2015 Annual Report
Tetragon Financial Group Limited 2015 Annual Report
Tetragon Financial Group Limited 2015 Annual Report
Contents
1
5
9
14
19
30
32
39
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40
41
42
43
46
50
51
56
59
63
64
Letter to Shareholders
TFG Overview
Key Metrics
2015 in Review
TFG Asset Management Overview
Corporate Responsibility
2015 Financial Review
Appendices
Appendix I: Directors’ Statements
Appendix II: Certain Regulatory Information
Appendix III: Fair Value Determination of CLO Equity Investments
Appendix IV: Fair Value Determination in TFG Asset Management
Appendix V: Reconciliation between U.S. GAAP and Fair Value Basis
Appendix VI: Additional CLO Portfolio Statistics
Appendix VII: Share Reconciliation and Shareholdings
Appendix VIII: Additional Corporate Information
Appendix IX: Board of Directors and the Audit Committee
Appendix X: Risk Factors
Shareholder Information
Endnotes
Tetragon Financial Group Limited 2015 Audited Financial Statements
Tetragon Financial Group Master Fund Limited 2015 Audited Financial Statements
TFG: Delivering Results Since 2005(1)(i)
Figure 1
RETURNS
ROE TARGET(ii)
AVERAGE ROE(iii)
2015 ROE
10-15%
13.5%
14.5%
Annualised range
Since April 2007 IPO
31 December 2015
SHAREHOLDER RETURNS(iv)
ONE YEAR
THREE YEARS
FIVE YEARS
SINCE APRIL 2007 IPO
+7%
to 31 December 2015
FTSE All-Share: +1%
+7%
Per annum
to 31 December 2015
FTSE All-Share: +7%
+18%
Per annum
to 31 December 2015
FTSE All-Share: +6%
+7%
Per annum
to 31 December 2015
FTSE: All-Share: +4%
RETURNING VALUE
DIVIDEND YIELD
2015 DIVIDEND COVER(v)
7%
4x
31 December 2015
31 December 2015
DIVIDEND GROWTH
FIVE-YEAR CAGR
13%
Per annum
to 31 December 2015
BUILDING VALUE
ALIGNMENT
FAIR VALUE NAV(vi)
FULLY DILUTED FAIR VALUE
NAV PER SHARE(vii)
PRINCIPAL & EMPLOYEE
OWNERSHIP(viii)
$2B
$19
31 December 2015
31 December 2015
19%
Q1 2016
Letter to Shareholders
Letter to Our Shareholders
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 (as of 9 November 2015) on the Specialist Fund Market(2) 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 31 December 2015.(3)
Dear Fellow Shareholders,
The Company made a number of significant achievements in
2015, which was otherwise a challenging year for many
investment strategies and a difficult market environment as a
whole. TFG posted strong annual Return on Equity (“RoE”)
growth, both on a like-for-like basis and on a Fair Value(4)
basis. TFG Asset Management, TFG’s diversified alternative
asset management business, has continued its growth
through active capital raising into existing businesses, the
launch of new businesses and acquisitions. TFG also
undertook several important initiatives to enhance
shareholder value.
ROE AND FAIR VALUE ROE GROWTH(5)
Throughout the industry in 2015, investment performance
across asset classes was generally negative and where
positive, returns were in many cases only modest. Against
that backdrop, we are pleased that the total return to TFG
shareholders was +6.6%(6) for the year, with those results not
fully reflecting the positive performance of the underlying
business, which had a Fair Value RoE of 14.5%. In fact, all but
one of TFG’s asset classes and underlying investment
strategies posted positive returns during the year, with TFG
Asset Management, U.S. CLOs, European event-driven
equities and global real estate investments, in particular,
delivering strong positive performance. A portion of the
growth of Fair Value RoE in 2015 was attributable to the
inclusion of the Fair Value of certain TFG Asset Management
assets (LCM(7), Polygon(8) and Hawke’s Point(9)) that have
otherwise been consolidated under U.S. GAAP and, as such,
reflects value, whilst reported in 2015, that has actually been
built over the last three years.
Both CLO 1.0 investments (approximately $56 million of Fair
Value Net Income(10) in 2015) and CLO 2.0 investments
(approximately $30 million of Fair Value Net Income)
performed well. The European CLOs (all pre-crisis deals) had
positive returns, but continued to underperform their U.S.
equivalents. 2015 marked a turning point in TFG’s CLO
investing, where total investments in CLO 2.0 deals exceeded
investments in CLO 1.0s for the first time as the Company
continued to invest in new CLO 2.0s while CLO 1.0s continued
to amortise. Event-driven equities produced a particularly
strong performance (approximately $67 million of Fair Value
Net Income). We were pleased that in a year that was
difficult for many hedge funds, the event-driven hedge fund
strategy generated double-digit returns. The global real
estate allocation also contributed approximately $25 million
of Fair Value Net Income. The only negative performer was
the distressed strategy, where TFG has approximately $100
million invested, with the strategy down 2.2% net for the
year. TFG continues to hold cash representing just under 20%
of Fair Value Net Asset Value (“Fair Value NAV”) at year end.
This cash balance is held to fund not only existing investment
commitments but also new investments, as well as dividends,
fees payable to Tetragon Financial Management LP (“TFM” or
the “Investment Manager”) and other potential uses of cash.
Tetragon Financial Group Limited 2015 Annual Report │1
(Continued)
Letter to Shareholders
CONTINUED GROWTH AT TFG ASSET MANAGEMENT
INITIATIVES TO ENHANCE SHAREHOLDER VALUE:
As announced in 2015, TFG’s investment manager is
continuing to grow TFG Asset Management with a view to a
planned initial public offering and listing of shares of TFG
Asset Management in the next three to five years. To that
end, TFG Asset Management continues to execute against
key benchmarks: increased EBITDA, growth in assets under
management (“AUM”), positive performance of the
underlying strategies and the addition of new managers to
the platform.
During the year, TFG Asset Management’s EBITDA increased
by 102% to $46.6 million, with Fair Value Net Income of
approximately $185 million for the year. TFG Asset
Management’s aggregate AUM grew 54% to $17.1 billion(11),
with LCM, the GreenOak joint venture(12) and Equitix(13) as
significant contributors to this growth. The underlying funds
managed by the TFG Asset Management platform generally
performed well against their peers.(14) And two of Polygon’s
hedge funds were nominated for 2015 EuroHedge Awards.(15)
TFG Asset Management added two new businesses in 2015:
in February, TFG completed its acquisition of Equitix, an
integrated core infrastructure asset management and
primary project platform; and in the fourth quarter, TFG
Asset Management launched Tetragon Credit Income
Partners (TCIP)(16), which is the general partner of a private
equity vehicle that, among other things, makes investments
in CLOs relating to risk retention rules. TFG is a core investor
in the vehicle, which had its first close in November 2015 with
committed capital of $142.9 million (of which TFG was $35
million). By investing alongside third-party investors in one or
more TCIP private equity vehicles, TFG (which owns TCIP as
general partner), is also potentially able to further diversify its
CLO equity holdings across multiple CLO managers and
increase its return on equity on those investments as TCIP
receives fees for its investment services.
The Fair Value of TFG Asset Management as at 31 December
2015 was approximately $422 million, with LCM and Polygon
shown at Fair Value for the first time during Q3 2015, and
with the Fair Value for Equitix growing by approximately $41
million during the year.
During the year, TFG embarked on several initiatives intended
to enhance shareholder value.
Stephen Prince joined as Co-Head of TFG Asset
Management and TFM’s Head of North America.
Stephen joined from Silver Creek Capital Management
LLC, a $7 billion alternative investment firm, where he
most recently served as Deputy Chief Investment
Officer and Chair of the Investment Committee.
Stephen is focusing on helping to build value at TFG as
it continues to seek to grow TFG Asset Management
organically and through acquisitions, attract
investment talent and optimise risk-adjusted returns
for TFG’s capital.
TFG retained Stifel Nicolaus Europe Ltd. and Cantor
Fitzgerald Europe as new joint corporate brokers to
the Company in 2015. The Company is working with
its new brokers to bring TFG’s story to a broader
investor group.
TFG’s shares were admitted for trading on the
Specialist Fund Market (“SFM”) of the London Stock
Exchange on 9 November 2015 (ticker: TFG.LN). TFG
believes that the principal benefits of having this
additional trading venue should be improved liquidity
through access to a broader investor base and
expanded analyst coverage. TFG will maintain its
listing on Euronext in Amsterdam(17). In conjunction
with the SFM admission, the Investment Manager has
conducted multiple meetings with potential
shareholders in 2015 and early 2016 in London,
Edinburgh and Amsterdam.
In December, TFG purchased 6 million TFG non-voting
shares at $10 per share in a tender offer using a
modified Dutch auction structure. Substantially all of
the TFG shares acquired in the tender offer are being
held to hedge against (or otherwise offset the future
impact of) grants of shares under long-term incentive
compensation awards by TFG Asset Management for
certain long-standing and senior employees.
(Continued)
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Letter to Shareholders
As of Q1 2016, principal and employee holdings of
TFG’s non-voting shares (including through incentive
compensation arrangements) increased to
approximately 19% of the outstanding shares, thereby
continuing to increase the alignment with
shareholders.
TFG’s website has been redesigned.
TFG hosted its annual Investor Day in London on 17
November 2015. The event was webcast live and the
replay can be viewed on our website,
www.tetragoninv.com.
The fourth quarter dividend was declared at $16.5
cents per share, making $64.75 cents for the full year,
an increase of 4.9% on 2014. This gives a current
dividend yield of approximately 7%.
Figure 2
TOP TEN HOLDINGS AT 31 DECEMBER 2015
CURRENT POSITIONING OF TFG’S PORTFOLIO:
We believe that TFG’s portfolio is currently well-positioned,
with many not easily replicated investments and with an
appropriate level of cash. The Investment Manager continues
to seek uncorrelated, alpha-generating strategies in which to
deploy TFG’s capital. The Investment Manager then seeks to
find high-quality managers who invest in these asset classes
and strategies; selects or structures suitable investment
vehicles that optimise risk-adjusted returns for TFG’s capital;
and, where appropriate, seeks for TFG, through 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 profits from
owning asset management businesses that derive income
from external investors. Thus, TFG seeks to use its balance
sheet to facilitate the growth of TFG Asset Management to
help create value for the Company. The results of this
strategy are reflected in the list of TFG’s top ten holdings
shown in Figure 2.
(Continued)
Tetragon Financial Group Limited 2015 Annual Report │3
Description Fair Value $MM % of Fair Value NAV 1Equitix (Manager)Asset Manager£1.9 Bn UK infrastructure fund asset manager173.98.7%2Polygon European Equity Opportunity FundFund Investment - EquitiesEuropean event driven equity hedge fund139.97.0%3LCM (Manager)Asset Manager$5.9 Bn CLO manager110.25.5%4Polygon Distressed Opportunities FundFund Investment - CreditDistressed opportunities hedge fund95.14.8%5GreenOak Real Estate (Manager)Asset Manager$6.6 Bn global real estate asset manager70.03.5%6Polygon (Manager)Asset Manager$1.5 Bn hedge fund manager67.03.4%7Polygon Convertible Opportunity FundFund Investment - CreditEvent driven credit hedge fund44.82.2%8Polygon Mining Opportunities FundFund Investment - EquitiesMining-related equity hedge fund38.11.9%9LCM XIX LP Fund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)32.51.6%10LCM XVI LPFund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)29.81.5% TOTAL 40.3% Holding Investment Type
Letter to Shareholders
OUTLOOK:
The past several years have witnessed unprecedented
monetary easing resulting in historically low interest rates
globally. Although in low-LIBOR environments, TFG may
achieve lower sustainable returns, TFG is generally invested,
including through the ownership of the relevant asset
managers, in strategies that are seeking “absolute” returns
rather than returns “relative to a financial index”. We believe
that TFG’s performance in 2015 reflects this approach.
During 2016, we are hopeful that our mix of asset classes and
investment strategies will continue to produce what we
believe are generally uncorrelated returns.
In terms of TFG Asset Management, despite increasing global
uncertainty, it is continuing to seek to increase AUM across
the platform. In addition, the Investment Manager continues
to look for new asset classes and new asset managers to add
to the TFG Asset Management platform. To date, through
attractive performance, strong fundraising and good
performance, the business has successfully grown.
In closing, we believe that TFG’s portfolio, including TFG Asset
Management, is well positioned to provide continued growth
in 2016.
With Regards,
The Board of Directors
29 February 2016
4│ tetragoninv.com
TFG Overview
TFG Overview
Tetragon Financial Group Limited (“TFG”) is a Guernsey
closed-ended company traded on Euronext Amsterdam N.V.
under the ticker symbol “TFG.NA” and (as of 9 November
2015) on the Specialist Fund Market of the London Stock
Exchange under ticker symbol “TFG.LN”.
Figure 3(i)(ii)
investment objective
inflation and real estate cycles.
is to generate distributable
TFG's
income and capital appreciation. It aims to provide stable
returns to investors across various credit, equity, interest
rate,
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 NAV as of 31 December 2015 was
approximately $2.0 billion. Figure 3 shows the company’s
current net asset breakdown
including TFG Asset
Management at full estimated Fair Value.
(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by broke rs associated with assets held directly
by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG’s investments, which may only be used for
designated purposes without incurring significant tax and transfer costs, net of “Other Net Assets and Liabilities.”
(ii) Assets characterised as “Equities” consist of the Fair Value of investments in Polygon-managed equity funds as well as the Fair Value of, or capital committed to,
equity assets (as applicable) held directly on TFG’s balance sheet. Please see Figure 10 for further details on asset composition.
Tetragon Financial Group Limited 2015 Annual Report │5
CLO Equity30.2%Equities14.5%Credit7.2%Real Estate7.1%Asset Managers: TFG AM21.2%Net Cash19.8%Fair Value Net Asset Breakdown at 31 December 2015
TFG Overview
investment objective of generating
To achieve TFG’s
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
its
investments in asset management businesses that derive
income from external investors.
investment
income
from
6│ tetragoninv.com
Additionally,
the business are also
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
important
and scalability of
considerations.
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
its
Management’s
exposure across asset classes, investment vehicles, durations,
and investor types, among other factors.
investment managers by diversifying
core
the
can
businesses
asset management
TFG's
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 Overview
TFG ASSET MANAGEMENT
Figure 4
ASSETS UNDER
MANAGEMENT(i)
$17B
31 December 2015
HEADCOUNT
OFFICES
CIRCA
210
Including GreenOak
London · New York
Plus GreenOak locations
GLOBAL OPERATING
PLATFORM
TM
TM
TM
TM
HAWKE’S POINT
TM
TM
Bank Loans
Real Estate
Joint Venture
Hedge Funds &
Private Equity
Infrastructure
Mining Finance
CLO Equity
Approx.
AUM
$6.1 billion(ii)
$6.6 billion(iii)
$1.5 billion(iv)
$2.8 billion(v)
Start up(vi)
$0.1 billion(vii)
LCM currently
Japan Fund I
manages 14 CLOs
Asia Fund II
UK Debt Fund I
Europe Fund I
Spain
US Fund I
US Fund II
Global Advisory
European Equity
Opportunity Fund
Convertible
Opportunity Fund
Mining Opportunity
Fund
Global Equities Fund
Distressed
Opportunities Fund
Recovery Fund
Fund I
Fund II
Fund III
Fund IV
Managed Account
Energy Saving
Investments
Energy Efficiency Fund
Tetragon Credit
Income II L.P.
TCI Capital
Management
(i)(ii)(iii)(iv)(v)(vi)(vii) 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 – a CLO loan manager.
The GREENOAK REAL ESTATE joint venture – a real estate-focused principal investing, lending and advisory firm.
POLYGON GLOBAL PARTNERS – a manager of open-ended hedge fund and private equity vehicles across a number of
strategies.
EQUITIX – an integrated core infrastructure asset management and primary project platform.
HAWKE’S POINT – a business that seeks to provide capital to companies in the mining and resource sectors.
TETRAGON CREDIT INCOME PARTNERS (TCIP) – TCIP acts as a general partner of a private equity vehicle that, among other
things, makes investments in CLOs relating to risk retention rules.
Assets under management for TFG Asset Management as of 31 December 2015 totalled approximately $17.0 billion.(18)
Tetragon Financial Group Limited 2015 Annual Report │7
Board of Directors
TFG’s Board of Directors is comprised of six members, four of whom are Independent Directors who have significant
experience in asset management and financial markets. Biographies of the directors can be found in Appendix IX.
Rupert Dorey
Independent Director
Frederic M. Hervouet
Independent Director
David Jeffreys
Independent Director
Byron Knief
Independent Director
Reade Griffith
Paddy Dear
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Key Metrics
Key Metrics
Key Metrics
The Company focuses on the following key metrics when assessing how value is being created for, and delivered to, TFG
shareholders:
Earnings : Fair Value Return on Equity and Fair Value EPS;
NAV per share; and
Dividends.
As noted in the Letter to Shareholders, TFG’s Key Metrics have been 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.
EARNINGS – FAIR VALUE RETURN ON EQUITY (“Fair Value RoE”)
Fair Value RoE for 2015 was 14.5%, close to the top of TFG’s long-term target range of 10-15%,(19)
enhanced by the move to fair value-based metrics in Q3 2015
Following a challenging environment for investing in Q3, TFG ended the year strongly, with Fair
Value Net Income(20) of $35.5 million in the quarter and $263.9 million for the full year. This
equated to a full year Fair Value RoE of 14.5% which included the impact of an uplift in the Fair
Value of TFG Asset Management representing 6.3% ($114.6 of net income net of fees).
Stand out performers in 2015 were CLOs, Polygon’s equity funds, “other equity” investments, real
estate and TFG Asset Management, each of which is described in more detail later in the report.
Figure 5(i)
(i) Average RoE is calculated from TFG’s IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset
Management businesses, the value of which has accumulated over several years. Consequently the full year return of
14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%.
10│ tetragoninv.com
ROE TARGET
10-15%
Annualised range
AVERAGE ROE
13.5%
Since April 2007 IPO
2015 ROE
14.5%
31 December 2015
36.1%20.8%15.3%6.6%14.5%0%5%10%15%20%25%30%35%40%20112012201320142015Annual Fair Value Return on Equity 2011 -2015 Target RoE: 10-15%Average RoE: 13.5%
Key Metrics
FAIR VALUE EARNINGS PER SHARE (“Fair Value EPS”)
TFG generated a Fair Value EPS(21) of $2.72 in 2015
The Fair Value Net Income of $263.9 million resulted in an EPS of $2.72, of which $1.18 related to the move to fair value accounting
for elements of TFG Asset Management. The underlying EPS performance of $1.54 represents a 24% increase over the
corresponding period in 2014.
Figure 6
Further detailed information on the drivers of the Company’s performance is provided later in this report.
Tetragon Financial Group Limited 2015 Annual Report │11
$3.46 $2.70 $2.52 $1.24 $2.72 FY 2011FY 2012FY 2013FY 2014FY 2015Fair Value EPS Comparison 2011 -2015(USD)
Key Metrics
FULLY DILUTED FAIR VALUE NAV PER SHARE
Fully Diluted Fair Value NAV per Share was $19.08 at the end of 2015, up 11.9% from the end of
Q4 2014
Total Fair Value NAV for TFG rose to $1,987.3 million at 31 December 2015, which equated to
Fully Diluted Fair Value NAV per Share(22) of $19.08.
The 11.9% growth recorded in the year is after distributing dividends of $0.64 during that
period.
Figure 7(i)
(i) Source: Fully Diluted Fair Value NAV per share based on TFG’s financial statements as of 31
December of each of the years shown. Please see Figure 22 on page 33 for more details on the
calculation of Fully Diluted Fair Value NAV Per Share.
12│ tetragoninv.com
FAIR VALUE NAV
$2B
31 December 2015
FAIR VALUE
NAV PER SHARE
$19
31 December 2015
NAV PER SHARE GROWTH
+12%
2015
$12.71$14.65$16.36$17.05$19.0820112012201320142015Fair Value NAV Per Share2011 -2015(USD)
DIVIDENDS PER SHARE (“DPS”)
TFG increased its quarterly dividend to 16.50 cents per share in Q4 2015 from 16.25 cents the
prior quarter
TFG declared a Q4 2015 DPS of $0.165, an increase on the level declared for Q2 and Q3 2015.
On a rolling 12-month basis, the dividend of $0.6475 per share represents a 4.9% increase over
the prior 12-month period and equated to an annualised dividend yield of 6.5% on the 31
December 2015 share price of $9.91.
This dividend declaration continues TFG’s progressive dividend policy, which targets a payout
ratio of 30-50% of normalised earnings. The Q4 2015 DPS of $0.165 brings the cumulative DPS
declared since TFG’s IPO to $4.09.
Figure 8
Key Metrics
DIVIDEND YIELD
7%
31 December 2015
2015 DIVIDEND COVER
4x
31 December 2015
DIVIDEND GROWTH
FIVE-YEAR CAGR
13%
Per annum
to 31 December 2015
Tetragon Financial Group Limited 2015 Annual Report │13
$0.395$0.470$0.565$0.6175$0.647520112012201320142015Dividend per Share Comparison2011 -2015(USD)
2015 In Review
2015 In Review
2015 In Review
The figure below illustrates the composition of TFG’s Fair Value net assets as of 31 December 2015 and 31 December 2014.
Figure 9(i)(ii)
Fair Value Net Asset Composition Summary(i)(ii)
(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets
held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG’s investments, which may
only be used for designated purposes without incurring significant tax and transfer costs, net of “Other Net Assets and Liabilities.”
(ii) Assets characterised as “Equities” consist of the Fair Value of investments in Polygon-managed equity funds as well as the Fair Value of, or capital
committed to, equity assets (as applicable) held directly on TFG’s balance sheet. Please see Figure 10 for further details on asset composition.
The table below highlights the fair value of TFG’s ten top holdings as of 31 December 2015.
Figure 10
Top 10 Holdings at 31 December 2015
Tetragon Financial Group Limited 2015 Annual Report │15
CLO Equity45.0%Equities14.5%Credit8.8%Real Estate4.9%Asset Managers: TFG AM6.5%Net Cash20.3%Net Asset Breakdown at 31 December 2014CLO Equity30.2%Equities14.5%Credit7.2%Real Estate7.1%Asset Managers: TFG AM21.2%Net Cash19.8%Fair Value Net Asset Breakdown at 31 December 2015 Description Fair Value $MM % of Fair Value NAV 1Equitix (Manager)Asset Manager£1.9 Bn UK infrastructure fund asset manager173.98.7%2Polygon European Equity Opportunity FundFund Investment - EquitiesEuropean event driven equity hedge fund139.97.0%3LCM (Manager)Asset Manager$5.9 Bn CLO manager110.25.5%4Polygon Distressed Opportunities FundFund Investment - CreditDistressed opportunities hedge fund95.14.8%5GreenOak Real Estate (Manager)Asset Manager$6.6 Bn global real estate asset manager70.03.5%6Polygon (Manager)Asset Manager$1.5 Bn hedge fund manager67.03.4%7Polygon Convertible Opportunity FundFund Investment - CreditEvent driven credit hedge fund44.82.2%8Polygon Mining Opportunities FundFund Investment - EquitiesMining-related equity hedge fund38.11.9%9LCM XIX LP Fund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)32.51.6%10LCM XVI LPFund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)29.81.5% TOTAL 40.3% Holding Investment Type
2015 In Review
NET ASSET BREAKDOWN AND INCOME FOR 2015
Figure 11
(i)
“U.S. CLO 1.0” refers to U.S. CLOs issued before or during 2008. “U.S. CLO 2.0” refers to U.S. CLOs issued after 2008. The U.S. CLO 1.0 segment includes an
investment in the BB tranche of a U.S. CLO 1.0 with Fair Value of $1.7 million.
(ii) Assets characterised as “Other Equities” consist of the Fair Value of, or capital committed to, investment assets held directly on the balance sheet.
(iii) The TFG Asset Management income figure 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.
Figure 11 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q4 2015 and full year 2015, compared to
2014.
U.S. CLO 1.0: TFG’s U.S. CLO 1.0 investments continued to make a positive contribution to the Company’s earnings during
2015, producing $55.7 million of income for the year, despite a pick-up in credit market volatility, particularly in energy and
commodity related credits. The average remaining expected duration of this segment of the portfolio declined in 2015 due to
continued post-reinvestment period structural deleveraging, optional redemptions, and one asset sale, driving an approximate
41% reduction in the fair value of TFG’s U.S. CLO 1.0 investments. The aggregate fair value of the U.S. CLO 1.0 portfolio is now
below that of the U.S. CLO 2.0 portfolio. As of the end of 2015, all of TFG’s U.S. CLO 1.0 deals were passing their junior-most
O/C tests.(23)
U.S. CLO 2.0: TFG’s U.S. CLO 2.0 investments performed well in 2015 generating income of $30.2 million for the year. As
with U.S. CLO 1.0 investments, the CLO 2.0 segment faced oil/gas and commodity credit related headwinds as well as a handful
of idiosyncratic defaults. The second half of the year also saw leveraged loan spreads widen with the average single-B
institutional U.S. loan spread rising by more than 26% from the lows registered earlier in the year.(24) We believe this allowed
our CLO managers to reinvest into loans at lower prices and wider effective spreads, increasing the potential arbitrage
available to our CLO equity investments (all else being equal). Certain of our managers also focused on recalibrating the
overall credit risk composition of their respective portfolios, by making opportunistic sales and substitutions. As of the end of
2015, all of TFG’s U.S. CLO 2.0s were in compliance with their junior-most O/C tests.(25)
European CLO: TFG’s European CLO investments generated positive returns on the year, recording $6.0 million of income.
