Tetragon Financial Group Limited: 2014 Annual Report
LONDON, February 27, 2015 /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."[(1)] In this report, we provide an update on TFG's results of operations for the period ending 31 December 2014.
DEAR FELLOW SHAREHOLDERS,
2014 was another active year for TFG: the Company made significant achievements, especially at TFG Asset Management. Whilst not immediately visible in the 2014 returns, we believe that this is particularly relevant, as the ongoing evolution of that business is creating value - which we hope will be demonstrated in returns over the coming years. We will focus on some of the details of that value creation in this report.
We articulated the following goals for 2014:
- To deliver 10-15% Return on Equity ("RoE") per annum to shareholders[(2)]: TFG returned RoE of 6.6% in 2014. Given that global interest rates have been at historical lows, we would not have anticipated 2014 to be a peak RoE year, and whilst 6.6% is a positive figure, it is below our target range. On the positive side, TFG Asset Management did well; GreenOak Real Estate's[(3)]strong business development resulted in a material increase in the fair value of TFG's holding; and the Company's CLO 1.0 portfolio performed well. On the negative side, certain European equity investments held directly on the balance sheet suffered losses for the year.
- To reduce the proportion of TFG's capital that pays away fees to third-party managers: The amount of capital that paid fees to external managers at 31 December 2014 was 33.6%, down from 53.4% at the end of 2013.[(4)]
- To grow client Assets Under Management ("AUM") and fee income within TFG Asset Management: At 31 December 2014, TFG's AUM was $11.1 billion, up from $9.2 billion at 2013 year-end.[(5)] As of early 2015, AUM stands at $13.0 billion following the Equitix acquisition. Of note, LCM[(6)]launched three more new CLOs during the year; the GreenOak joint venture completed its fundraising for its U.S. Fund II ahead of its target, launched a new Spain fund, and began raising assets for its second Asian fund; and Polygon[(7)] continued to raise assets for its funds.
- To add further asset management businesses to the TFG Asset Management platform: The Polygon Distressed fund launched by TFG Asset Management in late 2013 has performed strongly in 2014 and is well-positioned to raise external capital. TFG added two new businesses onto the platform in 2014: Equitix Holdings Limited ("Equitix"), an integrated core infrastructure asset management and primary project platform with AUM of approximately $2.0 billion (announced in October 2014 and closed on 2 February 2015); and Hawke's Point Resource Finance ("Hawke's Point"), a new start-up mining finance business established in the fourth quarter of 2014.
TFG Asset Management's importance to TFG's results continues to grow rapidly
TFG aims to achieve its RoE target[(8)] through a combination of asset returns and asset management operating income. We believe the latter is becoming more important to the overall returns. To illustrate this, we have selected two charts.
Figure 1
Percentage of
Consolidated Net
Assets Managed
Externally
%
2010 74.6%
2011 72.6%
2012 63.2%
2013 53.4%
2014 33.6%
Source: TFG
Figure 1 shows the percentage of TFG's assets managed by external managers. In 2007, at the time of its IPO, all of TFG's assets were invested with external managers. At year end 2014, 34% of TFG's assets were invested in external managers, with the majority of assets now being invested in funds or vehicles where TFG owns all or part of the asset manager (under the umbrella of TFG Asset Management). TFG expects this trend to continue as TFG Asset Management further diversifies and expands. Thus, the amount of fees paid away to external managers should also continue to decline.
In addition to saving fees that were previously paid away (TFG invests its own capital on a preferred-fee basis), TFG Asset Management allows TFG to receive fees from third parties, through its ownership of the asset management businesses. Figure 2 shows the growth in earnings that have derived from TFG Asset Management over the last five years.
Figure 2*
TFG AM Net
Economic
Income Before
Tax ($ MM)
2010 5.3
2011 10.0
2012 14.0
2013 20.2
2014 46.0
Source: TFG. *Please refer to the Financial Highlights section, Figure 22 for a definition of Net Economic Income.
TFG's RoE is the aggregate of both the asset returns and TFG Asset Management, and thus we believe this growth is important to the future RoE of the business as a whole.
We are highlighting this for three further reasons:
- First, NAV or NAV per share may not fully reflect value for asset management businesses (hence our earlier comment that we believe we have created value in 2014 that is not recognised in the 2014 RoE) and thus the value of TFG Asset Management may be greater than its NAV.
- Second, it is the combination of returns on the asset and returns from owning the asset management company that is at the core of our business and a central tenet to our strategy. The two streams are complementary as well as correlated.
- Third, we believe that looking at the business this way makes it easier for investors and analysts to analyse and anticipate returns. Instead of being seen as a "balance sheet with some operating businesses" we can increasingly be seen as "operating businesses supported by a strong balance sheet."
In light of these observations and developments, we present greater information on the asset management business than in previous reports, in order to provide greater clarity on the key drivers of TFG's performance.
Equitix
TFG completed the acquisition of Equitix Holdings Limited on 2 February 2015. The business was purchased (85% by TFG and 15% by existing management) for an enterprise value of £159.5 million, and partially financed by a £60 million bank facility made to the Equitix business.
Whilst well established, Equitix and its asset class are young enough to have, in our view, strong potential for future growth. TFG believes the current management team, together with support from TFG Asset Management, and potentially TFG's capital, is well positioned to continue to build the business.
Other Events
Also in 2014, the Company welcomed Frederic M. Hervouet as a non-executive independent director to the Board of Directors in July. He comes to TFG with over 17 years' experience in financial markets and asset management, and we believe he is a valuable addition to the existing team of independent directors.
In August 2014, the lawsuit filed by Omega Overseas Partners, Ltd. was dismissed in its entirety. We are very pleased to have this lawsuit behind us.
We are also pleased that some of our asset managers have been recognised by industry awards. Polygon hedge funds received three nominations for the 2014 EuroHedge Awards, with the Convertible Opportunity Fund winning the award for the Convertibles & Volatility category, the fund's third win in the last four years, and the Distressed Opportunities Fund nominated in the New Fund of the Year - Macro, Fixed Income, & Relative Value category.[(9)] In addition, GreenOak won the 2014 Real Estate Debt Manager of the Year Award at the Professional Pensions Investment Awards (PPIA).[(10)]
Outlook
We have said in the past that TFG's sustainable return levels should fluctuate with LIBOR, and low LIBOR rates will likely mean lower RoE for TFG. It is worth noting that, as the proportion of CLOs in TFG's portfolio reduces over time, the explicit LIBOR effect could diminish accordingly, although this point is not straightforward as many loans have LIBOR floors. However, notwithstanding this potential reduction in TFG's explicit correlation to LIBOR, as with all financial assets, expected future returns always have an implicit correlation to "risk free" returns (i.e. government bond yields). Thus, with government bond yields at multi-year lows we are commensurately cautious on expectations for investment returns in 2015.
Despite this, there are a few points that should differentiate TFG's outlook. First, nearly all the assets and asset classes in which TFG invests and nearly all of TFG's asset managers are seeking to achieve "absolute" returns as opposed to returns "relative to a financial index"; and to the extent that they achieve this, TFG's aggregate returns should be less affected by fluctuations in major market indices.
Second, as highlighted earlier in this letter, TFG also receives the returns from the asset management businesses it owns. All of these TFG Asset Management businesses have growth plans for 2015 and beyond, and the Company is working hard to deliver value in these businesses, which, to some degree, will be independent of day-to-day financial market volatility.
Lastly, in addition to the existing TFG Asset Management businesses, the Company continues to look for new asset classes and new asset managers to buy, partner with, or grow from scratch. To date, this area of the business has successfully grown over the last few years, and we hope and expect continued progress in building value in this part of TFG.
With Regards,
The Board of Directors
27 February 2015
TETRAGON FINANCIAL GROUP OVERVIEW
Tetragon Financial Group Limited ("TFG") is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG" that aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. TFG's investment objective is to generate distributable income and capital appreciation.
To achieve this objective, 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 the Investment Manager[(11)] to negotiate favourable terms for its investments.
- 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.
Through this investment strategy, TFG has become a diversified alternative asset management business that owns majority and minority stakes in asset managers and uses its balance sheet to invest in, build and grow those businesses.
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 seeks for TFG 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 profits from owning asset management businesses that derive income from external investors. Thus, TFG seeks to use its balance sheet to facilitate the growth of TFG Asset Management to help create value for itself and for TFG shareholders.
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.
TFG's permanent capital base should increase the likelihood of success for this strategy of investing in alternative asset managers and the assets they manage, as its capital is available both for supporting operations of the management businesses and for co-investing, seeding or anchoring new investment funds of the managers. In this sense, TFG is not only an investor, but also a business builder.
By early 2015, TFG's global alternative asset management businesses had approximately $13.0 billion of assets under management (pro forma).[(12)] These businesses consisted of LCM Asset Management ("LCM"), the GreenOak Real Estate ("GreenOak") joint venture, Polygon Global Partners ("Polygon"), and Hawke's Point. TFG finalised the acquisition of Equitix Holdings Limited ("Equitix") in February 2015 and Equitix's AUM is included in the above figure.
Figure 3[(13)]
[Figure 3]
The numbers below show annualised total shareholder return to 31 December 2014, defined as share price appreciation including dividends reinvested, for the last year, the last three years, the last five years, and since the Company's initial public offering in April 2007.
Figure 4
Total Shareholder Return Analysis (Annualised)
1 Year (2014) 5%
3 Years (2012-2014) 23%
5 Years (2010-2014) 27%
From IPO (2007-2014) 7%
Source: Bloomberg TRA function.
LCM
- LCM is a specialist in below-investment grade U.S. senior secured leveraged loans.
- The business was established in 2001 and has offices in New York and London.
- TFG acquired 75% of LCM in 2010 and the remainder in 2012.
- AUM was approximately $5.3 billion at 31 December 2014.
- 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 often four 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 0.50% of total assets, and a performance fee of 20% over a CLO equity IRR hurdle.
- Further information on LCM is available at http://www.lcmam.com.
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, Luxembourg, Madrid, Munich, and Seoul.
- TFG owns 23% of the business and carries it at fair value.
- AUM was approximately $4.4 billion at 31 December 2014.
- 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 2% 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.
- Further information can on GreenOak is available at http://www.greenoakrealestate.com.
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 acquired 100% of the business in 2012.
- AUM was approximately $1.4 billion at 31 December 2014.
- Polygon manages funds focusing on the following strategies: European event-driven equities, global convertible bonds, mining company equities, and distressed securities. Polygon also manages a private equity vehicle comprised of certain illiquid investments. Each fund manager has its own CIO and investment team. Polygon's open-ended funds have capacity levels set which seek to optimize the investment opportunity. The liquidity of these products is calibrated to match the duration of the underlying investments.
- 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%.
- Further information on Polygon is available at http://www.polygoninv.com.
EQUITIX
- Equitix is an integrated core infrastructure asset management and primary project platform.
- Equitix was established in 2007 and is based in London.
- TFG acquired 85% of the business in February 2015; over time, TFG's holding is expected to decline to approximately 74.8%. Management own the balance.
- AUM was approximately $2.0 billion at 31 December 2014.
- Since inception of the business, Equitix has raised over £1.2 billion across four UK-focused funds and managed accounts, investing in sectors including healthcare, education, utility infrastructure, social housing, renewable energy, transport, waste, and accommodation.
- 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 has ranged between 0.95% and 2.0% on invested capital. The core funds also have an additional fee on committed capital of approximately 0.30%.
- Further information on Equitix is available at http://www.equitix.co.uk.
HAWKE'S POINT
- Hawke's Point Resource Finance seeks to provide capital to companies in the mining and resource sectors.
- TFG established Hawke's Point in Q4 2014 and owns 100% of the business.
- Hawke's Point is currently actively evaluating a range of mine financing opportunities.
Board of Directors
TFG's Board of Directors is comprised of six members, four of whom are non-executive independent directors who have significant experience in asset management and financial markets. Biographies of the directors can be found in the appendix.
- Rupert Dorey (Independent Director)
- Frederic Hervouet (Independent Director)
- David Jeffreys (Independent Director)
- Byron Knief (Independent Director)
- Reade Griffith
- Paddy Dear
KEY METRICS
The Company focuses on four key metrics when assessing how value is being created for, and delivered to, TFG shareholders: Earnings, Net Asset Value ("NAV") per share, Dividends, and AUM. Drivers for each of the metrics are discussed in the following sections of the report.
EARNINGS - RETURN ON EQUITY ("RoE")
RoE for the full year was 6.6%, following a stronger Q4 compared to Q3 2014
TFG generated Net Economic Income[(14)] of $118.1 million in 2014, compared with $247.4 million in 2013, a fall of 52% year on year.
Figure 5
Annual Return on Equity
RoE
2007 11.4%
2008 -3.7%
2009 -27.6%
2010 47.7%
2011 36.1%
2012 20.8%
2013 15.3%
2014 6.6%
Average 13.3%
EARNINGS PER SHARE ("EPS")
TFG generated an Adjusted EPS of $1.24 in 2014
After adding $0.26 of EPS in Q4, TFG closed the year with an adjusted EPS[(15)] of $1.24 in 2014 (2013: $2.52).
Figure 6
Adjusted EPS Comparison 2012 - 2014 (USD)
2012 $2.70
2013 $2.52
2014 $1.24
Further information on the drivers of the Company's performance are examined in more detail later in this report.
NAV PER SHARE
Pro Forma Fully Diluted NAV per Share ended the year at $17.05, up 4.2% on the year
- Total NAV for TFG rose to $1,818.5 million by the end of 2014 from $1,803.2 million at the end of 2013, which equated to Pro Forma Fully Diluted NAV per Share[(16)] of $17.05, up from $16.82 in Q3 2014.
- TFG's Fully Diluted NAV per share grew by $0.69 or 4.2% in 2014 after distributing dividends of $0.61 per share during the year.
