Tetragon Financial Group Limited ("TFG") Half Yearly Report for Period Ended 30 June 2016
LONDON, July 29, 2016 /PRNewswire/ --
Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment(i) of the main market of the London Stock Exchange under ticker symbol "TFG.LN". In this report, we provide an update on TFG's results of operations for the period ending 30 June 2016.(ii)
This summary release should be read in conjunction with the full Half-Yearly Report which follows.
Key Metrics for H1 2016(iii)
- Annualised Fair Value Return on Equity ("RoE") of 4.5%(iv)
- Fair Value EPS of $0.47
- Fair Value NAV Per Share Total Return of 6.4% year to date and Fully Diluted Fair Value NAV per Share of $19.96
- Dividend Per Share for the quarter of 16.75 cents (dividend yield of 6.6%)
Highlights During the First Half
- TFG generated fair value earnings of $45.1 million
- The company bought back approximately 10 million shares in June at an average price of $10.00 per share
- Principal and employee ownership of TFG shares increased to approximately 23%
- TFG Asset Management's assets under management stood at $17.8 billion at 30 June 2016
About TFG:
TFG's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The company's investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure.
This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.
An investment in TFG involves substantial risks. Please refer to the company's website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG. This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the FMSA as a collective investment scheme from a designated country.
TFG's 'home Member State' for the purposes of the EU Transparency Directive
(i) (Directive 2004/109/EC) is the Netherlands.
TFG invests substantially all its capital through a master fund, Tetragon
Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the
issued non-voting shares. In this report, unless otherwise stated, we report on
the consolidated business incorporating TFG and TFGMF. References to "we" are to
Tetragon Financial Management LP, TFG's investment manager (the "Investment
(ii) Manager").
Please refer to Figure 22 and related notes of the attached H1 2016 Report for
(iii) full definitions of Fair Value RoE, Fair Value EPS and Fair Value NAV per Share.
TFG seeks to deliver 10-15% Fair Value RoE per annum to shareholders. TFG's
returns will most likely fluctuate with LIBOR. LIBOR directly flows through some
of TFG's investments and, as it can be seen as the risk-free short-term rate, it
should affect all of TFG's investments. In high-LIBOR environments, TFG should
achieve higher sustainable returns; in low-LIBOR environments, TFG should
(iv) achieve lower sustainable returns.
TETRAGON FINANCIAL GROUP LIMITED - Half Yearly Report (Period ended 30 June 2016)
London, 29 July 2016
Delivering Results Since 2005(1)(i)
Figure 1
TFG: Delivering
Results Since
2005(1)(i)
Returns
ROE TARGET(ii) 10-15% Annualised Range
AVERAGE ROE(iii) 13.0% Since April 2007 IPO
2016 ANNUALISED
ROE 4.5% 30 June 2016
Shareholder
Returns(iv)
SHARE PRICE
ONE YEAR +6% To 30 June 2016; FTSE: All-Share: +2%
THREE YEARS +3% Per annum to 30 June 2016; FTSE: All-Share: +6%
FIVE YEARS +10% Per annum to 30 June 2016; FTSE: All-Share: +6%
SINCE APRIL 2007
IPO +7% Per annum to 30 June 2016; FTSE: All-Share: +4%
NAV PER SHARE
TOTAL RETURN
ONE YEAR +17% To 30 June 2016
THREE YEARS +14% Annualised to 30 June 2016
FIVE YEARS +16% Annualised to 30 June 2016
SINCE APRIL 2007
IPO +12% Annualised to 30 June 2016
Returning Value
DIVIDEND YIELD 6.6% 30 June 2016
DIVIDEND
COVER(v) 3X 30 June 2016
DIVIDEND GROWTH
FIVE-YEAR CAGR 11.6% Per annum to 31 March 2016
Building Value
FAIR VALUE
NAV(vi) $1.9B 30 June 2016
FULLY DILUTED
FAIR VALUE NAV
PER SHARE(vii) $20 30 June 2016
Alignment
PRINCIPAL &
EMPLOYEE
OWNERSHIP(viii) 23% 30 June 2016
(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Please refer to end notes for important disclosures.
Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment(2) of the main market of London Stock Exchange under ticker symbol "TFG.LN". In this report, we provide an update on TFG's results of operations for the period ending 30 June 2016.(3)
29 July 2016
EXECUTIVE SUMMARY
TFG generated Fair Value(4) earnings of $45.1 million in H1 2016, giving an annualised Return on Equity ("RoE") for the first half of the year of 4.5%. Whilst the RoE is somewhat below our long-term target of 10-15%(5), and below our long-term average of 13.0%, we are pleased with the RoE to shareholders over the first half, particularly given the poor results from many market indices and the performance problems of several alternative asset managers. Furthermore, our RoE may also be viewed in light of the fact that 10-year bonds (supposedly "risk free" returns) are close to, and in some cases below, zero in the major global economies(6). Thus, as we have said for some time, we expect that our investment returns will be lower than our long-term goals while this environment persists.
TFG's performance can be measured by a number of metrics, including a long-term RoE target. In addition, we think it is useful to consider the growth in NAV per share. Fair Value NAV per share total return grew 6.4% in the first half of 2016. In line with other listed investment companies, we now report on the "Fair Value NAV Per Share Total Return" in addition to the simple "Fair Value NAV Per Share" in our Key Metrics.(7) We have added a chart showing this metric since TFG's IPO at the end of this Executive Summary.
During the first half of 2016, noteworthy positive performers were CLOs with net income of $45.1 million and equity hedge funds with net income of $12.3 million, while TFG Asset Management was negative during the first half, with a net loss of $1.9 million during the period.
Notwithstanding the small reduction in Fair Value NAV for TFG Asset Management, there were some positive events for the asset management business during the first half of the year: LCM performed well and increased assets under management ("AUM") from $6.1 billion to $6.4 billion; Equitix continued to raise capital with AUM rising from £1.88 billion to £1.94 billion; and TCI II(8) (a private equity vehicle that invests in CLOs) had a second close, and has over $200 million of committed capital as of the end of June. Furthermore, TCICM,(9) a CLO manager that is a subsidiary of TCI II and an affiliate of TFG Asset Management, was established and started managing capital in May 2016 and its first CLO closed in July. Also in July, GreenOak(10) completed the acquisition of Grafton Partners, the property adviser to the West End of London Property Unit Trust (WELPUT). WELPUT was established in 2001 in partnership with Schroder Real Estate and is the top performing fund in the Association of Real Estate Funds Index over the past 10 years.(11) Further details are available on GreenOak's website under "News."
During the second quarter, the Company repurchased 10 million TFG shares at an average price of $10.00 per share. This reduced Fair Value NAV by approximately $100 million, but boosted Fair Value NAV Per Share as it reduced the Pro Forma Fully Diluted number of shares in issue. The Fully Diluted Fair Value NAV Per Share at the end of H1 2016 was $19.96, up from $19.08 at year end 2015, an increase of 4.6% even after allowing for dividends. The second quarter dividend was declared at 16.75 cents per share, producing a 12-month rolling dividend growth of 4.4%.
In order to manage its balance sheet more efficiently whilst also hopefully allowing for opportunistic investments during times of market dislocation, TFG obtained a revolving debt facility ("Revolver") for a maximum of $75 million, with a duration of over three years. TFG's investment manager may potentially seek to increase the amount of loans available alongside the existing facility.
In the first half of 2016, the principals and certain employees of TFG's investment manager and employees of TFG Asset Management continued to increase their holdings in TFG shares. Including all shares owned outright and those held under deferred schemes, these holdings now total approximately 23 million shares, or 23% of TFG's shares.(12)
Phil Bland, our long-standing Chief Financial Officer for both TFG's investment manager and TFG Asset Management, will be retiring later this year. He will be succeeded by Paul Gannon, who has been at the firm for 10 years and who has significant experience with all aspects of the Company's investments and financial reporting. Paul has been promoted to Co-CFO and will work closely with Phil during the implementation of the succession plan.
After 11 years on the TFG board as a non-executive director, Byron Knief stepped down earlier this year. Mr. Knief has been replaced by William P. Rogers, Jr. Mr. Rogers has worked with TFG for many years and comes to the Company with a wealth of knowledge of corporate matters. He retired from Cravath, Swaine & Moore LLP in December 2015 after 36 years at the firm. His full biography can be found in Appendix VIII.
The next Investor Day will follow the release of the full-year results and thus has been scheduled for 8 March 2017 in London. A full agenda and more details will follow in due course.
Figure 2
TFG Fair Value NAV Per Share Total Return Since April 2007 IPO(13)
TFG Fair Value NAV Per Share Total Return Since April 2007
IPO
Total Return Performance
YTD 1 Yr 3 Yr 5 Yr Since April
2007 IPO
Fair Value NAV per share total return 6.4% 17.1% 46.5% 106.3% 183.2%
MSCI ACWI 1.6% (3.1%) 21.3% 33.8% 31.3%
TFG Hurdle 1.6% 3.1% 9.2% 16.0% 41.6%
TFG OVERVIEW
TFG is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment of the main market of the London Stock Exchange under ticker symbol "TFG.LN."(14)
TFG's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Company's investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure.
TFG's Fair Value Net Asset Value ("NAV") as of 30 June 2016 was approximately $1.9 billion. Figure 3 shows the Company's current net asset breakdown including TFG Asset Management at full estimated Fair Value.
Figure 3(i)(ii)
Fair Value Net Asset Breakdown at 30 June 2016
CLO Equity 26.8%
Equities 16.2%
Credit 7.8%
Real Estate 8.7%
TFG Asset Management (privately-held
securities) 21.0%
Net Cash 19.5%
Total 100.0%
Net Cash consists of: (1) cash held
directly by Tetragon Financial Group
Master Fund Limited, (2) excess margin
held by brokers associated with assets
held directly by Tetragon Financial Group
Master Fund Limited, and (3) cash held in
certain designated accounts related to
TFG's investments, which may only be used
for designated purposes without incurring
significant tax and transfer costs, net of
(i) "Other Net Assets and Liabilities."
Assets characterised as "Equities" consist
of the Fair Value of investments in
Polygon-managed equity funds as well as
the Fair Value of, or capital committed
to, equity assets (as applicable) held
directly on TFG's balance sheet. Please
see Figure 12 for further details on asset
(ii) composition.
To achieve TFG's investment objective of generating distributable income and capital appreciation, TFG's current investment strategy is:
- To identify attractive asset classes and investment strategies.
- To identify asset managers it believes to be superior.
- To use the market experience of TFM, TFG's investment manager, to negotiate favourable terms for its investments.
- Through TFG Asset Management, and where sensible, to seek to own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on its capital.
In addition, TFM's current investment strategy is to continue to grow TFG Asset Management - as TFG's diversified alternative asset management business - with a view to a possible initial public offering and listing of its shares.
As part of its investment strategy, TFM may employ hedging strategies and leverage in seeking to provide attractive returns while managing risk.
The Investment Manager seeks to identify asset classes that offer excess returns relative to their investment risk, or "intrinsic alpha." It analyses the risk/reward, correlation, duration and liquidity characteristics of each potential capital use to gauge its attractiveness and incremental impact on the Company.
The Investment Manager then seeks to find high-quality managers who invest in these asset classes; selects or structures suitable investment vehicles that optimise risk-adjusted returns for TFG's capital; and/or seeks for TFG (via TFG Asset Management) to own a share of the asset management company. TFG aims to not only produce asset level returns, but also aims to enhance these returns with capital appreciation and investment income from its investments in asset management businesses that derive income from external investors.
Certain considerations when evaluating the viability of a potential asset manager typically include: performance track records, reputation, regulatory requirements, infrastructure needs and asset gathering capacity. Potential profitability and scalability of the business are also important considerations. Additionally, the core capabilities, investment focus and strategy of any new business should offer a complementary operating income stream to TFG Asset Management's existing businesses. The Investment Manager looks to mitigate potential correlated risks across TFG Asset Management's investment managers by diversifying its exposure across asset classes, investment vehicles, durations, and investor types, among other factors.
TFG's asset management businesses can operate autonomously, or on the TFG Asset Management platform. In either case, the objective is for them to benefit from an established infrastructure, which can assist in critical business management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence.