As with the U.S. CLO 1.0 portfolio, we continued to see amortization of these European CLOs and undertook certain optional
redemptions, reducing the U.S. dollar fair value by over 50%. The vast majority of these optional calls were finalised during the
year and TFG has received the net redemption proceeds. At the end of 2015, all of TFG’s European CLOs were in compliance
with their junior-most O/C tests. (26)
16│ tetragoninv.com
(continued)
20152015Q4 20152014 Fair Value Net Assets ($MM) Fair Value Net Income($MM)Fair Value Net Income ($MM)Fair Value Net Income ($MM) CLO Equity U.S. CLO 1.0(i) 260.6 55.7 14.4 116.7 CLO Equity U.S. CLO 2.0(i) 281.7 30.2 1.6 29.7 CLO Equity European CLOs 58.5 6.0 0.9 22.7 Equities Equity Funds 198.3 15.3 9.6 (3.2) Equities Other Equities(ii) 90.5 51.6 4.2 (27.1) Credit Convertible Bond Fund 44.8 2.3 0.6 5.4 Credit Distressed Fund 95.1 (5.4) (0.6) 3.3 Credit Direct Loans 3.0 1.0 0.3 1.3 Real Estate Real Estate 141.7 25.2 (2.5) 10.1 Asset Management TFG Asset Management(iii) 422.1 185.2 26.3 55.0 Net Cash Net Cash 391.0 0.1 - - Net Cash Corporate Fees and Expenses NA (92.2) (17.5) (69.1) Net Cash Net Hedge PnL and Taxes NA (11.1) (1.8) (26.7) 1,987.3 263.9 35.5 118.1 Asset Category Asset Subcategory
2015 In Review
Equity Funds: Polygon’s event-driven equity investments generated Fair Value Net Income of $15.3 million during 2015,
compared to a loss of $3.2 million in 2014. Fair Value Net Income generated in Q4 2015 was $9.6 million, a turnaround from a
challenging Q3. Polygon’s European event-driven strategy returned 10.3% net during 2015, and its mining equity vehicle
returned 6.2% net; the HFRX Event-Driven index(27) was down 6.94% in 2015 by comparison. Please refer to page 26 for
further details on the performance of the individual funds.
Other Equities: These assets had positive returns of $4.2 million in Q4 2015, and full year fair value net income of $51.6
million for 2015.
Convertible Fund: The contribution from Polygon’s convertible fund investment had fair value net income of $0.6 million
during Q4 2015, and full year net income of $2.3 million. The fund’s performance was up 4.56% net during 2015, compared to
-0.12% for the HFRX Convertible Index.(28) Please refer to page 26 for further details on the fund’s performance.
Distressed Fund: This asset subcategory had a loss of $0.6 million during Q4 2015 and a loss of $5.4 million for the full year.
Polygon’s distressed fund performance was down 2.2% net during 2015, compared to the HFRX Distressed Index which was
down 11.1% net in 2015; 6.7% of this drawdown was during Q4 alone.(29) It should be noted that the net loss attributable from
TFG’s investment in the Distressed Fund also reflects start up costs for this aspect of the asset management business. Please
refer to page 26 for further details on the fund’s performance.
Real Estate: Despite a loss of $2.5 million during the quarter, real estate investments contributed $25.2 million to net
income during 2015, with the majority of the year’s contribution coming from U.S. and Japanese investments. Overall,
approximately $17.3 million of cash was returned during the quarter bringing the life-to-date cash returned to $106.1 million
on the GreenOak-managed investments.
TFG Asset Management: TFG’s investment in TFG Asset Management generated $26.3 million of capital appreciation and
investment income during the fourth quarter, as the valuations of these investments were recalibrated. The main contributors
were increases in the carrying value of TFG’s investments in Equitix and LCM as both businesses continued to grow their AUM
and profitability. 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 15.
Net Cash: TFG held $391 million of Fair Value in net cash at 31 December 2015. The Company actively manages its cash
levels to cover future commitments and to enable it to capitalise on opportunistic investments.
Figure 12
Tetragon Financial Group Limited 2015 Annual Report │17
TFG Asset Management - Net Income Q4 2015BusinessFair Value Q4 2015($MM)Fair Value Q3 2015($MM)Fair Value Movement ($MM)Equitix173.9161.612.3GreenOak Joint Venture70.067.03.0Hawke's Point0.80.80.0TCIP0.30.00.3LCM110.2104.45.8Polygon67.068.6(1.6)Change in Fair Value422.1402.319.8Other TFGAM investment income and impact of currency hedge on Equitix6.5Total Capital Appreciation and Investment Income26.3
2015 In Review
2015 Major New Investments
U.S. CLO 2.0: In 2015, TFG acquired majority equity positions in two LCM-managed CLOs for a total cost of $62.4 million.
During Q4 2015, TFG made a capital commitment of $35.0 million to Tetragon Credit Income II L.P. (“TCI II”), a new vehicle
focused on CLO investments relating to risk retention rules. TCIP acts as the general partner of TCI II. Although no capital
was drawn from TFG before the end of 2015, TCI II had made its first investment into LCM XX Limited Partnership, to which
TFG has exposure on a look-through basis.
Real Estate: During 2015, TFG invested $81.4 million into various real estate funds and vehicles which focus on a variety
of geographical areas including the Americas, Europe, and Asia.
Equitix: In February 2015, TFG completed the acquisition of 85%(30) of Equitix Holdings Limited for a total enterprise value
of £159.5 million.
2015 Major Asset Sales and Optional Redemptions
U.S. CLO 1.0: During 2015, TFG sold one U.S. CLO 1.0 transaction for total proceeds of $6.5 million. In addition, TFG
exercised its optional call rights on 11 U.S 1.0 CLOs, generating unwind proceeds of $67.1 million through the end of 2015.
Certain of these transactions have not yet liquidated all of their underlying assets and the Company expects to receive
additional proceeds from these redemptions in 2016.
European CLOs: TFG initiated an optional early redemption of two European CLOs in 2015, which generated partial
unwind proceeds of €23.1 million during the year. The Company expects to receive additional liquidation payments from
the redemptions in 2016.
Real Estate: During 2015, TFG received approximately $49.7 million in return of capital and income on certain
investments in GreenOak-managed real estate vehicles; of this, $2.9 million was received in 2016.
18│ tetragoninv.com
TFG Asset Management Overview
TFG Asset Management Overview
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 31 December 2015, TFG Asset Management comprised LCM, the GreenOak
joint venture, Polygon, Equitix, Hawke’s Point and TCIP (please see Figure 13 for the breakdown of AUM and Fair Value by business
line). TFG Asset Management has approximately $17.0 billion of assets under management(31) and approximately 210 employees
globally. Figure 14 depicts the growth of that AUM over the last five years.
During 2015, TFG Asset Management performed well, generating Fair Value Net Income of $185.2 million during the year,
compared to $55.0 million in 2014. The total Fair Value Net Assets of TFG Asset Management was $422.1 million at 31 December
2015. Each of the underlying businesses increased its AUM during the year and the amount of fee income generated; see Figure 15
for details. We are hopeful for continuing positive progress during 2016.
Figure 13(32)
Figure 14(33)
(i) The Fair Value of TFG’s 23% stake.
20│ tetragoninv.com
EBITDA
$47M
31 December 2015
EBITDA GROWTH
+102%
2014 - 2015
AUM
$17B
31 December 2015
AUM GROWTH
+54%
2015
$4.0 $7.7 $9.2 $11.1 $17.1 Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015TFG AM Assets Under ManagementLCM: U.S. CLOsGreenOak: Global Commercial Real EstatePolygon: Hedge FundsEquitix: UK InfrastructureTCIPat 31 December 2011 -2015($BN)LCM: U.S. CLOs$6.1 GreenOak: Global Commercial Real Estate$6.6 Polygon: Hedge Funds$1.5 Equitix: UK Infrastructure$2.8 TCIP$0.1 TFG AM AUM by Business Lineat 31 December 2015($BN)Equitix$173.9GreenOak Joint Venture(i)$70.0Hawke's Point$0.8TCIP$0.3LCM$110.2Polygon$67.0TFG AM Fair Value by Business Lineat 31 December 2015($MM) TFG ASSET MANAGEMENT PRO-FORMA EBITDA (Ex-GreenOak)
Figure 15
TFG Asset Management Overview
(i) 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 show the performance of the TFG Asset Management businesses rather than what is
reflected in TFG’s U.S. GAAP financial statements.
(ii) The performance and success fees include some realised 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 year end. Similar amounts, if any, from LCM and
GreenOak are recognised when received. TFG is able to invest at a preferred level of fees.
Overview: Figure 15 shows a pro forma statement of operations which reflects the operating performance of the majority -
owned asset management companies within TFG Asset Management. Although they are currently reported under U.S. GAAP,
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
included in the pro forma EBITDA currently.
EBITDA: EBITDA equivalent for the majority-owned TFG Asset Management businesses rose by 102% in 2015 compared with
2014, accelerated in large part by the inclusion of Equitix from the start of February 2015.
Management fee income: Management fee income continued to increase with the growth of the TFG Asset Management
businesses. Fee-paying capital increased significantly year on year, both through organic growth of the Polygon and LCM
businesses and, notably, from the acquisition of Equitix which added approximately $2.0 billion of fee-paying AUM from early
February onwards. See Figures 13 and 14 for further information on TFG Asset Management’s AUM.
Performance and success fees: Compared to last year, performance and success fees have increased significantly – by 174% –
boosted by the addition of Equitix to TFG Asset Management. After a challenging third quarter for performance, TFG Asset
Management finished the year with a strong Q4, with particularly strong performances from both the Primary and Secondary
businesses within Equitix, from realised performance fees generated by LCM and from performance fees relating to certain of
Polygon’s hedge funds, as described earlier in this report.
Other fee income: This category includes third party CLO management fee income, all of which relates to U.S. CLO 1.0
transactions, which continued to decline in line with expectations as these transactions amortised down. In addition, it includes
certain cost recoveries from TFG relating to seeded Polygon hedge funds and management services revenues earned by Equitix.
The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report,
decreased slightly year on year although the teams supporting the seeded funds continued to grow. As these businesses
mature and build third party capital, such cost recoveries should reduce. This category also includes fee income generated by
Equitix on certain management services contracts, which is a growing part of the Equitix business.
Operating expenses: Operating expenses rose by approximately 30% in 2015 compared to 2014, largely driven by the
addition of the Equitix business in early 2015, plus additions to the teams supporting the growing Polygon and Hawke's Point
businesses.
Tetragon Financial Group Limited 2015 Annual Report │21
2015(i)20142013$MM$MM$MMManagement fee income55.042.936.8Performance and success fees(ii)52.119.012.8Other fee income19.119.224.7Interest income2.40.20.3Total income128.681.374.6Operating, employee and administrative expenses(75.4)(58.2)(47.1)Minority Interest(6.6)0.00.0Net income - "EBITDA equivalent"46.623.127.5TETRAGON FINANCIAL GROUPTFG Asset Management Pro Forma Statement of Operations (excluding GreenOak)
TFG Asset Management Overview
BUSINESS OVERVIEWS
The following pages provide a summary of each asset management business and a 2015 review of AUM growth and underlying
strategy / investment vehicle performance.
All data is at 31 December 2015, unless otherwise stated.
TM
Description of Business:
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 www.lcmam.com.
Amount of TFG’s
Investment in Products:
$227.1 million.
TFG held equity investments with total fair value of $224.1 million (U.S. CLO 1.0: $12.2 million, U.S.
CLO 2.0: $211.8 million) in LCM-managed CLOs.
LCM additionally manages a portfolio of U.S. broadly-syndicated leveraged loans held directly on TFG’s
balance sheet. At year-end 2015, the fair value of these loans was $3.0 million.
AUM:
Figure 16
The LCM-managed CLOs issued during the year were:
LCM XVIII, $610 million, 31 March 2015;
LCM XIX, $618 million, 28 July 2015;
LCM XX, $509 million, 13 November 2015
LCM’s AUM is $6.1 billion, compared to $5.9 billion at the end of Q3 2015 and $5.3 billion at the end
of 2014. During 2015, three new issue LCM-managed CLOs were closed, representing $1.7 billion in
AUM (at the time of issuance).
The LCM-managed CLOs issued during the year were:
LCM XVIII, $610 million, 31 March 2015;
LCM XIX, $618 million, 28 July 2015;
LCM XX, $509 million, 13 November 2015
Performance in 2015:
LCM continued to perform well in 2015, despite certain oil and gas-related realised and unrealised
losses. During the year, LCM had defaults in three obligors (which includes one which was a technical
default due to an exchange offer by the issuer) across all of the CLOs it manages, representing less
than 0.2% of its AUM at the end of the year.
As of the end of the year, all of LCM’s Cash Flow CLOs(34) that were still within their reinvestment
periods remained in compliance with their coverage tests, continuing to pay senior and subordinated
management fees and to generate cash flows for their equity tranches.
22│ tetragoninv.com
$3.4$4.3$4.2$5.3$6.1YE 2011YE 2012YE 2013YE 2014YE 2015LCM AUM History ($BN)CLO 1.0CLO 2.0
TFG Asset Management Overview
TM
Description of Business:
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 www.greenoakrealestate.com.
Amount of TFG’s
Investment in Products:
$115.4 million.
AUM:
Figure 17
(i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2015. TFG owns a 23% stake in GreenOak.
AUM includes all third-party interests and total projected capital investment costs.
AUM is $6.6 billion. During 2015, GreenOak completed its fundraise of its Europe Fund I with total
commitments of €250 million, closed Asia II in excess of $500 million, and raised assets for a variety of
projects such as 425 Park Avenue in the United States. GreenOak also continues to generate advisory
fees across its various regions. Since its inception, GreenOak has raised approximately $3.7 billion of
equity to invest in targeted strategies and assets, acquired 113 assets representing approximately 13
million square feet of space and $6.8 billion of real estate value within its target markets.
Tetragon Financial Group Limited 2015 Annual Report │23
$0.6$2.3$3.6$4.4$6.6 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015GreenOak AUM History(i) ($BN)EuropeU.S.Japan
TFG Asset Management Overview
GREENOAK (continued)
AUM, continued
Figure 18
($MM)
United States
Investment Period
Equity Raised(i)
Fund I & Co-Investments
2011 - 2013
Fund II & Co-Investments
2014 - Present
425 Park/Other
U.S. Sub-Total
2012
Fund I & Co-Investments
Fund II & Co-Investment to
date
Other
Japan Sub-Total
2012 - Present
2015 - Present
2011, 2013
Europe Fund I
2014 - Present
Spanish Separate Account
2014
UK Investment Program
2012 - Present
European Credit
2013 - Present
Europe Sub-Total
Asia
Europe
TOTAL
356
865
513
1,734
324
597
44
965
271
86
303
361
1,021
3,720
(i) Source: GreenOak, as of 31 December 2015. Includes assets previously purchased by GreenOak that have been monetised.
Performance in 2015:
GreenOak-managed vehicles continue to perform well across their European, U.S., and Asian
businesses. In particular, U.S. Fund I and Japan Fund I are now starting to monetise significant parts of
their portfolios, with both funds currently projected to exceed expected IRRs.
In the United States, GreenOak raised $630 million of equity; invested $675 million of equity; closed
eight investments; and purchased approximately $1.7 billion of real estate on an all-in cost basis. The
company returned more fund equity to investors than it invested during the year, having disposed of a
number of assets. Inception to date, GreenOak’s U.S. business has invested in and committed to 36
transactions totalling $4.7 billion of asset value, with $1.6 billion of equity invested.
In Europe, GreenOak completed its fundraise of Europe Fund I with total commitments of €250
million; it invested over €190 million across 14 investments and in its Debt Fund I; and made six loans
for a total commitment of £55 million, bringing the total from inception to nearly £150 million.
In Asia, GreenOak closed in excess of $500 million for Asia Fund II plus $100 million of co-invest
capital; invested $170 million in equity between Japan Fund I and Asia Fund II; and closed on seven
transactions totalling over $550 million on an all-in cost basis. Inception to date, GreenOak Asia has
invested and committed to $1.8 billion of asset value (cost basis) with $420 million of equity.
GreenOak also continued to realise advisory revenues across all of its regions. Since the company’s
inception, GreenOak has monetised approximately $1.9 billion of stabilised assets in GreenOak funds
and separate accounts.
24│ tetragoninv.com
TFG Asset Management Overview
TM
Description of Business:
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%.
Further information on Polygon is available at www.polygoninv.com.
Amount of TFG’s
Investment in Products:
$338.1 million.
AUM:
Figure 19(i)
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and
associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon
Distressed Opportunities Master Fund, as calculated by the applicable fund administrator at 31 December 2011, 2012, 2013,
2014, and 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited.
AUM is $1.5 billion for all funds; $1.2 billion for open strategies.
Tetragon Financial Group Limited 2015 Annual Report │25
$409$529$855$1,113$1,248YE 2011YE 2012YE 2013YE 2014YE 2015Polygon Hedge Funds AUM History ($MM)(Convertibles, European Event-Driven Equity, Mining Equities, Distressed, Other Equity)ConvertiblesEuropean Event-Driven EquityMining EquitiesDistressed OpportunitiesOther Equity
TFG Asset Management Overview
POLYGON (continued)
Performance in 2015:
Figure 20(35)
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 performa nce
numbers provided herein reflects the actual net performance of the funds net of management and performance fees, as well as
any commissions and direct expenses incurred by the funds, but before withholding taxes, and other indirect expenses. All
returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions
prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance
may also lead to different performance results than those shown.
P&L in 2015 for the Private Equity Vehicle was $26.9 million through to 31 December 2015 before FX movements of -$18.5
million. P&L is +$152.4 million from closing date net asset value before FX movements of -$39.2 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 $459 million and excludes the effects of FX and
certain assets purchased through recycled capital. The estimated approximate LTD multiple including those two items (FX and
recycled capital) would be 1.9x. Each of these multiples will be different from the multiples reflected for specific limited partners
in the fund, which would be calculated with respect to relevant class of partners in accordance with the fund’s limited
partnership agreement.
Convertibles:
Polygon's convertibles strategy invests primarily in convertible securities in Europe and North
America.
2015 net performance was 4.5%, compared to the HFRX Convertible Arbitrage Index which
returned -0.12% for the same period; annualised net performance since inception in May 2009 has
been 17.1% compared to 5.1% for the benchmark index.(36)
European Event-Driven
Equity:
Polygon’s European Event-Driven strategy invests primarily in the major European equity markets,
with an event-driven focus.
The strategy returned 10.3% net during 2015. This compares to the HFRX Event Driven Index which
returned -6.9% for the same period; annualised net performance since inception in July 2009 has
been 11.2% compared to 1.8% for the benchmark index.(37)
Mining Equities:
Polygon’s Mining Equities strategy focuses primarily in the equities of global mining companies,
many of them based on gold.
The strategy posted net returns of 6.2% for 2015, versus the GDXJ Junior Gold Miners Index, which
was down 19.7% for the same period; annualised net performance since inception in June 2012 has
been 3.3% compared to -32.2% for the benchmark index.(38)
26│ tetragoninv.com
Fund AUM at 31 Dec 2015 ($MM) Q4 2015 Net Performance 2015 Net Performance Annualised Net LTD Performance Convertibles(35.i)417.9$ 1.0%4.5%17.1%European Event-Driven Equity(35.ii)637.0$ 5.2%10.3%11.2%Mining Equities(35.iii)70.0$ 5.1%6.2%3.3%Distressed Opportunities(35.iv)100.0$ -1.2%-2.2%4.3%Other Equity(35.v)23.2$ 1.5%9.6%16.0%Total AUM - Open Funds1,248.1$ Estimated approx. LTD Multiple Private Equity Vehicle(35.vi)262.4$ N/AN/A1.9xTotal AUM1,510.5$ Polygon Funds Summary
TFG Asset Management Overview
POLYGON (continued)
Distressed
Opportunities:
Polygon’s Distressed strategy focuses on opportunities in companies undergoing, or about to
undergo, balance sheet restructurings.
Net performance during 2015 was -2.2%. This compares to the HFRX Distressed Restructuring
Index, which has returned -11.1% 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
-4.3%.(39)
Other Equities:
These investments returned 9.6% net performance during 2015 and annualised performance from
inception to 31 December 2015 was 16.0%.(40)
Private Equity:
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, including $50.0 million during 2015. Performance in 2015 was affected by
foreign exchange moves; P&L for 2015 was +$26.9 million; FX movements accounted for -$18.5
million, leading to net P&L of $8.4 million. Life to date, gross P&L is +$152.4 million excluding FX;
FX movements accounted for -$39.2 million, and thus net P&L was $113.2 million.(41) TFG has not
invested directly in this product; however, TFG Asset Management is the beneficiary of certain
contracted management fee income.
Tetragon Financial Group Limited 2015 Annual Report │27
TFG Asset Management Overview
TM
Description of Business:
Equitix is an integrated core infrastructure asset management and primary project platform.
Equitix was established in 2007 and is based in London.
TFG owns 85% of the business; over time, TFG’s holding is expected to decline to approximately
74.8%. Management own the balance.
Equitix typically invests in 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%.
Further information on Equitix is available at www.equitix.co.uk.
Amount of TFG’s
Investment in Products:
TFG has exposure to the performance of Equitix funds indirectly through its ownership of the
company as Equitix holds certain GP interests in the funds it manages. As at 31 December 2015, these
interests were valued at £12.5 million ($18.4 million).
AUM:
Figure 21
AUM is £1.9 billion ($2.8 billion)(i), compared to £1.3 billion at the end of 2014.
(i) USD-GBP rate as at 31 December 2015.
Performance in 2015:
Equitix Fund I is cash generative and fully invested across 21 projects, Equitix Fund II is cash generative
and fully invested across 35 projects and EF III is cash generative and fully invested/committed across
45 projects; all are delivering stable yields to investors. The Equitix Energy Efficiency Funds are in their
investment period and are 70% committed to a diversified portfolio of projects; the portfolio is cash
generative. The Equitix Managed Account is fully invested/committed and the portfolio is cash
generative. Equitix Fund IV is in the process of fund raising and expected soon to reach its target with
a significant proportion of capital invested/committed to date.
28│ tetragoninv.com
£339£493£1,027£1,328£1,880 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015Equitix AUM History (£MM)Equitix Fund IEquitix Fund IIEquitix Fund IIIEquitix Fund IVEnergy Efficiency FundsManaged Account
TFG Asset Management Overview
HAWKE’S POINT
TM
Description of Business:
Hawke’s Point is a mining finance company established by TFG in Q4 2014 which seeks to provide
capital to companies in the mining and resource sectors.
TFG Asset Management established Hawke’s Point in Q4 2014 and owns 100% of the business.
Hawke’s Point is currently actively evaluating a range of mine financing opportunities.
Amount of TFG’s
Investment in Products:
In 2015, there were no investments on which to report.
AUM:
Not applicable.
TM
Description of Business:
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).
Amount of TFG’s
Investment in Products:
$35.0 million of committed capital.
AUM:
TCI II had its first close in November 2015 with committed capital of $142.9 million.
Performance in 2015:
TCI II made its first investment during Q4 2015, a majority stake in the equity tranche of LCM XX
Limited Partnership. The TCIP team is focused on a near term pipeline of potential investments and
third-party CLO sub-advisory arrangements.
Tetragon Financial Group Limited 2015 Annual Report │29
Corporate Responsibility
Corporate Responsibility
Corporate Responsibility
TFG believes that being a good citizen is an important part of doing business. It aims to contribute positively to the
communities around it by participating in the following initiatives:
TFG Asset Management is the largest contributor to BACIT Limited (the Battle Against Cancer Investment Trust) a UK-based
charitable investment vehicle. BACIT only invests where the relevant investment manager provides investment capacity on
a ‘‘gross return’’ basis, meaning that BACIT and its subsidiaries (the “Group”) do not bear the impact of management or
performance fees on its investments. This may be achieved by the relevant manager or fund agreeing not to charge
management or performance fees, by rebating or donating back to the Group any management or performance fees
charged or otherwise arranging for the Group to be compensated so as effectively to increase its investment return on the
relevant investment by the amount of any such fees. BACIT does not charge its investors fees. However, it donates 1% of
NAV each year to charity (50% to The Institute of Cancer Research and 50% to The BACIT Foundation). In addition, BACIT
also intends to invest up to one per cent per annum of NAV to acquire interests in drug development and medical
innovation projects undertaken by the Institute of Cancer Research or its subsidiaries in the field of cancer research and
therapeutics which have the potential for commercial development and application. Further information on this initiative
can be found on BACIT’s website, www.bacitltd.com.
TFG Asset Management also supports Hedge Funds Care │Help for Children, a charity for the prevention and treatment of
child abuse. Hedge Funds Care, also known as Help For Children (HFC), is an international charity, supported largely by the
hedge fund industry, whose sole mission is preventing and treating child abuse. Its main goals are to raise as much money
as possible to fund the programs that do the preventing and treating of child abuse; and to showcase the philanthropy of
the hedge fund and finance industries. Further information can be found at www.hfc.org.
In addition, TFG Asset Management is a corporate supporter of the Royal Court Theatre, its neighbour in London. The Royal
Court bills itself as “the writer’s theatre” and has a particular mission to develop and cultivate new theatrical works from
established and budding playwrights. Corporate sponsorships such as ours enable the Royal Court to support and develop
exciting new plays. Further information can be found at www.royalcourttheatre.com.
TFG Asset Management’s Polygon business is a member of the Alternative Investment Management Association (“AIMA”)
and is a signatory of the Standards of the Hedge Fund Standards Board (“HFSB”).
Equitix, one of TFG Asset Management’s businesses, has adopted specific initiatives regarding Environmental, Social and
Governance (“ESG”) policies, by incorporating ESG policy and requesting socially responsible analysis and reporting within
corporate governance of the projects they own and manage through all of their Funds. Furthermore, Equitix has a fund
dedicated to making investments within the energy efficiency sector, which will make a direct contribution to the reduction
of energy consumption and greenhouse gas emissions. Equitix is a signatory of the United Nations Principles of Responsible
Investment (www.unpri.org) and a member of the UK Sustainable Investment and Finance Association (www.uksif.org).
Please visit the Equitix website for further information: http://www.equitix.co.uk/sri.html.
Tetragon Financial Group Limited 2015 Annual Report │31
2015 Financial Review
Financial Review
2015 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.(43)
Financial Highlights
Figure 22
TFG uses, among others, the following metrics to understand the progress and performance of the business:
Fair Value Net Income ($263.9 million): Adds back to the U.S. GAAP net income ($127.3 million) the imputed 2015 share
based compensation ($22.0 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction and
the Fair Value adjustment ($114.6 million) attributable to Polygon, LCM, Hawke’s Point and TCIP which are currently
consolidated under U.S. GAAP but are reflected in TFG’s key metrics as if they are held at Fair Value and not consolidated.
Please see Appendix V for further details.
Fair Value Return on Equity (14.5%): Fair Value Net Income ($263.9 million) divided by Net Assets at the start of the year
($1,818.5 million).
Pro Forma Fully Diluted Shares (104.2 million):(44) Adjusts the U.S. GAAP shares outstanding (95.9 million) for the impact of
escrow shares used as consideration in the Polygon transaction and associated stock dividends (together, 6.6 million) and for
the potential impact of share options issued (1.7 million). These options represent the intrinsic value of shares available for the
GreenOak Founders as at the end of 2015 (1.7 million) plus potential impact of options issued to TFG’s investment manager at
the time of TFG’s IPO (0.0 million). See also Figure 40.