Figure 7
TFG Consolidated Net Assets ($MM) and Pro Forma Fully Diluted NAV per Share(i)
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
Consolidated
Net Assets
($MM) 1510 1570 1624 1621 1667 1680 1704 1803
NAV / Share
(pro forma
fully
diluted) 13.12 13.75248 14.29 14.65 15.02 15.17 15.49 16.36
Table continues
TFG Consolidated Net Assets ($MM) and Pro Forma Fully Diluted NAV per Share(i)
Q1 2014 Q2 2014 Q3 2014 Q4 2014
Consolidated
Net Assets
($MM) 1784 1809 1804 1818
NAV / Share
(pro forma
fully
diluted) 16.83 17.08 16.82 17.05
(i) Source: NAV per share based on TFG's financial statements as of the relevant quarter-end date. Please note that the pro forma fully diluted NAV per share reported as of each quarter-end date 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 on page 34 for more details.
DIVIDENDS PER SHARE ("DPS")
TFG declared quarterly dividends for 2014 totalling $0.6175 per Share, a 9.3% increase on 2013
- TFG declared a Q4 2014 DPS of $0.1575, up from $0.155 in Q3 2014. On a rolling 12-month basis, the dividend of $0.6175 per share represents a 9.3% increase over the prior year and equated to a dividend yield of 6.2% on the year-end share price of $9.90.
- TFG continues to pursue a progressive dividend policy with a target payout ratio of 30-50% of normalised earnings. The Q4 2014 DPS of $0.1575 brings the cumulative DPS since TFG's IPO to $3.443.
Figure 8
12-month Rolling
DPS Comparison
2012 - 2014
(USD)
2012 $0.470
2013 $0.565
2014 $0.6175
AUM GROWTH
TFG Asset Management grew its total AUM by 20% in 2014 as all business lines added fee-paying capital and ended the year with $11.1 billion of AUM
In addition, as a result of the acquisition of Equitix, TFG Asset Management will start 2015 with an additional $2.0 billion of AUM for a pro forma total of $13.0 billion, which is shown in Figure 9.
Figure 9[(i)]
TFG AM Assets Under Management including pro forma AUM post-Equitix ($MM)
Business 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-14 pro forma
LCM $ 4.3 $ 4.2 $ 5.3 $ 5.3
GreenOak $ 2.3 $ 3.6 $ 4.4 $ 4.4
Polygon $ 1.1 $ 1.4 $ 1.4 $ 1.4
Equitix $ - $ - $ - $ 2.0
Total $ 7.7 $ 9.2 $ 11.1 $ 13.0
(i) GreenOak AUM includes funds and advisory assets managed by GreenOak Real Estate, LP, a separately registered investment adviser under the U.S. Investment Advisers Act of 1940. Polygon AUM includes 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 and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund administrator. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. All data is at 31 December 2014.
2014 YEAR IN REVIEW
RETURNS BY ASSET TYPE AND TFG ASSET MANAGEMENT
Figure 10
Asset Type 2014 Net Assets Income(iv) 2014
($MM) ($MM)
U.S. CLO 1.0(i) 439.8 116.7
U.S. CLO 2.0(i) 258.8 29.7
European CLOs 120.1 22.7
U.S. Direct Loans 22.1 0.6
Hedges(ii) 0.6 (10.6)
Polygon Equity Funds 178.0 (3.2)
Polygon Credit, Convertibles & Distressed Funds 138.0 8.8
Other Equities, Credit, Convertibles & Distressed(iii) 85.0 (27.2)
Real Estate 88.3 10.1
TFG Asset Management 118.3 45.9
(i) "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 investment in the BB tranche of a U.S. CLO 1.0 with fair value of $1.7 million.
(ii) "Hedges" refers to interest rate swaption hedges put in place in relation to certain interest rate risks relating to the CLO portfolio.
(iii) Assets characterised as "Other Equities, Credit, Convertibles, Distressed" consist of the fair value of, or capital committed to, investment assets held directly on the balance sheet.
(iv) TFG Asset Management income figure is "Net Economic Income Before Tax."
Figure 10 above shows the returns by asset type for 2014 and the returns for TFG Asset Management.
- CLOs again made the most significant contribution to EPS, although the CLO 1.0 portfolio continues to amortise down and yields on CLO equity dropped again during 2014.
- Sales of some CLO equity positions generated realised gains in the first half of the year.
- Both real estate investments and investments in Polygon credit and convertible funds generated improved returns year-on-year. The equity-focused investments, both through Polygon funds and directly on the balance sheet, generated losses on the year after a strong year in 2013 and indeed a strong start to 2014.
TFG Asset Management had a positive year in 2014, generating net economic income before tax of $45.9 million, and as a contribution to EPS this represented a 129% increase year-on-year. TFG Asset Management appears to have outperformed in the majority of its funds across asset classes; more details are provided later in this section. Furthermore, all of TFG Asset Management's businesses raised net new AUM during the year and made progress in growing their businesses.
Figure 11
TETRAGON FINANCIAL GROUP
TFG Asset Management Statement of Operations 2013 - 2014
2014 2013
$MM $MM
Fee income(i) 81.1 74.3
Interest income 0.2 0.3
Total income 81.3 74.6
Operating, employee and administrative expenses(i) (58.2) (47.1)
Net income - "EBITDA equivalent" 23.1 27.5
Unrealised gain on asset management stake(iii) 36.3 6.2
Performance fee allocation to TFM (6.7) (6.7)
Amortisation expense on management contracts (6.8) (6.8)
Net economic income before taxes 45.9 20.2
(i) Nets off cost of recovery on "Other fee income" against this cost contained in "Operating, employee, and administrative expenses." Operating costs also removes amortisation expense from the U.S. GAAP segmental report. Fee income includes amounts earned through third-party fee sharing arrangements. It also includes any fees earned through fees paid on investments made by TFG in Polygon hedge funds or other investment vehicles. TFG is able to invest at a preferred level of fees.
(ii) Includes an unrealised gain generated by a recalibration of the fair value of the 23% stake held in GreenOak. For accounting purposes TFG treats this stake as an investment carried at fair value rather than consolidating the underlying net assets and net income of this business.
Figure 11 shows the statement of operations for TFG Asset Management. The asset managers are at different stages of evolution and therefore different stages of profitability.
Revenues:
LCM is a relatively mature and stable business, although it is the Company's opinion that its AUM can continue to grow. 2014 was a very strong year for LCM as many of the older vintage CLOs paid performance fees.
GreenOak is still a young and growing business; and notwithstanding the fact that from a standing start in 2010 they have achieved over $4.0 billion of AUM, by the nature of their business, profits are mainly achieved when the carry is paid, which is normally several years after the initial investments are made.
Within Polygon, each fund operates as a separate entity with different funds at different stages of evolution and profitability. The Convertibles fund had a strong and profitable year and is keeping its capital constrained; European event-driven equities lost money in 2014 and thus did not earn any substantial performance fees; and the Distressed fund is early-stage so, whilst the fund had a good year of performance, TFG will not benefit from fee income until third-party assets are raised, which is planned for 2015.
Hawke's Point is a start up business, and thus losses are likely in the early years as the business is established.
Third-party fees from external managers made another contribution in 2014, albeit lower than in 2013.
Costs:
LCM had higher compensation costs associated with its profitability, as did the Polygon convertibles fund.
Start-up businesses, namely the Polygon distressed fund and Hawke's Point, had costs but no third-party revenues in 2014 as they are in the process of establishing their respective businesses.
Figure 12
TETRAGON FINANCIAL GROUP
Analysis of Net Assets and 2014 Profitability by Business Segment
Net
Economic
Net Asset Income EBITDA
Value Before Tax Equivalent
Business Segment $MM $MM $MM
Investment Portfolio 1,716.6 84.8 N/A
TFG Asset Management (pre-Equitix) 118.3 45.9 23.1
Total 1,834.9 130.7 23.1
EXPOSURE TO ASSET MANAGERS
Given that external managers now only manage 34% of Company assets, the table below has been created to show TFG's exposure to each of TFG Asset Management's underlying asset managers, both in terms of the NAV of TFG monies invested in that asset manager's various funds, and the NAV of the carrying value of TFG's ownership of the asset manager itself. This illustrates a significant accounting difference between GreenOak, where TFG owns 23% and thus holds it on its balance sheet as an investment, and the other asset managers, where TFG owns a majority stake and thus consolidates the earnings and holds the asset at purchase price less amortisation. This is important as it is the combined exposure that is relevant from a risk perspective. In some cases, the NAV of the asset manager may not completely reflect the intrinsic value of the business: for example, under U.S. GAAP, the fair value of the LCM management contracts has amortised to zero since the business was purchased in 2010, whilst its AUM has more than doubled.
Figure 13
TFG Exposure to Asset Managers
TFG Carrying Value Total NAV Percentage
Investments of Asset of
in Products Manager Total NAV
($MM) ($MM) ($MM)
LCM 230 0 230 12.7%
GreenOak 88 66 155 8.5%
Polygon 316 30 346 19.0%
Equitix(i) 0 137 137 7.5%
Hawke's Point 0 0 0 0.0%
Direct Investments(ii) 79 0 79 4.3%
External Managers 617 0 617 33.9%
Cash and Other(i) 233 22 255 14.0%
NAV 1,563 255 1,818 100.0%
(i) Equitix and cash figures are pro forma.
(ii) Adjusted net assets of such investments consists of the fair value of, or capital committed to, investment assets held directly on the balance sheet.
BUSINESS OVERVIEWS
The following pages outline the progress of each business during 2014 in turn.
All data is at 31 December 2014, unless otherwise stated.
LCM
LCM is a specialist in below-investment
grade U.S. broadly-syndicated leveraged
Description of Business: loans.
$230.4 million.
TFG held equity investments with total fair
value of $208.3 million (U.S. CLO 1.0: $36.8
million, U.S. CLO 2.0: $171.5 million) in
LCM-managed CLOs.
LCM additionally manages a portfolio of U.S.
broadly-syndicated leveraged loans held
directly on TFG's balance sheet. At year-end
2014, the fair value of these loans was
Amount of TFG's Investment in Products: $22.1 million.
Carrying Value of Asset Manager: $0.0 million.
AUM: $5.3 billion.
Figure 14
LCM AUM History ($BN)
Q1 2012 $3.7
Q2 2012 $4.1
Q3 2012 $3.9
Q4 2012 $4.3
Q1 2013 $4.5
Q2 2013 $4.3
Q3 2013 $4.3
Q4 2013 $4.2
Q1 2014 $4.8
Q2 2014 $5.1
Q3 2014 $4.9
Q4 2014 $5.3
As in recent years, LCM's U.S. CLO 1.0 transactions continued to
amortise during 2014. Despite this headwind, LCM's total CLO
assets under management increased by approximately 24%
year-over-year, ending 2014 at $5.3 billion, with 12 active CLOs
under management. The LCM-managed CLOs issued during the year
were:
- LCM XV, $600 million, 25 February 2014,
- LCM XVI, $700 million, 19 June 2014, and
- LCM XVII, $400 million, 15 October 2014.
LCM performed well in 2014, with all of LCM's Cash Flow
CLOs[(17)] that were still within their reinvestment periods
continuing to pay senior and subordinated management fees. LCM's
overall Oil & Gas segment loan exposure, which saw volatility
during the fourth quarter, totalled approximately 3.4% of CLO
AUM[(18)] as of 31 December 2014. This level was slightly below
market-wide U.S. CLO exposure to Oil & Gas issuers, which stood
at approximately 3.5% over a comparable period.[(19)] It is
important to note that approximately 88.0% of LCM's CLO AUM at
the end of 2014 consisted of CLO 2.0 transactions within which
total Oil & Gas exposure totalled 3.5% versus 4.0% for all U.S.
post-crisis CLOs.[(20)]
Among other things, LCM typically focuses on the stability of CLO
overcollateralization ("O/C") levels and minimizing loan asset
defaults and losses. For example, during 2014, no loans defaulted
within any LCM Cash Flow CLOs (see page 44 for portfolio default
rate information). This compares to a 12-month default rate of
3.2% for the broader U.S. leveraged loan market, according to
S&P/LCD.[(21)] More importantly, the highest 12-month default
rate incurred by LCM-developed and managed CLOs since its
founding in 2001 was 1.9%, at year-end 2009.[(22)] This compares
to the broader U.S. market level of 10.8% which was reached
during Q4 2009.[(23)] TFG believes that LCM's default loss
outperformance versus its peers may differentiate it from many
other U.S. CLO managers, especially those without track records
spanning multiple credit cycles, and thus should allow LCM to
Performance in 2014: continue to raise CLO assets.
GREENOAK
Description of GreenOak is a real-estate focused principal investing and
Business: advisory firm.
Amount of TFG's
Investment in
Products: $88.3 million.
$66.5 million. The fair value of TFG's holding in the
GreenOak joint venture is determined primarily by reference
to a private equity-style valuation framework in which a
range of multiples is applied to GreenOak's projected
earnings (EBITDA). The range for 2014 was 7-11 x and the
selected point was the 65th centile in the range. This
Carrying Value of resulted in an increase in fair value from $34.1 million in
Asset Manager: Q2 2014 to $66.5 million at year-end 2014.
AUM: $4.4 billion.
Figure 15
GreenOak AUM History[(i)]($BN)
Q1 2012 $1.7
Q2 2012 $1.7
Q3 2012 $1.9
Q4 2012 $2.3
Q1 2013 $3.0
Q2 2013 $3.2
Q3 2013 $3.6
Q4 2013 $3.6
Q1 2014 $4.1
Q2 2014 $3.9
Q3 2014 $4.2
Q4 2014 $4.4
(i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2014. TFG owns a 23% stake in GreenOak. AUM include all third-party interests and total projected capital investment costs.
During 2014, GreenOak completed its fundraising for its U.S. Fund II ahead of its target, launched a new Spain fund, continued to raise assets for its UK debt fund, and began raising assets for its second Japan fund. To date, GreenOak has raised approximately $2.6 billion of equity to invest in targeted strategies and assets.