TFG ASSET MANAGEMENT
Figure 4(15)
ASSETS UNDER HEADCOUNT OFFICES GLOBAL OPERATING
MANAGEMENT(i) PLATFORM
$18B CIRCA 230 London . New York
Including GreenOak Plus GreenOak locations
LCM GreenOak Polygon
Real Estate Joint Hedge Funds & Private
Bank Loans Venture Equity
Approx AUM $6.4 billion(ii) $6.8 billion(iii) $1.5 billion(iv)
- LCM Currently - Japan Fund I - European Equity
manages 16 CLOs - Asia Fund II Opportunity Fund
- UK Debt Fund I - Convertible
- Europe Fund I Spain Opportunity Fund
- US Fund I - Mining Opportunity
- US Fund II Fund
- Global Advisory - Global Equities
Fund
- Distressed
Opportunities Fund
- Recovery Fund
TCIP + TCICM
CLO Equity Bank Loans
$0.2 billion(vii) $0.3 billion(viii)
- Tetragon Credit
Income II L.P.
Equitix Hawke's Point
Mining
Infrastructure Finance
$2.6 billion(v) Start up(vi)
- Fund I
- Fund II
- Fund III
- Fund IV
- Managed Account
- Energy Saving
Investments
- Energy Efficiency
Fund
(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Products/mandates listed are not necessarily open for new investment and are not an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction, but to illustrate the TFG Asset Management platform strategy.
TFG Asset Management consists of:
- LCM Asset Management(16) - a CLO loan manager.
- The GreenOak Real Estate joint venture - a real estate-focused principal investing, lending and advisory firm.
- Polygon Global Partners(17) - a manager of open-ended hedge fund and private equity vehicles across a number of strategies.
- Equitix(18) - an integrated core infrastructure asset management and primary project platform.
- Hawke's Point(19) - a business that seeks to provide capital to companies in the mining and resource sectors.
- Tetragon Credit Income Partners (TCIP)(20) - TCIP acts as a general partner of a private equity vehicle that, among other things, makes investments in CLOs relating to risk retention rules.
- TCI Capital Management LLC (TCICM)(21) - a CLO loan manager.
Assets under management for TFG Asset Management as of 30 June 2016 totalled approximately $17.8 billion.(22)
Board of Directors
TFG's Board of Directors is comprised of six members, four of whom are independent directors who have significant experience in asset management and financial markets. Biographies of the directors can be found in Appendix VIII.
- Rupert Dorey (Independent Director)
- Frederic Hervouet (Independent Director)
- David Jeffreys (Independent Director)
- William P. Rogers, Jr. (Independent Director)
- Reade Griffith
- Paddy Dear
KEY METRICS
The Company focuses on the following key metrics prepared on a Fair Value(23) basis, when assessing how value is being created for, and delivered to, TFG shareholders:
- Earnings: Fair Value Return on Equity and Fair Value EPS
- Fair Value NAV Per Share: NAV Per Share Total Return and NAV per share
- Dividends
EARNINGS - FAIR VALUE RETURN ON EQUITY ("Fair Value RoE")
Annualised Fair Value RoE for H1 2016 was 4.5%; below TFG's long-term target range of 10-15%.(24)
Overall, the first half of 2016 proved to be a difficult environment for investment funds, so TFG was pleased to record a positive set of results, including a Fair Value Net Income(25) of $45.1 million. This resulted in an annualised Fair Value RoE of 4.5% for the first half of the year, which was slightly above the annualised Fair Value RoE of 4.1% for Q1 2016.
- Continuing from Q1, there were positive contributions from nearly all of the investment classes across the portfolio, other than TFG Asset Management.
Figure 5(i)
Annual Fair Value Return on Equity 2012 - YTD 2016
2012 20.8%
2013 15.3%
2014 6.6%
2015 14.5%
2016 annualised 4.5%
Target RoE 10-15%
Average RoE 13.0%
Average RoE is calculated from TFG's IPO
in 2007. 2015 RoE includes a fair value
adjustment for certain TFG Asset
Management businesses, the value of
which has accumulated over several
years. Consequently, the full year
return of 14.5% is not prepared on a
like for like basis with prior years.
Like for like performance for 2015 was
(i) 8.2%.
FAIR VALUE EARNINGS PER SHARE ("Fair Value EPS")
TFG generated a Fair Value EPS(26) of $0.47 in H1 2016
The Fair Value Net Income of $45.1 million resulted in a Fair Value EPS of $0.47. These results are significantly down from the same period last year, reflecting the generally adverse and volatile conditions in H1 2016 as well as some strong one-off contributions in H1 2015.(27)
Figure 6
Fair Value EPS Comparison
2012 - H1 2016 (USD)
H1 H2 Total Year
FY 2012 $1.15 $1.55 $2.70
FY 2013 $1.02 $1.50 $2.52
FY 2014 $0.90 $0.34 $1.24
FY 2015 $1.13 $1.59 $2.72
H1 2016 $0.47
Further detailed information on the drivers of the Company's performance is provided later in this report.
FULLY DILUTED FAIR VALUE NAV PER SHARE
Fully Diluted Fair Value NAV Per Share was $19.96 at the end of H1 2016, up 13.0% from the same period in 2015. Fair Value NAV Per Share Total Return was 6.4% year to date.
- Fully Diluted Fair Value NAV per Share increased significantly during the period as the positive impact from operating performance was boosted by a repurchase of 10 million shares for an all-in cost of $100.7 million.
- Although the share repurchase reduced net assets, by buying its shares at a discount to NAV, TFG increased the Fair Value NAV Per Share by approximately $0.94.
- As usual, TFG returned value to shareholders through its quarterly dividend. Over the past 12 months, quarterly dividends have amounted to $0.66 per share.
Figure 7
Fair Value NAV Per Share Total Return
2012-H1 2016 H1 FY
2012 9.9% 19.0%
2013 5.4% 15.8%
2014 6.3% 8.1%
2015 5.5% 16.0%
2016 6.4%
Figure 8(i)
Fair Value NAV Per Share
H1 2012 - H1 2016
2012 $13.75
2013 $15.17
2014 $17.08
2015 $17.66
2016 $19.96
Source: Fully Diluted Fair Value NAV per share based on TFG's
financial statements as of 30 June of each of the years
shown. Please see Figure 22 on page 28 for more details on
(i) the calculation of Fully Diluted Fair Value NAV Per Share.
DIVIDENDS PER SHARE ("DPS")
TFG increased its quarterly dividend to 16.75 cents per share in Q2 2016
- TFG declared a Q2 2016 DPS of $0.1675 per share, an increase from $0.165 in Q1 2016. On a rolling 12-month basis, the dividend of $0.66 per share represents a 4.3% increase over the prior 12-month period and equates to an annualised dividend yield of 6.6% on the 30 June 2016 share price of $9.99.
- This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q2 2016 DPS of $0.1675 brings the cumulative DPS declared since TFG's IPO to $4.4175.
Figure 9
Dividend per Share Comparison
2012 - H1 2016 (USD)
H1 H2 Total Year
2012 $0.2200 $0.2500 $0.4700
2013 $0.2750 $0.2900 $0.5650
2014 $0.3050 $0.3125 $0.6175
2015 $0.3200 $0.3275 $0.6475
2016 $0.3325 - $0.3325
H1 2016 IN REVIEW
The figure below illustrates the composition of TFG's Fair Value Net Assets as of 30 June 2016 and 31 December 2015.
Figure 10: Fair Value Net Asset Composition Summary(i)(ii)
Fair Value Net Asset Composition
Summary(i)(ii)
Fair Value Net
Asset
Breakdown at Net Asset
31 December Breakdown at
2015 30 June 2016
CLO Equity 30.2% 26.8%
Equities 14.5% 16.2%
Credit 7.2% 7.8%
Real Estate 7.1% 8.7%
TFG Asset Management
(privately-held securities) 21.2% 21.0%
Net Cash 19.8% 19.5%
Total 100.0% 100.0%
Net Cash consists of: (1) cash held
directly by Tetragon Financial Group
Master Fund Limited, (2) excess margin
held by brokers associated with assets
held directly by Tetragon Financial
Group Master Fund Limited, and (3) cash
held in certain designated accounts
related to TFG's investments, which may
only be used for designated purposes
without incurring significant tax and
transfer costs, net of "Other Net
(i) Assets and Liabilities."
Assets characterised as "Equities"
consist of the Fair Value of
investments in Polygon-managed equity
funds as well as the Fair Value of, or
capital committed to, equity assets (as
applicable) held directly on TFG's
balance sheet. Please see Figures 11
and 12 for further details on asset
(ii) composition.
Top 10 Holdings as of 30 June 2016
The table below highlights the fair value of TFG's ten top holdings as of 30 June 2016.
Figure 11
Top 10 Holdings at 30 June 2016
% of
Fair
Fair Value Value
Holding Investment Type Description $MM NAV
1 Equitix (Manager) Privately-held securities GBP1.9 Bn UK infrastructure
in asset mgt business fund asset manager 167.1 8.8%
2 Polygon European Fund Investment - Equity European event driven equity 148.0 7.8%
Equity Opportunity hedge fund
Fund
3 LCM (Manager) Privately-held securities $6.4 Bn CLO manager 102.8 5.4%
in asset mgt business
4 Polygon Distressed Fund Investment - Credit Distressed opportunities 95.3 5.0%
Opportunities Fund hedge fund
5 GreenOak Real Privately-held securities $6.8 Bn global real estate 66.0 3.5%
Estate (Manager) in asset mgt business asset manager
6 Polygon (Manager) Privately-held securities
$1.5 Bn hedge fund manager 62.9 3.3%
7 Polygon Convertible Fund Investment - Credit Event driven credit hedge fund 46.9 2.5%
Opportunity Fund
8 Polygon Mining Fund Investment - Equity Mining-related equity 42.5 2.2%
Opportunities Fund hedge fund
9 LCM XVI LP CLO Equity Investment US broadly syndicated corporate 35.9 1.9%
loans (CLO)
10 GreenOak US Real Estate US Real Estate fund 35.3 1.9%
II Fund
TOTAL 42.1%
Net Asset Breakdown and Income for H1 2016
Figure 12
NET ASSET BREAKDOWN AND INCOME FOR Q1 2016
H1 2016 H1 2016 2015 2015
Fair Value Fair Value Fair Value Fair Value
Net Assets Net Income Net Income Net Income
Asset Category Asset Subcategory ($MM) ($MM) ($MM) ($MM)
CLO Equity U.S. CLO 1.0(i) 190.0 12.5 260.6 55.7
CLO Equity U.S. CLO 2.0(i) 283.5 23.7 281.7 30.2
CLO Equity European CLOs 38.2 8.7 58.5 6.0
CLO Equity CLO Equity Fund 0.1 0.2 - -
Equities Equity Funds 210.6 12.3 198.3 15.3
Equities Other Equities(ii) 98.2 6.0 90.5 51.6
Credit Convertible Bond Fund 46.9 2.1 44.8 2.3
Credit Distressed Fund 95.3 0.2 95.1 (5.4)
Credit Direct Loans 6.3 0.5 3.0 1.0
Real Estate Real Estate 165.1 5.8 141.7 25.2
Privately-Held TFG Asset
Securities Management(iii) 400.1 (1.9) 422.1 185.2
Net Cash Net Cash 373.1 0.5 391.0 0.1
Net Cash Corporate Fees and Expenses NA (23.9) NA (92.2)
Net Cash Net Hedge PnL and Taxes NA (1.6) NA (11.1)
1,907.4 45.1 1,987.3 263.9
"U.S. CLO 1.0" refers to
U.S. CLOs issued before or
during 2008. "U.S. CLO 2.0"
refers to U.S. CLOs issued
after 2008. The U.S. CLO
1.0 segment includes an
investment in the BB
tranche of a U.S. CLO 1.0
with Fair Value of $1.7
(i) million.
Assets characterised as
"Other Equities" consist of
the Fair Value of, or
capital committed to,
investment assets held
directly on the balance
(ii) sheet.