Fair Value EPS ($2.72): Calculated as Fair Value Net Income ($263.9 million) divided by weighted-average U.S. GAAP shares(i)
during the period (97.1 million).
Fully Diluted Fair Value NAV per Share ($19.08):(44) Calculated as Fair Value Net Assets ($1,987.3 million) divided by Pro Forma
Fully Diluted shares (104.2 million).
(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.
Tetragon Financial Group Limited 2015 Annual Report │33
201520142013U.S. GAAP net income ($MM)$127.3$95.1$224.3Fair Value Net income ($MM)$263.9$118.1$247.4U.S. GAAP EPS$1.31$1.00$2.29Fair Value EPS$2.72$1.24$2.52Fair Value Return on equity14.5%6.6%15.3%Fair Value Net Assets ($MM)$1,987.3$1,818.5$1,803.2U.S. GAAP number of shares outstanding (MM)95.995.998.9Fair Value NAV per share$20.73$18.96$18.23Pro Forma number of shares outstanding (MM)104.2106.6110.2Fully diluted Fair Value NAV per share$19.08$17.05$16.36DPS$0.6475$0.6175$0.565 TETRAGON FINANCIAL GROUP Financial Highlights Through 2013 - 2015
Financial Review
Fair Value EPS Analysis 2013-2015
Figure 23
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201520142013Investment portfolio segmentU.S. CLO 1.0$0.58$1.23$1.74U.S. CLO 2.0$0.31$0.31$0.23European CLOs$0.06$0.24$0.89Equity Funds$0.16($0.03)$0.20Other Equities$0.53($0.28)$0.10Convertible Bond Fund$0.02$0.05$0.02Distressed Fund($0.06)$0.04$0.02Direct Loans$0.01$0.01$0.04Real Estate$0.26$0.11$0.03TFG Asset Management (fair value basis)$1.91$0.48$0.21FX, Options and Hedges($0.10)($0.15)$0.10Corporate Expenses($0.95)($0.64)($0.97)Corporate Income Taxes($0.01)($0.13)($0.09)Fair Value EPS$2.72$1.24$2.52Weighted Average Shares (MM)97.195.498.0TETRAGON FINANCIAL GROUPTFG Fair Value Earnings per Share Analysis Through 2013 - 2015 Financial Review
Statement of Operations (Fair Value Basis)
Figure 24
Performance Fee
A performance fee of $4.7 million was accrued in Q4 2015 in accordance with TFG’s investment management agreement. In 2015,
the Investment Manager earned performance fees of $35.8 million. The hurdle rate for the Q1 2016 incentive fee has been reset at
3.259558% (Q4 2015: 2.971858%) as per the process outlined in TFG’s 2015 audited financial statements and in accordance with
TFG’s investment management agreement. Please see TFG’s website, www.tetragoninv.com, and the 2015 TFG audited financial
statements for more details on the calculation of this fee.
Tetragon Financial Group Limited 2015 Annual Report │35
201520142013$MM$MM$MMInterest income134.7152.5204.8Fee income34.281.174.3Other income - cost recovery9.923.621.1Insurance recovery9.81.02.1Dividend income0.10.10.1Investment income188.7258.3302.4Management and performance fees(92.3)(49.8)(90.0)Other operating and administrative expenses(43.6)(101.5)(80.1)Amortisation of intangible assets(29.7)(6.8)(6.8)Total operating expenses (165.6)(158.1)(176.9)Net investment income23.1100.2125.5Net change in unrealised appreciation in investments157.4(48.8)105.1Realised gain on investments90.591.816.0Realised and unrealised losses from hedging and fx(6.2)(12.5)9.6Net realised and unrealised gains from investments and fx241.730.5130.7Net income before tax264.8130.7256.2Income tax(0.9)(12.6)(8.8)Net income263.9118.1247.4 TETRAGON FINANCIAL GROUP Fair Value Statement of Operations Through 2013 - 2015
Financial Review
Balance Sheet (Fair Value Basis)
Figure 25
See Appendix V for the reconciliation between the U.S. GAAP consolidated balance sheet and the balance sheet prepared on a Fair
Value basis.
36│ tetragoninv.com
201520142013$MM$MM$MMAssetsInvestments, at fair value1,543.01,356.21,533.0Intangible assets- 29.736.5Cash and cash equivalents402.7402.0245.9Amounts due from brokers59.952.142.0Derivative financial assets19.419.215.2Fixed Assets- 0.10.3Deferred tax asset and income tax receivable- 10.08.3Other receivables3.133.426.5Total assets2,028.11,902.71,907.7LiabilitiesOther payables and accrued expenses36.054.579.8Amounts payable on share options- 12.310.7Deferred tax liability and income tax payable4.111.510.7Derivative financial liabilities0.75.93.3Total liabilities 40.884.2104.5 Net assets 1,987.31,818.51,803.2 TETRAGON FINANCIAL GROUP Fair Value Balance Sheet as at 31 December 2013, 2014, and 2015 Financial Review
Statement of Cash Flows(i)
Figure 26
(i) The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million, 2013: US$ 53.9 million) with a value equivalent to US$ 12.0 million (2014:
US$ 6.4 million, 2013: US$ 4.4 million) elected to be taken by the dividend recipient in shares rather than cash.
Tetragon Financial Group Limited 2015 Annual Report │37
201520142013$MM$MM$MMOperating ActivitiesOperating cash flows after incentive fees and before movements in working capital315.0290.9375.6Purchase of fixed assets(0.1)(0.1)(0.4)Amounts due from broker(7.8)(10.2)(28.9)Change in (payables) / receivables(19.6)(0.4)2.7Cash flows from operating activities287.5280.2349.0Investment ActivitiesProceeds on sales of investments- Proceeds from sale of CLOs6.5171.5- - Net proceeds from derivative financial instruments7.7- 8.1- Proceeds from investments73.317.3102.6- Proceeds from realisation of real estate investments46.856.311.5- Proceeds from GreenOak working capital repayment6.45.1- Purchase of investments- Purchase of CLOs(62.4)(84.3)(73.1)- Purchase of bank loans- (1.4)(22.4)- Purchase of real estate investments(81.4)(77.0)(43.5)- Investments in asset managers(133.1)- (0.5)- Investments in Equity Funds(5.0)- (115.0)- Investments in Convertible Bond Fund- (15.0)(10.0)- Investments in Distressed Fund(5.0)(30.0)(60.0)- Investments in Other(22.0)(62.6)(10.9)Cash flows from operating and investing activities119.3260.1135.8Proceeds from issue of Shares0.1- - Net purchase of shares(60.9)(50.9)(16.1)Dividends paid to shareholders(50.5)(52.0)(49.5) Cash flows from financing activities (111.3)(102.9)(65.6)Net increase in cash and cash equivalents8.0157.270.2Cash and cash equivalents at beginning of period402.0245.9175.9Adjustment to cash balance upon deconsolidation(7.6)- - Effect of exchange rate fluctuations on cash and cash equivalents0.3(1.1)(0.2)Cash and cash equivalents at end of period402.7402.0245.9 TETRAGON FINANCIAL GROUP Fair Value Statement of Cash Flows Through 2013 - 2015
Financial Review
Fair Value Net Income to U.S. GAAP Reconciliation
Figure 27
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.
1.
2.
Adjustment one takes into account a Fair Value adjustment of $114.6 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 $22.0 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. This
mechanic and future vesting schedule are described in more detail in the 2015 TFG audited financial statements.
38│ tetragoninv.com
2015 $MM Fair Value Net Income263.9Fair Value Adjustments(114.6)Share based compensation(22.0)U.S. GAAP net income127.3 Fair Value Net Income to U.S. GAAP Reconciliation Appendices
Appendices
Appendices
APPENDIX I
Directors’ Statements
The Directors of TFG confirm that (i) this Annual Report constitutes the TFG management review for the year ended 31 December
2015 and contains a fair review of that period and (ii) the 2015 audited financial statements accompanying this Annual Report for
TFG have been prepared in accordance with applicable laws and in conformity with U.S. generally accepted accounting principles.
APPENDIX II
Certain Regulatory Information
This Performance Report constitutes TFG’s annual financial report as required pursuant to Section 5:25c of the Dutch Financial
Markets Supervision Act (“FMSA”). Pursuant to Section 5:25c and 5:25m of the FMSA, this report is made public by means of a
press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) and also
made available to the public by way of publication on the TFG website (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 constitutes regulated information (“gereglementeerde informatie”) within the
meaning of Section 1:1 of the FMSA.
TFG shares (the “Shares”) are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFM 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.
40│ tetragoninv.com
Appendices
APPENDIX III
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.
Figure 28
U.S. CLOs Modelling Assumption
Figure 29
U.S. CLOs Modelling Assumption
Figure 30
Discount Rates
Tetragon Financial Group Limited 2015 Annual Report │41
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% 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% CLO Type Q4 2015 Q4 2014 U.S. 1.0 12.0%12.0% European 1.0 13.0%13.0% U.S. 2.0 - seasoned 11.0%11.0% U.S. 2.0 - less than 12 months old Deal IRRDeal IRR
Appendices
APPENDIX IV
Fair Value Determination In 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 31 December 2015,
this consolidation exemption was applied to TFG’s holdings in Polygon, LCM and Hawke’s Point (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”(45)
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 V.
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 31 December 2015.
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 (“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 Manager.
Figure 31
42│ tetragoninv.com
InvestmentTFG holdingFair Value Valuation approach($MM)Discount RateMultipleValue as % of AUMEquitix75% & Debt173.9Quoted market multiples and cross-check to recent transaction. Debt at par + accrued interest9.5% 15% Discount for Lack of Liquidity ("DLOL")5.3 x - 6.3 x EBITDA20% discount built-inN/AGreenOak23%70.0Quoted market multiples and cross-check using blended EBITDA and quoted market multiplesN/A11.7 x- 12.3 x Adjusted EBITDAN/ALCM 100%110.2Discounted cash flow analysis, cross checked to market multiples11.5%-13.5% 15% Discount for Lack of Liquidity ("DLOL")N/A1.6% -1.9% DLOL built-inPolygon100%67.0Discounted cash flow analysis, cross checked to market multiples12%-14% 20% DLOL7.7 x EBITDADLOL built-in3.8 x - 4.3 x DLOL built-inHawke's Point100%0.8Replacement cost basisN/AN/AN/ATCIP100%0.3Discounted cash flow analysis12.5%-14.5% 15% Discount for Lack of Liquidity ("DLOL")N/AN/AValuation approach to TFG's investments in TFG Asset ManagementRanges utilised Appendices
APPENDIX V
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 and Hawke’s Point 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 ($29.9
million) of the purchase of 25% of LCM in 2012. Previously, this was being amortised on a straight-line basis over 10 years, and
each quarter an applicable adjustment is made to reduce the performance fees payable to the investment manager.
Figure 32
Tetragon Financial Group Limited 2015 Annual Report │43
Fair ValueU.S. GAAPConsolidated Value31-Dec-1531-Dec-15Change($MM)($MM)($MM)Polygon67.023.443.6LCM110.2-110.2Hawke's Point0.8-0.8TCIP0.3-0.3Net assets of consolidated businesses-17.8(17.8)Deferred tax liability re intangible assets-(5.8)5.8Fair Value impact gross of imputed performance fee178.335.4142.9$MMGross change in NAV for purposes of incentive fee calculation142.9Full amortisation of LCM base cost(29.9)NAV for purposes of incentive fee calculation113.0Imputed performance fee28.3Fair Value impact net of imputed performance fee114.6TFG Asset Management - Impact of Use of Fair Value Metrics on Consolidated Businesses
Appendices
APPENDIX V (continued)
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.
We assume that the date of notional de-consolidation was the start of Q3 2015, the quarter in which the IPO Strategy, and thus the
change in the purpose for the expanded TFG Asset Management, was confirmed.
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 H2 2015, 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 notional performance fees of $28.3 million as calculated in Figure 32.
In addition, as in prior periods, we back out share-based compensation of $22.0 million as, under ASC 805, TFG is recognizing the
value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting.
This mechanic and future vesting schedule are described in more detail in the 2015 Master Fund audited financial statements.
Figure 33
44│ tetragoninv.com
Fair Value Net Economic Income$MM Fair Value Adjustments$MM Share Based Compensation$MM U.S. GAAP$MM Interest income134.7- - 134.7Fee income34.236.0- 70.2Other income - cost recovery9.97.4- 17.3Insurance recovery9.8- - 9.8Dividend income0.1- - 0.1Investment income188.743.4- 232.1Management and performance fees(92.3)28.3- (64.1)Other operating and administrative expenses(43.6)(43.8)(22.0)(109.4)Amortisation of intangible assets(29.7)23.4- (6.3)Total operating expenses (165.6)7.9(22.0)(179.8)Net investment income23.151.3(22.0)52.3Net change in unrealised appreciation in investments157.4(156.7)- 0.7Realised gain on investments90.5- - 90.5Realised and unrealised losses from hedging and fx(6.2)- - (6.2)Net realised and unrealised gains from investments and fx241.7(156.7)- 85.0Net income before tax264.8(105.4)(22.0)137.3Income tax(0.9)(9.2)- (10.1)Net income263.9(114.6)(22.0)127.3 TETRAGON FINANCIAL GROUP Fair Value to U.S. GAAP Statement of Operations Reconciliation Through 2015
Appendices
APPENDIX V (continued)
Reconciliation Between U.S. GAAP and Fair Value Basis (continued)
Figure 34 shows a reconciliation between the Balance Sheet prepared on a full Fair Value basis and on a U.S. GAAP basis. As noted
above, we assume that the date of notional de-consolidation was the start of Q3 2015, the quarter in which the IPO Strategy, and
thus the purpose for the expanded TFG Asset Management – to be held as an investment for IPO – was confirmed.
In addition to adding in the unrealised Fair Value of $178.3 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 ($23.4 million), cash of $37.7 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 $28.3 million relating to the Fair Value adjustment as
detailed in Figure 32.
Figure 34
Tetragon Financial Group Limited 2015 Annual Report │45
Fair Value$MM Fair Value Adjustments$MM U.S. GAAP$MM AssetsInvestments, at fair value1,543.0(178.3)1,364.7Intangible assets- 23.423.4Cash and cash equivalents402.737.7440.4Amounts due from brokers59.9- 59.9Derivative financial assets19.4- 19.4Fixed Assets- 0.50.5Deferred tax asset and income tax receivable- 9.29.2Other receivables3.118.421.5Total assets2,028.1(89.1)1,939.0LiabilitiesOther payables and accrued expenses36.017.253.2Deferred tax liability and income tax payable4.18.312.4Derivative financial liabilities0.7- 0.7Total liabilities 40.825.566.3 Net assets 1,987.3(114.6)1,872.7 TETRAGON FINANCIAL GROUP Fair Value to U.S. GAAP Balance Sheet Reconciliation as at 31 December 2015
Appendices
APPENDIX VI
Additional CLO Portfolio Statistics
Each individual deal's metrics used in the calculation of the figures below will differ from the overall averages and vary across the
portfolio.
Figure 35
Figure 36
(i) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was
assigned a “Selective Default” rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging
12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes
approximately 10.5% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's
corporate default rate.
(ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date.
46│ tetragoninv.com
17.3%17.1%17.0%17.3%17.0%16.1%15.9%16.2%16.4%16.7%16.4%16.6%21.6%21.6%21.7%21.9%22.0%21.7%21.7%21.8%22.0%22.5%22.6%23.0%10.8%10.9%10.3%11.6%11.4%11.4%11.2%12.0%12.0%12.7%12.8%12.4%7.5%7.6%7.6%8.4%8.1%7.4%7.5%7.3%7.3%5.7%5.5%5.1%0.0%5.0%10.0%15.0%20.0%25.0%Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Weighted-Average IRR on TFG's CLO InvestmentsWeighted-Average IRR on TFG's CLO Investments ALL TFGU.S. CLO 1.0U.S. CLO 2.0EUR1.1%1.5%1.8%1.5%1.5%1.6%1.2%1.0%0.7%0.4%0.5%0.6%2.2%1.4%2.4%2.1%1.2%4.4%3.3%3.2%3.8%1.2%1.3%1.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Trailing 12-Month Default RatesTFG and U.S. Market-Wide Trailing 12-Month Default Rates (i)(ii)TFG Trailing 12-Month Loan RateS&P/LCD Trailing 12-MonthDefault Rate Appendices
Additional CLO Portfolio Statistics (continued)
CLO PORTFOLIO CREDIT QUALITY
Figure 37
Tetragon Financial Group Limited 2015 Annual Report │47
ALL CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 5.1%5.0%4.9%5.4%4.6%3.7%4.5%3.3%3.2%4.5%3.8%3.5% Below Obligors: WARF: 2,5412,5682,5532,5422,5652,6212,5542,4422,3502,5072,4882,549 U.S. CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 4.0%4.1%3.9%3.8%3.4%3.0%4.4%2.5%2.2%2.6%2.5%2.9% Below Obligors: WARF: 2,5102,5502,5342,5132,5442,5562,4892,3472,2572,4022,3992,540 EUR CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 9.7%8.7%9.1%11.8%9.4%6.9%4.8%6.5%7.2%12.8%10.0%6.4% Below Obligors: WARF: 2,6702,6422,6312,6582,6502,8942,8192,8262,7292,9742,8882,592
Appendices
Figure 38
CLO EQUITY PORTFOLIO DETAILS AS OF 31 DECEMBER 2015
Notes
(i)
Transactions are investments made on a particular investment date. Multiple transactions may be associated with the same tranche of the
same CLO deal. Note that certain transactions may have been removed from the table above, as the remaining value of the assets of those
CLOs is immaterial. TFG may continue to hold such transactions as of the date of this report.
(ii) The USD investment cost reflects a USD-EUR exchange rate fixed at a single historical rate to avoid the impact of skewed weightings and FX
volatility over time. As such, the investment costs of European CLOs as shown in this table may not be comparable to the investments costs as
shown in TFG's financial statements.
(iii) Par weighted-average spread over LIBOR or EURIBOR (as appropriate) of the underlying loan assets in each CLO's portfolio.
(iv) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the debt tranches issued by each CLO, as of the closing date of
each transaction.
(v) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the debt tranches issued by each CLO, as of the most recent
trustee report date.
(vi) The current junior-most O/C cushion is the excess (or deficit) of the junior-most O/C test ratio over the test requirement, as of the latest
trustee report available as of the report date. Calculations are ignored and stated as “N/A” In certain cases where debt has been substantially,
but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful.
(vii) The junior-most O/C cushion at close is the excess (or deficit) of the junior-most O/C test ratio over the test requirement that was expected on
each deal's closing date. Please note that two of TFG's investments are so called “par structures” which don't include a junior O/C test. They
have been marked by an “N/A” in the relevant junior-most O/C test columns.
(viii) Calculated by annualising the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion.
(ix) Calculated from TFG's investment date. Includes both historical cash flows received to-date and prospective cash flows expected to be
received, based on TFG's base case modelling assumptions.
Inception to report date cash flow received on each transaction as a percentage of its original cost.
(x)
48│ tetragoninv.com
OriginalDeal End ofWtd AvgOriginalCurrentCurrent Jr-Jr-Most O/CAnnualizedITD CashInvest. CostClosingYear ofReinvSpreadCost of FundsCost of FundsMost O/CCushion at(Loss) GainReceived asTransaction(i)Deal Type($MM USD)(ii)DateMaturityPeriod(bps)(iii)(bps)(iv)(bps)(v)Cushion(vi)Close(vii)of Cushion(viii)IRR(ix)% of Cost(x)Transaction 1EUR CLO37.5 200720242014351 55 149 6.20% 3.86% 0.27% - 51.1%Transaction 2EUR CLO29.7 200620232013384 52 104 3.21% 3.60% (0.04%) 10.1% 135.1%Transaction 5EUR CLO36.9 200720222014396 60 69 5.29% 5.74% (0.05%) 11.2% 131.0%Transaction 7EUR CLO38.5 200720232013388 46 104 21.08% 3.64% 1.99% 3.4% 60.7%Transaction 10EUR CLO27.0 200620222012356 50 131 13.74% 4.54% 0.98% 1.1% 56.8%Transaction 86EUR CLO3.6 200620222012356 50 131 13.74% 3.11% 1.13% 9.1% 42.6%EUR CLO Subtotal:173.2 375 53 111 10.13% 4.26% 0.66% 85.3%Transaction 11US CLO20.5 200620182012288 45 131 52.09% 4.55% 5.11% 20.8% 202.4%Transaction 12US CLO22.8 200620192013333 46 132 54.22% 4.45% 5.43% 20.8% 202.8%Transaction 13US CLO15.2 200620182012304 47 67 11.51% 4.82% 0.71% 21.9% 234.3%Transaction 14US CLO26.0 200720212014332 49 74 4.43% 5.63% (0.14%) 19.2% 222.5%Transaction 15US CLO28.1 200720212014390 52 60 4.27% 4.21% 0.01% 29.8% 291.6%Transaction 16US CLO23.5 200620202013360 46 63 6.55% 4.44% 0.22% 21.1% 238.3%Transaction 17US CLO26.0 200720212014300 40 41 4.63% 4.24% 0.04% 24.7% 250.7%Transaction 22US CLO37.4 200720212014380 53 76 6.44% 5.00% 0.16% 21.9% 226.6%Transaction 24US CLO16.9 200620182012389 46 118 39.80% 4.17% 3.80% 17.9% 199.9%Transaction 32US CLO24.0 200720212014304 59 71 4.27% 5.57% (0.16%) 22.2% 229.8%Transaction 34US CLO22.2 200620202012372 50 143 16.14% 6.66% 1.05% 18.7% 207.9%Transaction 36US CLO28.4 200720212013344 46 83 4.82% 5.18% (0.04%) 19.4% 199.2%Transaction 47US CLO28.3 200620212013330 47 57 4.27% 4.34% (0.01%) 22.7% 240.6%Transaction 56US CLO23.0 200720192014611 42 N/A56.96% 4.53% 5.97% 22.6% 249.2%Transaction 57US CLO0.6 200720192014611 42 N/A56.96% 4.53% 5.97% 49.2% 1574.9%Transaction 61US CLO29.1 200720212014345 45 55 2.70% 4.04% (0.15%) 17.9% 192.9%Transaction 63US CLO27.3 200720212013353 53 105 7.83% 4.78% 0.36% 19.4% 209.5%Transaction 64US CLO15.4 200720212013359 38 56 N/AN/AN/A23.2% 245.1%Transaction 65US CLO26.9 200620212013340 47 119 19.49% 4.96% 1.60% 15.3% 173.2%Transaction 66US CLO21.3 200620202013289 49 66 4.25% 4.05% 0.02% 22.8% 243.4%Transaction 68US CLO19.3 200620202013319 48 54 8.83% 4.41% 0.49% 28.3% 295.7%Transaction 69US CLO28.2 200720192013319 44 53 11.30% 5.61% 0.65% 27.0% 272.8%Transaction 72US CLO4.8 200720192014611 42 N/A56.96% 4.53% 5.97% 19.5% 149.0%Transaction 73US CLO1.9 200720192014611 42 N/A56.96% 4.53% 5.97% 19.5% 149.0%Transaction 75US CLO32.7 201120222014366 168 193 7.41% 4.05% 0.74% 11.2% 84.0%Transaction 77US CLO14.5 201120232016385 212 214 4.04% 5.04% (0.25%) 12.0% 70.0%Transaction 78US CLO22.9 201220232015407 217 176 5.68% 4.00% 0.43% 16.6% 94.3%Transaction 79US CLO19.4 201220222015379 215 184 3.86% 4.00% (0.04%) 8.4% 66.8%Transaction 80US CLO22.7 201220222016392 185 185 3.19% 4.17% (0.27%) 10.6% 69.1%Transaction 81US CLO21.7 201220242016416 216 193 3.37% 4.00% (0.19%) 7.3% 52.4%Transaction 82US CLO25.4 201220222016396 206 207 3.54% 4.00% (0.14%) 9.5% 52.7%Transaction 83US CLO20.8 201320252017447 193 193 6.48% 6.17% 0.11% 14.5% 60.0%Transaction 84US CLO24.6 201320232017391 183 184 3.93% 4.02% (0.03%) 16.5% 69.1%Transaction 85US CLO1.0 201320252017394 170 171 4.87% 5.01% (0.05%) 9.9% 52.9%Transaction 87US CLO23.0 201320262018402 199 199 3.20% 4.00% (0.39%) 3.7% 35.4%Transaction 88US CLO30.1 201420242018390 199 200 3.54% 4.02% (0.26%) 11.5% 41.8%Transaction 89US CLO33.6 201420262018407 195 195 3.56% 3.96% (0.26%) 13.7% 36.5%Transaction 90US CLO20.7 201420262018414 203 200 3.95% 4.00% (0.04%) 13.2% 24.3%Transaction 91US CLO27.8 201520272019425 215 212 3.82% 4.00% (0.23%) 14.9% 15.5%Transaction 92US CLO34.6 201520272020425 199 199 4.05% 3.99% 0.13% 16.1% 12.6%US CLO Subtotal:892.5 375 111 126 10.47% 4.45% 0.65% 154.4%Total CLO Portfolio:1,065.7 375 102 123 10.42% 4.42% 0.65% 143.1% CLO EQUITY PORTFOLIO DETAILS AS OF 31 DECEMBER 2015 (continued)
Figure 39
Appendices
(i) The current junior-most O/C cushion is the excess (or deficit) of the junior-most O/C test ratio over the test requirement, as of the latest trustee
report available as of the report date. Calculations are stated as “N/A” In certain cases where debt has been substantially, but not fully, repaid,
resulting in a junior-most O/C test cushion that is not meaningful.
Tetragon Financial Group Limited 2015 Annual Report │49
$42.3$84.3$46.4$107.3$27.8$34.6$0$20$40$60$80$100$120201520162017201820192020Reinvestment End DateBased on Original Investment Size ($ Millions)$0.0$52.6$81.3$86.4$296.9$167.6$130.2$89.3$21.8$77.3$62.4$0$100$200$300$40020172018201920202021202220232024202520262027CLO Deal MaturitiesBased on Original Investment Cost ($ Millions)001212210510152025<= 0%0% to 2%2% to 4%4% to 6%Over 6%Current Junior-Most O/C Test Cushion Distribution(by Number of Transactions)
Appendices
APPENDIX VII
Share Reconciliation and Shareholdings
Figure 40(46)
Shareholdings
Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 31 December 2015, the following
persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:
Mr. Reade Griffith*
Mr. Paddy Dear*
Mr. David Wishnow
Mr. Jeff Herlyn
Mr. Rupert Dorey
Mr. Michael Rosenberg
Mr. Frederic Hervouet
Long Term Incentive Programme (“LTIP”) and other equity-based awards(47)
8,195,861
2,969,897
243,894
170,904
102,717
68,052
10,133
5,650,000
*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 31 December 2015, certain employees of subsidiaries of TFG and other affiliated persons own in the
aggregate approximately 3.3 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding
any TFG shares held by the GreenOak principals or employees.
