Tetragon Financial Group Limited: Semi-Annual Performance Report For Period Ended 30 June 2015
LONDON, July 31, 2015 /PRNewswire/ --
Shareholder Return
The numbers below show annualised total shareholder return to 30 June 2015, defined as share price appreciation including dividends reinvested, for one year, three years, five years, and since the Company's initial public offering in April 2007.
Figure 1
Total Shareholder Return Analysis (Annualised)
1 Year 7%
3 Years 17%
5 Years 26%
From IPO (April 2007) 7%
Source: Bloomberg TRA function.
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 30 June 2015.
EXECUTIVE SUMMARY
TFG had a good first half to 2015 with an annualised Return on Equity ("RoE") of 12%, in line with the Company's over-the cycle target of 10-15% per annum.(2)Notable performance in the first half came from (1) equities, both direct investments and Polygon's(3) event-driven European equity strategy; (2) U.S. CLO 1.0 and 2.0 deals; and (3) GreenOak-managed real estate(4), particularly in Japan and the United States. In addition, TFG Asset Management ("TFG AM") continued to grow organically through both underlying fund performance and asset raising. TFG AM closed on its acquisition of Equitix(5) in Q1 2015.
The second quarter dividend was declared at $16.25 cents per share, giving 12 months' rolling dividend growth of 6.3%.
Enhancing liquidity: As indicated in our Q1 2015 report, TFG has submitted an application seeking admission for TFG's shares to trade on the Specialist Fund Market ("SFM")(6) of the London Stock Exchange. TFG believes that the principal benefit of having this additional trading platform should be improved liquidity through (1) access to a broader investor base and (2) expanded analyst coverage. TFG would maintain its listing on Euronext in Amsterdam. It is currently anticipated that the admission to the SFM will be completed in November 2015.(7)
Medium-term planning: The Company's investment strategy with respect to TFG AM has led it to become a diversified alternative asset management business that owns majority and minority stakes in asset managers. TFG uses its balance sheet to invest in, build and grow those businesses. Some of the growth has been organic - through active capital raising into existing businesses leveraging off the TFG AM platform and launching new businesses such as Hawke's Point. The Investment Manager(8) has also sought to accelerate growth through joint ventures and partnerships with existing businesses and via acquisitions, as was the case with Equitix. The Investment Manager believes that considerable value has already been built within TFG AM. Given the significantly increased scale of TFG AM in light of this organic growth and, in particular, following the acquisition of Equitix - in terms of AUM (approximately $15 billion)(9), people (approximately 200), infrastructure and profitability - the Investment Manager is reviewing how that value might be delivered to TFG's shareholders over the medium term.
One option under consideration is to seek to have an initial public offering and listing of shares of TFG AM in the next three to five years. Such an IPO would potentially create value for TFG Shareholders as well as provide an acquisition currency to accelerate the growth of TFG AM. As part of that consideration, the Investment Manager has engaged a strategic and capital markets specialist adviser to assess the feasibility for an IPO and review strategic options of further optimising value in TFG AM prior to an IPO. The Investment Manager expects to update shareholders on this aspect of its investment strategy in the Q3 2015 report.
Should such a strategic plan be settled upon, one result may be that all the businesses owned by TFG AM would be required under U.S. GAAP to move to a consistent basis of accounting - fair value - rather than being partly fair valued (as is the case with Equitix and GreenOak) and partly consolidated (as is the case with LCM Asset Management ("LCM") and Polygon). This would provide a certain consistency and thus clarity to the accounts. It would also result in a potentially material increase, net of fees, in the carrying value of businesses such as LCM and Polygon, which have historically been consolidated, and consequently, an increase in the Net Asset Value ("NAV") of TFG, all other things being equal.(10) In such an event, the Investment Manager would propose to defer any performance fees otherwise resulting with respect to the initial fair valuing of LCM and Polygon for a number of years or, if earlier, an IPO of TFG AM, with a "clawback" mechanic in place should the fair value of these businesses decline in the interim period. Furthermore, the Investment Manager believes that any such fees should be converted into TFG Shares in order to further align the Investment Manager with TFG Shareholders.
Investor Day: TFG plans to host its annual Investor Day in London on 17 November 2015. The event will be webcast live. Further details regarding registration and the agenda will be published closer to the date of the event.
TFG 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 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.
The Investment Manager seeks to identify asset classes that offer excess returns relative to their investment risk, or "intrinsic alpha." It analyses the risk/reward, correlation, duration and liquidity characteristics of each potential capital use to gauge its attractiveness and incremental impact on the Company.
The Investment Manager then seeks to find high-quality managers who invest in these asset classes; selects or structures suitable investment vehicles that optimise risk adjusted returns for TFG's capital; and/or seeks for TFG (via TFG AM) 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 may use its balance sheet to facilitate the growth of TFG AM to help create value 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 AM's existing businesses. The Investment Manager looks to mitigate potential correlated risks across TFG AM'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 AM platform: an established global asset management platform, which comprises critical business management functions such as risk management, operations, financial control, compliance, legal, business development and technology.
Figure 2 shows the company's current net asset breakdown.
Figure 2(i)(ii)
Net Asset Breakdown at 30 June 2015
CLO Equity 38.7%
Equities 14.7%
Credit 8.2%
Real Estate 7.4%
Asset Managers: TFG AM 13.7%
Net Cash 17.3%
Total 100.0%
(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG's investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of "Other Net Assets and Liabilities."
(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. Please see Figure 8 for further details on asset composition.
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, and Dividends. Drivers for each of the metrics are discussed in the following sections of the report.
EARNINGS - RETURN ON EQUITY ("RoE")
RoE for H1 2015 was an annualised 12.0%, within TFG's long-term target range of 10-15%(11), reflecting a good first half of the year across many of the business areas.
TFG generated Net Economic Income(12) of $109.0 million in H1 2015, compared with $86.0 million in the equivalent period last year, representing an increase of 26.7%.
Figure 3(i)
Annual Return on Equity 2011-YTD 2015
2011 36.1%
2012 20.8%
2013 15.3%
2014 6.6%
2015 Annualised 12.0%
Average 13.2%
(i) Average RoE is calculated from TFG's IPO in 2007.
EARNINGS PER SHARE ("EPS")
TFG generated an Adjusted EPS(13) of $1.13 in H1 2015
The H1 Net Economic Income(14) of $109.0 million resulted in an EPS of $1.13, the highest first half of the year adjusted EPS result for the Company since 2012.
Figure 4
Adjusted EPS Comparison 2011 - H1 2015 (USD)
H1 H2 FY
FY 2011 $2.20 $1.26 $3.46
FY 2012 $1.15 $1.55 $2.70
FY 2013 $1.02 $1.50 $2.52
FY 2014 $0.90 $0.34 $1.24
H1 2015 $1.13 n/a n/a
Further detailed information on the drivers of the Company's performance is provided later in this report.
NAV PER SHARE
Pro Forma Fully Diluted NAV per Share was $17.66 at the end of H1 2015, up 3.6% from the end of Q4 2014.
- Total NAV for TFG rose to $1,901.0 million at 30 June 2015, which equated to Pro Forma Fully Diluted NAV per Share(15) of $17.66.
- The 3.6% growth in NAV per Share recorded in the first half of the year is after distributing dividends of $0.315 during that period. The NAV per Share growth adjusting for the dividend distribution was approximately 5%.
Figure 5(i)
Pro Forma Fully Diluted NAV
per Share H1 2011 - H1 2015
(USD)
2011 $11.52
2012 $13.75
2013 $15.17
2014 $17.08
2015 $17.66
(i) Source: NAV per share based on TFG's financial statements as of 30 June of each of the years shown. Please note that the Pro Forma Fully Diluted NAV per share reported at each 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 18 on page 26 for more details.
DIVIDENDS PER SHARE ("DPS")
TFG increased its dividend to 16.25 cents per share.
- TFG declared a Q2 2015 DPS of $0.1625, an increase on the previous quarter. On a rolling 12-month basis, the dividend of $0.6325 cents per share represents a 6.3% increase over the prior 12-month period and equated to an annualised dividend yield of 6.3% on the 30 June 2015 share price of $10.07.