The TFG Asset Management
net income figure for 2015
includes the consolidated
net income before tax of
Polygon, LCM and Hawke's
Point to 30 June 2015, and
changes in the Fair Value
of those investments from 1
July to 31 December 2015.
The income relating to
investments in Equitix and
GreenOak reflects the
changes in the carrying
value of these equity
investments, and in the
case of Equitix, interest
income and changes in Fair
Value connected to the
loans held. For H1 2016 all
calculations reflect the
changes in fair value of
all businesses owned by TFG
Asset Management, and any
net distributions made from
(iii) them to TFG.
Figure 10 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q1 2016 compared to 2015.
Figure 12 above shows Fair Value Net Assets and Fair Value Net Income by asset class for H1 2016 compared to 2015.
CLOs
- U.S. CLO 1.0: TFG's U.S. CLO 1.0 investments contributed $12.5 million in Fair Value Net Income over the first half of 2016. This segment of the portfolio continues to naturally amortise, and as of the end of H1 2016, had seen a reduction of over 27% from year-end 2015. We continue to monitor opportunities to maximise value and we expect our U.S. CLO 1.0 deals will continue to convert into cash as they unwind over the near and medium term. As of the end of H1 2016, all of TFG's U.S. CLO 1.0 deals were passing their junior-most O/C tests.(28)
- U.S. CLO 2.0: TFG's U.S. CLO 2.0 investments produced $23.7 million in Fair Value Net Income during H1 2016. As we intend to achieve our exposure to new issue CLO equity investments via our investment in TCI II over the medium term, we do not expect the directly held U.S. CLO 2.0 segment to grow in a material way absent a more attractive secondary market, and may in fact begin to see declines in our direct U.S. CLO 2.0 investments, as they reach the ends of their reinvestment periods and begin to amortise. As of the end of H1 2016, all of TFG's U.S. CLO 2.0 were in compliance with their junior-most O/C tests.(29)
- European CLOs: The European CLO segment of TFG's portfolio produced $8.7 million in Fair Value Net Income during H1 2016. We expect to see this segment of the portfolio continue to convert into cash as we do not view the European CLO equity market as attractive at this time. All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of H1 2016.(30)
- CLO Equity Fund: The Company's CLO equity investment vehicle, TCI II, continues to make new issue investments during its ramp-up period. Through the end of H1 2016, TCI II had made, or committed to make, investments with a total cost of $100.0 million. TFG's available undrawn capital commitment totalled $50.0 million. During H1 2016, TFG received a small distribution of income from TCI II.
EQUITIES
- Equity Funds: Polygon's event-driven equity investments generated Fair Value Net Income of $12.3 million during H1 2016, with the strongest performance coming from investments in the Polygon European event-driven fund, which was up 5.0% net during H1, and the Polygon mining fund, which was up 12.2% net. Please refer to page 23 for further details on the performance of the individual funds.
- Other Equities: These assets generated Fair Value Net Income of $6.0 million in H1 2016, which built on the positive performance during Q1.
CREDIT
- Convertible Fund: The Polygon convertible fund investment contributed Fair Value Net Income of $2.1 million during H1 2016. The Polygon Convertible strategy returned 4.1% net during H1. Please refer to page 23 for further details on the fund's performance.
- Distressed Fund: The Polygon distressed fund investment generated $0.2 million of Fair Value Net Income during H1, after being lossmaking in Q1, and the fund returned 2.0% net during the period. Please refer to page 23 for further details on the fund's performance.
REAL ESTATE
- Real Estate: TFG's investment in Real Estate contributed $5.8 million of Fair Value Net Income during the first half of the year. This was driven primarily by income returned on the Japan Fund and also a commercial property investment in the United Kingdom.
TFG ASSET MANAGEMENT (privately-held securities in asset management businesses)
- TFG Asset Management: TFG's investment in TFG Asset Management comprises a diverse portfolio of alternative asset managers. TFG Asset Management recorded an unrealised loss of $1.9 million during the first half of the year as the valuations of these investments were recalibrated. After adjusting for FX hedging, TFG's investment in Equitix made a positive contribution in H1 of approximately $11.4 million, reflecting the performance of this business. TFG's investments in Polygon, GreenOak and LCM all recorded unrealised losses, reflecting a combination of factors, including, in some cases, the application of less favourable market multiples or discount rates, and a more conservative view on elements of projected performance this year. We continue to believe that the underlying economics and momentum of these businesses remain positive, as measured by, among other things, EBITDA and AUM growth, as described in the TFG Asset Management section in this report. For further information on the basis for determining the Fair Value of the TFG Asset Management investment, please see Appendix IV. TFG Asset Management's pro forma operating results are set out in Figure 16.
Figure 13
TFG Asset Management - Net Income H1 2016
Fair Value H1 2016 Fair Value Q4 2015 FV Movement
Business ($MM) ($MM) ($MM)
Equitix 167.1 173.9 (6.8)
GreenOak Joint Venture 66.0 70.0 (4.0)
Hawke's Point 0.7 0.8 (0.0)
TCIP 0.4 0.3 0.1
LCM 102.8 110.2 (7.4)
Polygon 62.9 67.0 (4.1)
Change in Fair Value 400.1 422.1 (22.1)
Other TFGAM investment income and impact of currency hedge on Equitix 20.2
Total Capital Appreciation and Investment Income (1.9)
CASH
- Net Cash: TFG held $373.1 million of Fair Value in net cash at 30 June 2016, a reduction on the balance held at the end of Q1 2016 as a result of the share repurchase. The Company actively manages its cash levels to cover future commitments and to enable it to capitalise on opportunistic investments.
H1 2016 Major New Investments
- Real Estate: TFG continued to add to its real estate exposure with investments in the first half of the year totalling approximately $27.9 million in GreenOak-managed vehicles. These investments were primarily centred on the United States and Europe.
- CLO Equity Fund: As outlined in the Q1 2016 report, TFG made a commitment of $15.0 million to TCI II, bringing TFG's total commitments to $50.0 million. No commitments had been drawn as of the end of H1 2016. To date, this commitment remains undrawn as TCI II ramps up by utilising a subscription credit facility.
- Repurchase of TFG Shares: In June, TFG repurchased $100 million of its shares at $10 per share via a tender offer managed by Deutsche Bank AG.
H1 2016 Major Asset Sales and Optional Redemptions
- European CLOs: TFG initiated an optional early redemption of one European CLO during H1 2016, and as of the end of the period, had received all expected liquidation proceeds (approximately €15.1 million)
- Real Estate: Some real estate investments returned capital and income during H1 2016. This was primarily from US and European-focused investment vehicles.
TFG Asset Management Overview
One of TFG's significant investments is TFG Asset Management, a diversified alternative asset management business that owns majority and minority stakes in asset managers. At 30 June 2016, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke's Point, TCIP(31) and TCICM (please see Figure 14 for the breakdown of AUM and Fair Value by business line). TFG Asset Management has approximately $17.8 billion of assets under management(32) and approximately 230 employees globally. Figure 15 depicts the growth of that AUM over the last five years. Each of the asset management businesses on the platform are privately-held.
Figure 14(33)
TFG AM AUM by Business Line at 30 June 2016 ($BN)
LCM: U.S. CLOs $6.4
GreenOak: Global Commercial Real Estate $6.8
Polygon: Hedge Funds $1.5
Equitix: UK Infrastructure $2.6
TCIP: CLO Equity $0.2
TCICM: Bank Loans $0.3
TFG AM Fair Value by Business Line at 30 June 2016 ($MM)
Equitix $167.1
GreenOak Joint Venture(i) $66.0
Hawke's Point $0.7
TCIP $0.4
LCM $102.8
Polygon $62.9
(i)The Fair Value of TFG's 23% stake.
Figure 15(34)
TFG AM Assets Under Management at 30 June 2012-2016 ($BN)
H1 2012 H1 2013 H1 2014 H1 2015 H1 2016
LCM: U.S. CLOs $4.1 $4.3 $5.1 $5.6 $6.4
GreenOak: Global Commercial Real Estate $1.7 $3.2 $3.9 $5.6 $6.8
Polygon: Hedge Funds $1.1 $1.5 $1.5 $1.5
Equitix: UK Infrastructure $2.1 $2.6
TCIP: CLO Equity $0.2
TCICM: Bank Loans $0.3
Total Reportable AUM $5.8 $8.7 $10.6 $14.8 $17.7
TFG Asset Management Pro Forma EBITDA (Ex-GreenOak)
Figure 16
TETRAGON
FINANCIAL GROUP
TFG Asset Management Pro Forma Statement of Operations (excluding GreenOak)
H1 2016 H1 2015(i) H1 2014
$MM $MM $MM
Management fee
income 31.9 25.3 20.4
Performance and
success fees(ii) 20.7 25.3 8.8
Other fee income 8.2 10.9 8.5
Interest income 0.8 0.7 0.1
Total income 61.6 62.2 37.8
Operating,
employee and
administrative
expenses (40.9) (31.0) (20.0)
Minority Interest (3.1) (3.2) -
Net income -
"EBITDA
equivalent" 17.6 28.0 17.8
The above table includes the income and expenses
attributable to TFG's majority owned businesses,
Polygon, LCM and Equitix during that period. In
the case of Equitix this only covers the period
from 2 February 2015, the date of the closing of
TFG's acquisition of Equitix. Although TFG
currently has an 85% effective economic share of
its business, 100% of Equitix's income and
expenses are reflected with the 15% not
attributable to TFG backed out through the
minority interest line. GreenOak is not included.
The EBITDA equivalent is a non-GAAP measure and is
designed to reflect the operating performance of
the TFG Asset Management businesses rather than
what is reflected in TFG's U.S. GAAP financial
(i) statements.
The performance and success fees include some
realised and unrealised Polygon performance fees.
These represent the fees calculated by the
applicable administrator of the relevant Polygon
funds, in accordance with the applicable fund
constitutional documents, when determining NAV at
the reporting date. Similar amounts, if any, from
LCM are recognised when received. TFG is generally
able to invest at a preferred level of fees.
Success fees also include fees earned by Equitix
on successfully completing certain primary
projects and delivering de-risked investments into
their secondary funds; these are recognised once
(ii) they are entitled to recover them.
- Overview: Figure 16 shows a pro forma statement of operations which reflects the operating performance of the majority-owned asset management companies within TFG Asset Management. Although, under U.S. GAAP, they are currently reported partially at Fair Value and partially on a consolidated basis, the aim of also presenting the underlying performance in this way is to give investors insight into a key driver behind that valuation. GreenOak, in which TFG holds a minority interest, is not currently included in the calculation of pro forma EBITDA.
- EBITDA: During Q2 2016, TFG Asset Management continued the solid start made in Q1, resulting in H1 2016 EBITDA of $17.6 million. Largely as a result of a very strong Q1 2015 for performance (realised and unrealised) and success fees, the EBITDA equivalent for the majority-owned TFG Asset Management businesses fell by 37% between H1 2015 and H1 2016. Management fees made up over 50% of the total fee income, up from 41% in 2015, and we believe that this is an indication of an improvement in the quality of earnings year on year.
- Management fee income: Management fee income continued to increase with the growth of the fee-paying AUM of the TFG Asset Management businesses. As shown in Figure 16, fee-paying capital increased significantly year on year, primarily through organic growth of the Equitix, Polygon and LCM businesses since H1 2015. See Figures 14 and 15 for further information on TFG Asset Management's AUM. Management fees grew by over 25% between H1 2015 and H1 2016.
- Performance and success fees: Compared to H1 2015, performance and success fees continued to lag, primarily due to a particularly strong H1 2015 performance from Equitix's primary business. Such fees do not tend to follow seasonal patterns and, indeed, this aspect of the Equitix business is working on an active deal pipeline. This effect has been partially offset by strong performance in certain Polygon funds, which has boosted the performance fees included in the EBITDA vis-a-vis the same period in 2015.
- Other fee income: This category includes third-party CLO management fee income relating to certain U.S. CLO 1.0 transactions, which continued to decline in line with expectations as these transactions amortised down. In addition, it includes certain cost recoveries from TFG relating to seeded Polygon hedge funds, which fell year on year. The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report, decreased slightly year on year although the teams supporting those seeded funds continued to grow. As these businesses mature and build third party capital, we expect that such cost recoveries should decrease. The other fee income category also includes fee income generated by Equitix on certain management services contracts, which is a strongly growing part of the Equitix business.