As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the “Vested
Shares”)) that were issued pursuant to TFG’s acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon
Management L.P.) and certain of its affiliates (the “Polygon Transaction”) have vested with certain persons (other than Messrs.
Griffith and Dear) (such persons, the “Sellers”), all of whom are employees or partners (“Employees”) of TFG-owned or affiliated
entities, pursuant to the Polygon Transaction.
Certain Sellers agreed to sell to Messrs. Griffith and Dear and certain employees of TFG Asset Management on 29 October 2015 an
aggregate of approximately 0.26 million Vested Shares at a price equal to the tender offer clearing price of $10. Messrs. Griffith
and Dear acquired acquire in aggregate approximately 0.12 million Vested Shares and these are included in their shareholdings
disclosed above.
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, nonpublic information.
50│ tetragoninv.com
2015 Shares (MM) Legal Shares Issued and Outstanding137.8Less: Shares Held In Subsidiary(17.0)Less: Shares Held In Treasury(12.8)Less: Escrow Shares(46.i)(12.1)U.S. GAAP Shares Outstanding95.9Add: Dilution for Share Options1.7Add: Escrow Shares(46.i)6.6Pro Forma Fully Diluted Shares104.2 U.S. GAAP to Fully Diluted Shares Reconciliation
Appendices
APPENDIX VIII
Additional Corporate Information
DESCRIPTION OF BUSINESS
TFG (company number 43321) is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol
“TFG.NA” and on the Specialist Fund Market of the London Stock Exchange under the symbol “TFG.LN”.
TFG’s investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to
investors across various credit, equity, interest rate, inflation and real estate cycles. The company’s investment portfolio comprises
a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank
loans, real estate, equities, credit, convertible bonds and infrastructure.
TFG’s asset-management platform, TFG Asset Management, consists of LCM, the GreenOak joint venture, Polygon, Equitix, Hawke’s
Point, and TCIP. TFG Asset Management is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 and
one of its investment management entities, Polygon Global Partners LLP, is authorised and regulated by the United Kingdom
Financial Services Authority.
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.
ORGANISATIONAL STRUCTURE
TFG currently invests through a “master-feeder” structure whereby TFG’s only direct investment is in shares of Tetragon Financial
Group Master Fund Limited, or the TFG Master Fund.
Figure 41
TFG has an authorised share capital of $1,000,000 divided into 10 voting shares, having a par value of $0.001 each, and
999,999,990 non-voting shares. The 10 voting shares in issue were issued at par and are owned by Polygon Credit Holdings II
Limited, which is a non-U.S. affiliate of TFG’s investment manager and is ultimately controlled by Reade Griffith and Paddy Dear.
TFG’s voting shares are the only shares of TFG entitled to vote for the election of TFG’s and the Master Fund’s boards of directors
and on all other matters, subject to the limited rights of the shares described in TFG’s Memorandum and Articles of Incorporation.
TFG’s voting shares are not entitled to receive dividends.
Except as described in TFG’s Memorandum and Articles of Incorporation, the non-voting shares are not entitled to vote on any
matter. The non-voting shares carry a right to any dividends or other distributions declared by TFG.
INVESTMENT MANAGEMENT
Tetragon Financial Management LP, or TFM, has been appointed the investment manager of TFG and the Master Fund pursuant to
an investment management agreement dated 26 April 2007 (the “Investment Management Agreement”). TFM’s general partner,
Tetragon Financial Management GP LLC, is responsible for all actions of the investment manager. The general partner is ultimately
controlled by Reade Griffith and Paddy Dear, who also control the holder of TFG’s voting shares and are the voting members of
TFM’s Investment and Risk Committees. Reade Griffith acts as the authorised representative of the general partner and TFM.
TFM’s Investment Committee is responsible for the investment management of TFG and the Master Fund portfolio and currently
consists of Reade Griffith, Paddy Dear, Jeffrey Herlyn, Michael Rosenberg, David Wishnow and Stephen Prince. The Investment
Committee determines the investment strategy of TFG and the Master Fund and approves each significant investment by them.
TFM’s Risk Committee is responsible for the risk management of TFG and the Master Fund portfolio and performs active and
regular oversight and risk monitoring. The risk committee has the same composition as the investment committee.
TFM’s Executive Committee oversees all key non-investment and risk activities of TFM and currently consists of Reade Griffith,
Paddy Dear, David Wishnow, Stephen Prince, Phil Bland, Sean Côté and Greg Wadsworth.
Tetragon Financial Group Limited 2015 Annual Report │51
(Continued)
Appendices
Additional Corporate Information (continued)
SUMMARY OF KEY TERMS OF TFG’S INVESTMENT MANAGEMENT AGREEMENT
Under the terms of the Investment Management Agreement, TFM has full discretion to invest the assets of TFG and the Master
Fund in a manner consistent with the investment objective of TFG. TFM has the authority to determine the investment strategy to
be pursued in furtherance of the investment objective, which strategy may be changed from time to time by TFM in its discretion.
TFM is authorised to delegate its functions under the Investment Management Agreement.
The Investment Management Agreement continues in full force and effect unless terminated (i) by the investment manager at any
time upon 60 days’ notice or (ii) immediately upon TFG or the Master Fund giving notice to the Investment Manager or the
Investment Manager giving notice to TFG or the Master Fund in relation to such entity in the event of (a) the party in respect of
which notice has been given becoming insolvent or going into liquidation (other than a voluntary liquidation for the purpose of
reconstruction or amalgamation upon terms previously approved in writing by the other party) or a receiver being appointed over
all or a substantial part or of its assets or it becoming the subject of any petition for the appointment of an administrator, trustee or
similar officer, (b) a party committing a material breach of the Investment Management Agreement which causes a material
adverse effect to the non-breaching party and (if such breach shall be capable of remedy) not making good such breach within 30
days of service upon the party in breach of notice requiring the remedy of such breach or (c) fraud or wilful misconduct in the
performance of a party’s duties under the Investment Management Agreement.
The Investment Management Agreement provides that none of the Investment Manager, its affiliates or their respective members,
managers, partners, shareholders, directors, officers and employees (including their respective executors, heirs, assigns, successors
or other legal representatives) (each, as an indemnified party) will be liable to the Master Fund, TFG or any investor in the Master
Fund or TFG for any liabilities, obligations, losses (including, without limitation, losses arising out of delay, mis-delivery or error in
the transmission of any letter, cable, telephonic communication, telephone, facsimile transmission or other electronic transmission
in a readable form), damages, actions, proceedings, suits, costs, expenses (including, without limitation, legal expenses), claims and
demands suffered in connection with the performance by the investment manager of its obligations under the Investment
Management Agreement or otherwise in connection with the business and operations of TFG or the Master Fund, in the absence of
fraud or wilful misconduct on the part of an indemnified party, and TFG and the Master Fund have each agreed to indemnify each
indemnified party against any such liabilities, obligations, losses, damages, actions, proceedings, suits, costs, expenses, claims and
demands, except as may be due to the fraud or wilful misconduct of the indemnified party.
TFM may act as investment manager or advisor to any other person, so long as its services to TFG or the Master Fund are not
materially impaired thereby, and need not disclose to TFG or the Master Fund anything that comes to its attention in the course of
its business in any other capacity than as investment manager. The Investment Manager is not liable to account for any profit
earned or benefit derived from advice given by the investment manager to other persons. The Investment Manager will not be
liable to TFG or the Master Fund for any loss suffered in connection with the Investment Manager’s decision to offer investments to
any other person, or failure to offer investments to TFG or the Master Fund.
The Investment Manager is authorised to enter into transactions on behalf of TFG and the Master Fund with persons who are
affiliates of the investment manager, provided that in connection with any such transaction that exceeds $5 million of aggregate
investment, the investment manager obtains either (i) the approval of a majority of the members of the Board Directors of TFG and
the Master Fund that do not have a material interest in such transaction (whether as part of a Board of Directors resolution or
otherwise) or (ii) an opinion from a recognized investment bank, auditing firm or other appropriate professional firm substantively
to the effect that the financial terms of the transaction are fair to TFG and the Master Fund from a financial point of view.
MANAGEMENT AND INCENTIVE FEES; EXPENSES
All fees and expenses of TFG and the Master Fund, except for the incentive fees for TFM as investment manager (as described
below), will be paid by the Master Fund, including management fees relating to the administration of TFG.
The Investment Manager is entitled to receive management fees equal to one and one-half percent (1.5%) per annum of the net
asset value (NAV) of TFG payable monthly in advance prior to the deduction of any accrued incentive fees. No separate
management fees are payable with respect to the NAV of the Master Fund.
TFG will also pay to the Investment Manager an incentive fee for each Calculation Period (as defined below) equal to 25% of the
increase in the NAV of TFG during the Calculation Period (before deduction of any dividend paid or the amount of any redemptions
or repurchases of Shares (or other relevant capital adjustments) during such Calculation Period) above (i) the Reference NAV (as
defined below) plus (ii) the Hurdle (as defined below) for the Calculation Period. If the Hurdle is not met in any Calculation Period
(and no incentive fee is paid), the shortfall will not carry forward to any subsequent Calculation Period.
A “Calculation Period” is a period of three months ending on March 31, June 30, September 30 and December 31 of each year, or as
otherwise determined by the Board of Directors of TFG.
The “Reference NAV” is the greater of (i) NAV at the end of the Calculation Period immediately preceding the current Calculation
Period and (ii) the NAV as of the end of the Calculation Period ending three months earlier than the Calculation Period referred to
in clause (i). For the purposes of determining Reference NAV at the end of a Calculation Period, NAV shall be adjusted by the
amount of accrued dividends and amounts of any redemptions or repurchases of Shares (or other relevant capital adjustments) and
incentive fees to be paid with respect to that Calculation Period.
The “Hurdle” for any Calculation Period will equal (i) the Reference NAV multiplied by (ii) the Hurdle Rate (defined below).
(Continued)
52│ tetragoninv.com
Appendices
Additional Corporate Information (continued)
The “Hurdle Rate” for any Calculation Period equals 3-month U.S. Dollar LIBOR determined as of 11:00 a.m. London time on the
first London business day of the then current Calculation Period plus the hurdle spread of 2.647858%, in each case multiplied by (x)
the actual number of days in the Calculation Period divided by (y) 365.
The incentive fee in respect of each Calculation Period is calculated by reference to the increase in NAV of the Shares before
deduction of any accrued incentive fee. The incentive fee is normally payable in arrears within 14 calendar days of the end of the
Calculation Period. If the Investment Management Agreement is terminated other than at the end of a Calculation Period, the date
of termination will be deemed to be the end of the Calculation Period. The Investment Manager does not charge separate fees
based on the NAV of the Master Fund.
TFG and the Master Fund generally bear all costs and expenses directly related to their investments or prospective investments,
such as brokerage commissions, interest on debit balances or borrowings, custodial fees and legal and consultant fees. TFG and the
Master Fund also generally bear all out-of-pocket costs of administration including accounting, audit, administrator and legal
expenses, costs of any litigation or investigation involving their activities, costs associated with reporting and providing information
to existing and prospective investors and the costs of liability insurance.
INVESTMENT MANAGER OPTIONS
In recognition of the work performed by the Investment Manager in successfully arranging the 2007 global offering and the
associated raising of new capital for the company, TFG granted to the investment manager options to purchase 12,545,330 of TFG's
non-voting shares (subject to the application of customary anti-dilution provisions) at an exercise price per share equal to the IPO
offer price (U.S. $10.00). These options became fully vested and immediately exercisable as of the date of admission to the
Euronext Amsterdam N.V. and will remain exercisable until the 10th anniversary of that date (i.e., 26 April 2017). None of the
options have been exercised.
THE INVESTMENT MANAGER’S ROLE WITH RESPECT TO TFG ASSET MANAGEMENT
TFM’s responsibilities with respect to TFG and the Master Fund include, inter alia:
investing and reinvesting the assets of TFG and the TFG Master Fund in securities, derivatives and other financial instruments
and other investments of whatever nature and committing the assets of TFG and the Master Fund in relation to agreements
with entities, issuers and counterparties;
holding cash balances or investing them directly in any short-term investments, and reinvesting any income earned thereon in
accordance TFG’s investment strategy;
purchasing, holding, selling, transferring, exchanging, mortgaging, pledging, hypothecating and otherwise acting to acquire and
dispose of and exercise all rights, powers, privileges and other incidents of ownership or possession with respect to investments
held or owned by TFG and the TFG Master Fund, with the objective of the preservation, protection and increase in value
thereof;
exercising any voting or similar rights attaching to investments purchased on behalf of TFG and the TFG Master Fund;
borrowing or raising monies from time to time without limit as to amount or manner and time of repayment;
engaging consultants, attorneys, independent accountants or such other persons as the investment manager may deem
necessary or advisable; and
entering into any other contracts or agreements in connection with any of the foregoing activities.
TFG Asset Management is an investment of the Master Fund, and, as such, TFM, as the investment manager, is responsible for
exercising any of the Master Fund’s voting or similar rights with respect to TFG Asset Management, as an investment. As with any
other category of investments, TFM is also responsible for decisions with respect to acquisitions and dispositions by the Master
Fund of asset management businesses – as investment decisions with respect to the Master Fund’s cash or other assets.(48)
Following the acquisition of an asset management business, that business then becomes a part of TFG Asset Management.
TFG Asset Management seeks to generate income and value from its asset management businesses by having these businesses
manage third-party investor capital. TFG Asset Management has an internal management team that is responsible for the TFG
Asset Management business as a whole, including the oversight of its various asset management businesses as they form and grow
the funds that they manage, and is responsible for its own costs.
The Master Fund may invest in the various funds and other vehicles managed by a TFG Asset Management business. It may also
provide financial support to any fund managed by a TFG Asset Management business (such as a “seeding” arrangement), or provide
equity, loans or other financial support to TFG Asset Management or its asset management businesses. TFM is responsible for any
decision to invest cash into any fund or other vehicle managed by a TFG Asset Management business(49) and is also responsible for
decisions regarding financial support for TFG Asset Management.
SERVICES AGREEMENT BETWEEN THE INVESTMENT MANAGER AND CERTAIN SUBSIDIARIES OF TFG ASSET MANAGEMENT
TFM has, since its inception, relied on two Polygon entities(50) for a broad range of services to support its activities.(51)
Following TFG’s 28 October 2012 acquisition of Polygon Management L.P., these entities have been part of TFG Asset Management.
The services provided to TFM under a Services Agreement by TFG Asset Management, through these entities, include infrastructure
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services such as operations, financial control, trading, marketing and investor relations, legal, compliance, office administration,
payroll and employee benefits. One of those entities, Polygon Global Partners LLP, which is authorised and regulated by the United
Kingdom Financial Conduct Authority, also provides services relating to the dealing in and management of investments,
arrangement of deals and advising on investments.
COST RECOVERY BY TFG ASSET MANAGEMENT FOR SERVICES PROVIDED TO TFG’S INVESTMENT MANAGER
TFG Asset Management, through its Polygon subsidiaries, has implemented a cost-allocation methodology with the objective of
allocating service-related costs, including to TFM, in a consistent, fair, transparent and commercially-based manner.(52)
TFG Asset Management then charges fees to TFM for the services allocated to TFM on a cost-recovery basis that is designed to
achieve full recovery of the allocated costs.
Most of the costs related to these services are directly or indirectly attributable to personnel or “human capital”, with
compensation typically being the largest single cost.(53)
Consequently, one of the most critical cost allocations is related to professionals’ time, which is commonly expressed as Full Time
Equivalents or “FTEs”. On a monthly basis, each TFG Asset Management employee, directly or via their team head, provides a
breakdown of the approximate percentage of time spent supporting the various businesses for the previous month (this excludes
certain functions such as office management and technology that are charged to business users on a standard basis (e.g., space
used or global headcount) which removes any need on the part of those teams to allocate their FTEs to business lines). TFG Asset
Management employees should not be incentivised to either over or under allocate to any business as their time allocation is not a
consideration in the determination of their overall compensation. Once allocated percentages are determined and agreed, a FTE is
derived. Personnel costs (excluding bonuses) of each function are calculated using a standard costing methodology, which includes
a standard add-on for employment taxes and standard employee benefits. Bonuses are charged to each business line (including
TFM) based on the FTE allocation described above.
In addition to FTE costs, there are a number of other costs that reflect the use of resources by TFG Asset Management personnel on
behalf of TFM (in addition to the other TFG Asset Management businesses), including real property costs, technology, travel and
entertainment and market data. A standard cost methodology is used to allocate these costs across the various business lines that
are supported, including TFM. The setting of standard costs is designed to reflect what those costs would be on an arm’s-length
basis. The methodology is designed to create consistency in order to provide a fair allocation of resource costs to all businesses.
Employee FTE data is collated and is used to process monthly cost allocations. Such allocations are invoiced monthly to users of the
TFG Asset Management platform which are not owned by TFG Asset Management, including TFM, or allocated within the TFG Asset
Management general ledger for businesses owned by TFG Asset Management.
TFG Asset Management cost allocation methodology is documented and updated annually by TFG Asset Management’s finance
team in consultation with its legal and compliance teams and is approved each year by TFG Asset Management’s executive
committee.
The methodology used to allocate costs forms part of the preparation of the financial statements of TFG and the Master Fund and
is therefore within the terms of reference of TFG’s Audit Committee. TFG’s auditors, reporting directly to TFG’s Audit Committee,
are currently employed under an agreed upon procedures assignment to periodically test that the costs allocated to (and therefore
recovered from) TFM have been properly calculated in accordance with the approved cost-allocation methodology. TFG’s
Independent Directors, who are specifically mandated to approve, among other things, related-party transactions, are required to
approve the methodology for allocating costs and in their sole discretion the application of that methodology as part of their
oversight processes. As such, the annual cost allocation methodology update and the actual annual cost allocations that result
based on these cost methodology policies and procedures are separately approved by the Independent Directors.
For additional information, please see TFG’s Financial Statements.
VALUATION
State Street (Guernsey) Limited serves as the TFG’s independent administrator and values the investments of the Master Fund on
an ongoing basis. The NAV per Share is expected to fluctuate over time with the performance of TFG’s investments. The NAV of
TFG and the Master Fund and the NAV per Share are determined as at the close of business on the last business day of each fiscal
quarter for purposes of calculating incentive fees. As TFG makes all of its investments through the Master Fund, TFG’s NAV will
equal the NAV of the Master Fund before any TFG specific liabilities, such as incentive fees. The Company’s valuation policies are
set forth on the Company’s website at www.tetragoninv.com. The information on the “Valuation” page of the website supersedes
any other disclosure by the Company with respect to such information. Subject to the foregoing, additional information with
respect to TFG’s or the Master Fund’s valuation policies may be found in each Company’s annual audited financial statements
accompanying this Annual Report.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Company has sought to continue to return value to its shareholders, including through dividends and share repurchases.
Dividends:
TFG continues to pursue a progressive dividend policy with a target payout ratio of 30-50% of normalised earnings, based on the
long-term target RoE of 10-15%.(54)
(Continued)
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The Board of Directors will have the authority to declare dividend payments, based upon the recommendation of the Investment
Manager, subject to the approval of the voting shares of TFG and adherence to applicable law, including the satisfaction of a
solvency test as required pursuant to the Companies (Guernsey) Law, 2008, as amended.
The Investment Manager’s recommendation with respect to the declaration of dividends (and other capital distributions) may be
informed by a variety of considerations, including (i) the expected sustainability of the Company’s cash generation capacity in the
short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current and anticipated operating
and economic environment and (iv) other potential uses of cash ranging from preservation of the Company’s investments and
financial position to other investment opportunities.
TFG has and may continue to also pay scrip dividends currently conducted through an optional dividend reinvestment program. If
the Board of Directors declares a cash dividend payable by TFG, they will also (in their capacity as directors of the Master Fund)
declare an equal dividend per share payable concurrently by the Master Fund.
Share Repurchases:
TFG has and may also continue to engage in share repurchases in the market from time to time. Such purchases may at
appropriate price levels below NAV represent an attractive use of TFG’s excess cash and an efficient means to return cash to
Shareholders. Any decision to engage in share repurchases will be made by the Investment Manager, upon consideration of
relevant factors, and will be subject to, among other things, applicable law and profits at the time. The Company also continues to
explore other methods of improving the liquidity of its shares.
REPORTING
In accordance with applicable regulations under Dutch law, TFG publishes monthly statements on its website for the benefit of its
investors containing the following information: the total value of the investments of the Master Fund; a general statement of the
composition of the investments of the Master Fund; and the number of legal issued and outstanding shares of TFG.
In addition, in accordance with the requirements of Euronext Amsterdam N.V. and applicable regulations under Dutch law, TFG
provides annual and semi-annual reports to its shareholders, including year-end financial statements, which in the case of the
financial statements provided in its annual reports, will be reported in accordance with U.S. GAAP and audited in accordance with
international auditing standards as well as U.S. GAAS for regulatory purposes, if applicable. The NAV of TFG is available to investors
on a monthly basis on the Company’s website at www.tetragoninv.com.
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APPENDIX IX
Board of Directors and the Audit Committee
THE 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 based private equity group, acting as a director of each of its Fund general partners and, from 2006, establishing and
serving as Managing Director of EQT Funds Management Limited, its Guernsey based management and administration office.
Between 1993 and June 2004, 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.
Byron Knief is Managing Director of Court Square Capital Advisor, LLC. Since 1989, he has raised and invested over $3 billion of
capital through a series of mezzanine and leveraged debt funds. Prior to 1989, he ran a variety of businesses for Citigroup in the
United States, Europe, Canada and Latin America. Byron received an undergraduate degree from Northwestern University and an
MBA from Columbia University. He has served as a director on the boards of several public and private companies. Current
corporate board memberships include DavCo Restaurants, Inc., JAC Products, Inc. and Olameter, Inc. He was also formerly a
director of Polygon Global Opportunities Fund and certain of its affiliates. Byron's charitable board memberships include The
Milbank Memorial Fund and The Mountain Top Arboretum. Byron is based in New York and is a Non-Executive, Independent
Director.
Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. He was previously the founder and
former 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. At Polygon, he is
primarily focused on the trading businesses and risk management. Reade is based in London and is an Internal Director.
Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. He was previously managing director and
the global head of Hedge Fund Coverage for UBS Warburg Equities. As global head of Hedge Fund Coverage and Chairman of the
Global Hedge Fund Committee, Paddy was responsible for the delivery of all of the bank's products and services to hedge fund
clients globally. He was on the board of UBS Netherlands, and was a member of both the European Equity Business Committee and
the Extended Global Equity Business Committee. Prior to this, Paddy 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. Prior to working in investment banking, he was a petroleum engineer with Marathon Oil Co.
Paddy holds an undergraduate degree in Petroleum Engineering from Imperial College in London. His responsibilities at Polygon
include risk management, overseeing Polygon's non-trading activities, managing investment bank interfaces and relationships and
new business development. Paddy is based in London and is an Internal Director.
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Board of Directors and the Audit Committee (continued)
THE AUDIT COMMITTEE
The Audit Committee of TFG is responsible for, among other items, assisting and advising TFG's Board of Directors with matters
relating to TFG's accounting and financial reporting processes and the integrity and audits of TFG's financial statements. The Audit
Committee is also responsible for reviewing and making recommendations with respect to the plans and results of each audit
engagement with TFG's and the Master Fund's independent accountants, the audit and non-audit fees charged by the independent
accountants and the adequacy of TFG's and the Master Fund's internal accounting controls.
Size, Independence and Composition of the Board of Directors of TFG and the Master Fund
The structure, and practices and committees of the Board of Directors of each of TFG and the Master Fund, including matters
relating to the size, independence and composition of the Board of Directors, the election and removal of members of the Board of
Directors, requirements relating to board action and the powers delegated to board committees, are governed by each entity’s
respective Memorandum and Articles of Incorporation.
Each of TFG and the Master Fund has six directors (referred to herein as the Directors). Subject as set out below and as elsewhere
described in the risk factors found on TFG’s website at http://www.tetragoninv.com/investor/riskfactors.aspx, not less than a
majority of the Directors are independent. A Director will be an “Independent Director” if the Board of Directors determines that
the person satisfies the standards for independence contained in the U.K. Combined Code in all material respects. If the death,
resignation or removal of an Independent Director results in the Board of Directors having less than a majority of Independent
Directors, the vacancy must be filled promptly. Pending the filling of such vacancy, the Board of Directors may temporarily consist
of less than a majority of Independent Directors and those Directors who do not meet the standards for independence may
continue to hold office. A Director who is not an Independent Director will not be required to resign as a Director as a result of an
Independent Director’s death, resignation or removal. In addition, the TFG’s Memorandum and Articles of Incorporation prohibit
the Board of Directors from consisting of a majority of Directors who are resident in the United Kingdom.
Election and Removal of Directors of TFG and the Master Fund
Each member of TFG’s and the Master Fund’s Boards of Directors is elected annually by the holder of TFG’s voting shares. All
vacancies on the Board of Directors including by reason of death or resignation may be filled, and additional Directors may be
appointed, by a resolution of the Voting Shareholder.
A Director may be removed from office for any reason by notice requesting resignation signed by all other Directors then holding
office, if the Director is absent from four successive meetings without leave expressed by a resolution of the Directors or for any
reason by a resolution of the holder of TFG’s voting shares. A Director will also be removed from the Board of Directors if he
becomes bankrupt, if he becomes of unsound mind, if he becomes a resident of the United Kingdom and such residency results in a
majority of the Board of Directors being residents of the United Kingdom or if he becomes prohibited by law from acting as a
Director. A Director is not required to retire upon reaching a certain age.
Action by the Board of Directors of TFG and the Master Fund
The Boards of Directors of TFG and the Master Fund may take action in a duly convened meeting, for which a quorum is five
Directors, or by a written resolution signed by at least five Directors. When action is to be taken by the Board of Directors, the
affirmative vote of five of the Directors then holding office is required for any action to be taken. As a result, the Board of Directors
will not be able to act without the affirmative vote of one of the directors affiliated with the holder of TFG’s voting shares.
The Directors are responsible for the management of TFG and the Master Fund. They have delegated to the Investment Manager
certain functions, including broad discretion to adopt an investment strategy to implement TFG’s investment objective. However,
certain matters are specifically reserved for the Board of Directors under the Memorandum and Articles of Incorporation.