Figure 16
Investment Period Equity Raised(i) ($MM)
United States
Fund I & Co-Investments 2011-2013 356
Fund II & Co-Investments 2014 - Present 865
Other 2012 82
U.S. Sub-Total 1,303
Japan
Fund I & Co-Investments 2012 - Present 325
Fund II closings to date 2015 105
Other 2011, 2013 7
Japan Sub-Total 437
Europe
Fund I Spain closings to date 2014 - Present 215
Spain Separate Account 2013 86
London Investment Program 2012 - 2013 271
European Credit 2013 - 2014 330
Europe Sub-Total 902
TOTAL 2,642
(i) Source: GreenOak, as of 31 December 2014. Includes assets previously purchased by GreenOak but have been monetized.
GreenOak continued to execute on its business strategy during
2014.
In the United States, U.S. Fund II had its final closing in
September 2014, with total capital commitments of over $750
million. During the year, it completed eight investments of over
$900 million in gross assets.
In Europe, GreenOak launched its Spain Fund in October 2014 and
has closed EUR175 million of investor capital commitments to
date. The UK Senior Debt Fund has closed GBP196 million to date.
In Japan, GreenOak invested over $600 million in gross assets and
approximately $150 million in equity. It also generated over $50
million of profits for Japan Fund I via asset sales.
GreenOak won the 2014 Real Estate Debt Manager of the Year Award
Performance in 2014: at the Professional Pensions Investment Awards (PPIA).[(24)]
POLYGON
Polygon manages
open-ended hedge
fund and private
equity vehicles
across a number of
Description of Business: strategies.
Amount of TFG's Investment in Products: $315.9 million.
Carrying Value of Asset Manager: $29.7 million.
$1.4 billion for
all funds; $1.1
billion for open
AUM: strategies.
Figure 17
Polygon Hedge Funds Assets Under Management History ($MM)
(Convertibles, European Event-Driven Equity, Mining Equities,
Distressed, Other Equity)
Q1 2012 $452
Q2 2012 $451
Q3 2012 $448
Q4 2012 $529
Q1 2013 $605
Q2 2013 $624
Q3 2013 $686
Q4 2013 $855
Q1 2014 $930
Q2 2014 $1,094
Q3 2014 $1,149
Q4 2014 $1,113
Performance for the hedge fund industry as a
whole was generally muted in 2014, with
returns for the HFRX Global Hedge Fund Index
at 0.58% for the year.[(25)] Against this
backdrop, all Polygon funds had positive net
performance for the year, with the exception
of the European event-driven equity strategy.
Further details for each strategy are outlined
Performance in 2014: over the next few pages.
Figure 18[(26)]
Polygon Funds Summary
AUM at 31 Dec
2014 2014 Annualised Net
Net
Fund ($MM) Performance LTD Performance
Convertibles[(26].[i)] $ 413.0 13.9% 19.4%
European Event-Driven
Equity[(26].[ii)] $ 516.0 -3.2% 11.4%
Mining Equities[(26].[iii)] $ 66.7 1.5% 2.2%
Distressed Opportunities[(26].[iv)] $ 95.4 8.3% 9.4%
Other Equity[(26].[v)] $ 22.4 21.1% 18.0%
Total AUM - Open Funds $ 1,113.5
Private Equity Vehicle[(26].[vi)] $ 304.0 -7.8% 2.6%
Total AUM $ 1,417.5
(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 2014. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited.
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. P&L for the Private Equity Vehicle was -$19.5 million in 2014, of which FX movements accounted for $19.0 million. 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. 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. All performance numbers provided herein reflects 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.
- Polygon's convertibles strategy invests primarily in
convertible securities in Europe and North America.
- During 2014, the portfolio performed strongly with
2014 net performance of 13.9%, compared to the HFRX
Convertible Arbitrage Index which returned -9.35% for
the year; annualised net performance since inception
in May 2009 has been 19.4% compared to 6.0% for the
benchmark index.[(27)]
- The strategy received two nominations for 2014
EuroHedge Awards, winning the Convertibles &
Volatility category, the third win in the last four
years. It was also nominated for the Long-Term
Performance - Macro, Fixed Income & Relative Value (5
years) category for the first time.[(28)]
Convertibles:
- This strategy invests primarily in the major
European equity markets, with an event-driven focus.
- The strategy returned -3.2% net in 2014. This
compares to the HFRX Event Driven Index which returned
-4.1% in 2014; annualised net performance since
inception in July 2009 has been 11.4% compared to 3.4%
for the benchmark index.[(29)]
European Event-Driven Equity:
- This strategy focuses primarily in the equities of
global mining companies, many of them based on gold.
- The strategy posted net returns of 1.5% for 2014.
This compares to the GDXJ Junior Gold Miners Index,
which was down -22.9% in 2014; annualised net
performance since inception in June 2012 has been 2.2%
compared to -36.5% for the benchmark index.[(30)]
Mining Equities:
- This strategy focuses on opportunities in companies
undergoing, or about to undergo, balance sheet
restructurings. The strategy was launched in September
2013 and the product continued to build out its
portfolio of idiosyncratic names and began to market
to external investors during Q4 2014.
- Net performance in 2014 was 8.3%. This compares to
the HFRX Distressed Restructuring Index, which
returned 0.48% in 2014.[(31)]
- The strategy received a nomination for New Fund of
the Year - Macro, Fixed Income, & Relative Value
category at the 2014 EuroHedge Awards.[(32)]
Distressed Opportunities:
- Assets under management in this category were $22.4
million at 31 December 2014.
- These investments have returned 21.1% net
performance through the end of 2014 and annualised
performance from inception through to the end of 2014
was 18.0%.[(33)]
Other Equities:
- This represents Polygon's portfolio of private and
less-liquid public assets being sold down in a
closed-ended investment vehicle. The fund has returned
$515.0 million of cash to its partners since inception
in March 2011, including $160.0 million in 2014.
Performance in 2014 was mainly driven by foreign
exchange moves, with approximately $19.0 million of
the -$19.5 million investment return attributable to
FX.[(34)] TFG has not invested directly in this
product; however, it is the beneficiary of certain
contracted management fee income.
Private Equity:
EQUITIX
Equitix is an integrated core infrastructure
Description of Business: asset management and primary project platform.
Amount of TFG's Investment in Products: $0.0 million.
$0.0 million at 31 December 2014;
approximately $137.0 million (net of
Carrying Value of Asset Manager: financing) at 2 February 2015.
AUM: $2.0 billion (GBP1.3 billion) (pro forma)
Figure 19
AUM at
Fund Name 31 December 2014 ($MM)[(i)]
Equitix Fund I 162
Equitix Fund II 519
Equitix Fund III 787
Energy Efficiency Funds 343
Managed Accounts 156
Total Equitix AUM 1,966
(i) USD-GBP exchange rate at 31 December 2014.
Given the recent closure of the acquisition, TFG will report on
updates to any investments and developments in the business over
Performance in 2014: the coming quarters.
HAWKE'S POINT RESOURCE FINANCE
Description
of Hawke's Point is a mining finance company established by TFG in Q4
Business: 2014.
Amount of
TFG's
Investment in As this is a start-up business, there are not yet any investments on
Products: which to report.
Carrying
Value of
Asset
Manager: $0.0 million.
EXTERNAL MANAGERS
External managers (primarily third-party CLO
Description of Business: managers).
$616.7 million of which the major exposures
are: U.S. CLO 1.0: $401.4 million, U.S. CLO
2.0: $87.2 million, European CLO: $120.1
million. In certain cases, TFG Asset
Management receives asset management fee
income derived from one-off and long-term fee
sharing arrangements with third-party CLO
Amount of TFG's Investment in Products: managers.
Carrying Value of Asset Manager: Not applicable.
AUM: Not applicable.
TFG's third-party-managed U.S. CLO 1.0 and 2.0
equity investments performed well during 2014,
with all such CLOs passing their O/C tests as
of the end of 2014.[(35)] The Company believes
that it took advantage of supportive credit
and technical loan market conditions to direct
certain early optional redemptions, while
other transactions continued to reinvest into
loan assets and generate strong equity tranche
cash flows. In aggregate, TFG's
third-party-managed U.S. CLO equity
investments generated cash flow of $267.6
million in 2014.
TFG's European CLO equity investments totalled
$120.1 million at the end of 2014, with all
such CLOs managed by third parties. All
European CLO investments were passing their
O/C coverage tests at year-end.[(36)] During
2014, this portfolio segment generated cash
Performance in 2014: flow of EUR33.5 million.
DIRECT BALANCE SHEET / CO-INVESTMENT OPPORTUNITIES
- Whilst TFG's Investment Manager does not make investment decisions at the various TFG Asset Management affiliated managers, it does sit on the various investment committees, and, in addition to investing in various funds, it also gets opportunities to make co-investments or additional investments. TFG may invest in opportunities directly from its balance sheet rather than through, for example, investments in other funds or collective investment schemes, when the Investment Manager sees an opportunity that fits its investment criteria, particularly where the structuring ability and the Company's long duration capital may give it a potential investment advantage. In some cases, TFG may also have exposure to the investment indirectly through fund investments.
- The net assets of this part of the portfolio at the end of 2014 were $78.8 million.[(37)] The vast majority of this is invested in publicly quoted equities.
- This segment of the portfolio experienced losses in 2014, primarily from European equity-related investments.
CASH
- As of the end of 2014, TFG continued to have no long-term debt. Investible Cash[(38)] grew over the year from approximately $218.8 million to $352.9 million, as the Company preserved cash in anticipation of funding certain investments, including the acquisition of Equitix.
- Cash flows from operations remained strong, with cash flows from operations reaching $290.4 million in 2014.
BALANCE SHEET COMPOSITION OVERVIEW
The Investment Manager seeks to invest TFG's capital in a manner consistent with the Company's goal of providing stable returns to its investors across various credit, equity, interest rate, inflation and real estate cycles. Given the long duration of many of the Company's assets, TFG's asset allocation methodology is not a fully dynamic, continuous process of risk adjustment, but is rather an evolution and diversification of income streams. The Investment Manager seeks to balance not just the risks and rewards of various asset classes, but also the risks and rewards of each asset manager that it owns.
2014 Net Asset Composition Review
Figures 20 and 21 illustrate the composition of TFG's net assets as of the end of 2014 and 2013. During the course of 2014, the Company's asset composition evolved in a manner consistent with recent historical trends and its intended asset allocation strategy.
- Key changes included continued reductions in the concentration of U.S. 1.0 and European CLOs, and growth in the share of U.S. 2.0 CLOs, real estate assets, and credit, convertible, and distressed investments.
- The decline in the share of U.S. 1.0 and European CLO transactions reflected post-reinvestment period structural de-leveraging of these transactions as well as selective early optional redemptions and outright secondary sales.
- Conversely, growth in the share of U.S. 2.0 CLOs, real estate assets, and credit, convertible, and distressed investments reflected additional investments into these asset classes (see details below).
- Additionally, the 2014 year-end Investible Cash balance grew both in absolute terms and as a percentage of total Net Assets. A significant share of this cash balance has been applied to the acquisition of Equitix post year-end.
Figure 20
TFG Net Asset Breakdown 2013-2014
2013 2014
U.S. CLO 1.0 41.0% 24.2%
U.S. CLO 2.0 11.0% 14.2%
Euro CLOs 10.2% 6.6%
U.S. Direct Loans 1.9% 1.2%
Hedges 0.5% 0.0%
Polygon Equity Funds 10.0% 9.8%
Polygon Credit, Convertible & Distressed Funds 4.7% 7.6%
Other Equity, Credit, Convertibles & Distressed (ii) 2.2% 4.7%
Real Estate 3.4% 4.9%
TFG Asset Management 5.4% 6.5%
Net Investible Cash (i) 9.7% 20.3%
Total 100.0% 100.0%
(i) Net Investible 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 of "Other Net Assets."
(ii) 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.
Figure 21
[Figure 21]
(i) Investible 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.
(ii) 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.
2014 Major New Investments
- U.S. 2.0 CLOs: In 2014, TFG acquired majority equity positions in three LCM-managed CLOs for a total cost of $84.3 million.
- Real estate: During 2014, TFG invested $77.0 million into GreenOak-managed real estate funds and vehicles primarily with exposure to commercial real estate in Tokyo, London, Spain, and gateway U.S. cities.
- Polygon credit, convertible and distressed funds: During 2014, TFG invested $45.0 million into Polygon-managed credit, convertible and distressed funds.
- Equitix: In October 2014, TFG announced a proposed acquisition of 85%[(39)] of Equitix Holdings Limited for a total enterprise value of £159.5 million, which was partially financed by a £60 million bank facility made to Equitix. The acquisition was completed on 2 February 2015.
2014 Major Asset Sales and Optional Redemptions
- U.S. 1.0 CLOs: During 2014, TFG sold eight U.S. CLO 1.0 transactions for total proceeds of $146.2 million. In addition, TFG exercised its optional call rights on five U.S 1.0 CLOs, generating unwind proceeds of $38.2 million to date. Certain of these transactions have not yet liquidated all of their underlying assets and the Company expects to receive additional proceeds from these redemptions in 2015.
- European CLOs: TFG sold one European CLO in the first half of 2014 for proceeds of €18.4 million. In addition, TFG initiated an optional early redemption of one European CLO late in 2014, which generated partial unwind proceeds of €4.7 million in January 2015 and which is expected to complete the unwind process during the remainder of the year.
TFG IN THE COMMUNITY
TFG believes that being a good citizen is an important part of doing business. It aims to contribute positively to the communities around it by participating in the following initiatives:
- TFG Asset Management is the largest contributor to BACIT Limited (the Battle Against Cancer Investment Trust) a UK-based charitable investment vehicle. BACIT only invests where the relevant investment manager provides investment capacity on a ''gross return'' basis, meaning that BACIT and its subsidiaries (the "Group") do not bear the impact of management or performance fees on its investments. This may be achieved by the relevant manager or fund agreeing not to charge management or performance fees, by rebating or donating back to the Group any management or performance fees charged or otherwise arranging for the Group to be compensated so as effectively to increase its investment return on the relevant investment by the amount of any such fees. BACIT does not charge its investors fees. However, it donates 1% of NAV each year to charity (50% to The Institute of Cancer Research and 50% to The BACIT Foundation). In addition, BACIT also intends to invest up to one per cent per annum of NAV to acquire interests in drug development and medical innovation projects undertaken by the Institute of Cancer Research or its subsidiaries in the field of cancer research and therapeutics which have the potential for commercial development and application. Further information on this initiative can be found on BACIT's website, http://www.bacitltd.com.