- Operating expenses: In H1 2016, a number of factors led to an increase in operating expenses within TFG Asset Management of $9.9 million, or 32% on the equivalent half year period in 2015, although when annualised and compared to the full year 2015 figure, the increase is a more modest 8%.
Costs increased in relation to Equitix, as it continues to grow its business. H1 2016 also included six months of costs versus five months in H1 2015. In addition, with respect to TCIP, costs associated with set up and marketing were incurred in H1 2016, compared to H1 2015 when the business had not yet been set up. Finally, TFG Asset Management continued to invest by increasing headcount in a number of areas, which will hopefully support the continued growth of the platform.
BUSINESS OVERVIEWS
The following pages provide a summary of each asset management business and a review of AUM growth and underlying strategy / investment vehicle performance during the first half of 2016.
All data is at 30 June 2016, unless otherwise stated.
LCM
- LCM is a specialist in below-investment grade U.S.
broadly-syndicated leveraged loans.
- The business was established in 2001 and has offices in
New York and London.
- TFG owns 100% of LCM.
- Currently, LCM manages loan assets exclusively through
CLOs, which are long-term, multi-year investment
vehicles. The typical duration of a CLO, and thus LCM's
management fee stream, depends on, among other things,
the term of its reinvestment period (currently typically
four to five years for a new issue CLO), the prepayment
rate of the underlying loan assets, as well as
post-reinvestment period reinvestment flexibility and
weighted average life constraints.
- CLO managers typically earn a management fee of up to
0.50% of total assets, and a performance fee of 20% over
a CLO equity IRR hurdle.
- Further information on LCM is available at
Description www.lcmam.com.
of Business:
$227.9 million.
TFG held CLO equity investments with total fair value of
$221.6 million (U.S. CLO 1.0: $3.2 million, U.S. CLO 2.0:
$218.4 million) in LCM-managed CLOs.
Amount of LCM provides expertise to the management of a portfolio of
TFG's U.S. broadly-syndicated leveraged loans held directly on
Investment in TFG's balance sheet. At the end of H1 2016, the fair value
Products: of these loans was $6.3 million.
AUM: Figure 17
LCM AUM History ($BN)
Total
YE 2012 $4.3
YE 2013 $4.2
YE 2014 $5.3
YE 2015 $6.1
H1 2016 $6.4
LCM's AUM is $6.4 billion at 30 June 2016. During H1 2016,
one new issue LCM-managed CLO closed.
LCM CLOs performed well in the first quarter of 2016, with
all of those that were effective and still within their
reinvestment periods continuing to pay senior and
subordinated management fees.
Performance
in H1 2016
GREENOAK
- GreenOak is a real estate-focused principal investing,
lending and advisory firm that seeks to create long-term value
for its investors and provide strategic advice to its clients.
- The business was established in 2010 as a joint venture with
TFG and has a presence in New York, London, Tokyo, Los Angeles,
Madrid, and Seoul.
- TFG owns 23% of the business.
- GreenOak currently has funds with investments focused on the
United States, Japan, Spain, and the United Kingdom.
- Funds are typically structured with management fees of
1.5%-2.0% and carried interest over a preferred return. The
funds generally have a multi-year investment period, with a
fund term of seven years after the final close, with possible
extensions subject to certain approvals.
- Further information on GreenOak is available at
Description of www.greenoakrealestate.com.
Business:
Amount of
TFG's
Investment in
Products: $138.3 million.
Figure 18
AUM: GreenOak AUM History(i) ($BN)
YE 2012 2.3
YE 2013 3.6
YE 2014 4.4
YE 2015 6.6
H1 2016 6.8
(i) Includes investment funds and advisory assets managed by
GreenOak at 30 June 2016. TFG owns a 23% stake in GreenOak. AUM
includes all third-party interests and total projected capital
investment costs.
Gross AUM is $6.8 billion at 30 June 2016. GreenOak initiated the
capital raise for its Europe Fund II in June, and, by the end of
June, had already closed the Euro equivalent of over $100
million.
GreenOak-managed vehicles continue to perform well across their
European, U.S. and Asian businesses. The performance of
GreenOak's first investment programs since inception is expected
to be strong:
US Fund I: gross 41% IRR and 2.0x, net 32% and 1.8x(i)(ii)
Japan Fund I: gross 42% IRR and 1.8x, net 30% and 1.6x(i)(ii)
UK Office Program: gross 21% IRR and 1.7x, net 17% and 1.5x(iii)
During H1 2016, GreenOak sold all of its central London office
assets well ahead of Brexit, achieving targeted gross IRRs and
equity multiples from a pair of City of London office
investments. GreenOak also realised its first sale from its Spain
Tactical program, which acquired eight retail assets in Spanish
cities including Madrid in July of 2014. In the past 15 months,
GreenOak's Europe Fund I (Spain) has fully committed its EUR250MM
of equity. In March, GreenOak closed a $650 million
Japan-oriented fund.
(i) The projected returns are achievable based upon certain
calculations by the Fund as reliant upon market and transaction
assumptions and projections derived by the Fund and are therefore
hypothetical. The projected returns are not a guarantee of any
particular performance or result.
(ii) The projected net returns are after management fees, carried
interest, organizational expenses, partnership expenses and taxes
(other than taxes or withholding specifics to certain limited
partners).
(iii) The projected returns for the investment program comprised
of individual asset investments are achievable based upon certain
calculations by the Firm as reliant upon market and transaction
assumptions and projections derived by the Firm and therefore
Performance hypothetical. The projected returns are not a guarantee of any
in H1 2016 particular performance or result..
POLYGON
- Polygon manages open-ended hedge fund and private equity
vehicles across a number of strategies.
- Polygon was established in 2002 and has offices in New York
and London.
- TFG owns 100% of the business.
- Fees in these products include a management fee that is
generally between 1.5% and 2.0% and the typical performance fee or
carried interest is 20%.
Description of - Further information on Polygon is available at www.polygoninv.com.
Business:
$352.7 million.
Amount of
TFG's
Investment in
Products:
Figure 19(i)
Polygon Hedge Funds AUM History ($MM)
(Convertibles, European Event-Driven Equity, Mining Equities,
Distressed, Other Equity)
AUM:
YE 2012 529
YE 2013 855
YE 2014 1,113
YE 2015 1,248
H1 2016 1,295
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon
European Equity Opportunity Master Fund and associated managed account,
Polygon Mining Opportunity Master Fund, Polygon Global Equities Master
Fund and Polygon Distressed Opportunities Master Fund, as calculated by
the applicable fund administrator at 31 December 2012, 2013, 2014,
2015, and 30 June 2016. Includes, where relevant, investments by
Tetragon Financial Group Master Fund Limited. AUM is $1.5 billion
for all funds; and $1.3 billion for open strategies.
Figure 20(35)
Polygon's various strategies performed well in H1 2016, with all
posting positive net returns year to date despite significant market
volatility in late June relating to the UK "Brexit" referendum. All of
Polygon's funds hedge their currency exposure, with the exception of
the Polygon Recovery Fund L.P.
Performance
in H1 2016:
Polygon Funds Summary
AUM at
30 June 2016 Q2 2016 Net YTD Net Annualised Net
Fund ($MM) Performance Performance LTD Performance
Convertibles(35.i) $442.3 3.0% 4.1% 16.4%
European Event-
Driven Equity(35.ii) $649.4 -0.1% 5.0% 11.1%
Mining Equities(35.iii) $79.9 11.1% 12.2% 5.8%
Distressed
Opportunities(35.iv) $100.3 4.1% 2.0% 4.3%
Other Equity(35.v) $22.7 1.0% 1.9% 14.7%
Estimated approx.
Total AUM - Open Funds $1,294.8 LTD Multiple
Private Equity
Vehicle(35.vi) $265.7 N/A N/A 1.8x
Total AUM $1,534.8
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 reflect the actual net performance of the funds
net of management and performance fees, as well as any commissions and
direct expenses incurred by the funds, but before withholding taxes, and
other indirect expenses. All returns include the reinvestment of
dividends, if any. Differences in account size, timing of transactions
and market conditions prevailing at the time of investment may lead to
different results. Differences in the methodology used to calculate
performance may also lead to different performance results than those
shown.
P&L YTD in 2016 for the Private Equity Vehicle was -$24.5 million through
to 30 June 2016 before FX movements of +$2.1 million. P&L is +$127.9
million from closing date net asset value before FX movements of -
$37.1 million. The fund is generally precluded from hedging FX exposure.
The fund has made life to date distributions of $565 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 1.8 x. Each of these multiples will be different from
the multiples reflected for specific limited partners in the fund, which
would be calculated with respect to relevant class of partners in
accordance with the fund's limited partnership agreement.
- Polygon's convertibles strategy invests primarily in convertible
securities in Europe and North America.
- H1 2016 net performance was 4.1%, compared to the HFRX Convertible
Arbitrage Index which returned 1.47% for the same period; annualised net
performance since inception in May 2009 has been 16.4% compared to 4.9%
for the benchmark index.(36)
Convertibles:
- Polygon's European Event-Driven strategy invests primarily in the
major European equity markets, with an event-driven focus.
- The strategy returned 5.0% net during H1 2016. This compares to the
HFRX Event Driven Index which returned 3.25% for the same period;
European annualised net performance for Polygon's fund since inception in
Event-Driven July 2009 has been 11.1% compared to 2.1% for the benchmark index.(37)
Equity:
- Polygon's Mining Equities strategy focuses primarily in the equities
of global mining companies, many of them based on gold.
- The strategy posted net returns of 11.1% for H1 2016, compared to
121.8% for the GDXJ Junior Gold Miners Index for the same period;
annualised net performance since inception in June 2012 has been
Mining 5.8% compared to -13.6% for the benchmark index.(38)
Equities:
- Polygon's Distressed strategy focuses on opportunities in companies
undergoing, or about to undergo, balance sheet restructurings.
- Net performance during H1 2016 was 4.1%. This compares to the HFRX
Distressed Restructuring Index, which returned 7.4% for the same
period. Annualised net performance since inception in September 2013
has been 4.3% for the fund, versus the benchmark index return of
Distressed -1.1%.(39)
Opportunities:
- These investments returned 1.9% net performance during H1 2016 and
annualised performance from inception to 31 December 2015 was 14.7%.(40)
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 $565 million of cash to its partners since inception in March
2011. As the fund generally does not hedge for FX exposure, P&L can be
affected by currency moves. P&L for H1 2016 was -$24.5 million; FX
movements accounted for +$2.1 million, leading to net P&L of -$22.4
million. Life to date, gross P&L is +$127.9 million excluding FX; FX
movements accounted for -$37.1 million, and thus net P&L was $90.8
million.([41]) TFG has not invested directly
in this product; however, TFG Asset Management 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 economic interest
is expected to decline to approximately 74.8%. Management own the
balance.
- Equitix typically invests in infrastructure projects in the
United Kingdom with long-term revenue streams across the
healthcare, education, social housing, highways & street lighting,
offshore transmission and renewable and waste sectors.
- Fees in this product include a management fee, and a carry
interest fee that is over a hurdle currently set at 7.5%. The
carried interest fee is typically 20% over the hurdle, and the
management fee after the investment period is typically between
1.25% and 1.65%; during the investment period it 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%.
Description of - Further information on Equitix is available at www.equitix.co.uk.
Business:
TFG has exposure to the performance of Equitix funds indirectly
Amount of TFG's through its ownership of the company as Equitix holds certain GP
Investment in interests in the funds it manages. As at 30 June 2016, these
Products: interests were valued at GBP13.9 million ($18.5 million).
Figure 21
Equitix AUM History (GBPMM)
AUM:
YE 2012 GBP493
YE 2013 GBP1,027
YE 2014 GBP1,328
YE 2015 GBP1,880
H1 2016 GBP1,937
(i)USD-GBP exchange rate at 30 June 2016.
AUM is GBP1.9 billion ($2.6 billion)(i) at 30 June 2016.
