that have the ability to invest in a range of assets and allow
(7) investors to compare investment companies with similar open-ended funds.
The AIC has a Code of Corporate Governance (AIC Code) which sets out a
framework of best practice in respect of the governance of investment
companies. The Board of Directors of TFG considers that reporting against the
principles and recommendations of the AIC Code, and by reference to the AIC
Corporate Governance Guide for Investment Companies (which incorporates the UK
Corporate Governance Code), will provide better information to shareholders.
Please visit the TFG website at
http://www.tetragoninv.com/site-services/aic/aic-code for further information.
Edison is an international equity research and investor access firm with a
team of over 110 analysts, investment and roadshow professionals and works
with both large and smaller capitalised companies, blue chip institutional
investors, wealth managers, private equity and corporate finance houses to
support their capital markets activity. Edison provides services to more than
400 retained corporate and investor clients from offices in London, New York,
Frankfurt, Sydney and Wellington. For further information, please visit:
www.edisoninvestmentresearch.com. Edison is authorised and regulated by the
(8) Financial Conduct Authority.
TFG received a five-star Morningstar Rating as of 30 September 2016. The
Morningstar Rating is an assessment of a fund's past performance - based
on both return and risk - which shows how similar investments compare with
their competitors. A high rating alone is insufficient basis for an investment
(9) decision.
As of 30 September 2016, TFG has an overall five-star Morningstar Rating,
as well as five stars over both three and five years.
Morningstar, Inc. rates investments from one to five stars based on how well
they have performed in comparison to similar investments, after adjusting for
risk and accounting for all relevant sales charges. Within each Morningstar
Category, the top 10% of investments receive five stars, the next 22.5% four
stars, the middle 35% three stars, the next 22.5% two stars, and the bottom
10% receive one star. Investments are rated for up to three time periods - 3,
5, and 10 years - and these ratings are combined to produce an overall rating.
Investments with less than three years of history are not rated. Morningstar
states that ratings are objective and based entirely on a mathematical
evaluation of past performance.
TFG has subscribed to Morningstar Essentials, for which it has paid a fee
to enable it to use the Morningstar Rating on TFG's website and other
investor materials.
Further information is available on Morningstar's website at
http://www.morningstar.co.uk/. (c)2016 Morningstar UK Limited. All Rights
Reserved. The information contained herein: (1) is proprietary to Morningstar
and/or its content providers; (2) may not be copied or distributed; and (3) is
not warranted to be accurate, complete, or timely. Neither Morningstar nor its
content providers are responsible for any damages or losses arising from any
use of this information. Past performance is no guarantee of future results.
For more detailed information about Morningstar Rating, including its
methodology, please go to
http://corporate.morningstar.com/US/documents/MethodologyDocuments/Methodology
Papers/MorningstarFundRating_Methodology.pdf
(i) Fair Value Total NAV Return is determined in accordance with the "NAV
total return performance" calculation as set forth on the Association of
Investment Companies ("AIC") website. TFG's Fair Value NAV per share Total
Return is determined for any period by calculating, as a percentage return on
the Fair Value NAV per Share at the start of such period, (i) the change in
Fair Value NAV per share over such period, plus (ii) the aggregate amount of
any dividends per share paid during such period, with any dividend deemed
reinvested at the Fair Value NAV per share at the month end date closest to
the applicable ex-dividend date (i.e., so that the amount of any dividend is
increased or decreased by the same percentage increase or decrease in Fair
Value NAV per share from such ex-dividend date through to the end of the
(10) applicable period).
(ii) MSCI ACWI refers to the MSCI All Countries World Index, which is managed
by MSCI Inc. It is a global equity index consisting of developed and emerging
market countries. Any indices and other financial benchmarks are provided for
illustrative purposes only. Comparisons to indices have limitations because,
for example, indices have volatility and other material characteristics that
may differ from the fund. Any index information contained herein is included
to show general trends in the markets in the periods indicated, is not meant
to imply that these indices are the only relevant indices, and is not intended
to imply that the portfolio or investment was similar to any particular index
either in composition or element of risk. The indices shown here have not been
selected to represent appropriate benchmarks to compare an investor's
performance, but rather are disclosed to allow for comparison of the
investor's performance to that of certain well-known and widely-recognised
indices. The volatility of the indices may be materially different from the
individual performance attained by a specific investor. In addition, the
fund's holdings may differ significantly from the securities that comprise the
indices. You cannot invest directly in an index. Further information on the
composition and calculation of the MSCI ACWI is available at www.msci.com. The
data depicted here is sourced from Bloomberg using Bloomberg's "Custom Total
Return Holding Period" function.