Transactions in which a Director has an Interest
Provided that a Director has disclosed to the other Directors the nature and extent of any interests of his in accordance with the
Companies (Guernsey) Law, 2008, as amended, a Director, notwithstanding his office: (a) may be a party to, or otherwise interested
in, any transaction or arrangement with TFG or the Master Fund or in which TFG or the Master Fund is otherwise interested; (b)
may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in,
any body corporate promoted by TFG or the Master Fund or in which TFG of the Master Fund is otherwise interested; and (c) shall
not be accountable to TFG or the Master Fund for any benefit derived from any such transaction or arrangement or from any
interest in any such body corporate, and no such transaction or arrangement shall be void or voidable on the ground of any such
interest or benefit or because such Director is present at or participates in the meeting of the Directors that approves such
transaction or arrangement, provided that (i) the material facts as to the interest of such Director in such transaction or
arrangement have been disclosed or are known to the Directors and the Directors in good faith authorise the transaction or
arrangement and (ii) the approval of such transaction or arrangement includes the votes of a majority of the Directors that are not
interested in such transaction or such transaction is otherwise found by the Directors (before or after the fact) to be fair to TFG or
the Master Fund as of the time it is authorised. Under the Investment Management Agreement, the Directors have authorised the
Investment Manager to enter into transactions on behalf of TFG or the Master Fund with persons who are affiliates of the
Investment Manager, provided that in connection with any such transaction that exceeds $5 million of aggregate investment the
Investment Manager informs the Directors of such transaction and obtains either (i) the approval of a majority of the Directors that
(Continued)
Tetragon Financial Group Limited 2015 Annual Report │57
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do not have a material interest in such transaction or (ii) an opinion from a recognised investment bank, auditing firm or other
appropriate professional firm substantively to the effect that the financial terms of the transaction are fair to TFG and the Master
Fund from a financial point of view.
Compensation
The remuneration for Directors is determined by resolution of the holder of TFG’s voting shares. Currently, the Directors’ annual
fee is $100,000, in compensation for service on the Boards of Directors of both TFG and the Master Fund. The Master Fund pays
Directors’ fees. The Directors affiliated with the Voting Shareholder have waived their entitlement to a fee. The Directors are
entitled to be repaid by TFG for all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties.
Directors of the Master Fund are compensated and reimbursed on the same basis. None of the Directors has a contract with TFG
or the Master Fund providing for benefits upon termination of employment.
Certain Corporate Governance Rules
TFG and the Master Fund are required to comply with all provisions of Guernsey company law relating to corporate governance to
the extent the same are applicable and relevant to TFG’s activities. In particular, each Director must seek to act in accordance with
the “Code of Practice-Company Directors” and “Code of Corporate Governance” issued by the Guernsey Financial Services
Commission. No formal corporate governance code applies to TFG or the Master Fund under Dutch law.
Indemnity
Each present and former Director or officer of TFG and the Master Fund is indemnified against any loss or liability incurred by the
Director or officer by reason of being or having been a Director or officer of TFG or the Master Fund. In addition, the Directors may
authorise the purchase or maintenance by TFG and the Master Fund for any Director or officer or former Director or officer of TFG
or the Master Fund of any insurance, in respect of any liability which would otherwise attach to the Director or officer or former
Director or officer.
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APPENDIX X
Risk Factors
An investment in TFG (together with the Master Fund, the “company”) involves substantial risks and uncertainties. Investors may
review a more detailed description of these risks and uncertainties and others to which the company is subject on TFG's website at
www.tetragoninv.com.
These risks and uncertainties include, among others, those listed below.
Risks Relating to the Company’s Asset Management Platform
As the company becomes more of a financial services firm that functions as a company that owns operating companies, it
may face difficulties as it invests in asset classes in which it does not have substantial experience.
The asset management business is intensely competitive, with competition based on a variety of factors, including
investment performance, the quality of service provided to clients, investor liquidity and willingness to invest, fund terms
(including fees), brand recognition and business reputation. Our asset management business competes with a number of
private equity funds, specialised investment funds, hedge funds, funds of hedge funds and other sponsors managing pools
of capital, as well as corporate buyers, traditional asset managers, commercial banks, investment banks and other financial
institutions (including sovereign wealth funds).
Asset management and financial advisory businesses are subject to extensive regulation, which affects the company's
activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could
result in additional burdens on the company's business. Recent legislative and regulatory changes in the United States,
such as the Dodd-Frank Act, and the European Union, such as the Alternative Investment Fund Managers Directive and the
European Market Infrastructure Regulation, could adversely affect the company's business.
As we have expanded and as we continue to expand the number and scope of our businesses, we increasingly confront
potential conflicts of interest relating to our activities. Certain of our funds may have overlapping investment objectives,
including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding
how to allocate investment opportunities among those funds. To the extent we fail to appropriately deal with any such
conflicts, it could negatively impact our reputation and ability to raise additional funds or result in potential litigation
against us.
Poor performance of our managed investment funds and vehicles would cause a decline in our asset management revenue,
income and cash flow, and could adversely affect our ability to raise capital for future investment funds.
Our asset management business depends in part on our ability to raise capital from third-party clients. If we are unable to
raise capital from third-party clients, we would be unable to collect management fees or deploy their capital into
investments and potentially collect transaction fees or incentive fees, which would materially reduce our asset
management revenue and cash flow.
Misconduct of our employees or at our portfolio companies could harm us by impairing our ability to attract and retain
clients and subjecting us to significant legal liability and reputational harm.
The performance of LCM and, in turn, the company's operating results, may be negatively influenced by various factors,
including the (i) performance of LCM-managed CLOs, which in general are subject to the same risks as the company's CLO
investments and are currently the primary source of LCM's revenues and (ii) ability of LCM to retain key personnel, the loss
of whom may negatively affect LCM's ability to provide asset and collateral management services in a fashion, and of a
quality, consistent with its prior practice. Furthermore, the company's ownership of LCM may negatively impact certain
aspects of the company's CLO investment strategy and as a result the company's performance as well as the company's
ability to diversify its investments across multiple asset managers.
The performance of Polygon and, in turn, the company's operating results, may be negatively influenced by various factors,
including the (i) performance of Polygon-managed funds, and (ii) ability of Polygon to retain key personnel, the loss of
whom may negatively affect Polygon's ability to provide asset management services in a fashion, and of a quality,
consistent with its prior practice.
GreenOak has a limited operating history and it may be unable to successfully operate its business or achieve its investment
objectives.
The company established Hawke’s Point as a new start-up mining finance business in the fourth quarter of 2014. There is
no assurance that Hawke’s Point will find appropriate financing and investment opportunities, will raise third-party funds
necessary to pursue opportunities or generate fee income, or that its investments in such opportunities will generate
profitable returns in the future.
Equitix has a limited operating history and the company has controlled Equitix for a short period. The company acquired
Equitix in February 2015. The company may not achieve the growth and performance that it expects to achieve by acquiring
Equitix, which may adversely affect the company’s results of operations.
(Continued)
Tetragon Financial Group Limited 2015 Annual Report │59
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Risk Factors (continued)
TFG Asset Management has organized Tetragon Credit Income Partners Ltd. (“TCIP”) in connection with the company’s
efforts to deploy capital and resources intended to assist CLO collateral managers (including LCM) in satisfying recent “risk
retention” rules which were promulgated by U.S. federal regulators pursuant to the Dodd-Frank Act (the “U.S. Risk
Retention Rules”) and/or similar rules promulgated by the European Union (the “E.U. Risk Retention Rules”). The company,
together with certain third parties, is a significant investor in TCIP’s affiliated investment vehicle. There can be no
assurance that the U.S. Risk Retention Rules or the E.U. Risk Retention Rules will not change or be interpreted by regulators
in a manner such that TCIP’s proposed transactions and arrangements do not facilitate compliance with the U.S. Risk
Retention Rules and/or the E.U. Risk Retention Rules, or in a manner that otherwise precludes the contemplated
transactions or arrangements. If the structures and arrangements established by TCIP were, in the future, determined to
subject TCIP, its affiliated investment vehicle, any other TFG affiliate or any third-party manager to unacceptable regulatory
risk, TCIP’s ability to make investments would likely be severely and negatively limited and arrangements with third-party
managers may be terminated as a result.
As the company invests in new asset classes and as its asset mix changes, its revenues and profitability could be reduced.
Risks Relating to the Company’s Investment Portfolio
Many of the company's investments are in the form of highly subordinated securities, which are susceptible to losses of up
to 100% of the initial investments, including losses resulting from changes in the financial rating ascribed to, or changes in
the market value or fair value of, the underlying assets of an investment.
CLO vehicles, which make up a large portion of the company's current investment portfolio generally invest in fixed income
securities rated lower than Baa by Moody's or lower than BBB by S&P (or, if not rated, of comparable quality) and may be
regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest
payments. Moreover, market developments (including, without limitation, deteriorating economic outlook, rising defaults
and rating agency downgrades) may impact the fair value of an investment and/or its underlying assets, as we experienced
during the period from the third quarter of 2008 through the first half of 2009.
Defaults, their resulting losses and other losses on underlying assets (including bank loans) may have a negative impact on
the value of the company's portfolio and cash flows received. In addition, bank loans may require substantial workout
negotiations or restructuring in the event of a default or liquidation which could result in a substantial reduction in the
interest rate and/or principal.
The modeled cash flow predictions and assumptions used to calculate the IRR and fair value of each CLO investment may
prove to be inaccurate and require adjustment. Factors affecting the accuracy of such modeled cash flow predictions
include: (1) uncertainty in predicting future market values of certain distressed asset types, (2) the inability to accurately
model collateral manager behaviour and (3) the divergence of assumed variables from realised levels over the period
covered by the model.
Bank loans are generally subject to liquidity risks and, consequently, there may be limited liquidity if a Securitization Vehicle
is required to sell or otherwise dispose of such bank loans.
Many of the company's investments in securitization vehicles are and will be illiquid and have values that are susceptible to
changes in the ratings and market values of such vehicles' underlying assets, which may make it difficult for the company to
sell such holdings.
The company may be exposed to counterparty risk, which could make it difficult for the company to collect on the
obligations represented by investments and result in significant losses.
The performance of many of the company's investments may depend to a significant extent upon the performance of its
asset managers (internal and external).
The company is subject to concentration risk in its investment portfolio, which may increase the risk of an investment in
TFG.
The company's CLO investments are subject to (i) interest rate risk, which could cause the company's cash flow, fair value of
its assets and operating results to decrease and (ii) currency risk, which could cause the value of the company's CLO
investments in U.S. Dollars to decrease regardless of the inherent value of the underlying investments.
The Investment Manager may not be successful in the utilization of hedging and risk management transactions, which could
subject the company’s investment portfolio to increased risk or lower returns on its investments and in turn cause a
decrease in the fair value of the company’s assets.
The ability of securitization vehicles in which the company invests to sell assets and reinvest the proceeds may be
restricted, which may reduce the yield from the company's investment in those Securitization Vehicles.
In connection with the transaction with GreenOak, the company will invest its capital, directly and indirectly, in certain real
estate investments. Real estate investments are subject to various risks and fluctuations and cycles in value and demand,
many of which are beyond the company's control.
60│ tetragoninv.com
(Continued)
Appendices
Risk Factors (continued)
The real estate investments made, and to be made, by GreenOak are relatively difficult to sell quickly. Return of capital and
realisation of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying property.
GreenOak may be unable to realise its investment objectives by sale, other disposition or refinance at attractive prices
within any given period of time or may otherwise be unable to complete any exit strategy.
The company invests a portion of its capital, directly and indirectly, in certain European-listed equity securities. Such
investments are subject to various risks, many of which are beyond the company’s control. Risks or events which could
negatively affect such equity security investments include, but are not limited to: increased volatility in the market price
and with respect to trading volume of the equity securities and increased uncertainty and government intervention in
global financial markets.
The company invests a portion of its capital, directly and indirectly, in certain mining-industry related equity securities,
including through Hawke’s Point. Such investments are subject to various risks, many of which are beyond the company’s
control. In addition to the risks discussed above associated with equity investments generally, risks or events which could
negatively affect mining-industry related equity investments include, but are not limited to: exploration, developmental and
operational risks.
The company invests a portion of its capital, directly and indirectly, in certain convertible securities, mainly in the form of
debt securities that can be exchanged for equity interests. Such investments are subject to various risks, many of which are
beyond the company’s control. Risks or events which could negatively affect convertible security investments include, but
are not limited to: declining credit quality of issuers of the convertible securities and increased volatility in the market price
and with respect to trading volume of the underlying equity into which the convertible securities are convertible.
The company invests a portion of its capital, directly and indirectly, in certain distressed opportunities. Such investments
are subject to various risks, many of which are beyond the company’s control. Risks or events which could negatively affect
distressed opportunity investments include, but are not limited to: difficulty in obtaining information as to the true
condition of the issuer; potential for abrupt and erratic market movements and above average price volatility of the
securities; and potential for litigation.
The company may invest or intends to invest a portion of its capital, directly or indirectly, in infrastructure projects through
Equitix, which the company acquired in February 2015. Investments in infrastructure projects are subject to specific risks
including, but not limited to: (i) construction risks, (ii) subcontractor risks, (iii) financing risks, (iv) governmental risks and (v)
long time horizons.
Direct investments in asset managers will expose the company's business to additional risks, including: a decline in the price
of securities, a more complex regulatory environment and competition.
Risks Relating to TFG and the Master Fund
TFG's principal source of cash will be the investments that it makes through the Master Fund. TFG's ability to pay dividends
will depend on it receiving distributions from the Master Fund.
Shareholders will not be able to terminate the company's investment management agreement. None of the Investment
Manager or the Service Providers owe fiduciary duties to the shareholders of TFG.
The shares of TFG may continue to trade below NAV. The NAV per Share will change over time with the performance of the
company's investments and will be determined by the company's valuation principles. The fees payable to the Investment
Manager will be based on NAV and changes in NAV, which will not necessarily correlate to changes in the market value of
the shares of TFG.
TFG and the Master Fund have approved a very broad investment objective and the Investment Manager will have
substantial discretion when making investment decisions. In addition, the Investment Manager's strategies may not achieve
the company's investment objective.
TFG is an investment company that has been registered under the laws of Guernsey. The rights of its Shareholders and the
fiduciary duties that the Board of Directors owes to TFG and the Shareholders are governed by Guernsey law and TFG’s
articles of incorporation. As a result, the rights of the Shareholders and the fiduciary duties that are owed to them and TFG
may differ in material respects from the rights and duties that would be applicable if TFG were organised under the laws of
a different jurisdiction or if it were not permitted to vary such rights and duties in its articles of incorporation.
The liability of the Investment Manager is limited under the company’s arrangements with it, and the company has agreed
to indemnify the Investment Manager against claims that it may face in connection with such arrangements, which may
lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would if
investments were being made solely for its own account.
TFG is not, and does not intend to become, regulated as an investment company under the Investment Company Act and
related rules.
The company may become involved in litigation that adversely affects the company's business, investments and results of
operations.
(Continued)
Tetragon Financial Group Limited 2015 Annual Report │61
Appendices
Risk Factors (continued)
No formal corporate governance code applies to TFG under Dutch law and TFG will not be bound to comply with the U.K.
Combined Code other than as set forth in its articles of incorporation.
Risks Relating to the Investment Manager and Services Providers and Affiliated Relationships
The company's organizational, ownership and investment structure may create significant conflicts of interest that may be
resolved in a manner which is not always in the best interests of the company or the shareholders of TFG.
The company’s success depends on its continued relationship with the Investment Manager and its principals. If this
relationship were to end or the principals or other key professionals were to depart, it could have a material adverse effect
on the company’s business, investments and results of operations.
The Investment Manager's compensation structure may encourage the Investment Manager to invest in high-risk
investments.
The liability of the Investment Manager to the company is limited and the company's indemnity of the Investment Manager
may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise
would.
The Investment Manager may devote time and commitment to other activities.
Risks Relating to Taxation
U.S. investors may suffer adverse tax consequences because TFG will be treated as a passive foreign investment company (a
“PFIC”) for U.S. federal income tax purposes.
Investors may suffer adverse tax consequences if TFG or the Master Fund is treated as resident in the U.K. or the U.S. for tax
purposes.
Risks Relating to the Shares
Shares of TFG (the “Shares”) do not carry any voting rights other than limited voting rights in respect of variation of their
class rights. The holder of the voting shares of TFG will be able to control the composition of the Board of Directors and
exercise extensive influence over TFG's and the Master Fund's business and affairs. Additional information on the
organizational structure and corporate governance of TFG may be found on TFG's website at www.tetragoninv.com.
The Shares are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFM trading markets
are less liquid than other major exchanges, which could affect the price of the Shares. TFG may decide in the future to list
the Shares on a stock exchange other than Euronext in Amsterdam and SFM. There can be no assurance that an active
trading market would develop on such an exchange.
There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are
U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S.
person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must
be a “Qualified Purchaser” or a “Knowledgeable Employee” (each as defined in the Investment Company Act), and,
accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is
a “Qualified Purchaser” or a “Knowledgeable Employee” under the Investment Company Act. These restrictions may
adversely affect overall liquidity of the Shares.
Your ability to invest in the Shares or to transfer any Shares that you hold may be limited by restrictions imposed by ERISA
regulations, TFG's articles of incorporation and other tax considerations.
The company may issue additional securities that dilute existing holders of Shares, including as a result of the exercise of
the Investment Management Options.
The foregoing is not a comprehensive list of the risks and uncertainties to which the company is subject.
62│ tetragoninv.com
(Continued)
Shareholder Information
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
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
General Partner of Investment Manager
Tetragon Financial Management GP LLC
399 Park Avenue, 22nd Floor
New York, NY 10022
United States of America
Investor Relations
David Wishnow / Greg Wadsworth
ir@tetragoninv.com
Press Inquiries
Sard Verbinnen & Co
tetragon-svc@sardverb.com
Auditors
KPMG Channel Islands Ltd.
Glategny Court
Glategny Esplanade
St. Peter Port, Guernsey
Channel Islands GY1 1WR
Sub-Registrar and CREST Transfer Agent
Computershare Investor Services (Guernsey) Limited
1st Floor, Tudor House
Le Bordage
St Peter Port, Guernsey
Channel Islands GY1 1DB
Legal Advisor (as to U.S. law)
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
United States of America
Legal Advisor (as to Guernsey law)
Ogier
Redwood House
St. Julian’s Avenue
St. Peter Port, Guernsey
Channel Islands GY1 1WA
Legal Advisor (as to Dutch law)
De Brauw Blackstone Westbroek N.V.
Claude Debussylaan 80
1082 MD Amsterdam
The Netherlands
Stock Listing
Euronext Amsterdam N.V.
London Stock Exchange (Specialist Fund Market)
Administrator and Registrar
State Street (Guernsey) Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
Tetragon Financial Group Limited 2015 Annual Report │63
Endnotes
ENDNOTES
TFG is not responsible for the contents of any third-party website noted in this report.
TFG: Delivering Results Since 2005
(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) Average RoE is calculated from TFG’s IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset
Management businesses, the value of which has accumulated over several years. Consequently the full year return of
14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%. Please refer to
page 33 for a definition of Fair Value RoE and Appendix V for more details.
(iv) Annualised total shareholder return to 31 December 2015, 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.
Source: Bloomberg TRA function.
(v) Fair Value EPS divided by Dividends per Share at 31 December 2015.
(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 also 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
hereinafter 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 IV and V for further details.
(vii) Fully Diluted Fair Value NAV per share as defined on page 33 of this report.
(viii) Partner & Employee shareholdings at 31 December 2015, 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.
Letter to Shareholders
(2)
(3)
(4)
(5)
(6)
(7)
(8)
TFG’s ‘home Member State’ for the purposes of the EU Transparency Directive (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 Manager”).
Please see Note (1)(vi).
Please see Note (1)(ii).
Annualised total shareholder return from 1 January to 31 December 2015, defined as share price appreciation including
dividends reinvested. Source: Bloomberg TRA function.
LCM Asset Management LLC, a CLO loan manager that is part of TFG Asset Management, hereinafter referred to in this
report as “LCM”.
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, hereinafter referred
to in this report as “Polygon”. Polygon Global Partners LLP is authorised and regulated by the United Kingdom Financial
Conduct Authority.
(9)
Hawke’s Point, a mining finance company that is part of TFG Asset Management, hereinafter referred to in this report as
“Hawke’s Point”.
(10)
Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value Net Income.
(11)
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, and Tetragon
Credit Income II L.P. (“TCI II”) as calculated by the applicable administrator for value date 31 December 2015. Includes,
64│ tetragoninv.com
Endnotes
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.
(12)
GreenOak Real Estate, LP, hereinafter referred to in this report as “GreenOak”. TFG owns a 23% interest in GreenOak.
(13)
Equitix Holdings Limited, hereinafter referred to in this report as “Equitix”.
(14)
(15)
Please refer to the “Business Overviews” in the TFG Asset Management Overview section of this report for further
information on performance benchmarks.
The Polygon Convertible Opportunity Fund was nominated for the 2015 EuroHedge Award in the Convertibles & Volatility
category. There were four other nominees for this award. The Polygon European Equity Opportunity Fund was nominated
for the 2015 EuroHedge Award in the Event Driven and Distressed category. There were five other nominees for this award.
The EuroHedge Award is organised by EuroHedge magazine, a publication of Hedge Fund Intelligence. To be considered for
an award, funds must submit performance data to the HedgeFund Intelligence Database and have at least a 12-month track
record history. The only exception to this rule is for new fund awards where a minimum seven-month track record is
required; for these awards, the funds' whole performance history to date is taken into account. Winners are decided using
an established methodology based upon a combination of Sharpe ratios and returns over the relevant time period.
Nominations are decided by those funds in each peer group that achieve the strongest Sharpe ratios over 12 months, so
long as they also beat the median returns in their relevant peer groups and are within 10% of their high-water marks. The
eventual winners will be the funds that have the best returns, as long as they also have Sharpe ratios within 25% of the best
Sharpe of the nominees in their relevant peer groups. Most of the award categories require a minimum asset level of at
least $100 million. Most of the award categories require a minimum asset level of at least $100 million. Further
information about the award, including nomination and winning criteria, is available at www.hedgefundintelligence.com.
(16)
Tetragon Credit Income Partners, hereinafter referred to in this report as “TCIP”.
(17)
Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V. (“Euronext Amsterdam”). As is the case for
Euronext Amsterdam, the SFM is a regulated market for the purposes of the Markets in Financial Instruments Directive.
TFG Overview
(18)
Please see Note 11.
Key Metrics
(19)
Please see note (1)(ii).
(20)
Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value Net Income.
(21)
Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value EPS.
(22)
Please refer to Financial Highlights on page 33 of this report for the definition of Pro Forma Fully Diluted Shares and Fully
Diluted Fair Value NAV per Share.
2015 in Review
(23)
Based on the most recent trustee reports available as of 31 December 2015.
(24)
“LCD Leveraged Lending Review,” S&P, Q4 2015.
(25)
Based on the most recent trustee reports available as of 31 December 2015.
(26)
Based on the most recent trustee reports available as of 31 December 2015.
(27)
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 Funds’
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.
(28)
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
Tetragon Financial Group Limited 2015 Annual Report │65
Endnotes
to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for
comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the
indices may be materially different from the individual performance attained by a specific investor. In addition, the Funds’
holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The
HFRX 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.
(29)
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 Funds’
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.
(30)
TFG’s 85% economic share of Equitix is expected to decline to approximately 74.8% over time.
TFG Asset Management Overview
(31)
Please see Note 11.
(32)
Please see Note 11.
(33)
Please see Note 11.
(34)
(35)
The LCM III, LCM IV, LCM V, LCM VI, LCM IX, LCM X, LCM XI, LCM XII, LCM XIII, LCM XIV, LCM XV, LCM XVI, LCM XVII, LCM
XVIII, LCM XIX, and LCM XX CLOs are referred to as the “LCM Cash Flow CLOs.” LCM-managed CLOs that are no longer
outstanding are not included in the LCM Cash Flow CLO statistics. In addition, these statistics do not include the
performance of certain transactions that were developed and previously managed by a third-party prior to being assigned
to LCM, some of which continue to be managed by LCM.
(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
66│ tetragoninv.com
Endnotes
(36)
(37)
described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term.
It is contemplated that PRF’s term will be extended to March 2018 with a potential further one year extension thereafter
based on investor approval. Individual investor performance will vary based on their high water mark. Currently, the
majority of Class C share class investors have not reached their high water mark, so their performance is the same as their
gross performance. The AUM figure for PRF is as calculated by the applicable fund administrator.
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.
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
Tetragon Financial Group Limited 2015 Annual Report │67
Endnotes
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.
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.
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.
(39)
(40)
(41)
The Private Equity Vehicle noted above is the Polygon Recovery Fund L.P. (“PRF”). The manager of the PRF is a subsidiary of
TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment
described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term.
It is contemplated that PRF’s term will be extended to March 2018 with a potential for a further one year extension
thereafter, based on investor approval. Individual investor performance will vary based on their high water mark. Currently
the majority of Class C share class investors have not reached their high water mark, so their performance is the same as
68│ tetragoninv.com
Endnotes
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 see refer to
http://www.tetragoninv.com/portfolio/clo-equity.
2015 Financial Review
(43) On occasion, figures may not total due to rounding.
(44)
Fair Value Fully Diluted NAV per Share seeks to reflect certain potential changes to the total non-voting shares over the next
few years, which may be utilised in the calculation of NAV per Share. Specifically, the number of shares used to calculate
U.S. GAAP NAV per Share has been adjusted to incorporate:
(i) The Escrow Shares, which have been used as consideration for the acquisition of Polygon and applicable stock dividends
relating thereto, and which are held in escrow and are expected to be released and incorporated into the U.S. GAAP NAV
per Share over the next two years.
(ii) The number of shares corresponding to the applicable intrinsic value of the options issued to the Investment Manager at
the time of the company’s IPO with a strike price of $10.00, to the extent such options are in the money at period end. The
intrinsic value of the manager (IPO) share options is calculated as the excess of (x) the closing price of the shares as of the
final trading day in the relevant period over (y) $10.00 (being the exercise price per share) times (z) 12,545,330 (being a
number of shares subject to the options before the application of potential anti-dilution). The terms of exercise under the
options allow for exercise using cash, as well as, with the consent of the board of the company, certain forms of cashless
exercise. Each of these prescribed methods of exercise may give rise to the issuance of a different number of shares than
the approach described herein. If the options were to be surrendered for their intrinsic value with the board’s consent,
rather than exercised, the number of shares issued would equal the intrinsic value divided by the closing price of the shares
as of the final trading day in the relevant period. This approach has been selected because we currently believe it is more
reasonably illustrative of a likely outcome if the options are exercised. The options are exercisable until 26 April 2017.