Equitix Funds I-III are now cash generative and fully invested or
committed. Equitix Fund IV achieved total commitments of GBP486
million through the end of Q2 2016 and has further commitments due in
the coming months. To date, Equitix Fund IV has deployed over GBP200
million of investments across 14 infrastructure assets. Equitix
Performance in Managed Account received a further GBP30 million commitment from its
H1 2016: Limited Partner.
HAWKE'S POINT
- Hawke's Point is a mining finance company established by TFG Asset
Management in Q4 2014 that seeks to provide capital to companies in
the mining and resource sectors.
- TFG Asset Management owns 100% of the business.
- Hawke's Point is currently actively evaluating a range of mine
Description of financing opportunities.
Business:
Amount of
TFG's
Investment in
Products: As of 30 June 2016, there were no investments on which to report.
AUM: Not applicable.
TCIP and TCICM
- TCIP acts as a general partner of a private equity vehicle that,
among other things, makes investments in CLOs relating to risk
retention rules.(42)
- The business was established at the end of 2015 and is managed out of
New York and London.
- TFG owns 100% of the business.
- TCIP currently acts as general partner of Tetragon Credit Income II
L.P. ("TCI II"), which focuses on CLO investments relating to risk
retention rules, including majority stakes in CLO equity tranches of
transactions managed by LCM or sub-advised by third-party CLO managers.
TCI II is structured with a management fee and carried interest over a
preferred return (each on non-LCM investments). It has a multi-year
investment period and a term of seven years (subject to potential
extensions and otherwise as required by applicable regulatory
requirements).
- TCI Capital Management LLC ("TCICM") is a specialist in
below-investment grade U.S. broadly-syndicated leveraged loans. TCICM
was established as a Delaware limited liability company in November
2015 and is a subsidiary of Tetragon Credit Income II L.P and recently
commenced operations. It acts as a CLO collateral manager and sponsor
for certain CLO investments. It utilises, and has access to, the TFG
Asset Management platform, including personnel from Polygon Global
Partners and LCM Asset Management LLC.
- Currently, TCICM manages loan assets exclusively through CLOs (which
includes warehouse vehicles created in anticipation of future CLOs),
which are long-term, multi-year investment vehicles. At this time,
TCICM expects to utilise the investment expertise of certain third
party sub-advisors to assist in the management of its CLOs. Such
sub-advisors will typically earn a substantial portion of the
management fees from the CLOs.
- CLO managers typically earn a management fee of up to 0.50% of total
assets, and a performance fee of 20% over a CLO equity IRR hurdle.
- Further information on TCIP and TCICM is available at
Description www.tetragoninv.com.
of Business:
Amount of
TFG's
Investment
in Products: $50.0 million of committed capital in TCIP.
TCI II had a second close in March 2016, bringing its total committed
capital to $203.4 million.
TCI II made an initial commitment to invest $36.0 million in the equity
tranche of a TCICM-managed CLO. Given the current committed capital of
TCI II, TFG's share of this investment is approximately $8.8 million.
This investment closed shortly after the end of H1 2016.
Committed
Capital TCI II invests in CLOs managed by TCICM.
During H1 2016, TCI II made an investment in a majority stake in the
equity tranche of LCM XXI LP and an initial commitment to invest in a
majority stake in the equity tranche of TCI-Flatiron 2016-1 Ltd, a U.S.
CLO managed by TCICM and sub-advised by a third party. TCIP continues to
evaluate investment opportunities for TCI II during its investment
period. Including a distribution made shortly after the end of H1 2016,
TCI II had made distributions of income of approximately $1.3 million to
its limited partners.
During H1 2016, TCICM acted as asset manager (with a third party as the
operational support provider) for a warehouse vehicle created in
Performance anticipation of the issuance of TCI-Flatiron 2016-1 Ltd, a U.S. broadly
in H1 2016: syndicated CLO that closed shortly after the end of H1 2016
H1 2016 FINANCIAL REVIEW
This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), adjusted from Q3 2015 to reflect the Fair Value of TFG Asset Management's businesses which are consolidated under U.S. GAAP, and provides comparative data where applicable. Comparative data presented for periods prior to Q3 2015 are disclosed as they were reported at the time and have not been adjusted retrospectively to be presented on a fair value basis.
FINANCIAL HIGHLIGHTS
Figure 22
TETRAGON FINANCIAL GROUP
Financial Highlights Through H1 2014 - H1 2016
H1 2016 H1 2015 H1 2014
U.S. GAAP Net income ($MM) $41.7 $95.7 $71.9
Fair Value Net income ($MM) $45.1 $109.0 $86.0
U.S. GAAP EPS $0.44 $0.99 $0.75
Fair Value EPS $0.47 $1.13 $0.90
Fair Value Return on equity 2.3% 6.0% 4.8%
Fair Value Net Assets ($MM) $1,907.4 $1,901.0 $1,808.5
U.S. GAAP number of shares outstanding (MM) 87.5 96.8 94.2
Fair Value NAV per share $21.81 $19.64 $19.19
Fully diluted shares outstanding (MM) 95.6 107.6 105.9
Fully diluted Fair Value NAV per share $19.96 $17.66 $17.08
DPS $0.3325 $0.3200 $0.305
TFG uses, among others, the following metrics to understand the progress and performance of the business:
- Fair Value Net Income ($45.1 million): See Appendix IV for reconciliation to U.S. GAAP net income.
- Fair Value Return on Equity (2.3%): Fair Value Net Income ($45.1 million) divided by Net Assets at the start of the year ($1,987.3 million).
- Fully Diluted Shares Outstanding (95.6 million): Adjusts the U.S. GAAP shares outstanding(i) (87.5 million) for various dilutive factors (8.1 million shares). See Figure 35 for more details.
- Fair Value EPS ($0.47): Calculated as Fair Value Net Income ($45.1 million) divided by weighted-average U.S. GAAP shares(i) during the period (95.8 million).
- Fully Diluted Fair Value NAV Per Share ($19.96): Calculated as Fair Value Net Assets ($1,907.4 million) divided by Fully Diluted Shares Outstanding (95.6 million).
(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.
FAIR VALUE EPS ANALYSIS H1 2014 - H1 2016
Figure 23
TETRAGON FINANCIAL GROUP
TFG Fair Value Earnings per Share Analysis Through H1 2014 - H1 2016
H1 2016 H1 2015 H1 2014
Investment portfolio segment
U.S. CLO 1.0 $0.13 $0.37 $0.74
U.S CLO 2.0 $0.25 $0.27 $0.12
European CLOs $0.09 $0.02 $0.14
Equity Funds $0.13 $0.15 $0.12
Other Equities $0.06 $0.44 ($0.07)
Convertible Bond Fund $0.02 $0.02 $0.05
Distressed Fund - - $0.06
Direct Loans $0.01 $0.01 $0.01
Real Estate $0.06 $0.22 $0.11
TFG Asset Management ($0.02) $0.14 $0.21
FX, Options and Hedges ($0.02) ($0.07) ($0.10)
Corporate Expenses ($0.24) ($0.36) ($0.45)
Corporate Income Taxes $0.00 ($0.08) ($0.04)
Fair Value EPS $0.47 $1.13 $0.90
Weighted Average Shares (MM) 95.8 96.3 96.0
STATEMENT OF OPERATIONS (FAIR VALUE BASIS)
Figure 24
TETRAGON FINANCIAL GROUP
Fair Value Statement of Operations Through H1 2014 - H1 2016
H1 2016 H1 2015 H1 2014
$MM $MM $MM
Interest income 55.5 61.6 85.3
Fee income 1.6 30.7 33.0
Unrealised Polygon performance fees - 3.3 4.7
Other income - cost recovery - 9.9 11.4
Insurance Recovery - 9.8 -
Dividend income 2.2 0.1 -
Investment income 59.3 115.4 134.4
Management and performance fees (19.3) (40.8) (33.1)
Other operating and administrative expenses (4.6) (38.8) (41.2)
Amortisation of intangible assets - (3.4) (3.4)
Total operating expenses (23.9) (83.0) (77.7)
Net Investment income 35.4 32.4 56.7
Net change in unrealised appreciation / (depreciation)
in investments 37.5 40.2 (33.6)
Realised (loss) / gain on investments (26.2) 48.1 76.2
Realised and unrealised losses from hedging and fx (1.5) (4.4) (9.4)
Net realised and unrealised gains from investments and
fx 9.8 83.9 33.2
Net income before tax 45.2 116.3 89.9
Income tax (0.1) (7.3) (3.9)
Net income 45.1 109.0 86.0
Performance Fee
A performance fee of $2.5 million was accrued in Q2 2016 in accordance with TFG's investment management agreement. The hurdle rate for the Q3 2016 incentive fee has been reset at 3.301208% (Q2 2016: 3.276958%) as per the process outlined in TFG's 2015 audited financial statements and in accordance with TFG's investment management agreement. Please see TFG's website, www.tetragoninv.com, and the 2015 TFG audited financial statements for more details on the calculation of this fee.
BALANCE SHEET (FAIR VALUE BASIS)
Figure 25
TETRAGON FINANCIAL GROUP
Fair Value Balance Sheet as at 31 December 2014, 2015, and 30 June 2016
H1 2016 2015 2014
$MM $MM $MM
Assets
Investments 1,477.6 1,543.0 1,356.2
Intangible assets - - 29.7
Cash and cash equivalents 382.0 402.7 402.0
Amounts due from brokers 55.8 59.9 52.1
Derivative financial assets 28.3 19.4 19.2
Fixed Assets - - 0.1
Deferred tax asset and income tax receivable - - 10.0
Other receivables 1.0 3.1 33.4
Total assets 1,944.7 2,028.1 1,902.7
Liabilities
Other payables and accrued expenses 31.6 36.0 54.5
Amounts payable on share options - - 12.3
Deferred tax liability and income tax payable 2.0 4.1 11.5
Derivative financial liabilities 3.7 0.7 5.9
Total liabilities 37.3 40.8 84.2
Net assets 1,907.4 1,987.3 1,818.5
See Appendix IV for the reconciliation between the U.S. GAAP consolidated balance sheet and the balance sheet prepared on a Fair Value basis.
STATEMENT OF CASH FLOWS (FAIR VALUE BASIS)(i)
Figure 26
TETRAGON FINANCIAL GROUP
Fair Value Statement of Cash Flows Through H1 2014 - H1
2016
H1 2016 H1 2015 H1 2014
$MM $MM $MM
Operating Activities
Operating cash flows after incentive fees and before
movements in working capital 129.0 148.4 134.6
Purchase of fixed assets - (0.1) -
Amounts due (to) / from broker 4.1 (20.5) (31.0)
Decrease in net receivables 2.0 4.6 (2.8)
Cash flows from operating activities 135.1 132.4 100.8
Investment Activities
Proceeds on sales of investments
- Net proceeds from derivative financial instruments 3.1 7.6 (11.8)
- Proceeds from investments 1.4 68.3 12.5
- Proceeds from realisation of real estate investments 10.1 22.4 26.7
- Proceeds from GreenOak working capital repayment - 6.4 2.6
Purchase of investments
- Purchase of CLOs (12.7) (27.8) (63.6)
- Purchase of bank loans (4.4) - (1.4)
- Purchase of real estate investments (27.9) (54.9) (50.1)
- Investments in asset managers - (133.1) -
- Investments in Convertible Bond Fund - - (15.0)
- Investments in Distressed Fund - (5.0) (10.0)
- Investments in Other - (22.1) (27.3)
Cash flows from operating and investing activities 104.7 0.7 91.4
Net purchase of shares (100.7) 0.1 (50.9)
Dividends paid to shareholders (24.4) (24.8) (27.3)
Cash flows from financing activities (125.1) (24.7) (78.2)
Net increase in cash and cash equivalents (20.4) (24.0) 13.2
Cash and cash equivalents at beginning of period 402.7 402.0 245.9
Effect of exchange rate fluctuations on cash and cash
equivalents (0.3) 0.8 (0.2)
Cash and cash equivalents at end of period 382.0 378.8 258.9
The gross
dividend
payable to
shareholders
was $32.0
million (H1
2015: $30.3
million, H1
2014: $29.0
million) with
a value
equivalent to
$7.6 million
(H1 2015:
$5.5 million,
H1 2014: $1.7
million)
elected to be
taken by the
dividend
recipient in
shares rather
(i) than cash.