- TFG Asset Management also supports Hedge Funds Care │Help for Children, a charity for the prevention and treatment of child abuse. Hedge Funds Care, also known as Help For Children (HFC), is an international charity, supported largely by the hedge fund industry, whose sole mission is preventing and treating child abuse. Its main goals are to raise as much money as possible to fund the programs that do the preventing and treating of child abuse; and to showcase the philanthropy of the hedge fund and finance industries. Further information can be found at http://www.hfc.org.
- In addition, TFG Asset Management is a corporate supporter of the Royal Court Theatre, its neighbour in London. The Royal Court bills itself as "the writer's theatre" and has a particular mission to develop and cultivate new theatrical works from established and budding playwrights. Corporate sponsorships such as ours enable the Royal Court to support and develop exciting new plays. Further information can be found at http://www.royalcourttheatre.com.
2014 FINANCIAL REVIEW
This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), and provides comparative data where applicable.[(40)]
FINANCIAL HIGHLIGHTS
Figure 22
TETRAGON FINANCIAL GROUP
Financial Highlights 2012 - 2014
2014 2013 2012
U.S. GAAP net income ($MM) $95.1 $224.3 $357.2
Net economic income ($MM) $118.1 $247.4 $306.2
U.S. GAAP EPS $1.00 $2.29 $3.15
Adjusted EPS $1.24 $2.52 $2.70
Return on equity 6.6% 15.3% 20.8%
Net assets ($MM) $1,818.5 $1,803.2 $1,621.4
U.S. GAAP number of shares outstanding (MM) 95.9 98.9 98.8
U.S. GAAP NAV per share $18.96 $18.23 $16.41
Pro Forma number of shares outstanding (MM) 106.6 110.2 110.6
Pro Forma fully diluted NAV per share $17.05 $16.36 $14.65
DPS $0.6175 $0.565 $0.470
TFG uses, among others, the following metrics to understand the progress and performance of the business:
- Net Economic Income ($118.1 million): adds back to the U.S. GAAP net income ($95.1 million) the imputed 2014 share based employee compensation ($23.0 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction.
- Return on Equity (6.6%): Net Economic Income ($118.1 million) divided by Net Assets at the start of the year ($1,803.2 million).
- Pro Forma Fully Diluted Shares (106.6 million): adjusts the U.S. GAAP shares outstanding (95.9 million) for the impact of escrow shares used as consideration in the Polygon transaction and associated stock dividends (10.7 million).
- Adjusted EPS ($1.24): calculated as Net Economic Income ($118.1 million) divided by weighted-average U.S. GAAP shares[(i)] during the period (95.4 million).
- Pro Forma Fully Diluted NAV per Share ($17.05): calculated as Net Assets ($1,818.5 million) divided by Pro Forma Fully Diluted shares (106.6 million).[(41)]
(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.
EPS ANALYSIS 2013-2014
Figure 23
TETRAGON FINANCIAL GROUP
TFG Earnings per Share Analysis (2012 - 2014)
2014 2013 2012
Investment portfolio segment
U.S. CLO 1.0 $1.23 $1.74 $3.29
U.S. CLO 2.0 $0.31 $0.23 $0.14
European CLOs $0.24 $0.89 $0.22
Hedges ($0.11) $0.07 ($0.05)
Other income $0.01 $0.04 $0.08
Polygon Equity Funds ($0.03) $0.20 $0.01
Polygon Credit, Convertibles & Distressed Funds $0.09 $0.04 $0.00
Other Equities, Credit, Convertibles, Distressed ($0.28) $0.10 $0.00
Real Estate $0.11 $0.03 $0.00
FX and Options ($0.04) $0.03 ($0.01)
Expenses ($0.64) ($0.97) ($1.07)
Net EPS investment portfolio $0.89 $2.40 $2.61
Asset Management Segment - TFG AM $0.48 $0.21 $0.12
Corporate Income taxes ($0.13) ($0.09) ($0.03)
Adjusted EPS $1.24 $2.52 $2.70
Weighted Average Shares (millions) 95.4 98.0 113.3
STATEMENT OF OPERATIONS
Figure 24
TETRAGON FINANCIAL GROUP
Annual Statement of Operations 2012 - 2014
2014 2013 2012
$MM $MM $MM
Interest income 152.5 204.8 235.6
Fee income 81.1 74.3 36.7
Other income - cost recovery 23.6 21.1 6.8
Dividend income 0.1 0.1 -
Investment income 257.3 300.3 279.1
Management and performance fees (49.8) (90.0) (109.8)
Other operating and administrative expenses (107.3) (84.8) (42.6)
Total operating expenses (157.1) (174.8) (152.4)
Net investment income 100.2 125.5 126.7
Net change in unrealised appreciation in investments (48.8) 105.1 186.3
Realised gain on investments 91.8 16.0 5.3
Realised and unrealised gains/(losses) from hedging and fx (12.5) 9.6 (6.8)
Net realised and unrealised gains from investments and fx 30.5 130.7 184.8
Net economic income before tax and noncontrolling interest 130.7 256.2 311.5
Income tax (12.6) (8.8) (3.6)
Noncontrolling interest - - (1.7)
Net economic income 118.1 247.4 306.2
Performance Fee
A performance fee of $4.1 million was accrued in Q4 2014 in accordance with TFG's investment management agreement. In 2014, the Investment Manager earned performance fees of $22.8 million. The hurdle rate for the Q1 2015 incentive fee has been reset at 2.903458% (Q4 2014: 2.880458%) as per the process outlined in TFG's 2014 audited financial statements and in accordance with TFG's investment management agreement. Please see TFG's website, http://www.tetragoninv.com, and the 2014 TFG audited financial statements for more details on the calculation of this fee.
STATEMENT OF OPERATIONS BY BUSINESS SEGMENT
Figure 25
TETRAGON FINANCIAL GROUP
Statement of Operations by Segment 2014
Investment
Portfolio TFG AM Total
$MM $MM $MM
Interest income 152.3 0.2 152.5
Fee income - 81.1 81.1
Other income - cost recovery - 23.6 23.6
Dividend income 0.1 - 0.1
Investment and management fee income 152.4 104.9 257.3
Management and performance fees (43.1) (6.7) (49.8)
Other operating and administrative expenses (18.6) (88.7) (107.3)
Total operating expenses (61.7) (95.4) (157.1)
Net change in unrealised appreciation in investments (85.2) 36.4 (48.8)
Realised gain on investments 91.8 - 91.8
Realised and unrealised losses from hedging, fx and options (12.5) - (12.5)
Net realised and unrealised gains from investments and fx (5.9) 36.4 30.5
Net economic income before tax 84.8 45.9 130.7
BALANCE SHEET
Figure 26
TETRAGON FINANCIAL GROUP
Balance Sheet as at 31 December 2014 and 31 December 2013
2014 2013
$MM $MM
Assets
Investments, at fair value 1,356.2 1,533.0
Management contracts 29.7 36.5
Cash and cash equivalents 402.0 245.9
Amounts due from brokers 52.1 42.0
Derivative financial assets 19.2 15.2
Property, plant and equipment 0.1 0.3
Deferred tax asset and income tax receivable 10.0 8.3
Other receivables 33.4 26.5
Total assets 1,902.7 1,907.7
Liabilities
Other payables and accrued expenses 54.5 79.8
Amounts payable on share options 12.3 10.7
Deferred tax liability and income tax payable 11.5 10.7
Derivative financial liabilities 5.9 3.3
Total liabilities 84.2 104.5
Net assets 1,818.5 1,803.2
STATEMENT OF CASH FLOWS
Figure 27
TETRAGON FINANCIAL GROUP
Statement of Cash Flows 2012 - 2014
2014 2013 2012
$MM $MM $MM
Operating Activities
Operating cash flows after incentive fees and before movements
in working capital 290.9 375.6 368.2
Purchase of fixed assets (0.1) (0.4) -
Change in payables / receivables (0.4) 2.7 13.0
Cash flows from operating activities 290.4 377.9 381.2
Investment Activities
Proceeds on sales of investments
- Proceeds sale of CLOs 171.5 - 0.2
- Net proceeds from derivative financial instruments - 8.1 2.0
- Proceeds sale of bank loans and maturity and prepayment of
investments 17.3 102.6 84.6
- Proceeds on realisation of real estate investments 56.3 11.5 2.3
- Proceeds from GreenOak working capital repayment 5.1 - -
Purchase of investments
- Purchase of CLOs (84.3) (73.1) (113.2)
- Purchase of bank loans (1.4) (22.4) (90.1)
- Purchase of real estate investments (77.0) (43.5) (23.5)
- Investments in asset managers - (0.5) (2.7)
- Investments in Polygon Equity Funds - (115.0) (45.0)
- Investments in Polygon Credit, Convertibles and Distressed
Funds (45.0) (70.0) (10.0)
- Investments in Other Equities, Credit, Convertibles and
Distressed (33.8) (10.9) -
- Net payment or purchase of derivative financial instruments (28.8) - (8.3)
Cash flows from operating and investing activities(i) 270.3 164.7 177.5
Amounts due from broker (10.2) (28.9) 2.7
Net purchase of shares (44.5) (11.7) (164.1)
Dividends paid to shareholders (58.4) (53.9) (50.3)
Distributions paid to noncontrolling interest - - (1.8)
Cash flows from financing activities (113.1) (94.5) (213.5)
Net increase in cash and cash equivalents 157.2 70.2 (36.0)
Cash and cash equivalents at beginning of period 245.9 175.9 211.5
Effect of exchange rate fluctuations on cash and cash
equivalents (1.1) (0.2) 0.4
Cash and cash equivalents at end of period 402.0 245.9 175.9
(i) The 2014 figure reconciles to the U.S. GAAP Statement of Cash flows, "net cash provided by operating activities" figure of $321.8 million, adjusted for "dividends paid to Feeder in lieu of incentive fee liability" ($51.5 million).
NET ECONOMIC INCOME TO U.S. GAAP RECONCILIATION
Figure 28
Net Economic Income to U.S. GAAP Reconciliation
2014
$MM
Net economic income 118.1
Share based employee compensation (23.0)
U.S. GAAP net income 95.1
TFG is primarily reporting earnings through a non-GAAP measurement called Net Economic Income.
The reconciliation on the table above shows the adjustment required to get from this measure of earnings to U.S. GAAP net income.
For the year ended 31 December 2014, the only adjusting line item is share-based employee compensation of $23.0 million.
Under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as employee compensation over the period in which they are vesting. This mechanic and future vesting schedule are described in more detail in the Master Fund audited financial statements for the year ended 31 December 2014.
APPENDICES
APPENDIX I
DIRECTORS' STATEMENTS
The Directors of TFG confirm that (i) this Annual Report constitutes the TFG management review for the year ended 31 December 2014 and contains a fair review of that period and (ii) the 2014 audited financial statements accompanying this Annual Report for TFG have been prepared in accordance with applicable laws and in conformity with U.S. generally accepted accounting principles.
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 potentially 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.
Forward-looking CLO equity cash flow modelling assumptions unchanged at the end of Q4 2014:
The Investment Manager reviews and, when appropriate, adjusts in consultation with TFG's audit committee the CLO equity investment portfolio's modelling assumptions as described above. At the end of 2014, certain key assumptions relating to defaults, recoveries, prepayments and reinvestment prices were unchanged from the previous quarter. This was the case across both U.S. and European deals.
These key average assumption variables include the modelling assumptions disclosed as a weighted average (by U.S. dollar amount) of the individual deal assumptions, aggregated by geography (i.e. U.S. and European). Such weighted averages may change from month to month due to movements in the amortised costs of the deals, even without changes to the underlying assumptions. Each individual deal's assumptions may differ from this geographical average and vary across the portfolio.
The reinvestment price, assumptions about reinvestment spread and reinvestment life are also input into the model to generate an effective spread over LIBOR. Newer vintage CLOs may have a higher weighted-average reinvestment spread over LIBOR or shorter reinvestment life assumptions than older deals. Across the entire CLO portfolio, for those deals still in their reinvestment periods, the reinvestment price assumption of 100% for U.S. deals and European deals with their respective assumed weighted-average reinvestment spreads, generates an effective spread over LIBOR of approximately 294 bps on broadly syndicated U.S. loans. All middle market loan deals and European Loan deals are through the end of their reinvestment periods.
Figure 29
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 30
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 68%
Prepayment Rate
Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price
Until deal maturity 100%
Application of Discount Rate to Projected CLO Equity Cash Flows: U.S. CLO 1.0 Equity - discount rates unchanged
In determining the applicable rates to use to discount projected cash flows, an analysis of observable risk premium data is undertaken. For U.S. CLOs, observable risk premia such as BB and BBB CLO tranche spreads have been extremely stable at the current low levels.
For example, according to Citibank research, BB spreads were unchanged at 5.0% at the end of Q4 2014, compared with Q3 2014.
Market related information, such as broker research and bid lists, also tended to support the view that discount rates or yields had remained stable. Taking into account, among other things, the factors outlined above, this discount rate has been maintained at 12%.
European CLO Equity - discount rates unchanged
According to Citibank research, at the end of Q4 2014, European CLO 1.0 BB spreads were 5.9%, which was broadly unchanged on the end of the previous quarter end. At these levels, they are only 0.9% higher than the U.S. CLO 1.0 BB spreads (see above) and reflect a sustained compression of spreads between Europe and the U.S. over the last few quarters and maintaining a discount rate of 13% is consistent with this. The observable range of European risk premia over the U.S. equivalent, among other factors, will continue to be monitored in coming quarters.