- This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q2 2015 DPS of $0.1625 brings the cumulative DPS declared since TFG's IPO to $3.7625.
Figure 6
Dividend Per Share Comparison 2011-2015 (USD)
H1 H2 FY
2011 $0.19 $0.205 $0.395
2012 $0.22 $0.25 $0.470
2013 $0.275 $0.29 $0.565
2014 $0.305 $0.3125 $0.6175
2015 $0.32 n/a n/a
H1 2015 IN REVIEW
PERFORMANCE BY ASSET TYPE
The figure below illustrates the composition of TFG's net assets as of the end of H1 2015 and year end 2014.
Figure 7(i)(ii)
Net Asset Composition Summary
Net Asset Net Asset
Breakdown at 31 Breakdown at
December 30 June
2014 2015
CLO Equity 45.0% 38.7%
Equities 14.5% 14.7%
Credit 8.8% 8.2%
Real Estate 4.9% 7.4%
Asset Managers: TFG AM 6.5% 13.7%
Net Cash 20.3% 17.3%
Total 100.0% 100.0%
(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG's investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of "Other Net Assets and Liabilities."
(ii) Assets characterised as "Equities" consist of the fair value of investments in Polygon-managed equity funds as well as the fair value of, or capital committed to, equity assets (as applicable) held directly on TFG's balance sheet. Please see Figure 8 for further details on asset composition.
NET ASSET BREAKDOWN AND INCOME FOR H1 2015
Figure 8
NET ASSET BREAKDOWN AND INCOME FOR H1 2015
H1 2015 Net H1 2015
Assets Income(iii)
Asset Category Asset Subcategory ($MM) ($MM)
CLO Equity U.S. CLO 1.0(i) 379.9 36.0
CLO Equity U.S. CLO 2.0(i) 280.9 26.1
CLO Equity European CLOs 75.1 1.6
Equities Equity Funds 192.6 14.7
Equities Other Equities(ii) 86.2 42.6
Credit Convertible Bond Fund 44.6 2.1
Credit Distressed Fund 100.9 0.4
Credit Direct Loans 11.3 0.7
Real Estate Real Estate 140.3 21.1
Asset Management TFG Asset Management 260.7 13.9
Net Cash Net Cash 328.5 0.1
Net Cash Corporate Fees and Expenses NA (35.8)
Net Cash Net Hedge PnL and Taxes NA (14.5)
1901.0 109.0
(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 $1.8 million.
(ii) Assets characterised as "Other Equities" consist of the fair value of, or capital committed to, investment assets held directly on the balance sheet.
(iii) TFG Asset Management income figure is "Net Economic Income Before Tax." This includes the consolidated results for Polygon and LCM in addition to any change in value, realised or unrealised, attributable to the investments in Equitix and GreenOak.
Figure 8 above shows net assets and net income by asset class for H1 2015.
- U.S. 1.0 CLOs: TFG's U.S. CLO 1.0 investments performed well during H1 2015, with all such CLOs passing their junior-most O/C tests as of the end of the period.(16) In particular, stable underlying credit quality and a reduction in the pace of structural deleveraging during H1 2015 compared with 2014 supported continued stable equity performance for TFG's U.S. CLO 1.0 transactions and allowed us to complete a number of optional redemptions and opportunistic sales, which were generally accretive to returns. In aggregate, during H1 2015 U.S. 1.0 CLOs generated net income of $36.0 million.
- U.S. 2.0 CLOs: The performance of TFG's U.S. 2.0 CLOs remained stable during Q2 2015 making for a healthy H1 2015. As of the end of Q2 2015, all of TFG's U.S. 2.0 CLOs were in compliance with their junior-most O/C tests.(17) During Q2 2015, we took advantage of favourable market conditions to refinance the liabilities of LCM XII, reducing the transaction's financing costs, which may increase the returns to the equity tranche held by the Company, all else being equal. During H1 2015, U.S. 2.0 CLOs generated net income of $26.1 million.
- European CLOs: All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of H1 2015.(18) Nonetheless, income generation by this segment of the portfolio was weak during the first half of the year as a number of transactions suffered realised losses in their underlying loan portfolios, negatively impacting CLO equity valuations. During H1 2015, this portfolio segment generated net income of $1.6 million.
- Equity Funds: Polygon's equity hedge funds all performed well during H1 2015, particularly the European event-driven equity strategy. Please refer to pages 20 and 21 for further details on the performance of the individual funds.
- Other Equities: This category had a quiet second quarter after the very strong first quarter driven by the sale of an equity position established in 2014.
- Convertible Fund: Polygon's convertible fund was profitable in H1 2015. Please refer to pages 20 and 21 for further details.
- Distressed Fund: Polygon's distressed fund was a small positive contributor during H1 2015. Please refer to pages 20 and 21 for further details.
- Real Estate: GreenOak-managed real estate investments continued the strong performance seen in Q1 2015. Income generation was across a number of different investment vehicles, with realisations in the U.S. Fund I and the Japan Fund contributing close to 50% of income during the period.
- TFG AM: The first half incorporated Equitix for the first time. Equitix and other parts of TFG AM had a strong first half in terms of both performance of the underlying funds as well as new AUM growth. Further details are on page 22 of this report.
Figure 9
TFG AM - Net Assets and Income
US GAAP Net Assets H1 Income
Business Treatment ($MM) ($MM)
Equitix Fair Value 145.4 6.5
GreenOak Joint Venture Fair Value 67.2 0.8
TFG AM Consolidated Business Consolidated 48.1(i) 6.6
260.7 13.9
(i) Comprising the Polygon management contracts plus the aggregated net assets of Polygon, LCM and Hawke's Point.
H1 2015 Major New Investments
- U.S. 2.0 CLOs: In H1 2015, TFG acquired a majority equity position in one LCM-managed CLO for a total cost of approximately $27.8 million. Additionally, TFG agreed to acquire a majority equity position in a new issue LCM-managed CLO that priced during Q2 2015 for a cost of $34.6 million; this transaction closed in July 2015.
- Real Estate: During H1 2015, TFG invested $54.9 million into various real estate funds and vehicles which focus on a variety of geographical areas including the Americas, Europe and Asia.
- Equitix: On 2 February 2015, TFG completed the acquisition of Equitix for a total enterprise value of £159.5 million, which was partially financed by an external £60 million bank facility. TFG's investment is structured through the holding of a mezzanine loan, a 12% loan note and an equity stake which in aggregate has a combined cost of $133.1 million. TFG holds 85% of the loan notes with management holding 15%. Over time its effective economic share through the equity holding is expected to decline to 74.8% with management owning the balance.
- Other Equities: During H1 2015 TFG invested $20.0 million in two U.S. pre-IPO companies.
H1 2015 Major Asset Sales and Optional Redemptions
- U.S. CLOs: During H1 2015, TFG exercised its optional call rights on two U.S. CLO 1.0 deals and sold one U.S. CLO 1.0 transaction, generating call proceeds of approximately $15.1 million and sale proceeds of $6.5 million. TFG has received substantially all of the expected proceeds from these redemptions, with some small final payments remaining, pending the sale or settlement of certain assets and the closing of the CLOs' issuer entities.
- European CLOs: TFG exercised its optional call rights on one European CLO in the first half of 2015, generating call proceeds of approximately €17.4 million. TFG has received substantially all of the expected proceeds from this redemption, with a small final payment to be received after the closing of the CLO's issuer.
- Real Estate: During H1 2015, TFG received $22.4 million, representing both capital and income on certain investments. The majority of these receipts were from investments focused on the United States and Japan.
TFG ASSET MANAGEMENT OVERVIEW
TFG AM OVERVIEW
One of TFG's significant investments is TFG AM, a diversified alternative asset management business that owns majority and minority stakes in asset managers. At 30 June 2015, TFG AM comprised LCM, the GreenOak joint venture, Polygon, Equitix and Hawke's Point (please see Figure 10 for the breakdown of AUM by business line). TFG AM has approximately $15 billion of assets under management(19) and has approximately 200 employees globally. Figure 11 depicts the growth of that AUM over the last five years.