(iii) The number of shares corresponding to the applicable intrinsic value of the options issued to the GreenOak Founders in
relation to the acquisition of a 10% stake in GreenOak in September 2010. 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) 3,908,241 (being a number of shares subject to the options).
Previously, As there were a number of contingent elements to the vesting of these options, including the repayment of the
working capital loan and continued service provision to GreenOak by the Founders, in accordance with U.S. GAAP, the
options were carried as a liability in the balance sheet of TFG Limited. Using a Black-Scholes model, these were revalued at
each reporting date, and changes in the valuation were reflected through the Statement of Operations. On 15 September
2015 the options vested, and as a result of vesting, all contingent elements to the options, other than market price, were
removed. Under ASC 815, once the vesting conditions were met, the options were reclassified to equity. The accounting
result of this is that a liability of $16.3 million was reclassified to the capital reserve in respect of share options, and
accordingly these share options are now incorporated into this dilution calculation.
(iv) In December 2015, TFG purchased 6 million TFG non-voting shares at $10 per share in a tender offer using a modified
Dutch auction structure. Approximately 5.65 million shares acquired in the tender offer are being held to hedge against (or
otherwise offset the future impact of) grants of shares under the LTIP and other equity-based awards by TFG Asset
Management for certain senior employees. Commencing from when the equity awards under the Plans are effective, the
fully diluted share count will start to be increased to reflect the level of shares “earned” under the LTIP and other equity-
based awards. 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.
Appendix IV
(45)
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 VII
(46)
For (46.i) please see Note 44(i).
Tetragon Financial Group Limited 2015 Annual Report │69
Endnotes
(47)
The LTIP and other 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).
Appendix VIII
(48)
TFM has determined that TFG’s current investment strategy is to continue to grow TFG Asset Management with a view to a
possible initial public offering and listing of its shares.
(49)
TFM is also responsible for selecting third-party managers who invest in asset classes appropriate for the TFG Master Fund.
(50)
(51)
(52)
(53)
These Polygon entities also provide infrastructure services to LCM and the GreenOak joint venture, infrastructure and
investment management services to Hawke’s Point and the TCI General Partner, and oversight services with respect to
Equitix.
Polygon Private Investment Partners LP, an investment management entity in which Reade Griffith and Paddy Dear have an
interest and that was not included in TFG’s 28 October 2012 acquisition of Polygon Management L.P., also continues to rely
on TFG Asset Management for certain services to support its activities. TFG Asset Management employs a cost allocation
and recovery methodology from Polygon Private Investment Partners LP that is the same as the cost allocation and recovery
methodology applied to TFM.
This cost allocation methodology also applies to the other TFG Asset Management businesses to which the Polygon entities
provide services.
Employee compensation will also include TFG Asset Management’s LTIP and its other equity-based awards. The cost of
purchasing the TFG shares which are being held to hedge against grants under such incentive programmes includes the
principal and interest payable on a loan from the TFG Master Fund to TFG Asset Management.
(54)
Please see Note (1)(ii).
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 constitutes regulated information (“gereglementeerde informative”) within the
meaning of Section 1:1 of the FMSA.
70│ tetragoninv.com
AUDITED FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2015
TETRAGON FINANCIAL GROUP LIMITED
AUDITED FINANCIAL STATEMENTS
For the year ended 31 December 2015
_____________________________________________________________________________________
CONTENTS
DIRECTORS’ REPORT
INDEPENDENT AUDITOR’S REPORT
STATEMENTS OF ASSETS AND LIABILITIES
STATEMENTS OF OPERATIONS
STATEMENTS OF CHANGES IN NET ASSETS
STATEMENTS OF CASH FLOWS
FINANCIAL HIGHLIGHTS
NOTES TO THE FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF TETRAGON FINANCIAL
GROUP MASTER FUND LIMITED
PAGE
2
6
8
9
11
12
13
14
1
TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT
For the year ended 31 December 2015
_____________________________________________________________________________________
The Directors present to the shareholders their report together with the audited financial statements for the year
ended 31 December 2015.
THE COMPANY AND ITS INVESTMENT OBJECTIVE
Tetragon Financial Group Limited (the “Company”) was registered in Guernsey on 23 June 2005 as a company limited
by shares, with registered number 43321. All voting shares of the Company are held by Polygon Credit Holdings II
Limited (the “Voting Shareholder”). The Company continues to be registered and domiciled in Guernsey, and the
Company's non-voting shares (the “Shares”) are listed on Euronext Amsterdam N.V. (ticker symbol: TFG.NA). On 9
November 2015, the Company announced the successful admission (“Admission") of its non-voting shares to trading
on the Specialist Fund Market of the London Stock Exchange plc ("SFM") (ticker symbol: TFG.LN). The Company acts
as a feeder fund in a “master feeder structure” investing substantially all of its assets in Tetragon Financial Group
Master Fund Limited (the “Master Fund”).
The Company'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 Master
Fund’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.
As at 31 December 2015, TFG Asset Management consisted of Polygon Global Partners LP and Polygon Global
Partners LLP (collectively with certain affiliates, “Polygon”), LCM Asset Management LLC (“LCM”), Equitix Holdings
Limited (“Equitix”), Hawke's Point, the GreenOak Real Estate LP ("GreenOak") joint venture and Tetragon Credit
Income Partners ("TCIP").
TFG Asset Management L.P. is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 (the
“Advisers Act”) and one of its investment management entities, Polygon Global Partners LLP, is authorized and
regulated by the United Kingdom Financial Conduct Authority. The registered office of the Fund is 1st Floor Dorey
Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ.
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on pages 9 to 10. A detailed review of activities and future developments is
contained in the Annual Report issued with these financial statements to the shareholders.
2
TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2015
_____________________________________________________________________________________
DIRECTORS
The Directors who held office during the year and up to the date of this report were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet*
David Jeffreys*
Byron Knief*
* Independent non-executive Directors
The remuneration for Directors is determined by resolution of the Voting Shareholder. Each of the Directors’ annual
fee is US$ 100,000 (year ended 31 December 2014: US$ 100,000) as compensation for service on the Boards of
Directors of both the Company and the Master Fund, which is paid by the Master Fund. Paddy Dear and Reade Griffith
have waived their entitlement to a fee in respect of their services as Directors.
The Directors have the option to elect to receive Shares in the Company instead of the quarterly fee. With respect to
the quarter ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received 2,564 Shares in
relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the
third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of
the fourth quarter 2015 dividend process.
The Directors are entitled to be repaid by the Company for all travel, hotel and other expenses reasonably incurred by
them in the discharge of their duties. None of the Directors has a contract with the Company or the Master Fund
providing for benefits upon termination of employment.
SECRETARY
State Street (Guernsey) Limited held the office of Secretary throughout the year and up to the date of this report.
DIVIDENDS
The Board of Directors has the authority to declare dividend payments, based upon the recommendation of the
Investment Manager, subject to the approval of the voting shares of the Company and adherence to applicable law
including the satisfaction of a solvency test as stated under The Companies (Guernsey) Law, 2008. The Investment
Manager’s recommendation with respect to the declaration of dividends (and other capital distributions) may be
informed by a variety of considerations, including (i) the expected sustainability of the Company’s cash generation
capacity in the short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current
and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of
the Company’s investments and financial position to other investment opportunities.
3
TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2015
_____________________________________________________________________________________
DIVIDENDS (continued)
The Directors declared a dividend amounting to US$ 0.1575 per Share for the quarter ended 31 December 2014, US$
0.1575 per Share for the Quarter Ended 31 March 2015, US$ 0.1625 per Share for the Quarter Ended 30 June 2015
and US$ 0.1625 per Share for the Quarter Ended 30 September 2015. The total dividend declared during the year
ended 31 December 2015 amounted to US$ 62.5 million or US$ 0.64 per Share (31 December 2014: US$ 58.4 million
or US$ 0.61 per Share). On 25 February 2016, the Directors declared a dividend US$ 0.165 per Share for the Quarter
Ended 31 December 2015.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008 requires the Directors to prepare financial statements for each financial year.
Under that law they have elected to prepare the financial statements in conformity with U.S. generally accepted
accounting principles (“U.S. GAAP”) and applicable law.
The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period.
In preparing those financial statements the Directors are required to:
Select suitable accounting policies and apply them consistently;
Make judgments and estimates that are reasonable and prudent;
State whether applicable accounting standards have been followed, subject to any material departures
disclosed and explained in the financial statements; and
Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the
Company will continue in business.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
The Directors are responsible for keeping of proper accounting records which disclose with reasonable accuracy at
any time the financial position of the Company and to enable them to ensure that the financial statements comply with
The Companies (Guernsey) Law, 2008. They have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on
the Company's website.
The Guernsey Financial Services Commission ("GFSC") has issued a Code of Corporate Governance (the “Code”)
which provides a framework that applies to all entities licensed by the GFSC or which are registered or authorised as a
collective investment scheme under the Protection of Investors (Bailiwick of Guernsey) Law, 1987.
4
TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2015
_____________________________________________________________________________________
STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued)
In conformity with the Code, the Company has prepared a self-assessment reflecting its nature, scale and complexity in
order to assist the Directors in their annual consideration of the Code.
The Directors confirm that we have complied with the above requirements in preparing the financial statements and
that to the best of our knowledge and belief:
The annual report includes a fair review of the development and performance of the business and the position
of the Company together with a description of the principal risks and uncertainties that the Company faces;
and
The financial statements, prepared in conformity with U.S. GAAP give a true and fair view of the assets,
liabilities, financial position, results and cash flows of the Company.
DISCLOSURE OF INFORMATION TO AUDITOR
So far as each of the Directors is aware, there is no relevant audit information of which the Company’s auditor is
unaware, and each has taken all the steps he ought to have taken as a Director to make himself aware of any relevant
audit information and to establish that the Company’s auditor is aware of that information.
AUDITORS
KPMG Channel Islands Limited are the appointed independent auditors of the Company and they have expressed their
willingness to continue in office. A resolution for the re-appointment of KPMG Channel Islands Limited as auditors of
the Company is to be proposed at the forthcoming Annual General Meeting.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
Date: 25 February 2016
5
Independent auditor’s report to the members of Tetragon Financial Group
Limited
We have audited the financial statements of Tetragon Financial Group Limited (the “Company”) for the year ended 31
December 2015 which comprise the Statements of Assets and Liabilities, the Statements of Operations, the Statements
of Changes in Net Assets, the Statements of Cash Flows, the Financial Highlights and the related notes. The financial
reporting framework that has been applied in their preparation is applicable law and U.S. generally accepted accounting
principles.
This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies
(Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors' Responsibilities set out on pages 4 and 5, the directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read
all the financial and non-financial information in the annual report to identify material inconsistencies with the audited
financial statements and to identify any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on the financial statements
In our opinion the financial statements:
give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of its net income
for the year then ended;
are in conformity with U.S. generally accepted accounting principles; and
comply with the Companies (Guernsey) Law, 2008.
6
Independent auditor’s report to the members of Tetragon Financial Group
Limited (continued)
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires
us to report to you if, in our opinion:
the Company has not kept proper accounting records; or
the financial statements are not in agreement with the accounting records; or
we have not received all the information and explanations, which to the best of our knowledge and belief are
necessary for the purpose of our audit.
Lee C. Clark
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Guernsey
February 25, 2016
7
TETRAGON FINANCIAL GROUP LIMITED
STATEMENTS OF ASSETS AND LIABILITIES
As at 31 December 2015
Assets
Investment in the Master Fund
Total assets
Liabilities
Accrued incentive fee
Amounts payable on share options
Total liabilities
Net assets
Equity
Share capital
Share premium
Capital reserve in respect of share options
Share based employee compensation reserve
Retained earnings
Shares outstanding
Shares
Note
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
2
5
4
6
7
4, 8
3, 12
11
6
1,877.4
1,877.4
1,834.9
1,834.9
4.7
-
4.7
4.1
12.3
16.4
1,872.7
1,818.5
0.1
921.9
28.1
19.6
903.0
1,872.7
0.1
929.4
11.8
31.4
845.8
1,818.5
Millions
95.9
Millions
95.9
Net Asset Value per share
US$ 19.54
US$ 18.96
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
Date: 25 February 2016
8
TETRAGON FINANCIAL GROUP LIMITED
STATEMENTS OF OPERATIONS
For the year ended 31 December 2015
Note
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
Investment income allocated from the Master Fund
Interest income
Fee income
Other income – cost recovery
Insurance recovery
Dividend income
Total investment income allocated from the Master Fund
Direct expenses
Incentive fee
Total direct expenses
Operating expenses allocated from the Master Fund
Employee costs
Management fees
Share based employee compensation
Legal and professional fees
Amortization on intangible assets
Audit fees
Other operating and administrative expenses
Total operating expenses allocated from the Master Fund
Total operating expenses
Net investment income
Net decrease in unrealized depreciation on:
Share options
Net decrease in unrealized depreciation arising from direct
operations
Net realized and unrealized gain from investments
and foreign currency allocated from the Master Fund
Net realized gain / (loss) from:
Investments
Derivative financial instruments
Foreign currency transactions
9
5
8
3
4
134.7
70.2
17.3
9.8
0.1
232.1
(35.8)
(35.8)
(58.6)
(28.3)
(22.0)
(7.2)
(6.3)
(0.4)
(21.2)
(144.0)
152.5
81.1
23.6
1.0
0.1
258.3
(22.8)
(22.8)
(61.7)
(27.0)
(23.1)
(17.6)
(6.8)
(0.4)
(21.8)
(158.4)
(179.8)
(181.2)
52.3
77.1
(3.9)
(3.9)
82.7
4.8
4.9
92.4
(1.6)
(1.6)
124.4
(36.3)
12.0
100.1
TETRAGON FINANCIAL GROUP LIMITED
STATEMENTS OF OPERATIONS (continued)
For the year ended 31 December 2015
Net (decrease) / increase in unrealized (depreciation) / appreciation on:
Investments
Derivative financial instruments
Translation of assets and liabilities in foreign currencies
Net realized and unrealized gain from investments
and foreign currencies allocated from the Master Fund
Net increase from operations before tax
Income and deferred tax expense allocated from the Master Fund
Net income
Earnings per Share
Basic
Diluted
Weighted average Shares outstanding
Basic
Diluted
The accompanying notes are an integral part of the financial statements.
Note
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
(0.3)
8.0
(11.1)
(3.4)
89.0
137.3
(10.1)
127.3
(52.2)
10.2
(25.9)
(67.9)
32.2
107.7
(12.6)
95.1
10
10
10
10
US$ 1.31
US$ 1.21
Millions
97.1
105.5
US$ 1.00
US$ 0.90
Millions
95.4
106.1
10
TETRAGON FINANCIAL GROUP LIMITED
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended 31 December 2015
Note
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
From operations:
Total investment income
Total operating expenses
Net unrealized depreciation on share options
Net realized gain from investments and foreign currency allocated from
the Master Fund
Net unrealized gain / (loss) from investments and foreign currency
allocated from the Master Fund
Income and deferred tax expense
Net income
Share based employee compensation
Net increase in net assets resulting from operations
Dividends paid to shareholders
Issue of Shares
Purchase of Treasury Shares
Capital reserve in respect of Share Options
Decrease in net assets resulting from net share transactions
3
9
6
6
4
Total increase in net assets
Net assets at start of year
Net assets at end of year
The accompanying notes are an integral part of the financial statements.
232.1
(179.8)
(3.9)
92.4
(3.4)
(10.1)
127.3
22.0
149.3
(50.5)
0.1
(60.9)
16.3
(44.5)
54.3
257.3
(180.2)
(1.6)
100.1
(67.9)
(12.6)
95.1
23.1
118.2
(52.0)
-
(50.9)
-
(50.9)
15.3
1,818.5
1,803.2
1,872.7
1,818.5
11
TETRAGON FINANCIAL GROUP LIMITED
STATEMENTS OF CASH FLOWS
For the year ended 31 December 2015
Operating activities
Net income
Adjustments for:
Net unrealized depreciation on share options
Share based employee compensation expense
Net unrealized (depreciation) / appreciation on investment in the Master Fund
Operating cash flows before movements in working capital
Increase / (decrease) in payables
Net cash provided by operating activities
Financing activities
Issue of Shares
Purchase of Treasury Shares
Dividends paid to shareholders*
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
127.3
95.1
3.9
22.0
(42.5)
110.7
0.6
111.3
0.1
(60.9)
(50.5)
(111.3)
-
-
-
1.6
23.1
11.8
131.6
(28.7)
102.9
-
(50.9)
(52.0)
(102.9)
-
-
-
The accompanying notes are an integral part of the financial statements.
*The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million) with value equivalent to
US$ 12.0 million (2014: US$ 6.4 million) being taken by the dividend recipient in Shares rather than cash.
** The Company does not maintain any bank accounts or cash balances. All cash transactions take place within the
Master Fund.
12
TETRAGON FINANCIAL GROUP LIMITED
FINANCIAL HIGHLIGHTS
For the year ended 31 December 2015
The following represents selected per Share operating performance of the Company, ratios to average net assets and total
return information for the year ended 31 December 2015 and the year ended 31 December 2014.
Per Share operating performance
Net Asset Value at the start of the year
Net investment income (before incentive fee)
Incentive fee
Net realized and unrealized gain from investments and foreign currencies
Share based employee compensation
Dividends paid to shareholders
Income and deferred tax expense
Other capital transactions
Net Asset Value at the end of the year
31 Dec 2015 31 Dec 2014
US$
US$
18.96
0.91
(0.37)
0.87
0.23
(0.52)
(0.10)
(0.44)
19.54
18.23
1.05
(0.24)
0.32
0.24
(0.61)
(0.13)
0.10
18.96
Pro Forma Fully Diluted NAV per Share
Millions
Millions
Shares outstanding
Shares held in escrow
Share options
Pro Forma Fully Diluted Shares
95.9
6.6
1.7
104.2
95.9
10.7
-
106.6
Pro Forma Fully Diluted Net Asset Value per Share
US$ 17.97
US$ 17.05
Total return (NAV change before dividend payments and other capital
transactions) before incentive fee
Incentive fee
Total return (NAV change before dividend payments and other capital
transactions) after incentive fee
Ratios and supplemental data
10.07%
(1.95%)
8.10%
(1.31%)
8.12%
6.79%
Ratio to average net assets:
Operating expenses allocated from the Master Fund
(7.46%)
(7.46%)
Total operating expenses
Incentive fee
(1.27%)
Net investment income
4.29%
An individual shareholder’s per Share operating performance and ratios may vary from the above based on the timing of
capital transactions.
(6.46%)
(6.46%)
(1.89%)
2.78%
13
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2015
Note 1
Significant Accounting Policies
Basis of Presentation
The financial statements give a true and fair view, are prepared in conformity with U.S. GAAP and comply with The
Companies (Guernsey) Law, 2008.
The Company’s investment in the Master Fund is valued based on the Net Asset Value (“NAV”) per share, obtained
from the Master Fund’s Administrator, which is the Company’s interest in the Net Assets of the Master Fund. The
performance of the Company is directly affected by the performance of the Master Fund.
The Company’s Statements of Operations includes its allocated share of each type of gain, loss, income and expense of
the Master Fund’s Statements of Operations. Attached are the audited consolidated financial statements of the Master
Fund, which are an integral part of these financial statements. As at 31 December 2015, the Company had 100% (31
December 2014: 100%) economic ownership interest in the Master Fund. As the Company’s only asset is 100% of the
non-voting shares of the Master Fund and the audited consolidated financial statements of the Master Fund are
attached, a separate Schedule of Investments for the Company has not been included.
For financial statement reporting purposes, the Company is an investment company and follows the measurement
guidance set out in ASC 946, Financial Services – Investment Companies.
The accounting policies have been consistently applied by the Company during the year ended 31 December 2015 and
are consistent with those used in the previous year.
The financial statements are presented in United States Dollars.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the accompanying notes, including the
valuation of investments. The Company’s management believes that the estimates made in preparing the financial
statements are reasonable and prudent. Actual results could differ materially from these estimates.
Valuation of Investments
The value of the investment in the Master Fund is based on the NAV per share obtained from the Master Fund’s
Administrator.
Expenses
Expenses are recognized in the Statements of Operations on an accruals basis.
14
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1
Significant Accounting Policies (continued)
Taxation
The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance
1989 and is charged GBP 1,200 per annum (31 December 2014: GBP 600).
In accordance with ASC Subtopic 740-10 – Income Taxes – Overall, the Company recognizes the effect of income tax
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. There
were no uncertain tax positions recognized at 31 December 2015 (31 December 2014: Nil).
Share Options
The fair value of the options granted to the Investment Manager at the time of the Company’s initial public offering in
2007, was recognized as a charge to a reserve in respect of the share options, over the year in which the Investment
Manager became unconditionally entitled to the options. The options were fully vested and immediately exercisable
from the date of the grant, on 26 April 2007, and remain exercisable for ten years.
The fair value of options issued to certain founding partners of GreenOak are also recognized through a capital reserve
in respect of share options. Previously, because of contingent elements, other than linked to market price, they were
recognized as a liability in the Statements of Assets and Liabilities. More details are included in Note 4.
If and when the share options are exercised the share capital and share premium accounts will be increased by the
applicable capital reserve.
Dividend Expensse
Dividend expense from Shares is recognized in the Statements of Changes in Net Assets.
Share Based Payments
Share-based compensation expense for all equity settled share-based payment awards granted is determined based on
the grant-date fair value. The Company recognizes these compensation costs net of an estimated forfeiture rate, and
recognizes compensation cost only for those Shares expected to meet the service and non-market performance
vesting conditions, on a straightline basis over the requisite service period of the award. These compensation costs are
determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards
with performance conditions.
15
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1
Significant Accounting Policies (continued)
Share Based Payments (continued)
When the Shares are actually issued the fair value of the Shares, as determined at the time of the award, is debited
against the share based employee compensation reserve and credited to share capital and share premium. Any
associated stock dividends accrued on the original award are debited against retained earnings and credited to share
capital and share premium using the value determined by the stock reference price at the date of each applicable
dividend.
Treasury Shares
When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly
attributable costs, is recognized as a deduction from equity. Repurchased Shares may be classified as treasury shares
from an accounting perspective and are presented as a deduction from total equity. When treasury shares are sold or
reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit
on the transaction is transferred to or from retained earnings. Shares may also be transferred out of the Treasury
Account and into TFG Holdings I, an entity established through a joint arrangement with the Master Fund. Where this
occurs the status of the Shares is unchanged from an accounting perspective and they are not included in the Shares
outstanding on the Statements of Assets and Liabilities.
Note 2
Investment in the Master Fund
At the year end, the Master Fund held investments at fair value, management contracts, cash and cash equivalents,
derivatives and other receivables and payables.
As at 31 December 2015, the Company had an investment of US$ 1,877.4 million in the Master Fund (31 December
2014: US$ 1,834.9 million).
Note 3
Share Based Payments
TFG Asset Management L.P. and certain of its affiliates, including Polygon’s asset management businesses and infrastructure
platform, along with Polygon’s interests in LCM and GreenOak, were acquired on 28 October 2012 (the “Acquisition”), in
exchange for consideration of approximately 11.7 million non-voting Shares to the sellers subject to certain vesting and
forfeiture conditions (the “Aggregate Consideration”). The Aggregate Consideration shall be held in escrow (along with
accrued stock dividends) until it is released over the period 2013 to 2017.
Under ASC 805 - Business Combinations ("ASC 805") these Shares are treated as payment for post combination services
rather than upfront consideration, hence the initial consideration was determined to be nil, resulting in a bargain purchase.
The expense is recognized in the Master Fund through the Statements of Operations, as well as reflecting the assets
acquired and a reserve to reflect the capital contribution of the Shares from the Company. The Company has a share
based compensation reserve and recognizes the expense indirectly as allocated from the Master Fund. The charge for the
year ended 31 December 2015 amounted to US$ 22.0 million (31 December 2014: US$ 23.1 million).
16
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 4
Share Options Issued to GreenOak Founders
On 16 September 2010, the Master Fund entered into a transaction with GreenOak whereby it received a 10% equity
interest in GreenOak and agreed to provide, among other things, a working capital loan of up to US$ 10.0 million and a
US$ 100.0 million co-investment commitment that is expected to fund up to a limited fixed percentage of any GreenOak
sponsored investment program, with the Master Fund retaining the option to invest further amounts.
Under the terms of the transaction, the Company granted to the GreenOak founding partners ("Founders") options to
purchase 3.9 million Shares (vesting after 5 years and subject to further conditions) at a strike price of US$ 5.50. The
aggregate fair value of the options granted at the transaction date was US$ 0.5 million.
On 15 September 2015 the options vested, and as a result of vesting, all contingent elements to the options, other than
market price, were removed. Under ASC 815, once the vesting conditions were met, the options were reclassified to
equity. The accounting result of this is that a liability of US$ 16.3 million was reclassified to the capital reserve in respect of
share options. US$ 16.3 million was the deemed fair value of the options at the time of vesting and was determined by
using a Black-Scholes model (31 December 2014: US$ 12.3 million).
The options are split approximately as follows: 50% are exercisable from 1 January 2016, expiring a year later; 25% are
exercisable from 1 January 2017, expiring a year later; 25% are exercisable from 1 January 2018, expiring a year later.
Note 5
Incentive Fee
The Company pays the Investment Manager an incentive fee for each Calculation Period (a period of three months
ending on 31 March, 30 June, 30 September and 31 December in each year or as otherwise determined by the
Directors) equal to 25% of the increase in the NAV of the Company during the Calculation Period (before deduction
of any dividend paid or the amount of any redemptions or repurchases of the Shares (or other relevant capital
adjustments) during such Calculation Period) above the Reference NAV (as defined below) plus the Hurdle (as defined
below) for the Calculation Period. If the Hurdle is not met in any Calculation Period (and no incentive fee is paid), the
shortfall will not carry forward to any subsequent Calculation Period.
The “Hurdle” for any Calculation Period will equal the Reference NAV multiplied by the Hurdle Rate (as defined
below). The Hurdle Rate for any Calculation Period equals 3-month USD LIBOR determined as of 11:00 a.m. London
time on the first London business day of the then current Calculation Period, plus the Hurdle Spread of 2.647858% in
each case multiplied by the actual number of days in the Calculation Period divided by 365.