(iii) Cumulative return determined on a quarterly compounding basis using the
actual TFG quarterly incentive fee LIBOR based hurdle rate. In the period from
IPO to June 2008 this was 8%; thereafter, the hurdle has been determined using
the 3 month USD LIBOR rate on the first day of each calendar quarter plus a
spread of 2.647858%.
TFG Overview
Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V.
("Euronext Amsterdam"). As is the case for Euronext Amsterdam, the SFS is a
regulated market for the purposes of the Markets in Financial Instruments
(11) Directive.
Includes GreenOak funds and advisory assets, LCM, Polygon Recovery Fund LP,
Polygon Convertible Opportunity Master Fund, Polygon European Equity
Opportunity Master Fund and associated managed account, Polygon Mining
Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon
Distressed Opportunities Master Fund, Equitix, TCI II, and TCICM as calculated
by the applicable administrator for value date 30 September 2016. Includes,
where relevant, investments by Tetragon Financial Group Master Fund Limited
and TCI II (in the case of LCM and TCICM). TFG Asset Management AUM as used in
this report includes the assets under management of several investment
advisers, including Tetragon Asset Management L.P., and GreenOak, each of
which is an investment manager registered under the U.S. Investment Advisers
Act of 1940. Figures for GreenOak and TCI II may also include committed
capital. TCICM utilises the investment expertise of certain third-party
sub-advisors to assist in the management of its CLOs. Such sub-advisors will
(12) typically earn a substantial portion of the management fees from the CLOs.
LCM Asset Management LLC, a CLO loan manager that is part of TFG Asset
(13) Management, referred to in this report as "LCM".
GreenOak Real Estate, LP, is referred to in this report as "GreenOak". TFG
(14) owns a 23% interest in GreenOak.
Polygon Global Partners LP and Polygon Global Partners LLP (and certain of
their affiliates), managers of open-ended hedge fund and private equity
vehicles across a number of strategies that are part of TFG Asset Management,
referred to in this report as "Polygon". Polygon Global Partners LLP is
(15) authorised and regulated by the United Kingdom Financial Conduct Authority.
(16) Equitix Holdings Limited, referred to in this report as "Equitix".
Hawke's Point, a mining finance company that is part of TFG Asset Management,
(17) referred to in this report as "Hawke's Point".
(18) Tetragon Credit Income Partners, referred to in this report as "TCIP".
(19) TCI Capital Management LLC, referred to in this report as "TCICM".
(20) Please see Note 12.
Key Metrics
TFG's Key Metrics were modified, effective from Q3 2015, to incorporate the
value that is being created in TFG Asset Management on a consistent Fair Value
basis using valuations provided by an independent valuation specialist
reporting to the Audit Committee. The resulting Fair Value metrics are
described in this section and further detail on the drivers for each of the
(21) Fair Value metrics is discussed in the following sections of the report.
(22) Please see Note (1)(ii).
Please refer to Financial Highlights on page 27 of this report for the
(23) definition of Fair Value Net Income.
Please refer to Financial Highlights on page 27 of this report for the
(24) definition of Fair Value EPS.
In Q1 2015, there were strong contributions from Other Equities, U.S. CLO 1.0
transactions and Real Estate. Please refer to the Q1 2015 report for more
(25) details.
TFG amended the terms of its Optional Stock Dividend Plan and Director Share
Issue Program to permit TFG to satisfy its obligations thereunder by
transferring non-voting shares of TFG that are being held by TFG as treasury
(26) shares.
Q3 2016 in Review
(27) Based on the most recent trustee reports available as of 30 September 2016.
(28) Based on the most recent trustee reports available as of 30 September 2016.
(29) Based on the most recent trustee reports available as of 30 September 2016.