Figure 10(i)
TFG AM AUM by Business Line at 30 June 2015 ($BN)
LCM: US CLOs 5.6
GreenOak: Global Commercial Real Estate 5.6
Polygon: Hedge Funds 1.5
Equitix: UK Infrastructure 2.1
Figure 11(ii)
TFG AM Assets Under
Management at 30 June
2011-2015 ($BN)
H1 2011 3.5
H1 2012 5.8
H1 2013 8.7
H1 2014 10.5
H1 2015 14.8
(i) Includes funds and advisory assets of the GreenOak joint venture, LCM Asset Management LLC, Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon Distressed Opportunities Master Fund, and Equitix Holdings as calculated by the applicable administrator for value date 30 June 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG AM 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 manager registered under the U.S. Investment Advisers Act of 1940.
(ii) Please see note (i) above.
BUSINESS OVERVIEWS
The following pages provide a summary of each asset management business and a H1 2015 review of AUM growth and underlying strategy / investment vehicle performance.
All data is at 30 June 2015, unless otherwise stated.
LCM
- LCM is a specialist in below-investment grade U.S.
broadly-syndicated leveraged loans.
- The business was established in 2001 and has offices in New
York and London.
- TFG owns 100% of LCM.
- Currently, LCM manages loan assets exclusively through CLOs,
which are long-term, multi-year investment vehicles. The typical
duration of a CLO, and thus LCM's management fee stream, depends
on, among other things, the term of its reinvestment period
(currently typically four to five years for a new issue CLO),
the prepayment rate of the underlying loan assets, as well as
post reinvestment period reinvestment flexibility and weighted
average life constraints.
- CLO managers typically earn a management fee of up to 0.50% of
total assets, and a performance fee of 20% over a CLO equity IRR
hurdle.
- Further information on LCM is available at
Description of http://www.lcmam.com.
Business:
$293.3 million.
Amount of
TFG's TFG held equity investments with total fair value of $227.0
Investment in million (U.S. CLO 1.0: $31.7 million, U.S. CLO 2.0: $196.3
Products: million) in LCM-managed CLOs.
Carrying
Value of
Asset
Manager: $0.0 million.
$5.6 billion.
Figure 12
AUM: LCM AUM History ($BN)
YE 2011 $3.4
YE 2012 $4.3
YE 2013 $4.2
YE 2014 $5.3
H1 2015 $5.6
LCM CLOs performed well in the second quarter of 2015, with all of
those that were effective and still within their reinvestment
periods continuing to pay senior and subordinated management fees.
LCM CLOs also significantly outperformed the U.S. leveraged loan
default rate during the second half of 2015. As of June 30, 2015
Performance in LCM Cash Flow CLO default rate[(20)] stood at 0.02% vs. 3.4% for
H1 2015: the S&P/ LSTA universe.[(21)]
GREENOAK
- The GreenOak joint venture 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.
- GreenOak currently has funds with
investments focused on the United
States, Japan, Spain, and the United
Kingdom.
- Funds are typically structured with
management fees of 1.5%-2.0% and
carried interest over a preferred
return. The funds generally have a
multi-year investment period, with a
fund term of seven years after the
final close, with possible extensions
subject to certain approvals.
- Further information on GreenOak is
available at
http://www.greenoakrealestate.com.
Description of Business:
Amount of TFG's Investment in Products: $123.7 million.
Carrying Value of Asset Manager: $67.2 million.
$5.6 billion.
Figure 13
AUM: GreenOak AUM History(i) ($BN)
YE 2011 $0.6
YE 2012 $2.3
YE 2013 $3.6
YE 2014 $4.4
H1 2015 $5.6
(i) Includes investment funds and
advisory assets managed by GreenOak at
30 June 2015. TFG owns a 23% stake in
GreenOak. AUM include all third-party
interests and total projected capital
investment costs. Includes, where
relevant, investments by TFG.
During Q2 2015, GreenOak saw assets
increase by $940.0 million largely on
the capital raising associated with the
redevelopment of the 425 Park Avenue NYC
project.
GreenOak-managed vehicles continue to
perform well across their European,
U.S., and Asian businesses. In
particular, U.S. Fund I and Japan Fund I
are now starting to monetise significant
parts of their portfolios, with both
Performance funds currently projected to exceed
in H1 2015: expected IRRs.
POLYGON
- Polygon manages open-ended hedge fund and private equity vehicles
across a number of strategies.
- Polygon was established in 2002 and has offices in New York and London.
- TFG owns 100% of the business.
- Fees in these products include a management fee that is generally
between 1.5% and 2.0% and the typical performance fee or carried interest
is 20%.
Description - Further information on Polygon is available at
of http://www.polygoninv.com.
Business:
Amount of
TFG's
Investment
in
Products: $338.1 million.
Carrying
Value of
Asset
Manager: $26.3 million.
$1.5 billion for all funds; $1.2 billion for open strategies.
Figure 14(i)
Polygon Hedge Funds AUM History ($MM)
(Convertibles, European Event-Driven Equity, Mining Equities, Distressed,
AUM: Other Equity)
YE 2011 $401
YE 2012 $529
YE 2013 $855
YE 2014 $1,113
H1 2015 $1,235
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon
European Equity Opportunity Master Fund and associated managed account,
Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund
and Polygon Distressed Opportunities Master Fund, as calculated by the
applicable fund administrator at 31 December 2011, 2012, 2013, and 2014,
and 30 June 2015. Includes, where relevant, investments by Tetragon
Financial Group Master Fund Limited.
Performance in the Polygon hedge funds was positive in H1 2015 for all open
products, as shown in the table below. This compares to a return of 1.27%
for the HFRX Global Hedge Fund Index.(22) Further details for each strategy
are outlined over the next few pages.
Performance
in H1 2015: Figure 15(23)
Polygon Funds Summary
AUM at 30 Jun 2015 YTD Annualised Net
Fund ($MM) Net Performance LTD Performance
Convertibles(23.i) $ 423.7 4.2% 18.5%
European Event-Driven
Equity(23.ii) $ 612.0 9.6% 12.1%
Mining Equities(23.iii) $ 70.2 5.1% 3.5%
Distressed
Opportunities(23.iv) $ 106.4 2.5% 8.2%
Other Equity(23.v) $ 22.8 7.1% 17.5%
Total AUM - Open Funds $ 1,235.1 Estimated approx.
LTD Multiple
Private Equity
Vehicle(23.vi) $ 293.3 N/A 1.87x
Total AUM $ 1,528.4
Note: The AUM noted above includes investments in the relevant
strategies by TFG, other than in respect of the Private Equity
Vehicle, where there is no such investment. The Private Equity
vehicle, at the time of the Polygon transaction and currently,
remains a closed investment strategy.
Past performance or experience (actual or simulated) does not
necessarily give a guide for the future and no representation is
being made that the funds listed will or are likely to achieve
profits or losses similar to those shown. Past performance or
experience (actual or simulated) does not necessarily give a guide
for the future and no representation is being made that the funds
listed will or are likely to achieve profits or losses similar to
those shown. Except as otherwise noted, all performance numbers
provided herein 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.
P&L for the Private Equity Vehicle was $4.2 million in H1 2015
before FX movements of -$12.9 million. P&L is +$109.1 million from
closing date net asset value before FX movements of -$33.6 million.
The fund is generally precluded from hedging FX exposure. The fund
has made life to date distributions of $530 million to its partners.
The estimated approximate LTD multiple is based on the fund's
quarter end net asset value and historical distributions and other
returns over an original aggregate purchase price for the fund's
initial assets of approximately $459 million and excludes the
effects of FX and certain assets purchased through recycled capital.
The estimated approximate LTD multiple including those two items (FX
and recycled capital) would be 1.75x. Each of these multiples will
be different from the multiples reflected for specific limited
partners in the fund, which would be calculated with respect to
relevant class of partners in accordance with the fund's limited
partnership agreement.
- Polygon's convertibles strategy invests primarily in convertible
securities in Europe and North America.
- Year to date through to 30 June 2015, the portfolio had net
performance of 4.2%, compared to the HFRX Convertible Arbitrage
Index which returned 2.5% for the same period; annualised net
performance since inception in May 2009 has been 18.5% compared to
5.9% for the benchmark index.(24)
Convertibles:
- This strategy invests primarily in the major European equity
markets, with an event-driven focus.