The ‘‘Reference NAV’’ is the greater of (i) NAV at the end of the Calculation Period immediately preceding the current
Calculation Period and (ii) the NAV as of the end of the Calculation Period immediately preceding the Calculation
Period referred to in clause (i). For the purpose of determining the Reference NAV at the end of a Calculation Period,
NAV shall be adjusted by the amount of accrued dividends and the amounts of any redemptions or repurchase of the
Shares (or other relevant capital adjustments) and incentive fees to be paid with respect to that Calculation Period.
17
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 5
Incentive Fee (continued)
The incentive fee in respect of each Calculation Period is calculated by reference to the NAV before deduction of any
accrued incentive fee. If the Investment Management Agreement is terminated other than at the end of a Calculation
Period, the date of termination will be deemed to be the end of the Calculation Period. The incentive fee is normally
payable in arrears after the end of the Calculation Period.
The incentive fee for the year ended 31 December 2015 was US$ 35.8 million (31 December 2014: US$ 22.8 million).
As at 31 December 2015, US$ 4.7 million was outstanding (31 December 2014: US$ 4.1 million).
Note 6
Share Capital
Authorized
The Company has an authorized share capital of US$ 1.0 million divided into 10 voting shares, having a par value of
US$ 0.001 each and 999,999,990 non-voting Shares, each having a par value of US$ 0.001. Shares are issuable either as
certificated shares or uncertificated shares, and in both cases as registered shares in accordance with applicable law.
Voting Shares
The 10 voting shares in issue were issued at par and are owned by the Voting Shareholder, which is a non-U.S. affiliate
of the Investment Manager.
The voting shares are the only shares of the Company entitled to vote for the election of Directors and on all other
matters put to a vote of shareholders, subject to the limited rights of the Shares described below. The voting shares
are not entitled to receive dividends.
Shares
The Shares are not entitled to vote on any matter other than limited voting rights in respect of variation of their class
rights. The Shares carry a right to any dividends or other distributions declared by the Company. The Shares are
subject to certain transfer restrictions as set out in the Company’s Memorandum and Articles of Incorporation.
The Directors, upon the recommendation of the Investment Manager and with prior approval of a resolution of voting
shares, may allot, issue or otherwise dispose of Shares to such persons, at such times, for such consideration and on
such terms and conditions as they deem necessary or desirable. There are no pre-emption rights attaching to any
Shares.
The Directors, upon the recommendation of the Investment Manager, may grant options over the Shares. The
Company may repurchase Shares and hold such repurchased Shares as Treasury Shares.
18
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 6
Share Capital (continued)
Share Transactions
Shares in issue at 31 December 2013
Issued in lieu of stock dividend
Issued through release of tranche of Escrow Shares
Shares purchased during the year
Shares in issue at 31 December 2014
Issued in lieu of stock dividend
Issued through release of tranche of Escrow Shares
Shares purchased during the year
Shares in issue at 31 December 2015
Optional Stock Dividend
Voting Shares
No.
10
-
-
-
10
-
-
-
10
Shares
No. MM
Shares
US$ MM
98.9
0.6
1.2
(4.9)
95.9
1.2
4.7
(6.0)
95.9
0.1
-
-
-
0.1
-
-
-
0.1
The Company has an Optional Stock Dividend Plan which offers investors an opportunity to elect to receive any
declared dividend in the form of dividend shares at a reference price determined by calculating the five-day weighted
average price post ex-dividend date.
During the year a total dividend of US$ 62.5 million (31 December 2014: US$ 58.4 million) was declared, of which US$
50.5 million was paid out as a cash dividend (31 December 2014: US$ 52.0 million), and the remaining US$ 12.0 million
(31 December 2014: US$ 6.4 million) was reinvested under the Optional Stock Dividend Plan.
Treasury Shares and Share Repurchases
The Company has entered into a joint arrangement with the Master Fund through the establishment of TFG Holdings I.
The Company may transfer, and has transferred, Shares previously held in a Treasury Account to TFG Holdings I.
Where this occurs the status of the Shares is unchanged from an accounting perspective and they are not included in
the Shares outstanding on the Statements of Assets and Liabilities.
On 30 November 2007, the Company announced the implementation of a share repurchase program ("Program") of
their outstanding Shares. This was renewed on several occasions. As at 31 December 2015, there was no share
repurchase program in place.
When the Program was in operation, the Master Fund had undertaken to repurchase an identical number of its own
shares from the Company as and when it made these repurchases in the open market. The Master Fund matched the
price per share paid by the Company.
The shares are held in a Treasury Account or in TFG Holdings I, allowing them to potentially be resold back to the
Company if it resells its own Shares back into the market at a later date. Whilst they are held by the Company
(whether directly or via TFG Holdings I), the Shares are neither eligible to receive dividends nor are they included in
the Shares outstanding on the Statements of Assets and Liabilities.
19
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 6
Share Capital (continued)
Treasury Shares and Share Repurchases (continued)
On 15 December 2015, the Company and the Master Fund announced that under the terms of a “modified Dutch
auction” tender offer (the “Tender Offer”) it had accepted for purchase approximately 6.0 million non-voting shares of
the Company at a purchase price of US$ 10.00 per share and an aggregate cost of US$ 60.9 million, including applicable
fees and expenses. The repurchased Shares were exchanged with the Company for the identical amount of Master
Fund Shares. Of the repurchased shares, 5.65m shares were transferred to an escrow account (see below) and the
remainder were transferred to TFG Holdings I.
As at 31 December 2015, 17.0 million Shares are held in TFG Holdings I (31 December 2014: 16.6 million) and 12.8
million Shares in the Treasury Account (31 December 2014: 12.8 million), with an aggregate attributed cost of US$
264.6 million (31 December 2014: US$ 261.0 million).
Escrow Shares
As part of the Acquisition to acquire TFG Asset Management, the Aggregate Consideration of 11.7 million Shares was
moved to an escrow account where they were to be held before being released in conjunction with the agreed vesting
schedule, subject to certain forfeiture conditions. During the year, 0.6 million Shares were added to the account due to
stock dividends, whilst 4.7 million shares were released in accordance with the vesting terms and schedule, leaving 6.6
million Shares in the account as at 31 December 2015 (31 December 2014: 10.7 million). As a result of the release of
4.7 million shares, a value of US$ 33.8 million was debited against the Share Based Employee Compensation Reserve,
which represented approximately 4.0 million Shares relating to the original escrow shares valued at the transaction
share price of US$ 8.43. In addition, approximately 0.7 million Shares released relating to stock dividends awarded on
the original shares released was debited against Retained Earnings, with the value being determined using the stock
reference price at each applicable dividend date (US$ 7.5 million). The remaining Shares, which remain eligible for stock
dividends, are expected to be released in 2016 and 2017, subject to the conditions described above.
Additionally, a second escrow account was opened during 2015. This is intended to hold Shares which will form part of
a long term incentive plan (“LTIP”) for certain employees of TFG Asset Management. During 2015, 5.65 million shares
were moved into this account and going forward, these shares will be eligible to participate in the stock dividend. As
at 31 December 2015, the terms and operation of this LTIP had yet to be finalized.
20
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 6
Share Capital (continued)
Other Share Transactions
Shares brought forward at 31 December 2013
Shares purchased during the year
Stock Dividend
Vested and released
Shares at 31 December 2014
Shares purchased during the year
Shares repurchased for use in LTIP
Stock Dividend
Vested and released
Shares at 31 December 2015
Note 7
Share Premium
Balance at start of year
Premium arising on issuance of Shares
Discount arising from purchase of Shares
Balance at end of year
Note 8
Related Party Transactions
Treasury
Shares
Shares
No. MM
7.9
4.9
-
-
12.8
-
-
-
-
12.8
Shares held in
TFG Holdings I
Shares
No. MM
16.6
-
-
-
16.6
0.4
-
-
-
17.0
Escrow shares
– TFG AM
acquisition
Shares
No. MM
11.3
-
0.7
(1.2)
10.7
-
-
0.6
(4.7)
6.6
Escrow Shares -
LTIP
Shares
No. MM
-
-
-
-
-
-
5.7
-
-
5.7
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
929.4
53.4
(60.9)
921.9
963.2
17.1
(50.9)
929.4
The Investment Manager is entitled to receive management fees equal to 1.5% per annum of the Net Asset Value of
the Company payable monthly in advance prior to the deduction of any accrued incentive fee. All fees and expenses of
the Company including the Management and Administration fees, but excluding incentive fees from the Investment
Manager, are paid by the Master Fund and allocated fully to the Company. An incentive fee may be paid to the
Investment Manager as disclosed in Note 5.
In recognition of the work performed by the Investment Manager in successfully arranging the global offering and the
associated raising of new capital for the Company, in 2007 the Company granted to the Investment Manager options
(the “Investment Management Options”) to purchase approximately 12.5 million of the Company’s Shares (before any
application of potential anti-dilution) at an exercise price per share equal to the Offer Price (US$ 10.00).
21
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 8
Related Party Transactions (continued)
The Investment Management Options were fully vested and immediately exercisable on the date of admission to
Euronext Amsterdam N.V. and will remain exercisable until the 10th anniversary of that date. The aggregate fair value
of the options granted at the time of the global offering was US$ 11.8 million. The fair value of each option granted
during 2007 was US$ 0.94 on the date of grant using the Binomial-pricing model with the following average
assumptions: expected dividend yield 8%, risk-free interest rate of 5.306%, an expected life of 5 years and a volatility of
17.5%.
The Company invests substantially all of its assets in the Master Fund, a Guernsey based closed-ended investment
company which has the same Investment Manager as the Company.
The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’
annual fee is US$ 100,000 as compensation for service on the Boards of Directors of both the Company and the
Master Fund. The Directors have the option to elect to receive Shares in the Company instead of the quarterly fee.
With respect to the year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received
2,564 Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in
relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be
determined as part of the fourth quarter 2015 dividend process. The Master Fund will pay the Directors’ fees. Paddy
Dear and Reade Griffith have waived their entitlement to a fee in respect of their services as Directors. The Directors
are entitled to be repaid by the Company all travel, hotel and other expenses reasonably incurred by them in the
discharge of their duties. None of the Directors has a contract with the Company or the Master Fund providing for
benefits upon termination of employment.
The Voting Shareholder is an affiliate of the Investment Manager and holds all of the voting shares. As a result of its
ownership and the degree of control that it exercises, the Voting Shareholder will be able to control the appointment
and removal of the Company’s Directors (subject to applicable law). Affiliates of the Voting Shareholder also control
the Investment Manager and, accordingly, control the Company’s business and affairs.
Paddy Dear, Reade Griffith, Rupert Dorey and Frederic Hervouet - all Directors of the Company and the Master Fund
– maintained (directly or indirectly) interests in Shares of the Company as at 31 December 2015, with interests of
1,401,647, 3,752,486, 102,717 and 10,133 Shares respectively (31 December 2014: 459,057, 1,377,683, 96,465 and Nil
Shares respectively). Messrs, Griffith and Dear also have a (direct or indirect) interest in the Escrow Shares (as defined
below).
As described in Note 4, TFG Asset Management L.P., including Polygon’s asset management businesses and infrastructure
platform, and interests in LCM and GreenOak, was acquired on 28 October 2012. The Shares issued in consideration are
subject to vesting and forfeiture conditions and are held in escrow for release over the period 2013 to 2017. These
escrow Shares are eligible to participate in the optional stock dividend program, and as a result of subsequent dividends,
further Shares were added to the relevant escrow accounts. As part of the Acquisition, Messrs, Griffith and Dear, as
founders of Polygon, were awarded consideration in Shares which will vest between 2015 and 2017.
22
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 8
Related Party Transactions (continued)
In particular, Messrs, Griffith and Dear were initially allocated 5,539,954 and 1,955,291 Shares, respectively, and these
are held in escrow pending release between 2015 and 2017. As at 31 December 2015, 4,443,375 Shares were held in
escrow on behalf of Mr. Griffith (31 December 2014: 6,259,363 Shares) and 1,568,250 on behalf of Mr. Dear (31
December 2014: 2,209,190 Shares).
It was also contractually agreed at the time of the Acquisition that they would be entitled to total annual compensation in
respect of their executive role with the Company and its subsidiaries totaling not more than US$ 100,000 each. During
the year ended 31 December 2015 total compensation paid to them each in this capacity by the Master Fund was US$
100,000 (31 December 2014: US$ 100,000).
Note 9
Dividends
Quarter ended 31 December 2013 of US$ 0.15 per share
Quarter ended 31 March 2014 of US$ 0.15 per share
Quarter ended 30 June 2014 of US$ 0.155 per share
Quarter ended 30 September 2014 of US$ 0.155 per share
Quarter ended 31 December 2014 of US$ 0.1575 per share
Quarter ended 31 March 2015 of US$ 0.1575 per share
Quarter ended 30 June 2015 of US$ 0.1625 per share
Quarter ended 30 September 2015 of US$ 0.1625 per share
31 Dec 2015
US$
MM
-
-
-
-
15.1
15.2
15.7
16.5
62.5
31 Dec 2014
US$
MM
14.8
14.1
14.6
14.9
-
-
-
-
58.4
The fourth quarter dividend of US$ 0.165 per share was approved by the Directors on 25 February 2016.
23
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 10
Earnings per Share
The calculation of the basic and diluted earnings per share is
based on the following data:
Earnings for the purposes of basic earnings per share being
net profit attributable to shareholders for the year
Weighted average number of Shares for the purposes of basic
earnings per share
Effect of dilutive potential Shares:
Share based employee compensation
Share options
Weighted average number of Shares for the purposes of
diluted earnings per share
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
127.3
97.1
6.6
1.7
105.5
95.1
95.4
10.7
-
106.1
Diluted earnings per share is calculated by adjusting the weighted average number of Shares outstanding assuming
conversion of all potential dilutive Shares. Share options and share based employee compensation are potential dilutive
Shares.
In respect of share based employee compensation, it is assumed that all of the Shares currently held in escrow will be
released, thereby increasing the weighted average number of Shares. This includes Shares which are scheduled to vest
and be released between 2016 and 2017.
In respect of share options, the intrinsic value of the Shares issued to the Investment Manager in connection with the
global offering in 2007 (see Note 8) is calculated using the Company’s quoted Share price on the last business day prior
to the year end. This is then converted into a number of Shares by dividing the aforementioned intrinsic value by the
aforementioned quoted Share price. This will yield the number of Shares to include in the dilution calculation.
In respect of share options issued to GreenOak, (see Note 4) a similar intrinsic value calculation is used to determine
the number of Shares to include in the dilution calculation.
24
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 11 Retained Earnings
Balance at start of year
Net increase in net assets resulting from operations for
the year
Dividends paid
Stock dividends on Shares released from Escrow
Balance at end of year
Note 12 Share based employee compensation reserve
Balance at start of year
Share based employee compensation
Release of Escrow Shares
Balance at end of year
Note 13
Subsequent Events
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
845.8
127.3
(62.5)
(7.5)
903.0
810.5
95.1
(58.4)
(1.4)
845.8
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
31.4
22.0
(33.8)
19.6
17.6
23.1
(9.3)
31.4
The Directors have evaluated the period up to 25 February 2016, which is the date the financial statements were
approved, and have concluded that there are no material events that require disclosure or adjustment to the financial
statements.
Note 14 Approval of Financial Statements
The Directors approved the financial statements on 25 February 2016.
25
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2015
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2015
CONTENTS
DIRECTORS’ REPORT
INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS
FINANCIAL HIGHLIGHTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PAGE
2
5
7
8
9
10
11
15
16
1
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT
For the year ended 31 December 2015
The Directors present to the shareholders their report together with the audited consolidated financial statements for
the year ended 31 December 2015.
THE FUND AND ITS INVESTMENT OBJECTIVE
Tetragon Financial Group Master Fund Limited (the “Fund”) was registered in Guernsey on 23 June 2005 as a company
limited by shares, with registered number 43322. All voting shares of the Fund are held by Polygon Credit Holdings II
Limited (the “Voting Shareholder”). The Fund continues to be registered and domiciled in Guernsey.
The registered office of the Fund is 1st Floor Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands,
GY1 6HJ.
The Fund'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.
As at 31 December 2015, TFG Asset Management consisted of Polygon Global Partners LP and Polygon Global
Partners LLP (collectively with certain affiliates, “Polygon”), LCM Asset Management LLC (“LCM”), Equitix Holdings
Limited (“Equitix”), Hawke's Point, the GreenOak Real Estate LP ("GreenOak") joint venture and Tetragon Credit
Income Partners ("TCIP").
TFG Asset Management L.P. is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 and
one of its investment management entities, Polygon Global Partners LLP, is authorised and regulated by the United
Kingdom Financial Conduct Authority.
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on page 8. A detailed review of activities and future developments is contained in
the Annual Report issued with these consolidated financial statements to the shareholders of Tetragon Financial Group
Limited (the “Feeder”).
DIRECTORS
The Directors who held office during the year were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet*
David Jeffreys*
Byron Knief*
* Independent non-executive Directors
The remuneration for Directors is determined by resolution of the Voting Shareholder. Each Director’s annual fee is
US$ 100,000 as compensation for service on the Board of Directors of both the Fund and the Feeder and is paid in
quarterly installments by the Fund. Paddy Dear and Reade Griffith have waived their entitlement to a fee.
2
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2015
DIRECTORS (continued)
The Directors have the option to elect to receive Shares in the Feeder instead of the quarterly fee. With respect to the
year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received 2,564 Shares in relation
to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the third
quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of the
fourth quarter dividend process.
The Directors are entitled to be repaid by the Fund for all travel, hotel and other expenses reasonably incurred by
them in the discharge of their duties. None of the Directors has a contract with the Fund or the Feeder providing for
benefits upon termination of employment.
DIVIDENDS
The Board of Directors has the authority to declare dividend payments, based upon the recommendation of the
Investment Manager, subject to the approval of the voting shares of the Fund and adherence to applicable law including
the satisfaction of a solvency test as stated under The Companies (Guernsey) Law, 2008. The Investment Manager’s
recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a
variety of considerations, including (i) the expected sustainability of the Fund’s cash generation capacity in the short and
medium term, (ii) the current and anticipated performance of the Fund, (iii) the current and anticipated operating and
economic environment and (iv) other potential uses of cash ranging from preservation of the Fund’s investments and
financial position to other investment opportunities. The Directors declared a dividend amounting to US$ 0.1575 per
Share for the Quarter Ended 31 December 2014, US$ 0.1575 per Share for the Quarter Ended 31 March 2015, US$
0.1625 per Share for the Quarter Ended 30 June 2015 and US$ 0.1625 per Share for the Quarter Ended 30 September
2015. The total dividend declared during the year ended 31 December 2015 amounted to US$ 62.5 million or US$
0.64 per Share (31 December 2014: US$ 58.4 million or US$ 0.61 per Share). On 25 February 2016, the Directors
have declared a dividend US$ 0.165 per Share for the Quarter Ended 31 December 2015.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008, requires the Directors to prepare financial statements for each financial year.
Under that law, they have elected to prepare the financial statements in conformity with U.S. generally accepted
accounting principles (“U.S. GAAP”) and applicable law.
The financial statements are required by law to give a true and fair view of the state of affairs of the Fund and of the
profit or loss of the Fund for that period.
In preparing those financial statements, the Directors are required to:
Select suitable accounting policies and apply them consistently;
Make judgments and estimates that are reasonable and prudent;
State whether applicable accounting standards have been followed, subject to any material departures
disclosed and explained in the financial statements; and
Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Fund
will continue in business.
The Directors are responsible for the keeping of proper accounting records which disclose with reasonable accuracy at
any time the financial position of the Fund and to enable them to ensure that the financial statements comply with The
Companies (Guernsey) Law, 2008. They have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Fund and to prevent and detect fraud and other irregularities.
3
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2015
STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued)
The Directors confirm that they have complied with the above requirements.
DISCLOSURE OF INFORMATION TO AUDITOR
So far as each of the Directors is aware, there is no relevant audit information of which the Fund’s auditor is unaware,
and each has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit
information and to establish that the Fund’s auditor is aware of that information.
AUDITORS
KPMG Channel Islands Limited are the appointed independent auditors of the Fund and they have expressed their
willingness to continue in office. A resolution for the re-appointment of KPMG Channel Islands Limited as auditors of
the Fund is to be proposed at the forthcoming Annual General Meeting.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
Date: 25 February 2016
4
Independent auditor’s report to the members of Tetragon Financial Group Master Fund
Limited
We have audited the consolidated financial statements (the “financial statements”) of Tetragon Financial Group Master
Fund Limited (the ”Fund” or “Group”) for the year ended 31 December 2015 which comprise the Consolidated
Statements of Assets and Liabilities, the Consolidated Statements of Operations, the Consolidated Statements of
Changes in Net Assets, the Consolidated Statements of Cash Flows, the Consolidated Condensed Schedule of
Investments, the Financial Highlights and the related notes. The financial reporting framework that has been applied in
their preparation is applicable law and U.S. generally accepted accounting principles.
This report is made solely to the Fund’s members, as a body, in accordance with section 262 of the Companies
(Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Fund’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Fund and the Fund’s members
as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors' Responsibilities set out on pages 3 and 4, the directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board's (APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances
and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates
made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the
financial and non-financial information in the annual report to identify material inconsistencies with the audited financial
statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on the financial statements
In our opinion the financial statements:
give a true and fair view of the state of the Group’s affairs as at 31 December 2015 and of its net income for
the year then ended;
are in conformity with U.S. generally accepted accounting principles; and
comply with the Companies (Guernsey) Law, 2008.
5
Independent auditor’s report to the members of Tetragon Financial Group Master Fund
Limited (continued)
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires
us to report to you if, in our opinion:
the Fund has not kept proper accounting records; or
the financial statements are not in agreement with the accounting records; or
we have not received all the information and explanations, which to the best of our knowledge and belief are
necessary for the purpose of our audit.
Chartered Accountants
Guernsey
25 February 2016
6
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
As at 31 December 2015
Assets
Investments, at fair value (Cost US$ 2,070.0 million, 31 Dec 2014: US$
1,916.4 million)
Management contracts
Cash and cash equivalents
Amounts due from brokers
Derivative financial assets
Fixed assets
Deferred tax asset
Prepaid income tax
Other receivables
Total assets
Liabilities
Derivative financial liabilities
Other payables and accrued expenses
Income tax payable
Deferred tax liability
Total liabilities
Net assets
Equity
Share capital
Share premium
Retained earnings
Capital contribution
Shares outstanding
Shares
Net Asset Value per share
Note
31 Dec 2015 31 Dec 2014
US$ MM
US$ MM
2
5
8
9
2, 3
1
17
17
10
2, 3
11
17
17
12
13
15
16, 22
1,364.7
23.4
440.4
59.9
19.4
0.5
9.2
-
21.5
1,939.0
0.7
48.5
5.8
6.6
61.6
1,356.2
29.7
402.0
52.1
19.2
0.1
10.0
0.6
32.8
1,902.7
5.8
50.5
2.9
8.6
67.8
1,877.4
1,834.9
0.1
881.1
976.6
19.6
1,877.4
0.1
888.6
914.8
31.4
1,834.9
Millions
Millions
12
95.9
95.9
US$ 19.58
US$ 19.13
The accompanying notes are an integral part of the consolidated financial statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
Date: 25 February 2016
7
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended 31 December 2015
Note
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
Interest income
Fee income
Other income – cost recovery
Insurance recovery
Dividend income
Investment income
Employee costs
Management fees
Share based employee compensation
Legal and professional fees
Amortization on intangible assets
Audit fees
Other operating and administrative expenses
Operating expenses
Net investment income
18
19
20
25
24
24
22
5
21
Net realized and unrealized gain / (loss) from investments and
foreign currency
Net realized gain / (loss) from:
Investments
Derivative financial instruments
Foreign currency transactions
Net (decrease) / increase in unrealized (depreciation) / appreciation on:
Investments
Derivative financial instruments
Translation of assets and liabilities in foreign currencies
Net realized and unrealized gain from investments and foreign
currency
Net increase from operations before tax
Income and deferred tax expense
17
Net income
The accompanying notes are an integral part of the consolidated financial statements.
8
134.7
70.2
17.3
9.8
0.1
232.1
(58.6)
(28.3)
(22.0)
(7.2)
(6.3)
(0.4)
(21.2)
(144.0)
88.1
82.7
4.8
4.9
92.4
(0.3)
8.0
(11.1)
(3.4)
89.0
177.1
(10.1)
167.0
152.5
81.1
23.6
1.0
0.1
258.3
(61.7)
(27.0)
(23.1)
(17.6)
(6.8)
(0.4)
(21.8)
(158.4)
99.9
124.4
(36.3)
12.0
100.1
(52.2)
10.2
(25.9)
(67.9)
32.2
132.1
(12.6)
119.5
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the year ended 31 December 2015
Note
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
From operations:
Net investment income
Net realized gain from investments and foreign currency
Net decrease in unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies
Income and deferred tax expense
Net income after tax
Share based employee compensation
Net increase in net assets resulting from operations
Dividends paid to Feeder in lieu of incentive fee liability
Dividends paid to shareholders
Total distributions
Issue of Shares
Purchase of Treasury Shares
Decrease in net assets resulting from capital transactions
Total increase / (decrease) in net assets
Net assets at start of year
Net assets at end of year
17
22
14
14
12
12
The accompanying notes are an integral part of the consolidated financial statements.
88.1
92.4
(3.4)
(10.1)
167.0
22.0
189.0
(35.2)
(50.5)
(85.7)
0.1
(60.9)
(60.8)
42.5
99.9
100.1
(67.9)
(12.6)
119.5
23.1
142.6
(51.5)
(52.0)
(103.5)
-
(50.9)
(50.9)
(11.8)
1,834.9
1,846.7
1,877.4
1,834.9
9
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended 31 December 2015
Operating activities
Net income
Adjustments for:
Realized gains on investments and derivatives
Cash received on investments in excess of interest income
Amortization on intangible assets
Share based employee compensation
Unrealized losses
Deferred tax
Operating cash flows before movements in working capital
Decrease / (increase) in receivables
Increase in payables
Income tax
Amounts due from brokers
Cash flows from operations
(Purchase) / sale of fixed assets
Proceeds from sale / prepayment / maturity of investments
Net proceeds / (payment) on derivative financial instruments
Purchase of investments
Net cash provided by operating activities
Financing activities
Proceeds from issue of Shares
Treasury Shares
Dividends paid to shareholders*
Dividends paid to Feeder in lieu of incentive fee liability
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of year
Year ended
31 Dec 2015
US$ MM
Year ended
31 Dec 2014
US$ MM
167.0
119.5
(72.8)
220.8
6.3
22.0
3.4
(1.2)
345.5
14.1
(2.1)
3.5
(7.8)
353.2
(0.3)
133.0
7.7
(309.0)
184.6
0.1
(60.9)
(50.5)
(35.2)
(146.5)
38.1
402.0
0.3
440.4
(88.1)
216.7
6.8
23.1
67.9
(3.8)
342.1
(6.2)
3.5
2.3
(10.2)
331.5
0.2
250.2
(28.8)
(241.5)
311.6
-
(50.9)
(52.0)
(51.5)
(154.4)
157.2
245.9
(1.1)
402.0
The accompanying notes are an integral part of the consolidated financial statements.