FAIR VALUE NET INCOME TO U.S. GAAP RECONCILIATION
Figure 27
Fair Value Net Income to U.S. GAAP Reconciliation
H1 2016
$MM
Fair Value Net Income 45.1
Fair Value Adjustments 8.1
Share based compensation (11.5)
U.S. GAAP net income 41.7
TFG is primarily reporting earnings through a non-GAAP measurement called Fair Value Net Income.
The reconciliation on the table above shows the adjustments required to get from this measure of earnings to U.S. GAAP net income.
- Adjustment one takes into account a Fair Value adjustment of $8.1 million for Polygon, LCM, Hawke's Point and TCIP as if they were de-consolidated and held at Fair Value rather than consolidated as they currently are for U.S. GAAP purposes. Further details are provided in Appendix IV.
- Adjustment two removes share based compensation of $11.5 million as, under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting, as well as in relation to certain long-term compensation plans. This mechanic and future vesting schedule for all share based compensation related shares are described in more detail in the 2016 TFG unaudited interim financial statements. The long-term compensation plans are also detailed in Appendix VII.
APPENDICES(43)
APPENDIX I
CERTAIN REGULATORY INFORMATION
This Performance Report constitutes TFG's semi-annual financial report as required pursuant to Section 5:25d of the Dutch Financial Markets Supervision Act ("FMSA"). This report is made public by means of a press release, which contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation, and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) pursuant to 5:25m of the FMSA. In addition, this report is also made available to the public by way of publication on the TFG website (www.tetragoninv.com).
An investment in TFG involves substantial risks. Please refer to the Company's website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG.
This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the FMSA as a collective investment scheme from a designated country.
This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.
TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFS trading markets are less liquid than other major exchanges, which could affect the price of the Shares.
There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a "Qualified Purchaser" or a "Knowledgeable Employee" (each as defined in the Investment Company Act of 1940), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a "Qualified Purchaser" or a "Knowledgeable Employee" under the Investment Company Act of 1940. These restrictions may adversely affect overall liquidity of the Shares.
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 2016 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 2016 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 28
U.S. CLOs Modelling Assumption
Variable Year Current Assumptions
CADR Until deal maturity 1.0x WARF-implied default rate (2.2%)
Recovery Rate Until deal maturity 73%
Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price Until deal maturity 100%
Figure 29
European CLOs Modelling Assumption
Variable Year Current Assumptions
CADR Until deal maturity 1.0x WARF-implied default rate (2.1%)
Recovery Rate Until deal maturity 67%
Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds
Reinvestment Price Until deal maturity 100%
Figure 30
Discount Rates
CLO Type H1 2016 Q4 2015
U.S. 1.0 12.0% 12.0%
European 1.0 13.0% 13.0%
U.S. 2.0 - seasoned 11.0% 11.0%
U.S. 2.0 - less than 12 months old Deal IRR Deal IRR
APPENDIX III
FAIR VALUE DETERMINATION OF TFG ASSET MANAGEMENT
In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies (the "Guide"), as an Investment Company, TFG carries all of its investments at Fair Value. However, as outlined in section 7.10 of the Guide, operating entities should be consolidated where TFG (i) has an economic interest in excess of 50%; (ii) is deemed to have control over the significant operational and financial decisions of the entity; and (iii) where the purpose of the operating entity is to provide services to the Investment Company (i.e., TFG) rather than realise a gain on the sale of the investment. As at 30 June 2016, this consolidation exemption was applied to TFG's holdings in Polygon, LCM, Hawke's Point and TCIP (the "Consolidated Businesses") because these businesses were managing some of TFG's investment capital and thus could be deemed to be providing services to TFG. In contrast, Equitix is not managing TFG's capital so is not subject to point (iii) above, and GreenOak is minority-owned so is not subject to points (i) or (ii) above.
The resultant inconsistency of treatment under U.S. GAAP of the businesses in TFG Asset Management is potentially confusing to the reader of TFG's financial statements, particularly since the determination and articulation in Q3 2015 of the "IPO Strategy"([44]) for TFG Asset Management, which confirmed that the primary commercial purpose for TFG Asset Management, including the Consolidated Businesses, is to be held as an investment for capital appreciation, in line with TFG's investment objective. Consequently, from Q3 2015, TFG has prepared and presented its non-GAAP financial metrics and performance information using a consistent Fair Value basis for all of TFG Asset Management. Some of the differences resulting from the presentation of non-GAAP metrics are reconciled in Appendix IV.
TFG's investments in the TFG Asset Management businesses are considered to be "Level 3" investments in the U.S. GAAP valuation hierarchy and the Audit Committee of TFG, comprising the Independent Directors, has engaged third-party valuation specialists to determine an indicative valuation for each of these businesses. These valuations have been adopted for the purposes of reporting the Fair Value impact in TFG's non-GAAP metrics as at 30 June 2016.
Figure 31 sets out the valuation approach utilised for each of the businesses as well as the range of market metrics utilised in determining Fair Value. Both management and performance fees (collectively, the "Fees") continue to be calculated based on the U.S. GAAP measure of Net Asset Value and thus the non-GAAP adjustments do not currently impact the Fees payable to the Investment Manager.
Figure 31
Valuation approach to TFG's investments in TFG Asset Management
TFG Fair Ranges
Investment holding Value Valuation approach Discount utilised Value as
($MM) Rate Multiple % of AUM
Equitix 75% 167.1 Discounted cash 9.5% 5.5 x - 6.5 N/A
& Debt flow analysis and 15% Discount x EBITDA
cross-check to for Lack 20% discount
quoted market of Liquidity built-in
multiples. Debt at ("DLOL")
par + accrued interest
GreenOak 23% 66.0 Quoted market N/A 12.0 x N/A
multiples and cross Adjusted
-check using EBITDA
blended EBITDA and
quoted market multiples
10.7%-12.7%
LCM 100% 102.8 Discounted cash 15% Discount N/A 1.4% -1.9%
flow analysis, for Lack DLOL built-in
cross checked to of Liquidity
market multiples ("DLOL")
Polygon 100% 62.9 Discounted cash flow 11.7-13.7% 6.8 x - 3.3 x - 3.8 x
analysis and 20% DLOL 7.6 x DLOL built-in
cross-check to EBITDA
quoted market DLOL built-in
multiples
Hawke's Replacement cost
Point 100% 0.7 approach N/A N/A N/A
TCIP 100% 0.4 Discounted cash 11.6%-13.6%
flow analysis 15% Discount N/A N/A
for Lack
of Liquidity
("DLOL")
APPENDIX IV
RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS
This section describes how the non-GAAP Fair Value adjustments relating to LCM, Polygon, Hawke's Point and TCIP have been made to the U.S. GAAP financials to arrive at the Key Performance Metrics.
Figure 32 details the impact of such a change in accounting treatment for LCM, Polygon, Hawke's Point and TCIP in terms of carrying value and performance fees.
In arriving at the imputed performance fee, the change in NAV is adjusted by the full amortisation of the remaining base cost ($27.7 million) of the purchase of 25% of LCM in 2012. Previously, this was being amortised on a straight-line basis over 10 years, and each quarter an applicable adjustment is made to reduce the performance fees payable to the investment manager.
Figure 32
TFG Asset Management - Impact of Use of Fair Value Metrics on Consolidated
Businesses
U.S. GAAP
Consolidated
Fair Value Value
30 Jun 16 30 Jun 16 Change
($MM) ($MM) ($MM)
Polygon 62.9 21.7 41.2
LCM 102.8 - 102.8
Hawke's Point 0.7 - 0.7
TCIP 0.4 - 0.4
Net assets of consolidated businesses - 17.8 (17.8)
Deferred tax liability re intangible assets - (5.4) 5.4
Fair Value impact gross of imputed performance fee 166.9 34.1 132.8
$MM
Gross change in NAV for purposes of incentive fee
calculation 132.8
Full amortisation of LCM base cost (27.7)
NAV for purposes of incentive fee calculation 105.1
Imputed performance fee 26.3
Fair Value impact net of imputed performance fee 106.5
RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS (continued)
Figure 33 shows a reconciliation between the Statement of Operations prepared on a full Fair Value basis and on a U.S. GAAP basis.
In addition to adding in the unrealised Fair Value as detailed in Figure 32, the reconciliation shows the removal of the operating P&L for H1 2016, and the reversal of certain balance sheet items relating to Polygon, LCM, Hawke's Point or TCIP. Such items include the remaining intangible asset balance relating to Polygon's management contracts and a reversal of a deferred tax liability.
We adjust for change in notional performance fees as calculated in Figure 32.
In addition, as in prior periods, we back out share-based compensation of $11.5 million as, under ASC 805, TFG is recognising the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting. This mechanic and future vesting schedule for share-based compensation are described in more detail in the 2016 Interim Master Fund unaudited financial statements.
Figure 33
Fair Value to U.S. GAAP Statement of Operations Reconciliation Through H1 2016
Fair Value Fair Value Share Based U.S.
Net Income Adjustments Compensation GAAP
$MM $MM $MM $MM
Interest income 55.5 - - 55.5
Fee income 1.6 26.0 - 27.6
Other income - cost
recovery - 8.2 - 8.2
Dividend income 2.2 - - 2.2
Investment income 59.3 34.2 - 93.5
Management and performance
fees (19.3) (2.0) - (21.3)
Other operating and
administrative expenses (4.6) (36.0) (11.5) (52.1)
Amortisation of intangible
assets - (1.7) - (1.7)
Total operating expenses (23.9) (39.7) (11.5) (75.1)
Net Investment income 35.4 (5.5) (11.5) 18.4
Net change in unrealised
appreciation /
(depreciation) in
investments 37.5 13.2 - 50.7
Realised (loss) / gain on
investments (26.2) - - (26.2)
Realised and unrealised
losses from hedging and fx (1.5) - - (1.5)
Net realised and
unrealised gains from
investments and fx 9.8 13.2 - 23.0
Net income before tax 45.2 7.7 (11.5) 41.4
Income tax (0.1) 0.4 - 0.3
Net income 45.1 8.1 (11.5) 41.7
Figure 34 shows a reconciliation between the Balance Sheet prepared on a full Fair Value basis and on a U.S. GAAP basis.
In addition to adding in the unrealised Fair Value of $166.9 million as detailed in Figure 32, the reconciliation shows the removal of certain balance sheet items relating to Polygon, LCM, Hawke's Point and TCIP, including the value of Polygon's un-amortised management contracts ($21.7 million), cash of $30.3 million held in TFG Asset Management, a small amount of fixed assets, a deferred tax asset and receivables, which mainly relate to cost recoveries. On the liability side, we reverse certain accrued expenses including compensation and add back a notional performance fee of $26.3 million relating to the Fair Value adjustment as detailed in Figure 32.
Figure 34
TETRAGON
FINANCIAL GROUP
Fair Value to U.S. GAAP Balance Sheet Reconciliation as at 30 June 2016
Fair Value U.S.
Fair Value Adjustments GAAP
$MM $MM $MM
Assets
Investments 1,477.6 (166.9) 1,310.7
Intangible
assets - 21.7 21.7
Cash and cash
equivalents 382.0 30.2 412.2
Amounts due from
brokers 55.8 - 55.8
Derivative
financial assets 28.3 - 28.3
Fixed Assets - 0.4 0.4
Deferred tax
asset and income
tax receivable - 10.1 10.1
Other
receivables 1.0 13.4 14.4
Total assets 1,944.7 (91.1) 1,853.6
Liabilities
Other payables
and accrued
expenses 31.6 7.9 39.5
Deferred tax
liability and
income tax
payable 2.0 7.6 9.6
Derivative
financial
liabilities 3.7 - 3.7
Total
liabilities 37.3 15.5 52.8
Net assets(i) 1,907.4 (106.5) 1,800.8
The U.S. GAAP net assets of Tetragon Financial
Group Master Fund are $1,803.3 million which are
calculated by adding back the incentive fee of
$2.5 million accrued at Tetragon Financial Group
Limited to its U.S. GAAP net assets of $1,800.8
(i) million.