U.S. CLO 2.0 Equity - seasoned deals now discounted at a standard rate of 11%; other deals discounted using deal IRR
The applicable discount rate for newer vintage deals has historically been determined with reference to each deal's specific IRR which, in the absence of other consistently available observable data points, was deemed to be the most appropriate indication of the current risk premium. In recent quarters, there has been an improved level of transparency and consistency of data available with respect to U.S. CLO 2.0 deals. Taking this into account, effective Q4 2014, seasoned CLO 2.0 deals (more than 12 months post purchase) will be discounted using a single generic rate, mirroring the approach for the 1.0 deals. Based on observable data for this sub-asset class as a whole, a rate of 11.0% has been determined to be the applicable rate. The deals affected by this change had a weighted average IRR of 11.4% at the end of Q4 2014, so moving to a generic discount rate of 11% has increased fair value by $2.2 million. For deals that were purchased within the last 12 months, the weighted average IRR was 13.1% at year-end. The Company will continue to monitor observable data on these newer vintage transactions in the coming quarters.
APPENDIX III
ADDITIONAL CLO PORTFOLIO STATISTICS
Each individual deal's metrics used in the calculation of the figures below will differ from the overall averages and vary across the portfolio.
Figure 31
[Figure 31]
Figure 32
[Figure 32]
(i) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a "Selective Default" rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes approximately 15.6% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate.
(ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date.
Figure 33
CLO PORTFOLIO CREDIT QUALITY
ALL CLOs Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+
or Below
Obligors: 3.3% 4.5% 3.7% 4.6% 5.4% 4.9% 5.0%
WARF: 2,442 2,554 2,621 2,565 2,542 2,553 2,568
U.S. CLOs Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+
or Below
Obligors: 2.5% 4.4% 3.0% 3.4% 3.8% 3.9% 4.1%
WARF: 2,347 2,489 2,556 2,544 2,513 2,534 2,550
EUR CLOs Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013
Caa1/CCC+
or Below
Obligors: 6.5% 4.8% 6.9% 9.4% 11.8% 9.1% 8.7%
WARF: 2,826 2,819 2,894 2,650 2,658 2,631 2,642
Table continues
ALL CLOs 2013 2012 2012 2012 2012
Caa1/CCC+
or Below
Obligors: 5.1% 6.0% 6.4% 5.7% 6.2%
WARF: 2,541 2,599 2,605 2,578 2,588
U.S. CLOs 2013 2012 2012 2012 2012
Caa1/CCC+
or Below
Obligors: 4.0% 4.5% 4.9% 4.2% 4.8%
WARF: 2,510 2,524 2,528 2,491 2,504
EUR CLOs 2013 2012 2012 2012 2012
Caa1/CCC+
or Below
Obligors: 9.7% 11.7% 12.2% 11.6% 11.1%
WARF: 2,670 2,896 2,903 2,910 2,900
CLO EQUITY PORTFOLIO DETAILS
AS OF 31 DECEMBER 2014
Figure 34
CLO Equity Portfolio Details
As of 31 December 2014
Original Deal End of Wtd Avg Original
Invest. Cost Closing Year of Reinv Spread Cost of Funds
Transaction(i) Deal Type ($MM USD)(ii) Date Maturity Period (bps)(iii) (bps)(iv)
Transaction 1 EUR CLO 37.5 2007 2024 2014 378 55
Transaction 2 EUR CLO 29.7 2006 2023 2013 395 52
Transaction 3 EUR CLO 22.2 2006 2022 2012 394 58
Transaction 4 EUR CLO 33.0 2007 2023 2013 399 48
Transaction 5 EUR CLO 36.9 2007 2022 2014 396 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 389 51
Transaction 7 EUR CLO 38.5 2007 2023 2013 387 46
Transaction 8 EUR CLO 26.9 2005 2021 2011 396 53
Transaction 10 EUR CLO 27.0 2006 2022 2012 377 50
Transaction 86 EUR CLO 3.6 2006 2022 2012 377 50
EUR CLO Subtotal: 288.6 390 52
Transaction 11 US CLO 20.5 2006 2018 2012 297 45
Transaction 12 US CLO 22.8 2006 2019 2013 326 46
Transaction 13 US CLO 15.2 2006 2018 2012 304 47
Transaction 14 US CLO 26.0 2007 2021 2014 334 49
Transaction 15 US CLO 28.1 2007 2021 2014 398 52
Transaction 16 US CLO 23.5 2006 2020 2013 367 46
Transaction 17 US CLO 26.0 2007 2021 2014 307 40
Transaction 18 US CLO 16.7 2005 2017 2011 284 45
Transaction 19 US CLO 1.2 2005 2017 2011 284 45
Transaction 20 US CLO 26.6 2006 2020 2012 384 52
Transaction 21 US CLO 20.7 2006 2020 2012 367 53
Transaction 22 US CLO 37.4 2007 2021 2014 386 53
Transaction 24 US CLO 16.9 2006 2018 2012 356 46
Transaction 25 US CLO 20.9 2006 2018 2013 377 46
Transaction 26 US CLO 27.9 2007 2019 2013 399 43
Transaction 29 US CLO 19.1 2005 2018 2011 475 66
Transaction 30 US CLO 12.4 2006 2018 2012 385 67
Transaction 32 US CLO 24.0 2007 2021 2014 307 59
Transaction 33 US CLO 16.2 2006 2020 2012 360 56
Transaction 34 US CLO 22.2 2006 2020 2012 358 50
Transaction 36 US CLO 28.4 2007 2021 2013 355 46
Transaction 38 US CLO 23.7 2007 2021 2013 297 42
Transaction 40 US CLO 13.0 2006 2020 2011 361 39
Transaction 44 US CLO 22.3 2006 2018 2012 107 54
Transaction 45 US CLO 23.0 2006 2018 2012 260 46
Transaction 46 US CLO 21.3 2007 2019 2013 284 51
Transaction 47 US CLO 28.3 2006 2021 2013 329 47
Transaction 49 US CLO 12.6 2005 2017 2011 - 40
Transaction 50 US CLO 12.3 2006 2018 2012 - 40
Transaction 56 US CLO 23.0 2007 2019 2014 337 42
Transaction 57 US CLO 0.6 2007 2019 2014 337 42
Transaction 58 US CLO 21.8 2007 2019 2014 338 49
Transaction 59 US CLO 0.4 2007 2019 2014 338 49
Transaction 61 US CLO 29.1 2007 2021 2014 319 45
Transaction 63 US CLO 27.3 2007 2021 2013 354 53
Transaction 64 US CLO 15.4 2007 2021 2013 367 38
Transaction 65 US CLO 26.9 2006 2021 2013 356 47
Transaction 66 US CLO 21.3 2006 2020 2013 287 49
Transaction 68 US CLO 19.3 2006 2020 2013 328 48
Transaction 69 US CLO 28.2 2007 2019 2013 316 44
Transaction 71 US CLO 1.7 2006 2018 2012 - 40
Transaction 72 US CLO 4.8 2007 2019 2014 337 42
Transaction 73 US CLO 1.9 2007 2019 2014 337 42
Transaction 74 US CLO 5.5 2007 2019 2014 338 49
Transaction 75 US CLO 32.7 2011 2022 2014 371 168
Transaction 76 US CLO 1.9 2006 2018 2012 260 46
Transaction 77 US CLO 14.5 2011 2023 2016 393 212
Transaction 78 US CLO 22.9 2012 2023 2015 452 217
Transaction 79 US CLO 19.4 2012 2022 2015 398 215
Transaction 80 US CLO 22.7 2012 2022 2016 402 185
Transaction 81 US CLO 21.7 2012 2024 2016 419 216
Transaction 82 US CLO 25.4 2012 2022 2016 404 206
Transaction 83 US CLO 20.8 2013 2025 2017 456 193
Transaction 84 US CLO 24.6 2013 2023 2017 395 183
Transaction 85 US CLO 1.0 2013 2025 2017 400 170
Transaction 87 US CLO 23.0 2013 2026 2018 412 199
Transaction 88 US CLO 30.1 2014 2024 2018 415 199
Transaction 89 US CLO 33.6 2014 2026 2018 426 195
Transaction 90 US CLO 20.7 2014 2026 2018 432 203
US CLO Subtotal: 1,151.1 349 89
Total CLO Portfolio: 1,439.7 357 81
Figure 34 (continued)
CLO Equity Portfolio Details (continued)
As of 31 December 2014
Current Current Jr- Jr-Most O/C Annualized ITD Cash
Cost of Funds Most O/C Cushion at (Loss) Gain Received as
% of
Transaction(i)(bps)(v) Cushion(vi) Close(vii) of Cushion(viii) IRR(ix) Cost(x)
Transaction 1 83 0.52% 3.86% (0.44%) 0.3% 43.5%
Transaction 2 76 1.55% 3.60% (0.25%) 9.9% 120.2%
Transaction 3 133 10.25% 5.14% 0.57% 11.4% 133.2%
Transaction 4 66 12.01% 5.76% 0.80% 15.1% 149.8%
Transaction 5 55 1.35% 5.74% (0.59%) 10.9% 105.6%
Transaction 6 87 16.34% 4.70% 1.35% 5.3% 56.6%
Transaction 7 70 12.61% 3.64% 1.16% 6.4% 50.8%
Transaction 8 130 23.95% 4.98% 2.02% 8.4% 113.1%
Transaction 10 88 3.50% 4.54% (0.12%) 0.6% 49.8%
Transaction 86 88 3.50% 3.11% 0.05% 8.7% 27.8%
EUR CLO Subtotal: 84 8.73% 4.61% 0.46% 87.7%
Transaction 11 60 11.87% 4.55% 0.88% 20.4% 195.3%
Transaction 12 62 12.93% 4.45% 1.04% 20.3% 194.6%
Transaction 13 58 8.65% 4.82% 0.45% 21.8% 219.6%
Transaction 14 57 2.93% 5.63% (0.34%) 19.3% 203.5%
Transaction 15 49 3.70% 4.21% (0.07%) 29.8% 261.1%
Transaction 16 53 4.97% 4.44% 0.06% 21.1% 221.0%
Transaction 17 40 4.80% 4.24% 0.07% 24.4% 221.4%
Transaction 18 58 12.86% 4.77% 0.88% 20.0% 207.8%
Transaction 19 58 12.86% 4.77% 0.88% 23.9% 202.1%
Transaction 20 105 10.17% 5.28% 0.60% 22.1% 207.4%
Transaction 21 110 7.45% 4.76% 0.32% 18.1% 185.4%
Transaction 22 59 4.30% 5.00% (0.09%) 21.9% 205.3%
Transaction 24 69 14.23% 4.17% 1.20% 17.7% 190.3%
Transaction 25 72 20.01% 4.13% 1.98% 22.2% 207.8%
Transaction 26 67 15.75% 4.05% 1.50% 19.0% 189.0%
Transaction 29 N/A N/A 4.82% N/A 19.4% 210.6%
Transaction 30 211 15.26% 5.16% 1.18% 17.9% 181.4%
Transaction 32 59 4.20% 5.57% (0.19%) 22.2% 203.4%
Transaction 33 204 13.81% 6.99% 0.77% 13.8% 167.8%
Transaction 34 82 10.04% 6.66% 0.42% 18.9% 197.7%
Transaction 36 70 3.52% 5.18% (0.21%) 19.3% 184.7%
Transaction 38 70 11.52% 5.07% 0.83% 27.7% 242.5%
Transaction 40 99 N/A N/A N/A 20.9% 193.4%
Transaction 44 N/A N/A 4.16% N/A 10.1% 142.9%
Transaction 45 146 11.04% 4.46% 0.82% 7.9% 120.6%
Transaction 46 132 7.56% 4.33% 0.43% 6.8% 112.6%
Transaction 47 48 3.93% 4.34% (0.05%) 22.8% 219.0%
Transaction 49 N/A N/A 3.94% N/A 11.1% 170.0%
Transaction 50 N/A N/A 4.25% N/A 12.6% 180.8%
Transaction 56 60 8.98% 4.53% 0.57% 22.1% 201.6%
Transaction 57 60 8.98% 4.53% 0.57% 47.1% 1179.0%
Transaction 58 62 5.69% 4.04% 0.22% 24.7% 217.7%
Transaction 59 62 5.69% 4.04% 0.22% 51.8% 1710.5%
Transaction 61 46 2.37% 4.04% (0.22%) 18.2% 175.1%
Transaction 63 66 3.79% 4.78% (0.13%) 19.5% 196.7%
Transaction 64 47 N/A N/A N/A 23.2% 223.8%
Transaction 65 78 9.41% 4.96% 0.55% 14.6% 160.9%
Transaction 66 53 3.89% 4.05% (0.02%) 23.0% 222.9%
Transaction 68 51 7.01% 4.41% 0.32% 28.0% 267.9%
Transaction 69 47 8.23% 5.61% 0.34% 26.9% 249.6%
Transaction 71 N/A N/A 4.25% N/A 27.3% 166.2%
Transaction 72 60 8.98% 4.53% 0.57% 17.9% 103.0%
Transaction 73 60 8.98% 4.53% 0.57% 17.9% 103.0%
Transaction 74 62 5.69% 4.04% 0.22% 21.2% 114.4%
Transaction 75 169 4.55% 4.05% 0.14% 11.7% 71.4%
Transaction 76 146 11.04% 2.43% 1.07% 35.5% 122.4%
Transaction 77 213 5.79% 5.04% 0.25% 13.7% 54.3%
Transaction 78 175 6.58% 4.00% 0.88% 16.7% 71.4%
Transaction 79 179 4.03% 4.00% 0.01% 9.0% 49.7%
Transaction 80 185 4.02% 4.17% (0.06%) 11.0% 51.3%
Transaction 81 194 5.08% 4.00% 0.47% 9.4% 36.6%
Transaction 82 207 4.16% 4.00% 0.07% 8.1% 38.0%
Transaction 83 193 7.20% 6.17% 0.55% 14.4% 36.6%
Transaction 84 184 4.15% 4.02% 0.07% 16.0% 46.7%
Transaction 85 171 5.10% 5.01% 3.31% 9.6% 30.0%
Transaction 87 199 4.22% 4.00% 0.21% 5.8% 17.7%
Transaction 88 200 4.06% 4.02% 0.05% 12.1% 20.0%
Transaction 89 195 3.97% 3.96% 0.03% 14.1% 13.3%
Transaction 90 203 4.03% 4.00% 0.17% 13.1% 0.0%
US CLO Subtotal: 101 6.45% 4.47% 0.32% 155.8%
Total CLO Portfolio: 98 6.91% 4.50% 0.35% 142.2%
Notes
(i) 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. TFG may continue to hold such transactions as of the date of this report.