In order to manage its balance sheet more efficiently whilst also hopefully
allowing for opportunistic investments during times of market dislocation, TFG
has obtained an unsecured Revolving Credit Facility. Its stated maturity date
of 1 April 2019 will automatically be extended by six months on 1 April and 1
October in each year unless a lender (with respect to its commitment and
loans) has provided prior written notice withholding consent to such an
extension. The Revolving Credit Facility is subject to a minimum usage fee of
4% per annum on any amount by which 25% of the maximum facility amount exceeds
the aggregate outstanding borrowings. In addition, there is a non-usage fee of
1% which is applied to the undrawn amount of the facility, excluding the
amount which is subject to the minimum usage fee. Any drawn portion will incur
(30) interest at a rate of 1-month U.S. LIBOR plus a spread of 4%.
(31) Please see Note 12.
(32) Please see Note 12.
(33) Please see Note 12.
Broad-based securities indices are unmanaged and are not subject to fees and
expenses typically associated with managed accounts or investment funds.
Investments cannot be made directly in a broad-based securities index. Past
performance or experience (actual or simulated) does not necessarily give a
guide for the future and no representation is being made that the funds listed
will or are likely to achieve profits or losses similar to those shown. Any
indices and other financial benchmarks are provided for illustrative purposes
only. Comparisons to indices have limitations because, for example, indices
have volatility and other material characteristics that may differ from the
funds. Any index information contained herein is included to show general
trends in the markets in the periods indicated, is not meant to imply that
these indices are the only relevant indices, and is not intended to imply that
the portfolio or investment was similar to any particular index either in
composition or element of risk. The indices shown here have not been selected
to represent appropriate benchmarks to compare an investor's performance, but
rather are disclosed to allow for comparison of the investor's performance to
that of certain well-known and widely-recognised indices. The volatility of
the indices may be materially different from the individual performance
attained by a specific investor. In addition, the fund's holdings may differ
significantly from the securities that comprise the indices. You cannot invest
directly in an index. The HFRX RV: FI-Convertible Arbitrage Index (Bloomberg
Code: HFRXCA), the HFRI RV: FI-Convertible Arbitrage Index (Bloomberg Code:
HFRICAI), the HFRX ED: Event Driven Index (Bloomberg Code: HFRXED), the HFRI
ED: Event Driven Index (Bloomberg Code: HFRIEDI), the HFRX DS: Distressed
Restructuring Index (Bloomberg Code: HFRXDS) and the HFRI DS: Distressed
Restructuring Index (Bloomberg Code: HFRIDSI) are compiled by HFR Hedge Fund
Research Inc. Further information relating to index constituents and
calculation methodology can be found at www.hedgefundresearch.com. The Market
Vectors Junior Gold Miners Index (Bloomberg Code: GDXJ) is compiled by Market
Vectors Index Solutions, a subsidiary of Van Eck. Further information relating
to index constituents and calculation methodology can be found at
(34) www.marketvectorsindices.com.
(i) The Polygon Convertible Opportunity Fund began trading with Class B
shares, which carry no incentive fees, on 20 May 2009. Class A shares of the
fund were first issued on 1 April 2010 and returns from inception through
March 2010 have been pro forma adjusted to match the fund's Class A share
terms as set forth in the Offering Memorandum (1.5% management fee, 20%
incentive fee over a hurdle and other items, in each case, as set forth in the
Offering Memorandum). From April 2010, forward, the reported returns reflect
actual Class A share performance on the terms set forth in the Offering
Memorandum. The return and AUM figures shown are final values as calculated by
the applicable fund administrator. All performance numbers provided herein
with respect to the Fund reflects the actual net performance of the fund net
of management and performance fees, as well as any commissions and direct
expenses incurred by the fund, but before withholding taxes, and other
indirect expenses. All returns include the reinvestment of dividends, if any.
Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown. (i) The fund began trading
(35) with Class B shares, which carry no incentive fees, on 20 May 2009.
(ii) The Polygon European Equity Opportunity Fund began trading 8 July 2009
with Class B shares, which carry no incentive fee. Class A shares commenced
trading on 1 December 2009. Returns from inception through November 2009 for
Class A shares have been pro forma adjusted to match the fund's Class A share
terms as set forth in the Offering Memorandum (1.5% management fee, 20%
incentive fee and other items, in each case, as set forth in the offering
Memorandum). From December 2009 to February 2011, reported performance
reflects actual Class A share performance on the terms set forth in the
Offering Memorandum. From March 2011, forward, the table reflects actual Class
A1 share performance on the terms set forth in the Offering Memorandum. Class
A1 share performance is equivalent to Class A share performance for prior
periods. The return and AUM figures shown are final values as calculated by
the applicable fund administrator. All performance numbers provided herein
with respect to the Fund reflects the actual net performance of the fund net
of management and performance fees, as well as any commissions and direct
expenses incurred by the fund, but before withholding taxes, and other
indirect expenses. All returns include the reinvestment of dividends, if any.
Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown.
(iii) The Polygon Mining Opportunity Fund began trading with Class B1 shares,
which carry no incentive fees, on 1 June 2012. Returns shown here through
October 2013 have been pro forma adjusted to account for a 2.0% management
fee, a 20% incentive fee, and non trading expenses capped at 1%, in each case,
as set forth in the Offering Memorandum. Class A1 shares of the fund were
first issued on 1 November 2013. From November 2013, forward, reported
performance reflects actual Class A1 share performance on the terms set forth
in the Offering Memorandum. The return and AUM figures are final values as
calculated by the applicable fund administrator. All performance numbers
provided herein with respect to the fund reflects the actual net performance
of the fund net of management and performance fees, as well as any commissions
and direct expenses incurred by the fund, but before withholding taxes, and
other indirect expenses. All returns include the reinvestment of dividends, if
any. Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown.
(iv) The Polygon Distressed Opportunities Fund began trading on 2 September
2013. Returns shown are for offshore Class A shares, reflecting the terms set
forth in the Offering Memorandum (2.0% management fee, 20% incentive fee and
other items, in each case). The return and AUM figures are final values as
calculated by the applicable fund administrator. All performance numbers
provided herein with respect to the fund reflects the actual net performance
of the fund net of management and performance fees, as well as any commissions
and direct expenses incurred by the fund, but before withholding taxes, and
other indirect expenses. All returns include the reinvestment of dividends, if
any. Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown.
(v) The Polygon Global Equities Fund began trading with Class B/B1 shares,
which carry no incentive fees, on 12 September 2011. Returns shown from
inception through August 2013 have been pro forma adjusted to account for a
2.0% management fee and a 20% incentive fee, in each case, as to be set forth
in further definitive documents. The fund began trading Class A shares, which
are not new issue eligible, on 23 September 2011. Class A1 shares of the Fund,
which are new issue eligible, were first issued on 1 November 2013, and
returns from inception through October 2013 have been pro forma adjusted to
match the fund's Class A1 performance. AUM figure and net performance is as
calculated by the applicable fund administrator. All performance numbers
provided herein with respect to the fund reflects the actual net performance
of the fund net of management and performance fees, as well as any commissions
and direct expenses incurred by the fund, but before withholding taxes, and
other indirect expenses. All returns include the reinvestment of dividends, if
any. Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown.
(vi) The Private Equity Vehicle noted is the Polygon Recovery Fund L.P.
("PRF"). The manager of the PRF is a subsidiary of TFG. The management fees
earned in respect of PRF are included in the TFG Asset Management business
segment described herein. PRF is a limited-life vehicle seeking to dispose of
its portfolio securities prior to the expiration of its term. PRF's term was
extended to March 2018 with a potential further one year extension thereafter.
Individual investor performance will vary based on their high water mark.
Currently the majority of Class C share class investors have not reached their
high water mark, so their performance is the same as their gross performance.
AUM figure and net performance is for PRF as calculated by the applicable fund
administrator. All performance numbers provided herein with respect to the
fund reflects the actual net performance of the fund net of management and
performance fees, as well as any commissions and direct expenses incurred by
the fund, but before withholding taxes, and other indirect expenses. All
returns include the reinvestment of dividends, if any. Differences in account
size, timing of transactions and market conditions prevailing at the time of
investment may lead to different results. Differences in the methodology used
to calculate performance may also lead to different performance results than
those shown.
For additional information on the Company's CLO equity investments, including
its buy and hold strategy, please refer to
(36) http://www.tetragoninv.com/portfolio/clo-equity.
Appendix III
TFM has determined that it will continue to grow TFG Asset Management, as
TFG's diversified alternative asset management business, with a view to a
planned initial public offering and listing of shares of TFG Asset Management
(37) in the next three to five years (referred to as the "IPO Strategy").