- The strategy has returned 9.6% net year to date through 30 June
2015. This compares to the HFRX Event Driven Index which has
returned 1.4% for the same period; annualised net performance
European since inception in July 2009 has been 12.1% compared to 3.4% for
Event-Driven the benchmark index.(25)
Equity:
- This strategy focuses primarily in the equities of global mining
companies, many of them based on gold.
- The strategy posted net returns of 5.1% for the first half of
2015, versus the GDXJ Junior Gold Miners Index, which returned
0.9%; annualised net performance since inception in June 2012 has
been 3.5% compared to -31.4% for the benchmark index.(26)
Mining Equities:
- This strategy focuses on opportunities in companies undergoing,
or about to undergo, balance sheet restructurings.
- Net performance during the first half of 2015 was 2.5%. This
compares to the HFRX Distressed Restructuring Index, which has
returned 0.9% for the same period. Annualised net performance
since inception in September 2013 has been 8.2% for the fund,
Distressed versus the benchmark index return of 1.4%.(27)
Opportunities:
- These investments have returned 7.1% net performance during H1
2015 and annualised performance from inception to 30 June 2015 was
17.5%.(28)
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 $530 million of cash to its
partners since inception in March 2011, including $15.0 million
during H1 2015. Performance in 2015 continues to be affected by
foreign exchange moves; P&L YTD is +$4.2 million, of which FX
movements account for -$12.9 million. P&L LTD is +$109.1 million,
of which FX movements account for -$33.6 million.(29) 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 asset management
and primary project platform.
- Equitix was established in 2007 and is based in London.
- TFG owns 85% of the business; over time, TFG's holding is
expected to decline to approximately 74.8%. Management own the
balance.
- Equitix typically invests in UK infrastructure projects with
long-term revenue streams across the healthcare, education,
social housing, highways & street lighting, offshore transmission
and renewable and waste sectors.
- Fees in this product include a management fee, and a carry
interest fee that is over a hurdle currently set at 7.5%. The
carried interest fee is typically 20% over the hurdle, and the
management fee after the investment period is typically between
1.25% and 1.65%; during the investment period it 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
Description www.equitix.co.uk.
of Business:
Amount of TFG does not directly hold any investments in Equitix managed
TFG's funds, however Equitix itself holds GP stakes in these funds. As at
Investment in 30 June 2015, these stakes were valued at GBP9.1 million ($14.4
Products: million).
Carrying
Value of
Asset
Manager: $145.4 million (net of debt).
GBP1.36 billion ($2.1 billion)(i)
Figure 16
AUM: Equitix AUM History (GBPMM)
YE 2011 GBP339
YE 2012 GBP493
YE 2013 GBP1,027
YE 2014 GBP1,328
H1 2015 GBP1,359
(i) USD-GBP rate as at 30 June 2015.
Equitix Fund I and Equitix Fund II are fully invested across 21
projects and 35 projects respectively, are cash generative and are
producing stable yields to investors. Equitix Fund II is fully
committed and the portfolio is cash generative. Equitix Energy
Efficiency Funds are in their investment period, are 70% committed
to a diversified portfolio of projects, and are cash generative.
Performance The Equitix Managed Account is fully committed and the portfolio is
in H1 2015: cash generative.
HAWKE'S POINT
- Hawke's Point is a mining finance company
established by TFG in Q4 2014 which 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.
Description of Business:
As this is a start-up business, there are not
Amount of TFG's Investment in Products: yet any investments on which to report.
Carrying Value of Asset Manager: $0.0 million.
TFG AM PRO-FORMA EBITDA (Ex-GreenOak)
Figure 17
TETRAGON FINANCIAL GROUP
TFG Asset Management Pro Forma Statement of Operations (excluding
GreenOak)
H1 2015(i) H1 2014 H1 2013
$MM $MM $MM
Management fee income 26.6 20.4 19.1
Performance and success fees(ii) 26.9 8.8 2.5
Other fee income 9.3 8.5 10.4
Interest income 0.7 0.1 0.1
Total income 63.5 37.9 32.2
Operating, employee and administrative expenses (32.3) (20.0) (16.6)
Minority Interest (3.2) - -
Net income - "EBITDA equivalent" 28.0 17.9 15.6
(i) In H1 2015 this table includes the income and expenses attributable to TFG's majority owned businesses, Polygon, LCM and Equitix during that period. In the case of Equitix this only covers the period from February 2, 2015, the date of the closing of TFG's acquisition of Equitix. Although TFG currently has an 85% effective economic share of its business, 100% of Equitix's income and expenses are reflected with the 15% not attributable to TFG backed out through the minority interest line. The GreenOak joint venture is not included. The EBITDA equivalent is a non-GAAP measure and is designed to show the performance of the TFG AM businesses rather than what is reflected in TFG's U.S. GAAP financial statements.
(ii) The performance and success fees include some unrealised Polygon performance fees. These represent the fees calculated by the applicable administrator of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining NAV at quarter end, less certain assumed costs. Similar amounts, if any, from LCM and the GreenOak joint venture are excluded from this line item. Such fees would typically not be realised or recognised under U.S. GAAP until calendar year end, and are therefore subject to change based on fund performance during the remainder of the year. There can be no assurance that the company will realise all or any portion of such amounts. Through 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million. It also includes any unrealised performance fees to potentially be 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.
- Overview: Figure 17 shows a pro forma statement of operations which reflects the operating performance of the majority-owned asset management companies within TFG AM. Thus, even though Equitix is fair valued for U.S. GAAP reporting purposes, this pro forma table includes Equitix as if it had been consolidated in order to be on the same basis as Polygon, LCM and Hawke's Point. GreenOak, in which TFG holds a minority interest, is not included in the pro forma EBITDA currently.
- EBITDA: EBITDA Equivalent for the majority-owned TFG AM businesses rose by 57% in H1 2015 compared with H1 2014, accelerated in large part by the inclusion of Equitix from the start of February 2015.
- Management fee income: Management fee income continued to increase with the growth of the TFG AM businesses. Fee paying capital increased significantly year on year, both through organic growth of the Polygon and LCM businesses and, notably, from the acquisition of Equitix which added approximately $2.0 billion of fee paying AUM from early February onwards.
- Performance and success fees: Polygon hedge fund performance fees(30) (realised and unrealised) were lower in H1 2015 than in H1 2014 despite the good start to the year, particularly by the European event-driven equity strategy, and the additional capital under management. This was because the Polygon funds had a particularly strong start to 2014. LCM also contributed realised performance fees in H1 2015, although also at a lower level than in H1 2014. Other performance and success fees were boosted strongly by the acquisition of Equitix, which has had an excellent first few months on the TFG AM platform. The profile of such fees may be more volatile than management fees, but have the potential to continue to make a significant contribution to the bottom line of TFG AM over time.
- Other fee income: This category includes third party CLO management fee income, all of which relates to CLO 1.0s, which continued to decline in line with expectations as such CLO 1.0s amortised down. In addition, it includes certain cost recoveries from TFG relating to seeded Polygon hedge funds which are described in more detail in the TFG AM Overview section of this report. Such cost recoveries increased year on year as the teams supporting the seeded funds grew.
- Operating expenses: Operating expenses rose by approximately 62% in H1 2015 compared to H1 2014, largely driven by the addition of the Equitix business in early 2015 plus additions to the teams supporting the growing Polygon hedge fund and Hawke's Point businesses.
H1 2015 FINANCIAL REVIEW
This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), and provides comparative data where applicable.(31)
FINANCIAL HIGHLIGHTS
Figure 18
TETRAGON FINANCIAL GROUP
Financial Highlights (H1 2013 - H1 2015)
H1 2015 H1 2014 H1 2013
U.S. GAAP net income ($MM) $95.7 $71.9 $87.4
Net economic income ($MM) $109.0 $86.0 $99.6
U.S. GAAP EPS $0.99 $0.75 $0.89
Adjusted EPS $1.13 $0.90 $1.02
Return on equity 6.0% 4.8% 6.1%
Net assets ($MM) $1,901.0 $1,808.5 $1,680.3
U.S. GAAP number of shares outstanding (MM) 96.8 94.2 97.6
U.S. GAAP NAV per share $19.64 $19.19 $17.22
Pro Forma number of shares outstanding (MM) 107.6 105.9 110.7
Pro Forma fully diluted NAV per share $17.66 $17.08 $15.17
TFG uses, among others, the following metrics to understand the progress and performance of the business:
- Net Economic Income ($109.0 million): Adds back to the U.S. GAAP net income ($95.7 million) the imputed H1 2015 share based employee compensation ($11.5 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction, and also includes net unrealised Polygon performance fees ($1.7 million).(32)
- Return on Equity (6.0%): Net Economic Income ($109.0 million) divided by Net Assets at the start of the year ($1,818.5 million).