APPENDIX V
SHARE RECONCILIATION AND SHAREHOLDINGS
Figure 35(45)
U.S. GAAP to Fully Diluted Shares Reconciliation
H1 2016 Shares
(MM)
Legal Shares Issued and Outstanding 139.1
Less: Shares Held in Subsidiary (27.0)
Less: Shares Held in Treasury (12.0)
Less: Total Escrow Shares(45.i) (12.7)
U.S. GAAP Shares Outstanding 87.5
Add: Dilution for Share Options(45.iii) 0.9
Add: Certain Escrow Shares(45.iv) 6.8
Add: Dilution for equity-based awards(45.v) 0.4
Fully Diluted Shares Outstanding 95.6
SHAREHOLDINGS
Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 30 June 2016, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:
Mr. Reade Griffith* 10,452,930
Mr. Paddy Dear* 3,484,009
Mr. David Wishnow 234,984
Mr. Jeff Herlyn 170,904
Mr. Rupert Dorey 115,951
Mr. Michael Rosenberg 68,052
Mr. Frederic Hervouet 15,978
Equity-based awards(46) 5,341,826
*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 2016, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.4 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees.
As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the "Vested Shares") that were issued pursuant to TFG's acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the "Polygon Transaction") have vested with certain persons (other than Messrs. Griffith and Dear), all of whom are employees or partners of TFG-owned or affiliated entities, pursuant to the Polygon Transaction.
Certain of these persons may from time to time enter into purchases or sales trading plans (each a, "Fixed Trading Plan") providing for the sale of Vested Shares or the purchase of TFG shares in the market, or may otherwise sell their Vested Shares or purchase TFG shares, subject to applicable compliance policies. Applicable brokerage firms may be authorised to purchase or sell TFG shares under the relevant Fixed Trading Plan pursuant to certain irrevocable instructions. Each Fixed Trading Plan is intended to comply with Rule 10b5-1 under the United States Securities Exchange Act of 1934, as amended. Each Fixed Trading Plan has been or will be approved by TFG in accordance with its applicable compliance policies.
For additional information regarding the Polygon Transaction and the future vesting schedule for shares issued thereunder, see Note 22 to the 2015 Tetragon Financial Group Master Fund Limited audited financial statements.
Rule 10b5-1 provides a "safe harbor" that is designed to permit individuals to establish a pre-arranged plan to buy or sell company stock if, at the time such plan is adopted, the individuals are not in possession of material, non-public information.
APPENDIX VI
HISTORICAL SHARE REPURCHASES
Figure 36
Historical Share Repurchases
TFG Share Repurchase History
Cumulative No. of Shares Cumulative
No. of Shares
Year $MM $MM (MM) (MM)
2007 $2.2 $2.2 0.3 0.3
2008 $12.4 $14.5 2.6 2.9
2009 $6.6 $21.2 2.4 5.3
2010 $25.5 $46.7 5.7 11.0
2011 $35.2 $81.9 5.1 16.1
2012 $175.6 $257.5 18.7 34.8
2013 $16.1 $273.6 1.4 36.2
2014 $50.9 $324.5 4.9 41.1
2015 $60.9 $385.4 6.0 47.1
2016 $100.7 $486.2 10.0 57.1
TOTAL $486.2 57.1
Figure 37
Cumulative TFG Share Repurchases ($MM)
$
Inception - 2013 $273.6
2014 $324.5
2015 $385.4
2016 $486.2
Share Repurchases:
The above graph shows historical share repurchases by TFG from inception to 30 June 2016. This has been updated to include the repurchase in Q2 2016 of 10 million shares for an aggregate cost of $100.7 million. This figure includes certain costs associated with the repurchase.(47)
APPENDIX VII
EQUITY-BASED COMPENSATION PLANS
In Q1 2016, TFG implemented an equity-based long-term incentive plan for certain senior employees of TFG Asset Management (excluding the principals of TFM).
Awards under the long-term incentive plan, along with other equity-based awards, are typically spread over multiple vesting dates up to 2024 which may vary for each employee and are subject to forfeiture provisions. The arrangements may also include additional periods, beyond the vesting dates, during which employees gain exposure to the performance of the TFG shares, but the shares are not issued to the employees. Such periods may range from one to five years beyond the vesting dates. The shares underlying these equity-based incentive programs typically will be held in escrow until they vest and will be eligible to receive shares under the TFG Dividend Re-investment Program ("DRIP Shares").
Where grants under these equity-based incentive programs will only be settled through the issuance of shares rather than through cash, and in accordance with U.S. GAAP rules for share-based compensation, TFG has elected to account for equity-based plans under ASC 718 - Equity-based payments to employees - and is applying the straight-line method for expense recognition and for calculating the share dilution effect. This means that the total expense of the initial awards is determined at the award date, or at the date that the award becomes eligible to be settled only in shares ("Award Date"), by applying a reference share price on the Award Date to the shares awarded. Taking into account all equity-based awards granted to TFG Asset Management employees, including the Q1 2016 LTIP awards, approximately 5.1 million shares have been awarded at a weighted average reference share price of $8.76 per share, implying a total share-based compensation charge of approximately $45 million spread over a period of up to eight years, excluding employer-related taxes.
The dilutive effect of the equity-based compensation plans will be reflected increasingly in TFG's fully diluted share count over the life of the plans. Such dilution will include, among other things and in addition to the award shares, any DRIP Shares and shares that will be required to cover employer taxes. At the end of Q2 2016, approximately 0.4 million shares were included in the fully diluted share count.
APPENDIX VIII
BOARD OF DIRECTORS
The Board of Directors currently comprises six directors, of which four are Independent Directors.
Rupert Dorey has over 30 years of experience in financial markets. Rupert was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt. He held a number of senior positions at CSFB, including establishing CSFB's high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales. Since 2005, he has been acting in a Non-Executive Directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles. Rupert is a former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors. Rupert is based in Guernsey and is a Non-Executive, Independent Director.
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, Frederic was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales. Previously, Frederic 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. Frederic has a MSc in Applied Mathematics and International Finance and a Master's Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the Université Paris Dauphine. He is a member of the Institute of Directors (IoD) and of the Guernsey Chamber of Commerce. Frederic is based in Guernsey and is a Non-Executive, Independent Director.
David Jeffreys provides directorship services to a small number of fund groups. From 1995 until 2010 David worked with EQT, a Scandinavian private equity group, acting as a director of each of its Fund general partners and, from 2006, establishing and serving as Managing Director of EQT Funds Management Limited, its Guernsey based management and administration office. Between 1993 and June 2004, David 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, David 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. David is based in Guernsey and is a Non-Executive, Independent Director.
William P. Rogers, Jr. retired from the Corporate Department of Cravath, Swaine & Moore LLP in December 2015 after 36 years at the firm. His practice encompassed the representation of both corporate and financial institution clients in a wide variety of matters, including international securities offerings, corporate governance and SEC compliance matters, mergers and acquisitions, and derivative financial products. Mr. Rogers was repeatedly cited as one of the United States' leading practitioners in capital markets by, among others, Chambers USA: America's Leading Lawyers for Business; Chambers Global: The World's Leading Lawyers for Business; The Legal 500; and IFLR1000. Mr. Rogers regularly advised a wide variety of clients, including Royal Dutch Shell plc, Bacardi Limited, Time Warner Inc., Northrop Grumman Corporation, CBS Corporation, INEOS Group Limited, Tetragon Financial Group Limited, Costamare Inc., priceline.com Incorporated, FactSet Research Systems Inc., Morgan Stanley, Citigroup, GasLog Ltd. and Goldman Sachs. Mr. Rogers also regularly advised corporate clients on derivatives matters, including the implications of the new Dodd-Frank swaps regulation. He was involved in the formation of the International Swaps and Derivatives Association (ISDA) and, prior to his move to London, regularly represented ISDA on legislative, regulatory and documentation matters. Mr. Rogers was born in Bronxville, New York. He received a B.A. from Union College in 1972 and a J.D. from Case Western Reserve School of Law in 1978. From 1998 to 2001, he served as the Managing Partner of Cravath's Corporate Department and, from 2001 to 2007, headed the firm's London office. Mr. Rogers is based in New York.
Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP (TFM) in 2005. He is a Principal of TFM, the Head of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, the CIO of Polygon's European Event Driven Equities strategy, a member of the Investment & Management Committee of Tetragon Credit Income Partners Ltd. and Tetragon Credit Income II L.P., and a member of the TFG board of directors. He was previously the founder and chief executive officer of the European office of Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998. He was a partner and senior managing director responsible for running the Global Event Driven arbitrage team in Tokyo, London and Chicago for the firm. He was previously with Baker, Nye, where he was an analyst working on an arbitrage and special situations portfolio. Reade holds a JD degree from Harvard Law School and an undergraduate degree in Economics from Harvard College. He also served as an officer in the U.S. Marine Corps and left as a Captain following the 1991 Gulf War. Reade is based in London.
Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP (TFM) in 2005. He is a Principal of TFM, a member of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, a member of the Investment & Management Committee of Tetragon Credit Income Partners Ltd. and Tetragon Credit Income II L.P., the Co-Head of TFG Asset Management and a member of the TFG board of directors. Paddy was previously a Managing Director and the Global Head of Hedge Fund Coverage for UBS Warburg Equities. Prior to this, he was co-head of European sales trading, execution, arbitrage sales and flow derivatives. He had been with UBS since 1988, including six years in New York. Paddy was in equity sales at Prudential Bache before joining UBS and started his career as a petroleum engineer with Marathon Oil Co. Paddy holds a BSc degree in Petroleum Engineering from Imperial College in London. Paddy is based in London.
FURTHER SHAREHOLDER INFORMATION
Registered Office of TFG and the
Master Fund
Tetragon Financial Group Limited
Tetragon Financial Group Master Fund Limited
1st Floor Dorey Court Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
Investment Manager
Tetragon Financial Management LP Legal Advisor (as to U.S. law)
399 Park Avenue, 22nd Floor Cravath, Swaine & Moore LLP
New York, NY 10022 Worldwide Plaza
United States of America 825 Eighth Avenue
New York, NY 10019
United States of America
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor Legal Advisor (as to Guernsey law)
New York, NY 10022 Ogier
United States of America Redwood House
St. Julian's Avenue
St. Peter Port, Guernsey
Channel Islands GY1 1WA
Investor Relations
David Wishnow / Greg Wadsworth
ir@tetragoninv.com
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
Press Inquiries 1082 MD Amsterdam
Gasthalter & Co. The Netherlands
tetragon@gasthalter.com
Stock Listing
Auditors Euronext Amsterdam N.V.
KPMG Channel Islands Ltd.
Glategny Court,
Glategny Esplanade
St. Peter Port, Guernsey London Stock Exchange (Specialist
Channel Islands GY1 1WR Fund Segment)
Sub-Registrar and CREST Transfer Agent Administrator and Registrar
Computershare Investor Services (Guernsey) Limited State Street (Guernsey) Limited
1st Floor, Tudor House 1st Floor Dorey Court
Le Bordage Admiral Park
St Peter Port, Guernsey St. Peter Port, Guernsey
Channel Islands GY1 1DB Channel Islands GY1 6HJ
ENDNOTES
TFG is not responsible for the contents of any third-party website noted in this report.
(1) (i) TFG commenced investing as an open-ended investment company in 2005, before its IPO in April 2007.
(ii) TFG seeks to deliver 10-15% Fair Value RoE per annum to shareholders. TFG's returns will most likely fluctuate with LIBOR. LIBOR directly flows through some of TFG's investments and, as it can be seen as the risk-free short-term rate, it should affect all of TFG's investments. In high-LIBOR environments, TFG should achieve higher sustainable returns; in low-LIBOR environments, TFG should achieve lower sustainable returns.
(iii) Fair Value RoE is calculated from TFG's IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset Management businesses, the value of which has accumulated over several years. Consequently the full year return of 14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%. Please refer to page 28 for a definition of Fair Value RoE and Appendix IV for more details.