Appendix V
(i) The Total Escrow Shares of 12.9 million consists of 6.9 million shares
which have been used as consideration for the acquisition of Polygon and
applicable stock dividends relating thereto, as well as 6.0 million shares
(38) held in a separate escrow account in relation to equity-based compensation.
(ii) This comprises: a) The number of shares corresponding to the applicable
intrinsic value of the options issued to the Investment Manager at the time of
the Company's IPO with a strike price of $10.00, to the extent such options
are in the money at period end. At the reporting date, this was 0.7 million
shares. The intrinsic value of the manager (IPO) share options is calculated
as the excess of (x) the closing price of the shares as of the final trading
day in the relevant period over (y) $10.00 (being the exercise price per
share) times (z) 12,545,330 (being a number of shares subject to the options
before the application of potential anti-dilution). The terms of exercise
under the options allow for exercise using cash, as well as, with the consent
of the board of the Company, certain forms of cashless exercise. Each of these
prescribed methods of exercise may give rise to the issuance of a different
number of shares than the approach described herein. If the options were to be
surrendered for their intrinsic value with the board's consent, rather than
exercised, the number of shares issued would equal the intrinsic value divided
by the closing price of the shares as of the final trading day in the relevant
period. This approach has been selected because we currently believe it is
more reasonably illustrative of a likely outcome if the options are exercised.
The options are exercisable until 26 April 2017. b) The number of shares
corresponding to the applicable intrinsic value of the remaining unexercised
options issued to the GreenOak Founders in relation to the acquisition of a
10% stake in GreenOak in September 2010. At the reporting date, this was 0.9
million. The intrinsic value of the GreenOak share options is calculated as
the excess of (x) the closing price of the shares as of the final trading day
in the relevant period over (y) $5.50 (being the exercise price per share)
times (z) 1,954,120 (being a number of shares subject to the options.
(iv) Certain Escrow Shares (6.9 million), which have been used as
consideration for the acquisition of Polygon and applicable stock dividends
relating thereto, and which are held in escrow and are expected to be released
and incorporated into the U.S. GAAP NAV per Share over the next two years.
(v) Dilution in relation to equity-based awards by TFG Asset Management for
certain senior employees. At the reporting date, this was 0.7 million. The
basis and pace of recognition is expected to match the rate at which service
is being provided to TFG Asset Management in relation to these shares. Please
see Appendix VII for more details.
Equity-based awards are intended to give certain senior employees of TFG Asset
Management long-term exposure to TFG stock (with vesting subject to forfeiture
(39) and certain restrictions). Please see Appendix VII for further details.
Appendix VI
TFG has and may also continue to engage in share repurchases in the market
from time to time. Such purchases may at appropriate price levels below NAV
represent an attractive use of TFG's excess cash and an efficient means to
return cash to shareholders. Any decision to engage in share repurchases will
be made by the Investment Manager, upon consideration of relevant factors, and
will be subject to, among other things, applicable law and profits at the
time. The Company also continues to explore other methods of improving the
(40) liquidity of its shares.
An investment in TFG involves substantial risks. Please refer to the company's
website at www.tetragoninv.com for a description of the risks and uncertainties
pertaining to an investment in TFG.
This release contains inside information within the meaning of Article 7(1) of
the EU Market Abuse Regulation.
This release does not contain or constitute an offer to sell or a solicitation
of an offer to purchase securities in the United States or any other
jurisdiction. The securities of TFG have not been and will not be registered
under the US Securities Act of 1933, as amended, and may not be offered or
sold in the United States or to US persons unless they are registered under
applicable law or exempt from registration. TFG does not intend to register
any portion of its securities in the United States or to conduct a public
offer of securities in the United States. In addition, TFG has not been and
will not be registered under the US Investment Company Act of 1940, and
investors will not be entitled to the benefits of such Act. TFG is registered
in the public register of the Netherlands Authority for the Financial Markets
under Section 1:107 of the Financial Markets Supervision Act as a collective
investment scheme from a designated country.
For further information, please contact:
TFG:
David Wishnow/Greg Wadsworth
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Prosek Partners
Andy Merrill and Ryan FitzGibbon
+1-212-279-3115 ext. 216 and ext. 234
Pro-tetragon@prosek.com