- Pro Forma Fully Diluted Shares (107.6 million): Adjusts the U.S. GAAP shares outstanding (96.8 million) for the impact of escrow shares used as consideration in the Polygon transaction and associated stock dividends (together, 10.7 million) and for the potential impact of options issued to TFG's investment manager at the time of TFG's IPO (0.1 million). See also figure 32.
- Adjusted EPS ($1.13): Calculated as Net Economic Income ($109.0 million) divided by weighted-average U.S. GAAP shares(i) during the period (96.3 million).
- Pro Forma Fully Diluted NAV per Share ($17.66): Calculated as Net Assets ($1,901.0 million) divided by Pro Forma Fully Diluted shares (107.6 million).(33)
(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.
EPS ANALYSIS H1 2013-H1 2015
Figure 19
TETRAGON FINANCIAL GROUP
TFG Earnings per Share Analysis (H1 2013 - H1 2015)
H1 2015 H1 2014 H1 2013
Investment portfolio segment
U.S. CLO 1.0 $0.37 $0.74 $0.74
U.S. CLO 2.0 $0.27 $0.12 $0.11
European CLOs $0.02 $0.14 $0.39
Equity Funds $0.15 $0.12 $0.01
Other Equities $0.44 ($0.07) NA
Convertible Bond Fund $0.02 $0.05 $0.01
Distressed Fund - $0.06 NA
Direct Loans $0.01 $0.01 $0.02
Real Estate $0.22 $0.11 $0.02
TFG Asset Management $0.14 $0.21 $0.13
FX, Options and Hedges ($0.07) ($0.10) $0.03
Corporate Expenses ($0.36) ($0.45) ($0.41)
Corporate Income Taxes ($0.08) ($0.04) ($0.03)
Adjusted EPS $1.13 $0.90 $1.02
Weighted Average Shares (millions) 96.3 96.0 98.0
STATEMENT OF OPERATIONS
Figure 20
TETRAGON FINANCIAL GROUP
Statement of Operations H1 2013 - H1 2015
H1 2015 H1 2014 H1 2013
$MM $MM $MM
Interest income 61.6 85.3 109.8
Fee income 30.7 33.0 30.7
Unrealised Polygon performance fees 3.3 4.7 1.5
Other income - cost recovery 9.9 11.4 10.3
Dividend income 0.1 - -
Investment income 105.6 134.4 152.3
Management and performance fees (40.8) (33.1) (37.0)
Other operating and administrative expenses (29.0) (41.2) (29.9)
Amortisation of intangible assets (3.4) (3.4) (3.4)
Total operating expenses (73.2) (77.7) (70.3)
Net investment income 32.4 56.7 82.0
Net change in unrealised appreciation in investments 40.2 (33.6) 9.4
Realised gain on investments 48.1 76.2 5.0
Realised and unrealised losses from hedging and fx (4.4) (9.4) 6.0
Net realised and unrealised gains from investments and fx 83.9 33.2 20.4
Net economic income before tax 116.3 89.9 102.4
Income tax (7.3) (3.9) (2.8)
Net economic income 109.0 86.0 99.6
Performance Fee
A performance fee of $5.7 million was accrued in Q2 2015 in accordance with TFG's investment management agreement. The hurdle rate for the Q3 2015 incentive fee has been reset at 2.931458% (Q2 2015: 2.918608%) 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.
BALANCE SHEET
Figure 21
TETRAGON FINANCIAL GROUP
Balance Sheet as at 31 December 2013 and 2014, and 30 June 2015
H1 2015 2014 2013
$MM $MM $MM
Assets
Investments, at fair value 1,471.9 1,356.2 1,533.0
Intangible assets 26.3 29.7 36.5
Cash and cash equivalents 378.8 402.0 245.9
Amounts due from brokers 72.6 52.1 42.0
Derivative financial assets 8.9 19.2 15.2
Property, plant and equipment 0.2 0.1 0.3
Deferred tax asset and income tax receivable 8.6 10.0 8.3
Other receivables 20.0 33.4 26.5
Total assets 1,987.3 1,902.7 1,907.7
Liabilities
Other payables and accrued expenses 47.0 54.5 79.8
Amounts payable on share options 15.2 12.3 10.7
Deferred tax liability and income tax payable 11.1 11.5 10.7
Derivative financial liabilities 13.0 5.9 3.3
Total liabilities 86.3 84.2 104.5
Net assets 1,901.0 1,818.5 1,803.2
STATEMENT OF CASH FLOWS
Figure 22
TETRAGON FINANCIAL GROUP
Statement of Cash Flows H1 2013 - H1 2015
H1 2015 H1 2014 H1 2013
$MM $MM $MM
Operating Activities
Operating cash flows after incentive fees and before movements
in working capital 148.4 134.6 183.6
Purchase of fixed assets (0.1) - -
Change in payables / receivables 4.6 (2.8) (0.2)
Cash flows from operating activities 152.9 131.8 183.4
Investment Activities
Proceeds on sales of investments
- Proceeds from sale of CLOs 6.5 128.0 -
- Net proceeds from derivative financial instruments 7.6 (11.8) -
- Proceeds from investments 68.3 12.5 84.9
- Proceeds from realisation of real estate investments 22.4 26.7 6.8
- Proceeds from GreenOak working capital repayment 6.4 2.6 -
Purchase of investments
- Purchase of CLOs (27.8) (63.6) (45.5)
- Purchase of bank loans - (1.4) (13.9)
- Purchase of real estate investments (54.9) (50.1) (17.0)
- Investments in asset managers (133.1) - (0.5)
- Investments in Equity Funds - - (60.0)
- Investments in Convertible Bond Fund - (15.0) (10.0)
- Investments in Distressed Fund (5.0) (10.0)
- Investments in Other (22.1) (27.3) -
Cash flows from operating and investing activities(i) 21.2 122.4 128.2
Amounts due from broker (20.5) (31.0) (20.0)
Net purchase of shares 5.6 (49.2) (13.7)
Dividends paid to shareholders (30.3) (29.0) (26.4)
Cash flows from financing activities (45.2) (109.2) (60.1)
Net (decrease) / increase in cash and cash equivalents (24.0) 13.2 68.1
Cash and cash equivalents at beginning of period 402.0 245.9 175.9
Effect of exchange rate fluctuations on cash and cash
equivalents 0.8 (0.2) (0.2)
Cash and cash equivalents at end of period 378.8 258.9 243.8
(i) The H1 2015 figure reconciles to the U.S. GAAP Statement of Cash flows, "net cash provided by operating activities" figure of $45.7 million, adjusted for "dividends paid to Feeder in lieu of incentive fee liability" ($24.5 million).
NET ECONOMIC INCOME TO U.S. GAAP RECONCILIATION
Figure 23
Net Economic Income to U.S. GAAP Reconciliation
H1 2015
$MM
Net economic income 109.0
Share based employee compensation (11.5)
Unrealised Polygon performance fees (3.3)
Imputed tax charge on unrealised Polygon performance fees 1.0
Estimated TFM incentive fee on unrealised Polygon performance fees 0.6
U.S. GAAP net income 95.7
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. There are currently two adjusting items. Share based employee compensation of $11.5 million and performance fee earned but not accrued of $1.7 million. In relation to the share based compensation, 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 unaudited financial statements for the period ended 30 June 2015.