(iv) Annualised total shareholder return to 30 June 2016, defined as share price appreciation including dividends reinvested, for the last year, the last three years, the last five years, and since TFG's initial public offering in April 2007, and annualised Fair Value NAV Per Share Total Return to 30 June 2016, for the last year, the last three years, the last five years, and since TFG's initial public offering in April 2007 as sourced from Bloomberg. Fair Value Total NAV Return is determined in accordance with the "NAV total return performance" calculation as set forth on the Association of Investment Companies ("AIC") website. TFG's Fair Value NAV per share Total Return is determined for any period by calculating, as a percentage return on the Fair Value NAV per Share at the start of such period, (i) the change in Fair Value NAV per share over such period, plus (ii) the aggregate amount of any dividends per share paid during such period, with any dividend deemed reinvested at the Fair Value NAV per share at the month end date closest to the applicable ex-dividend date (i.e., so that the amount of any dividend is increased or decreased by the same percentage increase or decrease in Fair Value NAV per share from such ex-dividend date through to the end of the applicable period).
(v) Fair Value EPS divided by Dividends per Share at 30 June 2016.
(vi) The vast majority of TFG's investments are held at fair value in accordance with U.S. GAAP. The fair value basis for TFG's key performance metrics adjusts U.S. GAAP to include the fair value of certain TFG Asset Management businesses that are currently consolidated under U.S. GAAP. The fair values used are as determined by TFG's Audit Committee based on information provided by an independent valuation specialist. The consistent use of fair value across all investments is referred to in this report as "Fair Value". Fair Value Key Metrics such as Fair Value RoE and Fair Value NAV are also adjusted to reflect incentive fees that would otherwise have arisen if these Fair Values were actually reflected in the U.S. GAAP accounting for TFG's financial statements. Please refer to Appendices III and IV for further details.
(vii) Fully Diluted Fair Value NAV Per Share based on TFG's financial statements as of 30 June 2016. Please note that the reported Fair Value NAV per share excludes any shares held in treasury or in a subsidiary as of that date, but includes shares held in escrow which are expected to be released and incorporated into the U.S. GAAP NAV per Share over a five-year period and the number of shares corresponding to the applicable intrinsic value of the options issued to the Investment Manager at the time of the Company's IPO. Please see Figure 22 for more details.
(viii) Partner & Employee shareholdings at 30 June 2016, including all deferred compensation arrangements. Please refer to the 2015 Audited Tetragon Financial Group Master Fund Limited financial statements for more details of these arrangements.
Executive Summary
(2) TFG's 'home Member State' for the purposes of the EU Transparency Directive (Directive 2004/109/EC) is the Netherlands.
(3) 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").
(4) Please see Note (1)(ii).
(5) Please see Note (1)(ii).
(6) Source: Wall Street Journal, "U.S. 10-Year Government Bond Yield Falls to Lowest Since 2012" June 14, 2016. http://www.wsj.com/articles/u-s-10-year-bond-falls-to-near-record-low-as-bund-yield-turns-negative-1465914088
(7) The Fair Value NAV per share Total Return adjusts the Fair Value NAV per share for any dividends paid out over the period (assuming dividends are re-invested at the prevailing Fair Value NAV per share).
(8) Tetragon Credit Income II L.P. ("TCI II"), referred to in this report as "TCI II".
(9) TCI Capital Management LLC, referred to in this report as "TCICM".
(10) GreenOak Real Estate, LP, is referred to in this report as "GreenOak". TFG owns a 23% interest in GreenOak.
(11) Source: The Association of Real Estate Funds (AREF) AREF/IPD UK Pooled Property Fund Index, December 2015 (http://www.aref.org.uk).
(12) Calculated by taking Partner & Employee shareholdings at 30 June 2016, including all deferred compensation arrangements and dividing the sum of US GAAP shares in issue and all future vesting shares for those persons, including deferred compensation arrangements.
(13) (i) Fair Value Total NAV Return is determined in accordance with the "NAV total return performance" calculation as set forth on the Association of Investment Companies ("AIC") website. TFG's Fair Value NAV per share Total Return is determined for any period by calculating, as a percentage return on the Fair Value NAV per Share at the start of such period, (i) the change in Fair Value NAV per share over such period, plus (ii) the aggregate amount of any dividends per share paid during such period, with any dividend deemed reinvested at the Fair Value NAV per share at the month end date closest to the applicable ex-dividend date (i.e., so that the amount of any dividend is increased or decreased by the same percentage increase or decrease in Fair Value NAV per share from such ex-dividend date through to the end of the applicable period).
(ii) MSCI ACWI refers to the MSCI All Countries World Index, which is managed by MSCI Inc. It is a global equity index consisting of developed and emerging market countries. Any indices and other financial benchmarks are provided for illustrative purposes only. Comparisons to indices have limitations because, for example, indices have volatility and other material characteristics that may differ from the fund. Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. Further information on the composition and calculation of the MSCI ACWI is available at www.msci.com. The data depicted here is sourced from Bloomberg using Bloomberg's "Custom Total Return Holding Period" function.
(iii) Cumulative return determined on a quarterly compounding basis using the actual TFG quarterly incentive fee LIBOR based hurdle rate. In the period from IPO to June 2008 this was 8%; thereafter, the hurdle has been determined using the 3 month USD LIBOR rate on the first day of each calendar quarter plus a spread of 2.647858%.
TFG Overview
(14) Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V. ("Euronext Amsterdam"). As is the case for Euronext Amsterdam, the SFS is a regulated market for the purposes of the Markets in Financial Instruments Directive.
(15) Includes GreenOak funds and advisory assets, LCM, Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon Distressed Opportunities Master Fund, Equitix, TCI II, and TCICM as calculated by the applicable administrator for value date 30 June 2016. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG Asset Management AUM as used in this report includes the assets under management of several investment advisers, including Tetragon Asset Management L.P., and GreenOak, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940. Figures for GreenOak and TCI II may also include committed capital.
(16) LCM Asset Management LLC, a CLO loan manager that is part of TFG Asset Management, is referred to in this report as "LCM".
(17) Polygon Global Partners LP and Polygon Global Partners LLP (and certain of their affiliates), managers of open-ended hedge fund and private equity vehicles across a number of strategies that are part of TFG Asset Management, referred to in this report as "Polygon". Polygon Global Partners LLP is authorised and regulated by the United Kingdom Financial Conduct Authority.
(18) Equitix Holdings Limited, referred to in this report as "Equitix".
(19) Hawke's Point, a mining finance company that is part of TFG Asset Management, referred to in this report as "Hawke's Point".
(20) Tetragon Credit Income Partners, referred to in this report as "TCIP".
(21) Please see Note 9.
(22) Please see Note 15.
Key Metrics
(23) TFG's Key Metrics were modified, effective from Q3 2015, to incorporate the value that is being created in TFG Asset Management on a consistent Fair Value basis using valuations provided by an independent valuation specialist reporting to the Audit Committee. The resulting Fair Value metrics are described in this section and further detail on the drivers for each of the Fair Value metrics is discussed in the following sections of the report.
(24) Please see note (1)(ii).
(25) Please refer to Financial Highlights on page 28 of this report for the definition of Fair Value Net Income.
(26) Please refer to Financial Highlights on page 28 of this report for the definition of Fair Value EPS.
(27) In Q1 2015, there were strong contributions from Other Equities, U.S. CLO 1.0 transactions and Real Estate. Please refer to the Q1 2015 report for more details.
H1 2016 in Review
(28) Based on the most recent trustee reports available as of 30 June 2016.
(29) Based on the most recent trustee reports available as of 30 June 2016.
(30) Based on the most recent trustee reports available as of 30 June 2016.
TFG Asset Management
(31) Please see Note 20.
(32) Please see Note 15.
(33) Please see Note 15.
(34) Please see Note 15.
(35) (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. PRF's term was extended to March 2018 with a potential further one year extension thereafter. Individual investor performance will vary based on their high water mark. Currently, the majority of Class C share class investors have not reached their high water mark, so their performance is the same as their gross performance. The AUM figure for PRF is as calculated by the applicable fund administrator.
(36) 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 www.hedgefundresearch.com.
(37) 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 www.hedgefundresearch.com.
(38) 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 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 www.hedgefundresearch.com. The Market Vectors Junior Gold Miners Index (Bloomberg Code: GDXJ) is compiled by Market Vectors Index Solutions, a subsidiary of Van Eck. Further information relating to index constituents and calculation methodology can be found at www.marketvectorsindices.com.
(39) 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 www.hedgefundresearch.com.
(40) 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.
(41) The Private Equity Vehicle noted is the Polygon Recovery Fund L.P. ("PRF"). The manager of the PRF is a subsidiary of TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term. PRF's term was extended to March 2018 with a potential further one year extension thereafter. Individual investor performance will vary based on their high water mark. Currently the majority of Class C share class investors have not reached their high water mark, so their performance is the same as their gross performance. AUM figure and net performance is for PRF as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the fund reflects the actual net performance of the fund net of management and performance fees, as well as any commissions and direct expenses incurred by the fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. 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.
(42) For additional information on the Company's CLO equity investments, including its buy and hold strategy, please refer to http://www.tetragoninv.com/portfolio/clo-equity.
Appendices
(43) Additional CLO Portfolio Statistics are not included this report, but may be reported from time to time in the future.
Appendix III
(44) TFM has determined that it will continue to grow TFG Asset Management, as TFG's diversified alternative asset management business, with a view to a planned initial public offering and listing of shares of TFG Asset Management in the next three to five years (referred to as the "IPO Strategy").
Appendix V
(45) (i) The Total Escrow Shares of 12.7 million consists of 6.8 million shares which have been used as consideration for the acquisition of Polygon and applicable stock dividends relating thereto, as well as 5.9 million shares held in a separate escrow account in relation to equity-based compensation.
(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. At the reporting date, this was 0.0 million shares. The intrinsic value of the manager (IPO) share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant period over (y) $10.00 (being the exercise price per share) times (z) 12,545,330 (being a number of shares subject to the options before the application of potential anti-dilution). The terms of exercise under the options allow for exercise using cash, as well as, with the consent of the board of the Company, certain forms of cashless exercise. Each of these prescribed methods of exercise may give rise to the issuance of a different number of shares than the approach described herein. If the options were to be surrendered for their intrinsic value with the board's consent, rather than exercised, the number of shares issued would equal the intrinsic value divided by the closing price of the shares as of the final trading day in the relevant period. This approach has been selected because we currently believe it is more reasonably illustrative of a likely outcome if the options are exercised. The options are exercisable until 26 April 2017.
(iii) The number of shares corresponding to the applicable intrinsic value of the remaining unexercised options issued to the GreenOak Founders in relation to the acquisition of a 10% stake in GreenOak in September 2010. At the reporting date, this was 0.9 million. The intrinsic value of the GreenOak share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant period over (y) $5.50 (being the exercise price per share) times (z) 1,954,120 (being a number of shares subject to the options.
(iv) Certain Escrow Shares (6.8 million), which have been used as consideration for the acquisition of Polygon and applicable stock dividends relating thereto, and which are held in escrow and are expected to be released and incorporated into the U.S. GAAP NAV per Share over the next two years.
(v) Dilution in relation to equity-based awards by TFG Asset Management for certain senior employees. At the reporting date, this was 0.4 million. The basis and pace of recognition is expected to match the rate at which service is being provided to TFG Asset Management in relation to these shares. See Appendix VII for more details.
(46) Equity-based awards are intended to give certain senior employees of TFG Asset Management long-term exposure to TFG stock (with vesting subject to forfeiture and certain restrictions). See Appendix VII for further details.
Appendix VI
(47) TFG has and may also continue to engage in share repurchases in the market from time to time. Such purchases may at appropriate price levels below NAV represent an attractive use of TFG's excess cash and an efficient means to return cash to shareholders. Any decision to engage in share repurchases will be made by the Investment Manager, upon consideration of relevant factors, and will be subject to, among other things, applicable law and profits at the time. The Company also continues to explore other methods of improving the liquidity of its shares.
An investment in TFG involves substantial risks. Please refer to the company's website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG.
This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.
This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the 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.
TFG:
David Wishnow/Greg Wadsworth
Investor Relations
ir@tetragoninv.com
Press Inquiries:
Gasthalter & Co
+1-212-257-4170
tetragon@gasthalter.com
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