(ii) 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 financial statements.
(iii) Par weighted-average spread over LIBOR or EURIBOR (as appropriate) of the underlying loan assets in each CLO's portfolio.
(iv) 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 transaction.
(v) 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 date.
(vi) 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 trustee report available as of the report date. Calculations are ignored and stated as "N/A" In certain cases where debt has been substantially, but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful.
(vii) 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. 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 junior-most O/C test columns.
(viii) Calculated by annualising the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion.
(ix) Calculated from TFG's investment date. Includes both historical cash flows received to-date and prospective cash flows expected to be received, based on TFG's base case modeling assumptions.
(x) Inception to report date cash flow received on each transaction as a percentage of its original cost.
CLO EQUITY PORTFOLIO DETAILS (CONTINUED)
AS OF 31 DECEMBER 2014
Figure 35
[Figure 35]
(i) 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 trustee report available as of the report date. Calculations are stated as "N/A" In certain cases where debt has been substantially, but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful.
APPENDIX IV
SHARE RECONCILIATION AND SHAREHOLDINGS
Figure 36[(42)]
Share Reconciliation and Shareholdings
U.S. GAAP to Fully Diluted Shares Reconciliation
2014 Shares
(MM)
Legal Shares Issued and Outstanding 136.0
Less: Shares Held In Subsidiary (16.6)
Less: Shares Held In Treasury (12.8)
Less: Escrow Shares(42.i) (10.7)
U.S. GAAP Shares Outstanding 95.9
Add: Manager (IPO) Share Options(42.ii) 0.0
Add: Escrow Shares(42.i) 10.7
Pro Forma Fully Diluted Shares 106.6
SHAREHOLDINGS
Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 31 December 2014, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:
Mr. Reade Griffith* 7,637,046
Mr. Paddy Dear* 2,668,247
Mr. David Wishnow 346,262
Mr. Jeff Herlyn 273,652
Mr. Michael Rosenberg 123,964
Mr. Rupert Dorey 96,465
*The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares[(42].[i)]. In addition to the foregoing, as of 31 December 2014, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.9 million shares, including interests with respect to the Escrow Shares[(42].[i)].
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) (such persons, the "Sellers"), all of whom are employees or partners ("Employees") of TFG-owned or affiliated entities, pursuant to the Polygon Transaction.
Certain of these Employees may from time to time enter into sales trading plans (each a, "Fixed Trading Plan") providing for the sale of Vested Shares in the market or may otherwise sell their Vested Shares subject to applicable compliance policies. Applicable brokerage firms may be authorized to sell such 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 2014 Tetragon Financial Group Master Fund Limited audited financial statements, included in the TFG 2014 Annual Report.
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, nonpublic information.
APPENDIX V
ADDITIONAL CORPORATE INFORMATION
DESCRIPTION OF BUSINESS
TFG (company number 43321) is a Guernsey company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG" that aims to provide stable returns to investors across various credit, equity, interest rate, inflation, and real estate cycles. The Company maintains an asset-management platform and an investment portfolio. Both business segments cover a broad range of assets including bank loans, real estate, equities, credit, convertible bonds and infrastructure.
TFG's asset-management platform ("TFG Asset Management") currently consists of Polygon Global Partners ("Polygon"), LCM Asset Management LLC ("LCM"), the GreenOak Real Estate L.P. ("GreenOak") joint venture, Hawke's Point and Equitix Holdings Limited ("Equitix"). TFG Asset Management L.P. is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 and one of its investment management entities, Polygon Global Partners LLP, is authorised and regulated by the United Kingdom Financial Services Authority. The Company is seeking to realise the benefits of building and integrating existing and potentially new asset management businesses into the platform. In turn, the Company will continue to advance this effort throughout 2015, including by evaluating other asset managers.
TFG is registered in the public register of the Netherlands Authority for the Financial Markets ("AFM") under section 1:107 of the Netherlands Financial Markets Supervision Act ("FMSA") as a collective investment scheme from a designated country.
TFG's investment objective is to generate distributable income and capital appreciation. To achieve this objective, Tetragon Financial Management LP (the "Investment Manager") seeks to identify opportunities, assets and asset classes it believes to be attractive and asset managers it believes to be superior based on their track record and expertise. It also seeks to use the market experience of the Investment Manager to negotiate favourable transactions and terms for its investments in asset classes and in asset managers. As part of this current investment strategy, the Investment Manager may employ hedging strategies and leverage in seeking to provide attractive returns while managing risk.
INVESTMENT MANAGEMENT
Tetragon Financial Management LP has been appointed the investment manager of TFG and the Master Fund pursuant to an investment management agreement dated 26 April 2007 (the "Investment Management Agreement"). The management and control of the Investment Manager is vested in its general partner, Tetragon Financial Management GP LLC (the "General Partner"), which is responsible for all actions of the Investment Manager. The General Partner is directly or indirectly controlled by Reade Griffith, Alexander Jackson and Paddy Dear, who also control TFG's voting shareholder. As the General Partner is responsible for all actions of the Investment Manager, any references to the Investment Manager in this Annual Report or in any of our disclosure shall be deemed to include a reference to the General Partner to the extent applicable. Mr. Griffith acts as the authorized representative of the General Partner and the Investment Manager.
The Investment Manager is registered as an investment adviser under the U.S. Investment Advisers Act of 1940.
The investment committee of the Investment Manager (the "Investment Committee") currently consists of Jeffrey Herlyn, Michael Rosenberg, David Wishnow, Reade Griffith and Paddy Dear and is responsible for the investment management of the portfolio and the business. The Investment Committee currently sets forth the investment strategy and approves each significant investment by the Master Fund.
The risk committee of the Investment Manager (the "Risk Committee") has the same composition as the Investment Committee. The Risk Committee is currently responsible for the risk management of the portfolio and the business and performs active and regular oversight and risk monitoring.
Polygon Global Partners LLP and Polygon Global Partners LP (together, the "Service Providers") provide the Investment Manager with certain services in relation to the Company pursuant to a Services Agreement dated 30 April 2012. The Service Providers have been indirect subsidiaries of TFG since 28 October 2012, when TFG acquired TFG Asset Management L.P. and certain of its affiliates. The Service Providers also provide operating, infrastructure and administrative services to LCM and GreenOak and to various Polygon managers pursuant to applicable services agreements. Polygon Global Partners LLP is authorised and regulated by the United Kingdom Financial Services Authority.
In recognition of the work performed by the Investment Manager in successfully arranging the global offering and the associated raising of new capital for the Company, TFG granted to the Investment Manager options (the "Investment Management Options") to purchase 12,545,330 of TFG's Non-Voting Shares (before the application of potential anti-dilution) at an exercise price per share equal to the IPO offer price (U.S. $10). The Investment Management Options are fully vested and immediately exercisable on the date of admission to Euronext Amsterdam N.V. and will remain exercisable until the 10th anniversary of that date (i.e., 26 April 2017).
For more information on TFG's investment manager, including a summary of key terms of the Investment Management Agreement, please refer to TFG's website at http://www.tetragoninv.com.
CLO BUY-AND-HOLD STRATEGY
The emphasis of the Investment Manager's current CLO investment strategy for the company has been on the selection and structuring of investment positions that are then intended to be held for returns based on cash flows and other revenues to provide a stable stream of income for the company. The Investment Manager believes, for example, that its buy-and-hold strategy has allowed the company to take a long-term view on the expected cash flows from a CLO or other securitization vehicle. Market developments, however, have and may continue to, impact the fair value of a securitization vehicle and/or its underlying assets.
VALUATION
State Street (Guernsey) Limited serves as the Company's independent administrator and values the investments of the Master Fund on an ongoing basis. The NAV per Share is expected to fluctuate over time with the performance of TFG's investments. The NAV of TFG and the Master Fund and the NAV per Share are determined as at the close of business on the last business day of each fiscal quarter for purposes of calculating incentive fees. As TFG makes all of its investments through the Master Fund, TFG's NAV will equal the NAV of the Master Fund before any TFG specific liabilities, such as incentive fees. The Company's valuation policies are set forth on the Company's website at http://www.tetragoninv.com. The information on the "Valuation" page of the website supersedes any other disclosure by the Company with respect to such information. Subject to the foregoing, additional information with respect to TFG's or the Master Fund's valuation policies may be found in each Company's annual audited financial statements accompanying this Annual Report.
CERTAIN CORPORATE AND LISTING BACKGROUND
Shares of TFG (the "Shares") are publicly traded solely on Euronext Amsterdam N.V. under the ticker symbol "TFG". The Shares do not carry any voting rights other than limited voting rights in respect of variation of their class rights. The voting shares of TFG are owned by Polygon Credit Holdings II Limited, which is a non-U.S. affiliate of the Investment Manager. Polygon Credit Holdings II Limited is controlled by Reade Griffith, Alexander Jackson and Paddy Dear. The voting shares are not entitled to receive dividends.
The current exchange listing, corporate structure and governance and investment management arrangements of TFG were established to help foster the achievement of the Company's investment objective. In particular, at the time of its initial public offering and in consultation with the Company's underwriters and its legal and financial advisors, the Investment Manager concluded that Euronext Amsterdam N.V. is favourably suited to facilitate the Company's pursuit of its investment objective and to address relevant legal, regulatory, liquidity and other commercial considerations. Similarly, TFG's corporate structure and governance were designed to seek to position the Company to best serve its investment objective as well as to address a variety of relevant considerations, including applicable legal requirements. The expansion of TFG's asset management platform may help facilitate a potential listing in the United States over the longer-term, which TFG continues to explore. U.S. markets tend to offer better research coverage, liquidity and valuations.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Company has sought to continue to return value to its shareholders, including through dividends and share repurchases.
Dividends:
TFG continues to pursue a progressive dividend policy with a target payout ratio of 30-50% of normalised earnings, based on the long-term target RoE of 10-15%.[(43)]
The Board of Directors will have the authority to declare dividend payments, based upon the recommendation of the Investment Manager, subject to the approval of the voting shares of TFG and adherence to applicable law, including the satisfaction of a solvency test as required pursuant to the Companies (Guernsey) Law, 2008, as amended.
The Investment Manager's recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a variety of considerations, including (i) the expected sustainability of the Company's cash generation capacity in the short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of the Company's investments and financial position to other investment opportunities.
TFG has and may continue to also pay scrip dividends currently conducted through an optional dividend reinvestment program. If the Board of Directors declares a cash dividend payable by TFG, they will also (in their capacity as directors of the Master Fund) declare an equal dividend per share payable concurrently by the Master Fund.
Share Repurchases:
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 liquidity of its shares.
REPORTING
In accordance with applicable regulations under Dutch law, TFG publishes monthly statements on its website for the benefit of its investors containing the following information: the total value of the investments of the Master Fund; a general statement of the composition of the investments of the Master Fund; and the number of legal issued and outstanding shares of TFG.
In addition, in accordance with the requirements of Euronext Amsterdam N.V. and applicable regulations under Dutch law, TFG provides annual and semi-annual reports to its shareholders, including year-end financial statements, which in the case of the financial statements provided in its annual reports, will be reported in accordance with U.S. GAAP and audited in accordance with international auditing standards as well as U.S. GAAS for regulatory purposes, if applicable. TFG also provides interim management statements to investors in accordance with section 5:25e of the FMSA. The NAV of TFG is available to investors on a monthly basis on the Company's website at http://www.tetragoninv.com.
APPENDIX VI
OTHER LEGAL MATTERS
On 18 June 2013, a shareholder derivative action was filed in United States District Court, Southern District of New York (the "Court"), against the six directors of the Company and the Master Fund, the Investment Manager, the principals of the Investment Manager and other affiliated entities by a purported shareholder of the Company (the "Action"). The Action made a series of allegations including with respect to the Acquisition (see Note 4 of the Master Fund 2014 Audited Financial Statements). The Company, the Master Fund and their Boards of Directors believed that the Action was factually and legally without merit. Accordingly, the defendants sought dismissal of the Action. On 7 August 2014, in an opinion by Judge Richard J. Sullivan, the Court dismissed the Action in its entirety finding that the plaintiffs had "failed to state a federal claim". The Court likewise refused to exercise its discretion to take cognizance of related claims asserted by the plaintiffs under Guernsey law. There has been no appeal of that ruling and the time for appeal has expired.
APPENDIX VII
BOARD OF DIRECTORS
Rupert 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.
Frederic 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 Masters 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 who is based in Guernsey, is a Non-Executive, Independent Director.
David Jeffreys provides directorship services to a small number of fund groups. From 1993 until 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 who is based in Guernsey, is a Non-Executive, Independent Director.
Byron Knief is Managing Director of Court Square Capital Advisor, LLC. Since 1989, he has raised and invested over $3 billion of capital through a series of mezzanine and leveraged debt funds. Prior to 1989, he ran a variety of businesses for Citigroup in the United States, Europe, Canada and Latin America. Mr. Knief received an undergraduate degree from Northwestern University and an MBA from Columbia University. He has served as a director on the boards of several public and private companies. Current corporate board memberships include DavCo Restaurants, Inc., JAC Products, Inc. and Olameter, Inc. He was also formerly a director of Polygon Global Opportunities Fund and certain of its affiliates. Mr. Knief's charitable board memberships include The Milbank Memorial Fund and The Mountain Top Arboretum. Mr. Knief who is based in the United States of America, is a Non-Executive, Independent Director.
Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. 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 of 25 people 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 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. He is a Principal of Tetragon Financial Group Management LP. Mr. Griffith, who is based in the United Kingdom, is an Internal Director.
Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. He was previously managing director and the global head of Hedge Fund Coverage for UBS Warburg Equities. As global head of Hedge Fund Coverage and Chairman of the Global Hedge Fund Committee, he was responsible for the delivery of all of the bank's products and services to hedge fund clients globally. He was on the board of UBS Netherlands, and was a member of both the European Equity Business Committee and the Extended Global Equity Business Committee. Prior to this, Mr. Dear 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 UBS. Prior to moving into investment banking, Mr. Dear was a petroleum engineer with Marathon Oil Co. He received a Bachelor of Science in Petroleum Engineering from Imperial College in London. He is a Principal of Tetragon Financial Group Management LP. Mr. Dear, who is based in the United Kingdom, is an Internal Director.
APPENDIX VIII
RISK FACTORS
An investment in TFG (together with the Master Fund, the "company") involves substantial risks and uncertainties. Investors may review a more detailed description of these risks and uncertainties and others to which the company is subject on TFG's website at http://www.tetragoninv.com.
These risks and uncertainties include, among others, those listed below.
Risks Relating to the Company's Asset Management Platform
- As the company becomes more of a financial services firm that functions as a company that owns operating companies, it may face difficulties as it invests in asset classes in which it does not have substantial experience.
- The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, investor liquidity and willingness to invest, fund terms (including fees), brand recognition and business reputation. Our asset management business competes with a number of private equity funds, specialized investment funds, hedge funds, funds of hedge funds and other sponsors managing pools of capital, as well as corporate buyers, traditional asset managers, commercial banks, investment banks and other financial institutions (including sovereign wealth funds).
- Asset management and financial advisory businesses are subject to extensive regulation, which affects the company's activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on the company's business. Recent legislative and regulatory changes in the United States, such as the Dodd-Frank Act, and the European Union, such as the Alternative Investment Fund Managers Directive and the European Market Infrastructure Regulation, could adversely affect the company's business.
- As we have expanded and as we continue to expand the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our activities. Certain of our funds may have overlapping investment objectives, including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. To the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds or result in potential litigation against us.
- Poor performance of our managed investment funds and vehicles would cause a decline in our asset management revenue, income and cash flow, and could adversely affect our ability to raise capital for future investment funds.
- Our asset management business depends in part on our ability to raise capital from third-party clients. If we are unable to raise capital from third-party clients, we would be unable to collect management fees or deploy their capital into investments and potentially collect transaction fees or incentive fees, which would materially reduce our asset management revenue and cash flow.
- Misconduct of our employees or at our portfolio companies could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.
- The performance of LCM and, in turn, the company's operating results, may be negatively influenced by various factors, including the (i) performance of LCM-managed CLOs, which in general are subject to the same risks as the company's CLO investments and are currently the primary source of LCM's revenues and (ii) ability of LCM to retain key personnel, the loss of whom may negatively affect LCM's ability to provide asset and collateral management services in a fashion, and of a quality, consistent with its prior practice. Furthermore, the company's ownership of LCM may negatively impact certain aspects of the company's CLO investment strategy and as a result the company's performance as well as the company's ability to diversify its investments across multiple asset managers.
- The performance of Polygon and, in turn, the company's operating results, may be negatively influenced by various factors, including the (i) performance of Polygon-managed funds, and (ii) ability of Polygon to retain key personnel, the loss of whom may negatively affect Polygon's ability to provide asset management services in a fashion, and of a quality, consistent with its prior practice.
- GreenOak has a limited operating history and it may be unable to successfully operate its business or achieve its investment objectives.
- The company established Hawke's Point as a new start-up mining finance business in the fourth quarter of 2014. There is no assurance that Hawke's Point will find appropriate financing and investment opportunities, will raise third-party funds necessary to pursue opportunities or generate fee income, or that its investments in such opportunities will generate profitable returns in the future.
- Equitix has a limited operating history and the company has controlled Equitix for a short period. The company acquired Equitix in February 2015. The company may not achieve the growth and performance that it expects to achieve by acquiring Equitix, which may adversely affect the company's results of operations.
- As the company invests in new asset classes and as its asset mix changes, its revenues and profitability could be reduced.
Risks Relating to the Company's Investment Portfolio
- Many of the company's investments are in the form of highly subordinated securities, which are susceptible to losses of up to 100% of the initial investments, including losses resulting from changes in the financial rating ascribed to, or changes in the market value or fair value of, the underlying assets of an investment.
- CLO vehicles, which make up a large portion of the company's current investment portfolio generally invest in fixed income securities rated lower than Baa by Moody's or lower than BBB by S&P (or, if not rated, of comparable quality) and may be regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Moreover, market developments (including, without limitation, deteriorating economic outlook, rising defaults and rating agency downgrades) may impact the fair value of an investment and/or its underlying assets, as we experienced during the period from the third quarter of 2008 through the first half of 2009.
- Defaults, their resulting losses and other losses on underlying assets (including bank loans) may have a negative impact on the value of the company's portfolio and cash flows received. In addition, bank loans may require substantial workout negotiations or restructuring in the event of a default or liquidation which could result in a substantial reduction in the interest rate and/or principal.
- The modeled cash flow predictions and assumptions used to calculate the IRR and fair value of each CLO investment may prove to be inaccurate and require adjustment. Factors affecting the accuracy of such modeled cash flow predictions include: (1) uncertainty in predicting future market values of certain distressed asset types, (2) the inability to accurately model collateral manager behaviour and (3) the divergence of assumed variables from realised levels over the period covered by the model.
- Bank loans are generally subject to liquidity risks and, consequently, there may be limited liquidity if a Securitization Vehicle is required to sell or otherwise dispose of such bank loans.
- Many of the company's investments in securitization vehicles are and will be illiquid and have values that are susceptible to changes in the ratings and market values of such vehicles' underlying assets, which may make it difficult for the company to sell such holdings.
- The company may be exposed to counterparty risk, which could make it difficult for the company to collect on the obligations represented by investments and result in significant losses.
- The performance of many of the company's investments may depend to a significant extent upon the performance of its asset managers (internal and external).
- The company is subject to concentration risk in its investment portfolio, which may increase the risk of an investment in TFG.
- The company's CLO investments are subject to (i) interest rate risk, which could cause the company's cash flow, fair value of its assets and operating results to decrease and (ii) currency risk, which could cause the value of the company's CLO investments in U.S. Dollars to decrease regardless of the inherent value of the underlying investments.
- The Investment Manager may not be successful in the utilization of hedging and risk management transactions, which could subject the company's investment portfolio to increased risk or lower returns on its investments and in turn cause a decrease in the fair value of the company's assets.
- The ability of securitization vehicles in which the company invests to sell assets and reinvest the proceeds may be restricted, which may reduce the yield from the company's investment in those Securitization Vehicles.
- In connection with the transaction with GreenOak, the company will invest its capital, directly and indirectly, in certain real estate investments. Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond the company's control.
- The real estate investments made, and to be made, by GreenOak are relatively difficult to sell quickly. Return of capital and realisation of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying property. GreenOak may be unable to realise its investment objectives by sale, other disposition or refinance at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy.
- The company invests a portion of its capital, directly and indirectly, in certain European-listed equity securities. Such investments are subject to various risks, many of which are beyond the company's control. Risks or events which could negatively affect such equity security investments include, but are not limited to: increased volatility in the market price and with respect to trading volume of the equity securities and increased uncertainty and government intervention in global financial markets.
- The company invests a portion of its capital, directly and indirectly, in certain mining-industry related equity securities, including through Hawke's Point. Such investments are subject to various risks, many of which are beyond the company's control. In addition to the risks discussed above associated with equity investments generally, risks or events which could negatively affect mining-industry related equity investments include, but are not limited to: exploration, developmental and operational risks.
- The company invests a portion of its capital, directly and indirectly, in certain convertible securities, mainly in the form of debt securities that can be exchanged for equity interests. Such investments are subject to various risks, many of which are beyond the company's control. Risks or events which could negatively affect convertible security investments include, but are not limited to: declining credit quality of issuers of the convertible securities and increased volatility in the market price and with respect to trading volume of the underlying equity into which the convertible securities are convertible.
- The company invests a portion of its capital, directly and indirectly, in certain distressed opportunities. Such investments are subject to various risks, many of which are beyond the company's control. Risks or events which could negatively affect distressed opportunity investments include, but are not limited to: difficulty in obtaining information as to the true condition of the issuer; potential for abrupt and erratic market movements and above average price volatility of the securities; and potential for litigation.
- The company may invest or intends to invest a portion of its capital, directly or indirectly, in infrastructure projects through Equitix, which the company acquired in February 2015. Investments in infrastructure projects are subject to specific risks including, but not limited to: (i) construction risks, (ii) subcontractor risks, (iii) financing risks, (iv) governmental risks and (v) long time horizons.
- Direct investments in asset managers will expose the company's business to additional risks, including: a decline in the price of securities, a more complex regulatory environment and competition.
Risks Relating to TFG and the Master Fund
- TFG's principal source of cash will be the investments that it makes through the Master Fund. TFG's ability to pay dividends will depend on it receiving distributions from the Master Fund.
- Shareholders will not be able to terminate the company's investment management agreement. None of the Investment Manager or the Service Providers owe fiduciary duties to the shareholders of TFG.
- The shares of TFG may continue to trade below NAV. The NAV per Share will change over time with the performance of the company's investments and will be determined by the company's valuation principles. The fees payable to the Investment Manager will be based on NAV and changes in NAV, which will not necessarily correlate to changes in the market value of the shares of TFG.
- TFG and the Master Fund have approved a very broad investment objective and the Investment Manager will have substantial discretion when making investment decisions. In addition, the Investment Manager's strategies may not achieve the company's investment objective.
- TFG is an investment company that has been registered under the laws of Guernsey. The rights of its Shareholders and the fiduciary duties that the Board of Directors owes to TFG and the Shareholders are governed by Guernsey law and TFG's articles of incorporation. As a result, the rights of the Shareholders and the fiduciary duties that are owed to them and TFG may differ in material respects from the rights and duties that would be applicable if TFG were organized under the laws of a different jurisdiction or if it were not permitted to vary such rights and duties in its articles of incorporation.
- The liability of the Investment Manager is limited under the company's arrangements with it, and the company has agreed to indemnify the Investment Manager against claims that it may face in connection with such arrangements, which may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would if investments were being made solely for its own account.
- TFG is not, and does not intend to become, regulated as an investment company under the Investment Company Act and related rules.
- The company may become involved in litigation that adversely affects the company's business, investments and results of operations.
- No formal corporate governance code applies to TFG under Dutch law and TFG will not be bound to comply with the U.K. Combined Code other than as set forth in its articles of incorporation.
Risks Relating to the Investment Manager and Services Providers and Affiliated Relationships
- The company's organizational, ownership and investment structure may create significant conflicts of interest that may be resolved in a manner which is not always in the best interests of the company or the shareholders of TFG.
- The company's success depends on its continued relationship with the Investment Manager and its principals. If this relationship were to end or the principals or other key professionals were to depart, it could have a material adverse effect on the company's business, investments and results of operations.
- The Investment Manager's compensation structure may encourage the Investment Manager to invest in high-risk investments.
- The liability of the Investment Manager to the company is limited and the company's indemnity of the Investment Manager may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would.
- The Investment Manager may devote time and commitment to other activities.
Risks Relating to Taxation
- U.S. investors may suffer adverse tax consequences because TFG will be treated as a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes.
- Investors may suffer adverse tax consequences if TFG or the Master Fund is treated as resident in the U.K. or the U.S. for tax purposes.
Risks Relating to the Shares
- Shares of TFG (the "Shares") do not carry any voting rights other than limited voting rights in respect of variation of their class rights. The holder of the voting shares of TFG will be able to control the composition of the Board of Directors and exercise extensive influence over TFG's and the Master Fund's business and affairs. Additional information on the organizational structure and corporate governance of TFG may be found on TFG's website at http://www.tetragoninv.com.
- The Shares are subject to legal and other restrictions on resale and the NYSE Euronext in Amsterdam trading market is less liquid than other major exchanges, which could affect the price of the Shares. TFG may decide in the future to list the Shares on a stock exchange other than NYSE Euronext in Amsterdam. There can be no assurance that an active trading market would develop on such an exchange.
- 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), 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. These restrictions may adversely affect overall liquidity of the Shares.
- Your ability to invest in the Shares or to transfer any Shares that you hold may be limited by restrictions imposed by ERISA regulations, TFG's articles of incorporation and other tax considerations.
- The company may issue additional securities that dilute existing holders of Shares, including as a result of the exercise of the Investment Management Options.
The foregoing is not a comprehensive list of the risks and uncertainties to which the company is subject.
SHAREHOLDER INFORMATION
Registered Office of TFG and the
Master Fund
Tetragon Financial Group Limited Issuing Agent, Dutch Paying and
Tetragon Financial Group Master Fund Limited Transfer Agent
1st Floor Dorey Court Kas Bank N.V.
Admiral Park Spuistraat 172
St. Peter Port, Guernsey 1012 VT Amsterdam
Channel Islands GY1 6HJ The Netherlands
Legal Advisor (as to U.S. law)
Investment Manager Cravath, Swaine & Moore LLP
Tetragon Financial Management LP Worldwide Plaza
399 Park Avenue, 22nd Floor 825 Eighth Avenue
New York, NY 10022 New York, NY 10019
United States of America United States of America
Legal Advisor (as to Guernsey law)
General Partner of Investment Manager Ogier
Tetragon Financial Management GP LLC Redwood House
399 Park Avenue, 22nd Floor St. Julian's Avenue
New York, NY 10022 St. Peter Port, Guernsey
United States of America Channel Islands GY1 1WA
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Investor Relations Claude Debussylaan 80
David Wishnow / Greg Wadsworth 1082 MD Amsterdam
ir@tetragoninv.com The Netherlands
Press Inquiries
Sard Verbinnen & Co Stock Listing
tetragon-svc@sardverb.com Euronext Amsterdam N.V.