Unrealised Polygon performance fees represent the fees calculated by the applicable administrator of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining net asset value at quarter end, less certain assumed costs. Similar amounts, if any, from Equitix, LCM, the GreenOak joint venture and Hawke's Point are excluded from this line item. Such fees would typically not be realised or recognised under U.S. GAAP until calendar year end, and are therefore subject to change based on fund performance during the remainder of the year. There can be no assurance that the company will realise all or any portion of such amounts.
Through 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million as shown above.
APPENDICES
APPENDIX I
Certain Regulatory Information
This Performance Report constitutes TFG's semi-annual financial report as required pursuant to Section 5:25e of the Dutch Financial Markets Supervision Act ("FMSA"). Pursuant to Section 5:25d and 5:25m of the FMSA, this report is made public by means of a press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) and also made available to the public by way of publication on the TFG website (http://www.tetragoninv.com).
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 informatie") within the meaning of Section 1:1 of the FMSA.
TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. trading market is less liquid than other major exchanges, which could affect the price of the Shares.
There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a "Qualified Purchaser" or a "Knowledgeable Employee" (each as defined in the Investment Company Act of 1940), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a "Qualified Purchaser" or a "Knowledgeable Employee" under the Investment Company Act of 1940. These restrictions may adversely affect overall liquidity of the Shares.
Directors' Statements
The Directors of TFG confirm that (i) this Performance Report constitutes the TFG management review for the six month period ended 30 June 2015 and contains a fair review of that period and (ii) the financial statements in the accompanying unaudited interim report for the six month period ended 30 June 2015 for TFG have been prepared in accordance with applicable laws and in conformity with accounting principles generally accepted in the United States of America.
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.
The below modelling assumptions are unchanged from last quarter. The Company will provide analytical information on these assumptions as needed going forward, rather than each quarter.
Figure 24
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 25
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%
Figure 26
Discount Rates
CLO Type H1 2015 Q4 2014
U.S. 1.0 12.0% 12.0%
European 1.0 13.0% 13.0%
U.S. 2.0 - seasoned 11.0% 11.0%
U.S. 2.0 - less than 12 months old Deal IRR Deal IRR
APPENDIX III
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 27 cannot be reproduced]
[Figure 28 cannot be reproduced]
CLO PORTFOLIO CREDIT QUALITY
Figure 29
Q3 Q4 Q1
ALL CLOs 2012 2012 2013 Q2 2013 Q3 2013 Q4 2013
Caa1/CCC+
or Below
Obligors: 6.4% 6.0% 5.1% 5.0% 4.9% 5.4%
2,54
WARF: 2,605 2,599 1 2,568 2,553 2,542
Q3 Q4 Q1
U.S. CLOs 2012 2012 2013 Q2 2013 Q3 2013 Q4 2013
Caa1/CCC+
or Below
Obligors: 4.9% 4.5% 4.0% 4.1% 3.9% 3.8%
2,51
WARF: 2,528 2,524 0 2,550 2,534 2,513
Q3 Q4 Q1
EUR CLOs 2012 2012 2013 Q2 2013 Q3 2013 Q4 2013
Caa1/CCC+
or Below
Obligors: 12.2% 11.7% 9.7% 8.7% 9.1% 11.8%
2,67
WARF: 2,903 2,896 0 2,642 2,631 2,658
Table Continues
ALL CLOs Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Caa1/CCC+
or Below
Obligors: 4.6% 3.7% 4.5% 3.3% 3.2% 4.5%
WARF: 2,565 2,621 2,554 2,442 2,350 2,507
U.S. CLOs Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Caa1/CCC+
or Below
Obligors: 3.4% 3.0% 4.4% 2.5% 2.2% 2.6%
2,51
WARF: 2,544 2,556 2,489 2,347 2,257 2,402
EUR CLOs Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Caa1/CCC+
or Below
Obligors: 9.4% 6.9% 4.8% 6.5% 7.2% 12.8%
WARF: 2,650 2,894 2,819 2,826 2,729 2,974
CLO EQUITY PORTFOLIO DETAILS
AS OF 30 JUNE 2015
Figure 30
Tetragon Financial Group Limited (TFG)
CLO Equity Portfolio Details
As of 30 June 2015
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 374 55
Transaction 2 EUR CLO 29.7 2006 2023 2013 397 52
Transaction 5 EUR CLO 36.9 2007 2022 2014 388 60
Transaction 6 EUR CLO 33.3 2006 2022 2012 414 51
Transaction 7 EUR CLO 38.5 2007 2023 2013 436 46
Transaction 8 EUR CLO 26.9 2005 2021 2011 398 53
Transaction 10 EUR CLO 27.0 2006 2022 2012 367 50
Transaction 86 EUR CLO 3.6 2006 2022 2012 367 50
EUR CLO
Subtotal: 233.4 397 52
Transaction 11 US CLO 20.5 2006 2018 2012 289 45
Transaction 12 US CLO 22.8 2006 2019 2013 336 46
Transaction 13 US CLO 15.2 2006 2018 2012 294 47
Transaction 14 US CLO 26.0 2007 2021 2014 329 49
Transaction 15 US CLO 28.1 2007 2021 2014 397 52
Transaction 16 US CLO 23.5 2006 2020 2013 361 46
Transaction 17 US CLO 26.0 2007 2021 2014 300 40
Transaction 18 US CLO 16.7 2005 2017 2011 290 45
Transaction 19 US CLO 1.2 2005 2017 2011 290 45
Transaction 20 US CLO 26.6 2006 2020 2012 388 52
Transaction 22 US CLO 37.4 2007 2021 2014 383 53
Transaction 24 US CLO 16.9 2006 2018 2012 364 46
Transaction 25 US CLO 20.9 2006 2018 2013 386 46
Transaction 26 US CLO 27.9 2007 2019 2013 402 43
Transaction 29 US CLO 19.1 2005 2018 2011 - 66
Transaction 30 US CLO 12.4 2006 2018 2012 - 67
Transaction 32 US CLO 24.0 2007 2021 2014 309 59
Transaction 33 US CLO 16.2 2006 2020 2012 367 56
Transaction 34 US CLO 22.2 2006 2020 2012 370 50
Transaction 36 US CLO 28.4 2007 2021 2013 353 46
Transaction 47 US CLO 28.3 2006 2021 2013 334 47
Transaction 56 US CLO 23.0 2007 2019 2014 338 42
Transaction 57 US CLO 0.6 2007 2019 2014 338 42
Transaction 58 US CLO 21.8 2007 2019 2014 336 49
Transaction 59 US CLO 0.4 2007 2019 2014 336 49
Transaction 61 US CLO 29.1 2007 2021 2014 327 45
Transaction 63 US CLO 27.3 2007 2021 2013 359 53
Transaction 64 US CLO 15.4 2007 2021 2013 363 38
Transaction 65 US CLO 26.9 2006 2021 2013 362 47
Transaction 66 US CLO 21.3 2006 2020 2013 294 49
Transaction 68 US CLO 19.3 2006 2020 2013 334 48
Transaction 69 US CLO 28.2 2007 2019 2013 323 44
Transaction 72 US CLO 4.8 2007 2019 2014 338 42
Transaction 73 US CLO 1.9 2007 2019 2014 338 42
Transaction 74 US CLO 5.5 2007 2019 2014 336 49
Transaction 75 US CLO 32.7 2011 2022 2014 371 168
Transaction 77 US CLO 14.5 2011 2023 2016 395 212
Transaction 78 US CLO 22.9 2012 2023 2015 439 217
Transaction 79 US CLO 19.4 2012 2022 2015 392 215
Transaction 80 US CLO 22.7 2012 2022 2016 403 185
Transaction 81 US CLO 21.7 2012 2024 2016 424 216
Transaction 82 US CLO 25.4 2012 2022 2016 401 206
Transaction 83 US CLO 20.8 2013 2025 2017 461 193
Transaction 84 US CLO 24.6 2013 2023 2017 394 183
Transaction 85 US CLO 1.0 2013 2025 2017 398 170
Transaction 87 US CLO 23.0 2013 2026 2018 406 199
Transaction 88 US CLO 30.1 2014 2024 2018 407 199
Transaction 89 US CLO 33.6 2014 2026 2018 417 195
Transaction 90 US CLO 20.7 2014 2026 2018 423 203
Transaction 91 US CLO 27.8 2015 2027 2019 435 215
US CLO
Subtotal: 1,026.4 357 98
Total CLO
Portfolio: 1,259.8 364 90
Figure 30 (continued)
CLO Equity Portfolio
Details (continued)
As of 30 June
2015
Current Current Jr- Jr-Most O/C Annualized ITD Cash
Cost of Funds Most O/C Cushion at (Loss) Gain Received as
Transaction(i) (bps)(v) Cushion(vi) Close(vii) of Cushion(viii) IRR(ix) % of Cost(x)
Transaction 1 113 0.69% 3.86% (0.40%) - 47.9%
Transaction 2 89 2.67% 3.60% (0.11%) 9.8% 128.9%
Transaction 5 60 2.49% 5.74% (0.41%) 10.9% 119.1%
Transaction 6 128 32.94% 4.70% 3.10% 3.1% 59.0%
Transaction 7 91 20.02% 3.64% 1.98% 5.1% 56.6%
Transaction 8 175 35.38% 4.98% 3.08% 9.1% 115.5%
Transaction 10 104 8.51% 4.54% 0.44% 1.1% 53.6%
Transaction 86 104 8.51% 3.11% 0.61% 9.6% 35.8%
EUR CLO
Subtotal: 106 14.04% 4.40% 1.04% 80.7%
Transaction 11 72 18.03% 4.55% 1.53% 20.4% 200.0%
Transaction 12 73 18.51% 4.45% 1.62% 20.2% 199.8%
Transaction 13 60 8.80% 4.82% 0.45% 21.9% 227.7%
Transaction 14 63 3.32% 5.63% (0.28%) 19.2% 214.1%
Transaction 15 51 3.69% 4.21% (0.06%) 29.8% 278.5%
Transaction 16 56 5.25% 4.44% 0.09% 21.1% 230.6%
Transaction 17 40 5.06% 4.24% 0.10% 24.7% 236.4%
Transaction 18 67 15.37% 4.77% 1.10% 20.0% 214.6%
Transaction 19 67 15.37% 4.77% 1.10% 23.9% 208.9%
Transaction 20 134 12.86% 5.28% 0.87% 22.2% 212.1%
Transaction 22 65 4.83% 5.00% (0.02%) 21.9% 217.0%
Transaction 24 81 20.34% 4.17% 1.82% 17.7% 196.4%
Transaction 25 87 29.16% 4.13% 2.94% 22.3% 212.9%
Transaction 26 76 20.59% 4.05% 2.00% 19.1% 195.2%
Transaction 29 N/A N/A 4.82% N/A 19.4% 210.8%
Transaction 30 N/A N/A 5.16% (0.57%) 18.7% 201.4%
Transaction 32 62 4.56% 5.57% (0.13%) 22.4% 217.9%
Transaction 33 244 16.27% 6.99% 1.00% 13.7% 170.2%
Transaction 34 105 11.22% 6.66% 0.53% 18.8% 203.5%
Transaction 36 74 3.77% 5.18% (0.17%) 19.4% 192.9%
Transaction 47 52 4.29% 4.34% (0.01%) 22.8% 231.1%
Transaction 56 86 11.09% 4.53% 0.79% 22.0% 207.7%
Transaction 57 86 11.09% 4.53% 0.79% 47.0% 1230.3%
Transaction 58 81 8.80% 4.04% 0.59% 24.6% 226.0%
Transaction 59 81 8.80% 4.04% 0.59% 51.5% 1800.3%
Transaction 61 49 2.22% 4.04% (0.22%) 18.1% 185.3%
Transaction 63 84 4.90% 4.78% 0.02% 19.6% 204.5%
Transaction 64 49 N/A N/A N/A 23.2% 236.3%
Transaction 65 88 12.74% 4.96% 0.90% 14.9% 168.1%
Transaction 66 54 4.17% 4.05% 0.01% 23.1% 234.2%
Transaction 68 52 7.91% 4.41% 0.41% 28.2% 283.1%
Transaction 69 49 9.60% 5.61% 0.48% 27.1% 262.5%
Transaction 72 86 11.09% 4.53% 0.79% 17.5% 109.0%
Transaction 73 86 11.09% 4.53% 0.79% 17.5% 109.0%
Transaction 74 81 8.80% 4.04% 0.59% 20.5% 122.2%
Transaction 75 177 5.47% 4.05% 0.35% 11.5% 78.6%
Transaction 77 213 5.72% 5.04% 0.19% 14.0% 62.5%
Transaction 78 175 6.76% 4.00% 0.80% 17.5% 83.7%
Transaction 79 179 3.80% 4.00% (0.06%) 8.8% 58.6%
Transaction 80 185 3.49% 4.17% (0.22%) 11.3% 60.0%
Transaction 81 194 5.42% 4.00% 0.51% 9.8% 44.0%
Transaction 82 207 3.85% 4.00% (0.06%) 10.1% 45.6%
Transaction 83 193 7.26% 6.17% 0.46% 15.4% 48.1%
Transaction 84 184 3.91% 4.02% (0.05%) 16.5% 57.9%
Transaction 85 171 5.07% 5.01% 0.03% 10.3% 41.7%
Transaction 87 199 4.24% 4.00% 0.15% 6.6% 28.7%
Transaction 88 200 3.89% 4.02% (0.10%) 12.3% 31.6%
Transaction 89 195 3.83% 3.96% (0.13%) 14.5% 28.3%
Transaction 90 203 3.94% 4.00% (0.08%) 13.8% 10.0%
Transaction 91 215 4.06% 4.00% 0.26% 14.6% 0.0%
US CLO
Subtotal: 112 7.55% 4.52% 0.39% 159.4%
Total CLO
Portfolio: 111 8.75% 4.50% 0.51% 144.9%
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 30 JUNE 2015
[Figure 31 cannot be reproduced]
APPENDIX IV
SHARE RECONCILIATION AND SHAREHOLDINGS
Figure 32(34)
Share Reconciliation and Shareholdings
U.S. GAAP to Fully Diluted Shares Reconciliation
H1 2015 Shares
(MM)
Legal Shares Issued and Outstanding 136.9
Less: Shares Held In Subsidiary (16.6)
Less: Shares Held In Treasury (12.8)
Less: Escrow Shares(34.i) (10.7)
U.S. GAAP Shares Outstanding 96.8
Add: Manager (IPO) Share Options(34.ii) 0.1
Add: Escrow Shares(34.i) 10.7
Pro Forma Fully Diluted Shares 107.6
Shareholdings
Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 30 June 2015, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:
Mr. Reade Griffith* 7,864,471
Mr. Paddy Dear* 2,853,711
Mr. David Wishnow * 243,894
Mr. Jeff Herlyn * 170,904
Mr. Michael Rosenberg * 99,555
Mr. Rupert Dorey 68,052
Mr. Frederic Hervouet 5,084
*The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares. In addition to the foregoing, as of 30 June 2015, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.5 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees.
As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the "Vested Shares")) that were issued pursuant to TFG's acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the "Polygon Transaction") have vested with certain persons (other than Messrs. Griffith and Dear) (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 authorised 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
TFG AM Reconciliation Between U.S. GAAP Net Economic Income and Pro Forma EBITDA
Figure 33
TETRAGON FINANCIAL GROUP
TFG AM: Reconciliation of U.S. GAAP net income to net economic income before tax
to Pro Forma EBITDA
Net
economic
U.S. GAAP income Net economic Pro Forma Pro Forma
net income adjustments income adjustments EBITDA
$MM $MM $MM $MM $MM
Management fee income 19.9 - 19.9 6.7 26.6
Performance and success fees 1.5 3.3 4.8 22.1 26.9
Other fee income 9.3 - 9.3 - 9.3
Interest income - - - 0.7 0.7
Total income 30.7 3.3 34 29.5 63.5
Operating, employee and
administrative expenses (24.0) - (24.0) (8.3) (32.3)
Minority interest - - - (3.2) (3.2)
Net income - "EBITDA
equivalent" 6.7 3.3 10.0 18.0 28.0
Unrealised gain on asset
management stake 0.8 - 0.8 - 0.8
Interest income on loans to
Equitix 6.5 - 6.5 (6.5) -
Amortisation expense on
management contracts (3.4) - (3.4) 3.4 -
Net economic income before
taxes 10.6 3.3 13.9 N/A N/A
- Overview: TFG and TFG Master Fund are both Investment Companies for U.S. GAAP purposes and the default accounting for Investment Companies under U.S. GAAP (ASC 946) is to fair value all assets and liabilities. See TFG Master Fund's Financial Statements, Note 2 Basis of Presentation, for further details.