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
Sub-Registrar and Transfer Agent
Computershare
One Wall Street
New York, NY 10286
United States of America
ENDNOTES
TFG is not responsible for the contents of any third-party website noted in this Annual Report.
Shareholder Letter
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
(1) Manager").
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
(2) environments, TFG should achieve lower sustainable returns.
GreenOak Real Estate, LP; hereinafter referred to in this report as "GreenOak."
GreenOak is separately registered as an investment adviser under the U.S.
(3) Investment Advisers Act of 1940. TFG owns a 23% interest in GreenOak.
The percentage of TFG's capital that is externally managed is calculated by
dividing the sum of the U.S. GAAP fair value of all investment assets managed by
parties other than TFG or its affiliates, by the total Net Asset Value of the
(4) Company.
Includes GreenOak funds and advisory assets, AUM for 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 and Polygon Distressed Opportunities
Master Fund, as calculated by the applicable administrator for value date 31
December 2014. Also includes pro forma AUM for Equitix Holdings at 31 December
2014. Includes, where relevant, investments by Tetragon Financial Group Master
Fund Limited. 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 Real Estate, LP, each of which is an investment
(5) manager registered under the U.S. Investment Advisers Act of 1940.
(6) LCM Asset Management LLC, hereinafter referred to in this report as "LCM."
Polygon Global Partners LP and Polygon Global Partners LLP and certain of their
(7) affiliates, hereinafter referred to in this report as "Polygon."
(8) Please see note 2.
The Polygon Convertible Opportunity Fund won the 2014 EuroHedge Award in the
Convertible & Volatility category. There were four other nominees for this
award. The Polygon Convertible Opportunity Fund was nominated for the 2014
EuroHedge Award in the Long-Term Performance - Macro, Fixed Income & Relative
Value (5 years) category. There were seven other nominees for this award. The
Polygon Distressed Opportunities Fund was nominated for the 2014 EuroHedge Award
in the New Fund of the Year - Macro, Fixed Income, & Relative Value category.
There were seven other nominees for this award. The EuroHedge Award is organized
by EuroHedge magazine, a publication of Hedge Fund Intelligence. To be
considered for an award, funds must submit performance data to the HedgeFund
Intelligence Database and have at least a 12-month track record history. The
only exception to this rule is for new fund awards where a minimum seven-month
track record is required; for these awards, the funds' whole performance history
to date is taken into account. Winners are decided using an established
methodology based upon a combination of Sharpe ratios and returns over the
relevant time period. Nominations are decided by those funds in each peer group
that achieve the strongest Sharpe ratios over 12 months, so long as they also
beat the median returns in their relevant peer groups and are within 10% of
their high-water marks. The eventual winners will be the funds that have the
best returns, as long as they also have Sharpe ratios within 25% of the best
Sharpe of the nominees in their relevant peer groups. Most of the award
categories require a minimum asset level of at least $100 million. The only
exceptions are the Emerging Manager & Smaller Fund and the New Fund of the Year
awards, where the minimum is set at $30 million, and the Long-Term Performance
awards, where the minimum asset level is $500 million. Further information about
the award, including nomination and winning criteria, is available at
(9) http://www.hedgefundintelligence.com.
GreenOak Real Estate was awarded the 2014 Real Estate Debt Manager of the Year
Award at the Professional Pensions Investment Awards (PPIA). The PPIA awards
process involved the shortlist being drawn up in association with Aon Hewitt, an
investment consultant form, to highlight those asset managers who demonstrated
both excellent performance and growth in assets under management. Shortlisted
entrants were then asked to complete a questionnaire detailing how they
differentiated themselves from their peers - detailing the product and client
service innovations had made over the 12 months to 30 June 2014. The winners in
each category were then decided by a panel of industry judges. Further
information can be found at
(10) http://www.investmentawards.co.uk/static/methodology.
(11) Please see note 1.
(12) Please see note 5.
Assets Under Management ("AUM") and "Employees Globally" include Equitix, which
(13) was acquired in February 2015, and the GreenOak joint venture.
Key Metrics
Please refer to Financial Highlights on page 34 of this report for the
(14) definition of Net Economic Income.
Please refer to Financial Highlights on page 34 of this report for the
(15) definition of Adjusted EPS.
Please refer to Financial Highlights on page 34 of this report for the
definition of Pro Forma Fully Diluted Shares and Pro Forma Fully Diluted NAV per
(16) Share.
2014 Year in Review
The LCM III, LCM IV, LCM V, LCM VI, LCM IX, LCM X, LCM XI, LCM XII, LCM XIII,
LCM XIV, LCM XV, LCM XVI, and LCM XVII CLOs are referred to as the "LCM Cash
Flow CLOs." LCM-managed CLOs that are no longer outstanding are not included in
the LCM Cash Flow CLO statistics. In addition, these statistics do not include
the performance of certain transactions that were developed and previously
managed by a third-party prior to being assigned to LCM, some of which continue
(17) to be managed by LCM.
Source: LCM as of 31 December 2014. Reflects internal LCM classification as Oil
(18) & Gas exposure.
Source: Wells Fargo Securities, "The CLO Salamagundi: Oil & Gas Exposure," 18
(19) December 2014.
Source: Wells Fargo Securities, "The CLO Salamagundi: Oil & Gas Exposure," 18
(20) December 2014.
Source: LCD Quarterly Review 4Q 2014: "Percentage of Outstanding Leveraged Loans
(21) in Default or Bankruptcy," 31 December 2014.
Source: LCM Asset Management LLC as of 31 December 2014. Excludes certain
transactions that were developed and previously managed by a third-party prior
(22) to being assigned to LCM, some of which continue to be managed by LCM.
Source: LCD Quarterly Review 4Q 2014: "Percentage of Outstanding Leveraged Loans
(23) in Default or Bankruptcy," 31 December 2014.
GreenOak Real Estate was awarded the 2014 Real Estate Debt Manager of the Year
Award at the Professional Pensions Investment Awards (PPIA). The PPIA awards
process involved the shortlist being drawn up in association with Aon Hewitt, an
investment consultant form, to highlight those asset managers who demonstrated
both excellent performance and growth in assets under management. Shortlisted
entrants were then asked to complete a questionnaire detailing how they
differentiated themselves from their peers - detailing the product and client
service innovations had made over the 12 months to 30 June 2014. The winners in
each category were then decided by a panel of industry judges. Further
information can be found at
(24) http://www.investmentawards.co.uk/static/methodology.
(25) HFRX Global Hedge Fund Index, HFR Asset Management, LLC.
(i) The 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). AUM figure and net performance is for
the Polygon Convertible Opportunity Master Fund as calculated by the applicable
fund administrator.
(ii) The 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, the
table 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.
AUM figure and net performance is for the Polygon European Equity Opportunity
Master Fund and associated managed account as calculated by the applicable fund
administrators.
(iii) The fund began trading with Class B1 shares, which carry no incentive
fees, on 1 June 2012. Returns 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, performance reflects actual Class A1 share performance on the
terms set forth in the Offering Memorandum. AUM figure and net performance is
for the Polygon Mining Opportunity Master Fund as calculated by the applicable
fund administrator.
(iv) The fund began trading on 2 September 2013. Class A shares of the fund were
first issued in September 2013 and returns from inception through September 2014
have been 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). AUM figure and net
performance is for the Polygon Distressed Opportunities Master Fund as
calculated by the applicable fund administrator.
(v) The 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 for the Polygon Global Equities Master Fund as
calculated by the applicable fund administrator.
(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, recently extended to
March 2016, and subject to a further one-year extension based on investor
approval. 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
(26) applicable fund administrator.
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
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. 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 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-recognized 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) is compiled by HFR Hedge
Fund Research Inc. Further information relating to index constituents and
(27) calculation methodology can be found at http://www.hedgefundresearch.com.
The Polygon Convertible Opportunity Fund won the 2014 EuroHedge Award in the
Convertible & Volatility category. There were four other nominees for this
award. The Polygon Convertible Opportunity Fund was nominated for the 2014
EuroHedge Award in the Long-Term Performance - Macro, Fixed Income & Relative
Value (5 years) category. There were seven other nominees for this award. The
EuroHedge Award is organized by EuroHedge magazine, a publication of Hedge Fund
Intelligence. To be considered for an award, funds must submit performance data
to the HedgeFund Intelligence Database and have at least a 12-month track record
history. The only exception to this rule is for new fund awards where a minimum
seven-month track record is required; for these awards, the funds' whole
performance history to date is taken into account. Winners are decided using an
established methodology based upon a combination of Sharpe ratios and returns
over the relevant time period. Nominations are decided by those funds in each
peer group that achieve the strongest Sharpe ratios over 12 months, so long as
they also beat the median returns in their relevant peer groups and are within
10% of their high-water marks. The eventual winners will be the funds that have
the best returns, as long as they also have Sharpe ratios within 25% of the best
Sharpe of the nominees in their relevant peer groups. Most of the award
categories require a minimum asset level of at least $100 million. The only
exceptions are the Emerging Manager & Smaller Fund and the New Fund of the Year
awards, where the minimum is set at $30 million, and the Long-Term Performance
awards, where the minimum asset level is $500 million. Further information about
the award, including nomination and winning criteria, is available at
(28) http://www.hedgefundintelligence.com.
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 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. 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 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-recognized 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 ED: Event Driven Index (Bloomberg
Code: HFRXED) is compiled by HFR Hedge Fund Research Inc. Further information
relating to index constituents and calculation methodology can be found at
(29) http://www.hedgefundresearch.com.
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 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. 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
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-recognized 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 Global
Hedge Fund Index (Bloomberg Code: HFRXGL) is compiled by HFR Hedge Fund Research
Inc. Further information relating to index constituents and calculation
methodology can be found at http://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
(30) http://www.marketvectorsindices.com.
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 documents (2.0% management fee, 20% incentive fee and other items,
in each case, as set forth in the offering documents) 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. 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 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-recognized 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 DS: Distressed Restructuring Index (Bloomberg Code: HFRXDS) is
compiled by HFR Hedge Fund Research Inc. Further information relating to index
constituents and calculation methodology can be found at
(31) http://www.hedgefundresearch.com.
The Polygon Distressed Opportunities Fund was nominated for the 2014 EuroHedge
Award in the New Fund of the Year - Macro, Fixed Income, & Relative Value
category. There were seven other nominees for this award. The EuroHedge Award is
organized by EuroHedge magazine, a publication of Hedge Fund Intelligence. To be
considered for an award, funds must submit performance data to the HedgeFund
Intelligence Database and have at least a 12-month track record history. The
only exception to this rule is for new fund awards where a minimum seven-month
track record is required; for these awards, the funds' whole performance history
to date is taken into account. Winners are decided using an established
methodology based upon a combination of Sharpe ratios and returns over the
relevant time period. Nominations are decided by those funds in each peer group
that achieve the strongest Sharpe ratios over 12 months, so long as they also
beat the median returns in their relevant peer groups and are within 10% of
their high-water marks. The eventual winners will be the funds that have the
best returns, as long as they also have Sharpe ratios within 25% of the best
Sharpe of the nominees in their relevant peer groups. Most of the award
categories require a minimum asset level of at least $100 million. The only
exceptions are the Emerging Manager & Smaller Fund and the New Fund of the Year
awards, where the minimum is set at $30 million, and the Long-Term Performance
awards, where the minimum asset level is $500 million. Further information about
the award, including nomination and winning criteria, is available at
(32) http://www.hedgefundintelligence.com.
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. 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
(33) those shown.
The Private Equity Vehicle noted above 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, recently extended
to March 2016, and subject to a further one-year extension based on investor
approval. 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. 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
(34) securities index.
(35) Based on the most recent trustee reports available as of 31 December 2014.
(36) Based on the most recent trustee reports available as of 31 December 2014.
Adjusted net assets of such investments consists of the fair value of, or
(37) capital committed to, investment assets held directly on the balance sheet.
Investible 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
(38) costs.
Balance Sheet Composition Overview
TFG's 85% share of Equitix is expected to decline to approximately 74.8% over
(39) time.
Financial Review
(40) On occasion, figures may not total due to rounding.
Pro Forma Fully Diluted NAV per Share seeks to reflect certain potential changes
to the total non-voting shares over the next few years, which may be utilised in
the calculation of NAV per Share. Specifically, the number of shares used to
(41) calculate U.S. GAAP NAV per Share has been adjusted to incorporate:
The Escrow Shares, 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
(i) per Share over the next three years.
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. 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
(ii) exercisable until 26 April 2017.
Appendix IV
Pro Forma Fully Diluted NAV per Share seeks to reflect certain potential changes
to the total non-voting shares over the next few years, which may be utilised in
the calculation of NAV per Share. Specifically, the number of shares used to
(42) calculate U.S. GAAP NAV per Share has been adjusted to incorporate:
The Escrow Shares, 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
(i) per Share over the next three years.
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. 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
(ii) exercisable until 26 April 2017.
Appendix V
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
(43) environments, TFG should achieve lower sustainable returns.
An investment in TFG involves substantial risks. Please refer to the company's website at http://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 constitutes regulated information ("gereglementeerde informative") within the meaning of Section 1:1 of the FMSA.
Please refer to the Company website, http://www.tetragoninv.com, for the Tetragon Financial Group Limited 2014 Audited Financial Statements and Tetragon Financial Group Master Fund Limited 2014 Audited Consolidated Financial Statements.
Contact information:
TFG:
David Wishnow/Greg Wadsworth
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Sard Verbinnen & Co
+1-212-687-8080
tetragon-svc@sardverb.com
PRN NLD
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