- Companies which meet certain criteria including primarily providing services, such as asset management services, to the Investment Company, can be subject to a service provider exemption under ASC 946, which results in them being consolidated rather than fair valued. Historically and as at 30 June 2015, the LCM, Polygon and Hawke's Point businesses are being accounted for under this exemption because they manage significant levels of TFG investment capital and historically there has been no specific articulated exit strategy. See TFG Master Fund's Financial Statements, Note 2 Principles of Consolidation, for further details.
- Should the medium-term strategic plan described in the Executive Summary be settled upon, one result may be that all the businesses owned by TFG AM would be required under U.S. GAAP to move to a consistent basis of accounting - fair value. Although the determination of fair value will be based on a calculation made by an independent valuation specialist (based in part on certain information such as forecasts provided by the Investment Manager) and subject to the approval of the Audit Committee of TFG, the Investment Manager would expect that the valuation range from which an appropriate valuation would be taken would be derived from a variety of industry-standard valuation techniques, depending on the stage of development of the business being valued. Please see Note 10 for further information.
- Following additional analysis of the application of Investment Company accounting to TFG AM post the acquisition of Equitix, it has been concluded that Equitix's relationships with TFG and TFGMF do not have the same service provider characteristics as LCM, Polygon and Hawke's Point and thus as at H1 2015 Equitix has been accounted for using the default Investment Company methodology - at fair value. Equitix had initially been consolidated at Q1 2015 in order to be consistent with the other majority-owned management entities but this has now been amended and applied consistently from the period since acquisition.
- Figure 17 provides a pro forma EBITDA calculation for the TFG AM businesses to assist in understanding its underlying operating performance. Figure 33 above takes the U.S. GAAP Net Income before tax for TFG AM and adds to it certain pro forma operating adjustments for the Fair Valued businesses (excluding the GreenOak joint venture) in order to give a combined set of operating metrics.
APPENDIX VI
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 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. He is 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 United States 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.
FURTHER 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 report.
(1) 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 Manager").
Executive Summary
(2) LIBOR directly flows through some of TFG's investments and, as it can be seen as the risk-free short-term rate, it should affect all of TFG's investments. In high-LIBOR environments, TFG should achieve higher sustainable returns; in low-LIBOR environments, TFG should achieve lower sustainable returns.
(3) Polygon Global Partners LP and Polygon Global Partners LLP and certain of their affiliates, hereinafter referred to in this report as "Polygon."
(4) GreenOak Real Estate, LP; hereinafter referred to in this report as "GreenOak." GreenOak is separately registered as an investment adviser under the U.S. Investment Advisers Act of 1940. TFG owns a 23% interest in GreenOak.
(5) Equitix Holdings Limited, hereinafter referred to in this report as "Equitix."
(6) Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V. ("Euronext Amsterdam"). As is the case for Euronext Amsterdam, the Specialist Fund Market is a regulated market for the purposes of the Markets in Financial Instruments Directive.
(7) There is no assurance that the application will receive approval and further details to be provided in due course.
(8) Please see note 1.
(9) Includes funds and advisory assets of the GreenOak joint venture, LCM Asset Management LLC, Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon Distressed Opportunities Master Fund, and Equitix Holdings as calculated by the applicable administrator for value date 30 June 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG AM 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 manager registered under the U.S. Investment Advisers Act of 1940.
(10) Although the determination of fair value will be based on a calculation made by an independent valuation specialist (based in part on certain information such as forecasts provided by the Investment Manager) and subject to the approval of the Audit Committee of TFG, the Investment Manager would expect that the valuation range from which an appropriate valuation would be taken would be derived from a variety of industry-standard valuation techniques, depending on the stage of development of the business being valued. Valuation techniques include, among other things, discounted cash flows, multiples of a measure of expected income (often EBITDA) and value expressed as a percentage of AUM. Values from recent transactions, such as the acquisition of Equitix, can also play a significant role in such a valuation exercise. In addition, the existence of several early-stage, seeded businesses alongside more mature, well-established businesses can make the valuation process more complex.
Historically, an income-multiple technique has been used as a relevant methodology for purposes of valuing TFG's interest in GreenOak, which is carried at fair value. Under that methodology, TFG applies a range of multiples (7x-11x) to GreenOak's projected EBITDA. Solely for the purposes of providing a very simple example of one potential approach to the valuation of the currently consolidated businesses (Polygon, LCM and Hawke's Point), applying this same multiple range to the annualised EBITDA of such businesses as at June 30, 2015 would result in a valuation range between US$140 million and US$220 million for Polygon, LCM and Hawke's Point, compared with the current accounting value of US$48.1 million (see Figure 9). The resultant impact on NAV would therefore be a range of US$69 million and US$129 million net of incentive fees. This range is for illustrative purposes only and should not be relied on for any other purpose and should not be construed as the Investment Manager's or TFG's definitive estimate of the valuations of such businesses. There can be no assurance, of course, that the independent valuation specialist or the Audit Committee would use the income multiple technique for purposes of valuing these business, or, if such technique were used, that such range of multiples would be applied or that any other factors (including the factors described above) would not materially affect the resulting valuations; any of these determinations could result in valuations that are materially outside of such range. Additionally, there can be no assurance that the valuation of these businesses as part of a future IPO of TFG AM or other strategic transaction would be within this range.
Key Metrics
(11) Please see note 2.
(12) Please refer to Financial Highlights on page 26 of this report for the definition of Net Economic Income.
(13) Please refer to Financial Highlights on page 26 of this report for the definition of Adjusted EPS.
(14) Please see note 12.
(15) Please refer to Financial Highlights on page 26 of this report for the definition of Pro Forma Fully Diluted Shares and Pro Forma Fully Diluted NAV per Share.
H1 2015 In Review
(16) Based on the most recent trustee reports available as of 30 June 2015.
(17) Based on the most recent trustee reports available as of 30 June 2015.
(18) Based on the most recent trustee reports available as of 30 June 2015.
TFG Asset Management Overview
(19) Please see note 9.
(20) Default statistics include data only from LCM Cash Flow CLOs as of 30 June 2015.
(21) LCD Quarterly Review Q2 2015: "Percent of Outstanding Leveraged Loans in Default or Bankruptcy" as of 30 June 2015.
(22) The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Funds' 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.
(23) (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. The AUM figure for PRF is as calculated by the applicable fund administrator.
(24) 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-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX RV: FI-Convertible Arbitrage Index (Bloomberg Code: HFRXCA) 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.
(25) 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-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX 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 http://www.hedgefundresearch.com.
(26) 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-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The 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 http://www.marketvectorsindices.com.
(27) 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-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX 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 http://www.hedgefundresearch.com.
(28) 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 those shown.
(29) 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 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.
(30) Unrealised Polygon performance fees represent the fees calculated by the applicable administrator of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining NAV at quarter end, less certain assumed costs. Similar amounts, if any, from LCM and the GreenOak joint venture are excluded from this line item. Such fees would typically not be realised or recognised under U.S. GAAP until calendar year end, and are therefore subject to change based on fund performance during the remainder of the year. There can be no assurance that the company will realise all or any portion of such amounts. Through 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million. It also includes any unrealised performance fees to potentially be 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.
H1 2015 Financial Review
(31) On occasion, figures may not total due to rounding.
(32) Please see note 30.
(33) 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 calculate U.S. GAAP NAV per Share has been adjusted to incorporate:
(i) 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 per Share over the next three years.
(ii) 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 exercisable until 26 April 2017.
Appendix IV
(34) Please see Note 33.
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 informatie") within the meaning of Section 1:1 of the FMSA.
About Tetragon:
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. The company's investment portfolio comprises a broad range of assets, including an asset-management business (TFG Asset Management), and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure.
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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