* The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million) with a value equivalent to
US$ 12.0 million (2014: US$ 6.4 million) elected to be taken by the dividend recipient in Shares rather than cash.
10
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS
As at 31 December 2015
Security Description
United States CLO Equity
Cayman Islands
ABS and Structured Finance
Broadly Syndicated Senior Secured Loans
CDOs Squared
Middle Market Senior Secured Loans
European CLO Equity
Ireland
Broadly Syndicated Senior Secured Loans
Luxembourg
Broadly Syndicated Senior Secured Loans
Netherlands
Broadly Syndicated Senior Secured Loans
United States CLO Mezzanine
Cayman Islands
Broadly Syndicated Senior Secured Loans
Loans
United Kingdom Loan Notes*
United Kingdom Mezzanine Loan*
United States Broadly Syndicated Senior Secured Loans
Unlisted Stock
Global Financial Real Estate Investment Manager
Norway – Equity Investments
United Kingdom – Infrastructure Asset Manager*
United States – Equity Investments
Investment Funds and Vehicles
United States – Real Estate
Japan – Real Estate
Latin America – Real Estate
Spain – Real Estate
United Kingdom – Real Estate
Global – Hedge Funds – Equities
Polygon European Equity Opportunity Fund**
Polygon Distressed Opportunities Fund***
Global – Hedge Funds – Credit and Convertible Bonds
Nominal
MM
Fair
Value
US$ MM US$ MM
Cost
% of
Net
Assets
18.4
1,125.1
17.3
133.2
1,294.0
100.4
100.4
71.1
71.1
24.0
24.0
1.8
1.8
79.5
7.7
3.4
90.6
17.6
1,028.8
16.6
123.9
1,186.9
-
510.8
-
29.8
540.6
0.00%
27.21%
0.00%
1.59%
28.80%
121.5
121.5
84.3
84.3
31.8
31.8
1.1
1.1
119.7
10.7
3.4
133.8
10.7
3.7
2.4
20.2
37.0
43.7
31.3
28.1
12.8
27.6
60.9
139.2
95.0
35.0
473.6
20.3
20.3
23.3
23.3
14.9
14.9
1.7
1.7
130.1
11.4
3.0
144.5
70.0
10.0
32.4
21.5
133.9
47.4
29.9
26.3
12.5
25.6
64.0
139.9
95.1
44.8
485.5
1.08%
1.08%
1.24%
1.24%
0.79%
0.79%
0.09%
0.09%
6.93%
0.61%
0.16%
7.70%
3.72%
0.53%
1.73%
1.15%
7.13%
2.52%
1.59%
1.40%
0.67%
1.37%
3.41%
7.44%
5.07%
2.39%
25.86%
Total Investments
2,070.0
1,364.7
72.69%
11
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2015
Financial Derivative Instruments
Forward Foreign Currency Exchange Contracts
Credit default swaps
Equity Total Return Swaps
Total Financial Derivative Instruments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Fair
Value
US$ MM
10.1
7.6
1.0
18.7
% of
Net
Assets
0.54%
0.40%
0.05%
0.99%
440.4
53.6
1,877.4
23.46%
2.86%
100.00%
* The securities held in Loan Notes, Mezzanine Loan and Infrastructure Asset Manager are the component parts of the
Fund’s investment in Equitix. See note 6 for more details.
**The investment in the Polygon European Equity Opportunity Fund consists of 436,051 units in Class A, 252,169 units
in Class B and 230,084 units in Class C as at 31 December 2015.
The stated objective of the Polygon European Equity Opportunity Fund is to seek superior risk adjusted returns. Its
stated intention is to invest predominantly in European listed equity securities, but may also invest in other asset
classes and in other non-European jurisdictions. Given the applicable notice, liquidity of up to 25% of the investment is
available on a quarterly basis (subject to certain conditions), and the entire investment could be liquidated over four
consecutive quarters.
*** The investment in the Polygon Distressed Opportunities Fund consists of 456,562 units in Class A, 311,764 units in
Class B, and 151,069 units in Class C at 31 December 2015.
The stated objective of the Polygon Distressed Opportunities Fund is to seek superior risk adjusted returns. It states
that to achieve this objective, it will invest primarily in investments (directly or indirectly) in securities, instruments and
assets that are either distressed or acquired from holders in distressed situations. Given the applicable notice, liquidity
of up to 25% of the investment is available on a quarterly basis (subject to certain conditions) subject to the
redemption occurring at least 12 months after the purchase of the shares or units to be redeemed. Accordingly, the
entire investment could be liquidated over four consecutive quarters subject to the conditions above.
12
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2014
Security Description
United States CLO Equity
Cayman Islands
ABS and Structured Finance
Broadly Syndicated Senior Secured Loans
CDOs Squared
Middle Market Senior Secured Loans
European CLO Equity
Ireland
Broadly Syndicated Senior Secured Loans
Luxembourg
Broadly Syndicated Senior Secured Loans
Netherlands
Broadly Syndicated Senior Secured Loans
United States CLO Mezzanine
Cayman Islands
Broadly Syndicated Senior Secured Loans
Loans
United States Broadly Syndicated Senior Secured Loans
Global Unsecured Loan
Listed Stock
United Kingdom – Equity Investments
Unlisted Stock
Global Financial Real Estate Investment Manager
Norway – Equity Investments
Investment Funds and Vehicles
United States – Real Estate
Japan – Real Estate
Netherlands – Real Estate
Spain – Real Estate
United Kingdom – Real Estate
Global – Hedge Funds – Equities
Polygon European Equity Opportunity Fund*
Polygon Distressed Opportunities Fund**
Global – Hedge Funds – Credit and Convertible Bonds
Nominal
MM
Fair
Value
US$ MM US$ MM
Cost
% of
Net
Assets
18.4
1,107.6
17.3
163.0
1,306.3
17.6
1,006.8
16.6
152.5
1,193.5
-
639.7
-
57.1
696.8
-
34.88%
-
3.11%
37.99%
100.4
100.4
121.5
121.5
71.1
71.1
24.0
24.0
1.8
1.8
22.4
5.5
27.9
84.3
84.3
31.8
31.8
1.1
1.1
22.0
5.5
27.5
33.3
33.3
10.7
2.4
13.1
44.9
21.4
0.2
10.9
12.7
61.0
134.2
90.0
35.0
410.3
53.0
53.0
46.8
46.8
20.3
20.3
1.7
1.7
22.1
6.4
28.5
29.4
29.4
66.5
2.8
69.3
46.1
20.3
0.1
9.5
12.3
63.3
120.8
95.5
42.5
410.4
2.89%
2.89%
2.55%
2.55%
1.10%
1.10%
0.09%
0.09%
1.20%
0.35%
1.55%
1.60%
1.60%
3.62%
0.15%
3.77%
2.52%
1.09%
0.01%
0.52%
0.67%
3.45%
6.58%
5.21%
2.32%
22.37%
Total Investments
1,916.4
1,356.2
73.91%
13
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2014
Financial Derivative Instruments
Interest Rate Swaptions
Forward Foreign Currency Exchange Contracts
Credit default swaps
Equity Total Return Swaps
Total Financial Derivative Instruments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Fair
Value
US$ MM
0.6
10.0
(4.1)
6.9
13.4
% of
Net
Assets
0.03%
0.55%
(0.23)%
0.38%
0.73%
402.0
63.3
1,834.9
21.91%
3.45%
100.00%
*The investment in the Polygon European Equity Opportunity Fund consists of 415,537 units in Class A, 242,483 units
in Class B and 228,851 units in Class C as at 31 December 2014.
The stated objective of the Polygon European Equity Opportunity Fund is to seek superior risk adjusted returns. Its
stated intention is to invest predominantly in European listed equity securities, but may also invest in other asset
classes and in other non-European jurisdictions. Given the applicable notice, liquidity of up to 25% of the investment is
available on a quarterly basis (subject to certain conditions), and the entire investment could be liquidated over four
consecutive quarters.
** The investment in the Polygon Distressed Opportunities Fund consists of 432,676 units in Class A, 295,765 units in
Class B, and 143,549 units in Class C at 31 December 2014.
The stated objective of the Polygon Distressed Opportunities Fund is to seek superior risk adjusted returns. It states
that to achieve this objective, it will invest primarily in investments (directly or indirectly) in securities, instruments and
assets that are either distressed or acquired from holders in distressed situations. Given the applicable notice, liquidity
of up to 25% of the investment is available on a quarterly basis (subject to certain conditions) subject to the
redemption occurring at least 12 months after the purchase of the shares or units to be redeemed. Accordingly, the
entire investment could be liquidated over four consecutive quarters subject to the conditions above.
14
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
FINANCIAL HIGHLIGHTS
For the year ended 31 December 2015 and 31 December 2014
The following represents selected per Share operating performance of the Fund, ratios to average net assets and total
return information for the year ended 31 December 2015 and 31 December 2014.
Per Share operating performance
Net Asset Value at start of year
Net investment income
Net realized and unrealized gain from investments, derivatives and foreign
currencies
Share based employee compensation
Dividends paid to shareholders
Income and deferred tax expense
Other capital transactions
Net Asset Value at the end of the year
Pro Forma Fully Diluted NAV per Share
Shares outstanding
Shares held in escrow
Pro Forma Fully Diluted Shares
31 Dec 2015
31 Dec 2014
US$
US$
19.13
0.91
0.92
0.23
(0.88)
(0.10)
(0.63)
19.58
18.67
1.05
0.34
0.24
(1.15)
(0.13)
0.11
19.13
Millions
95.9
6.6
102.5
Millions
95.9
10.7
106.6
Pro Forma Fully Diluted Net Asset Value per Share
US$ 18.32
US$ 17.21
Return (NAV change before dividend payments and other capital
transactions)
10.25%
8.03%
Ratios and supplemental data
Ratio to average net assets:
Total operating expenses
Net investment income
(6.41%)
4.63%
(7.39%)
5.50%
An individual shareholder’s per Share operating performance and ratios may vary from the above based on the timing of
capital transactions.
15
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2015
Note 1
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements give a true and fair view, are prepared in conformity with U.S. GAAP and comply
with The Companies (Guernsey) Law, 2008.
For financial statement reporting purposes, the Fund is an investment company and follows Financial Services –
Investment Companies (ASC 946).
The accounting policies have been consistently applied by the Fund during the year ended 31 December 2015 and are
consistent with those used in the previous year.
The consolidated financial statements are presented in United States Dollars.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the accompanying notes, including the
valuation of investments. The Fund’s management believes that the estimates made in preparing the consolidated
financial statements are reasonable and prudent, however actual results could differ materially from these estimates.
Foreign Currency Translation
Transactions in foreign currencies are translated at the foreign currency exchange rate ruling at the date of the
transaction. All assets and liabilities denominated in foreign currencies are translated to U.S. Dollars at the foreign
currency closing exchange rate ruling at the reporting date. Foreign currency exchange differences arising on
translation and realized gains and losses on disposals or settlements of monetary assets and liabilities are recognized in
the Consolidated Statements of Operations.
Foreign currency exchange differences relating to derivative financial instruments are included in foreign currency
transactions and translation of assets and liabilities in foreign currencies in the Consolidated Statements of Operations.
All other foreign currency exchange differences relating to monetary items, including cash and cash equivalents and
investments, are included in the foreign currency transactions and translation of assets and liabilities in foreign
currencies in the Consolidated Statements of Operations.
Investment Transactions and Investment Income
Investment transactions are recorded on a trade date basis (the trade date is the date that an entity commits to
purchase or sell an asset). Realized gains and losses are calculated on the identified historical cost basis. Interest income
is recognized on an effective interest rate basis.
Financial Instruments
Investments in CLO equity tranche investments (“CLO equity”), at fair value
In the absence of an active market for the equity tranche investments in securitization vehicles, a mark to model
approach has been adopted to determine their valuation. A third party valuation model that is used by the Investment
Manager and the Administrator has been selected for this purpose.
16
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1 Significant Accounting Policies (continued)
Financial Instruments (continued)
Investments in CLO equity tranche investments (“CLO equity”), at fair value (continued)
The model contains characteristics of the securitization vehicle structure, including current assets and liabilities, based
upon information derived by a specialist firm, from data sources such as the securitization vehicles’ trustee reports.
Key model inputs include projected defaults and recovery rates and reinvestment spreads for the relevant class of
underlying collateral held in the securitization vehicle. These inputs are derived by reference to a variety of market
sources, which are used by both the Investment Manager and the Administrator.
The model projects future cash flows which are discounted at the applicable rate in order to determine fair value. The
model assumptions are reviewed on a regular basis and adjusted as appropriate to take into account any changes in
observable data in relation to these inputs.
The Fund recognizes interest income and any impairment pursuant to “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (ASC 325). ASC 325 sets forth rules for
recognizing interest income and determining when an investment is impaired.
In accordance with ASC 325, the excess of the estimated future cash flows over the initial investment is the accretable
yield (or the “IRR”). At each individual coupon date, the IRR is recalculated and the new IRR is used to recognize
interest income on that particular investment until the following coupon date using the effective yield method. Cash
distributions received from investments under ASC 325 may not necessarily equal the income earned during any given
year or period. The amortized cost of each investment is equal to the initial investment plus the yield accrued to date
less all cash received to date less any write downs for impairment.
Investments in leveraged loans, at fair value
To the extent that the Fund’s leveraged loans are exchange traded and are priced or have sufficient bid price
indications from normal course trading at or around the valuation date (financial reporting date), such bid pricing will
determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value,
depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and,
most importantly, the level of actual trading activity.
Investments in CLO mezzanine tranche investments, at fair value
Investments in CLO mezzanine tranches are carried at fair value using the latest broker indicative bid prices. As the
mezzanine tranches are marked-to-market, changes in the fair value are recognized immediately in the Consolidated
Statements of Operations.
Investments in securities, listed stock, unlisted common stock and unsecured loans, at fair value
Investments in listed stock, unlisted stock and unsecured loans are carried at fair value. For listed stock, the closing
exchange price is utilized as the fair value price. For unlisted securities, their cost price, the price at which any recent
transaction in the security may have been effected and any other applicable factors may be considered, as well as
valuation techniques which may be used by market participants.
Investments in unlisted investment funds, at fair value
Investments in unlisted investment funds are valued utilizing the net asset valuations provided by the managers of the
underlying funds and / or their administrators. This approach is known as the “practical expedient” and has been
applied in accordance with the ASU 820.
17
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1
Significant Accounting Policies (continued)
Financial Instruments (continued)
Investments in real estate, at fair value
Investments where the primary purpose is to seek exposure to real estate are either made through an unlisted
investment fund structure (see “investments in unlisted investment funds, at fair value”) or, where the Fund is the sole
or majority investor in a company or partnership, which either directly or indirectly holds this exposure.
The Fund’s interests are valued by reference to net asset valuations provided by the investment advisor for the
investment and/or its administrator. The underlying real estate is revalued periodically but typically no more frequently
than on an annual basis.
Forward currency contracts, at fair value
Forward currency contracts are recognized at fair value on the date on which a derivative contract is entered into and
are subsequently re-measured at their fair value. Fair values are based on observable foreign currency forward rates,
recent market transactions, and valuation techniques, including discounted cash flow models, as appropriate. All
derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The best evidence of fair value of a forward contract at initial recognition is the transaction price. Subsequent changes
in the fair value of any forward contract are recognized immediately in the Consolidated Statements of Operations.
Interest rate swaptions, at fair value
This instrument combines the features of two other financial instruments, namely an option and an interest rate swap.
A swaption involves writing / purchasing options to enter into a swap.
When the Fund purchases a swaption, a premium is paid by the Fund and the swaption is initially recognized at the
amount of the premium. The swaption is subsequently marked-to-market to reflect the fair value of the swaption
purchased, which is reported as an asset on the Consolidated Statements of Assets and Liabilities, and changes in the
fair value are recognized immediately in the Consolidated Statements of Operations. Premiums paid on the purchase of
swaptions which expire unexercised are treated as realized losses.
Swaps and Contracts for difference
The Fund enters into swaps and contracts for difference (“CFDs”) arrangements with financial institutions. Swaps and
CFDs are typically traded on the OTC market. The arrangement generally involves an agreement by the Fund and a
counterparty to exchange the difference between the opening and closing price of the position underlying the contract,
which are generally on equity positions.
The fair value of the swap or CFD is derived by taking the difference between the quoted price of the underlying
security and the contract price. Realized and unrealized gains and losses are included in the Consolidated Statements of
Operations.
Credit default swaps
Credit default swaps are contracts in which the Fund pays or receives premium flows in return for the counterparty
accepting or selling all or part of the risk of default or failure to pay of a reference entity on which the swap is written.
Where the Fund has bought protection the maximum potential loss is the value of the premium flows the Fund is
contracted to pay until maturity of the contract. Where the Fund has sold protection the maximum potential loss is
the nominal value of the protection sold.
18
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1
Significant Accounting Policies (continued)
Financial Instruments (continued)
Credit default swaps (continued)
Credit default swaps are stated at fair value. Fair values are obtained from quoted market prices in active markets,
including recent market transactions, and valuation techniques, including discounted cash flow models, as appropriate.
The net income or expense on the swap agreements entered into by the Fund is reflected in the Statements of
Operations. Unrealized gains are reported as an asset and unrealized losses are reported as a liability in the Statements
of Assets and Liabilities. Changes in the fair value are reflected in the Statements of Operations in the period in which
they occur.
Tri-Party repurchase agreements
In a tri-party repurchase agreement, the Fund lends cash to a third party secured against collateral posted by the
borrower to a collateral agent.
At any point the Fund can recall the loan with twenty-four hour’s notice. Failure to deliver the cash will be considered
an event of default, enabling the Fund to take delivery of the collateral posted with the collateral agent.
Due to the highly liquid nature of these instruments, the amount being lent through these tri-party repos is recorded
as cash and cash equivalents in the Statements of Assets and Liabilities, with interest receivable accrued and recognized
as interest income in the Statement of Operations.
Fixed Assets
Fixed assets are stated at cost and depreciated on a straight-line basis over their estimated useful lives.
Cash and Cash Equivalents
Cash comprises current deposits with banks. Cash equivalents comprised of short-term highly liquid investments that
are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held
for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
Management Contracts
The cost of purchasing management contracts which provide investment management services to investment funds,
accounts and other vehicles are amortized over their useful lives. Management contracts are stated at cost less
accumulated amortization and impairment. The Fund reviews purchased intangible assets for impairment where there
are events or changes in circumstance that indicate the carrying value of an asset may not be recoverable.
Amortization is recognized through profit or loss in the Consolidated Statements of Operations on a straight-line basis
over the useful life of the agreements. The estimated useful life for the purposes of amortizing management contracts
ranges from three to ten years.
Principles of Consolidation
In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies
(the “Guide”), as an Investment Company, the Fund carries all investments at fair value, with the exception of the
investments detailed in the paragraph below.
19
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1
Significant Accounting Policies (continued)
Principles of Consolidation (continued)
Operating entities are consolidated where the Fund (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 Fund rather than realize a gain on the sale of the investment. This
consolidation exemption, as outlined in section 7.10 of the Guide, currently applies to the Fund’s holdings in Polygon,
LCM , Hawke's Point and TCIP (the “subsidiaries”).
These consolidated financial statements include the accounts of the Fund and its subsidiaries (collectively, the“Group”).
All significant intercompany balances and transactions have been eliminated on consolidation.
During the year, the Fund purchased an 85% economic stake in Equitix, an infrastructure asset management business.
This investment does not meet requirement (iii) of the exemption outlined above and is therefore carried at fair value.
The Fund owns 23% of GreenOak, a real estate investment manager and certain of its affiliates. It does not meet any of
the conditions of the exemption outlined above and is carried at fair value.
The Fund is the primary beneficiary of some securities which are considered variable interest entities (“VIE”). As the
Fund is accounting for its investments at fair value in accordance with the accounting guidance in the AICPA Audit and
Accounting Guide (2015): Investment Companies, all other investments in operating and non-operating entities are
carried at fair value regardless of the level of control. Consolidation of such entities is not required.
At 31 December 2015, the fair value of these VIEs is approximately US$ 1,084.6 million (31 December 2014: US$
1,227.4 million). These are non-recourse securities with no contingent liabilities where the Fund’s maximum loss
exposure is capped at the current carrying value.
Business Combinations
Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is
transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that
are substantive.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is
recorded as goodwill. When the excess is negative, a bargain purchase gain is recognized immediately in the
Consolidated Statements of Operations.
Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in
connection with a business combination are expensed as incurred.
Share Based Employee Compensation
Share-based compensation expense for all equity settled share-based payment awards granted is determined based on
the grant-date fair value. The Fund recognizes these compensation costs net of an estimated forfeiture rate, and
recognizes compensation cost only for those shares expected to meet the service and non-market performance vesting
conditions, on a straightline basis over the requisite service period of the award. These compensation costs are
determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards
with performance conditions.
20
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1 Significant Accounting Policies (continued)
Share Based Employee Compensation (continued)
The Feeder issues the shares to the employees or providers of employment like services whereas the Fund receives
the related services, and consequently the share based payments expense is recognized as a capital contribution. When
the shares are actually issued the fair value of the shares, as determined at the time of the award, is debited against
capital contribution and credited against share capital and share premium. Any associated stock dividends accrued on
the original award are debited against retained earnings and credited to share capital and share premium using the
value determined by the stock reference price at the date of each applicable dividend.
Fee Income
Fee income from management contracts is usually derived from either a base management fee, which is typically based
on assets under management, or an incentive or performance fee which is linked to the performance of the applicable
investment fund, account or vehicle. Base management fees are recognized on an accruals basis. Incentive or
performance fees are recognized only when they have crystalized, which is usually on an annual or otherwise defined
basis.
Dividend Income
Dividend income is recorded on the ex-dividend date, or when the information becomes available to the Fund.
Other Income
Where investment management, operating, infrastructure and administrative services are contractually provided to
external entities outside of the consolidated Group, these services, along with any associated direct costs are invoiced
and recorded as other income. This income is recognized on an accruals basis.
Expenses
Expenses are recognized in the Consolidated Statements of Operations on an accruals basis.
Taxation
Income taxes, Fund
The Fund is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and
is charged GBP 1,200 per annum (31 December 2014: GBP 600). The Fund has consolidated U.S. and UK operating
businesses which are subject to federal and local taxes as applicable.
Income taxes, Corporate Entities
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible
temporary differences to the extent that it is probable that future taxable profits will be available against which they can
be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that is no longer
probable that the related tax benefit will be realized.
21
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 1 Significant Accounting Policies (continued)
Income taxes, Corporate Entities (continued)
In accordance with ASC Subtopic 740-10 – Income Taxes – Overall, the Fund recognizes the effect of income tax
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. There were no uncertain tax
positions recognized at 31 December 2015 or 31 December 2014.
Dividend Expense
Dividend expense from shares are recognized in the Consolidated Statements of Changes in Net Assets.
Note 2
ASC 820, Fair Value Measurements
The Fund has adopted the provisions of “Fair Value Measurements” (ASC 820). ASC 820 defines fair value as the price
that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market
participants at the measurement date.
ASC 820 also establishes a framework for measuring fair value and a three level hierarchy for fair value measurement
based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or
unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability.
The three levels of the fair value hierarchy are described below:
Level 1 - Quoted in active markets for identical investments.
Level 2 - Prices determined using other significant observable inputs. These may include quoted prices for similar
securities, interest rates, prepayments spreads, credit risk and others.
Level 3 - Unobservable inputs. Unobservable inputs reflect assumptions market participants would be expected to use in
pricing the asset or liability.
The following is a summary of investments by asset class, derivative financial instruments and level as of 31 December
2015 in valuing the Fund’s assets and liabilities carried at fair value:
CLO Equity Tranches
CLO Mezzanine
Loans
Unlisted Stock
Forward foreign exchange contracts (asset)
Forward foreign exchange contracts (liability)
Credit default swaps
Equity total return swaps (asset)
Investments measured at Net Asset Value
Level 1
US$ MM
-
-
-
-
-
-
-
-
-
-
Level 2
US$ MM
-
1.7
3.0
10.0
10.8
(0.7)
1.0
7.6
-
33.4
Level 3
US$ MM
599.1
-
141.5
123.9
-
-
-
-
-
864.5
Total
Fair Value
US$ MM
599.1
1.7
144.5
133.9
10.8
(0.7)
1.0
7.6
485.5
1,383.4
During the year ended 31 December 2015, an unlisted stock transferred from level 3 to level 2 as a result of a regularly
published price becoming available. Additionally, under FASB 2015-07, the Fund evaluated the guidance to exclude certain
investments from fair value hierarchy and elected to adopt the new disclosure "Investments measured at Net Asset Value".
The 2014 comparatives have been adjusted to conform.
22
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 2
ASC 820, Fair Value Measurements (continued)
The following is a summary of investments by asset class, derivative financial instruments and level as of 31 December
2014 in valuing the Fund’s assets and liabilities carried at fair value:
CLO Equity Tranches
CLO Mezzanine
Loans
Unlisted Stock
Listed Stock
Interest rate swaptions
Forward foreign exchange contracts (asset)
Forward foreign exchange contracts (liability)
Credit default swaps
Equity total return swaps (asset)
Equity total return swaps (liability)
Investments measured at Net Asset Value
Level 1
US$ MM
-
-
-
-
29.4
-
-
-
-
-
-
-
29.4
Level 2
US$ MM
-
1.7
22.1
-
-
0.6
11.5
(1.5)
(4.1)
7.1
(0.2)
-
37.2
Level 3
US$ MM
816.9
-
6.4
69.3
-
-
-
-
-
-
-
-
892.6
Total
Fair Value
US$ MM
816.9
1.7
28.5
69.3
29.4
0.6
11.5
(1.5)
(4.1)
7.1
(0.2)
410.4
1,369.6
Investments measured at Net Asset Value:
The Fund holds investments in investment funds and vehicles which have been valued using the net asset value of the
underlying investment companies. This approach is known as the “practical expedient” and is in accordance with
ASC820. In addition, in line with issued guidance, the Fund has opted to remove these investments from disclosure
within the levelling hierarchy. See Note 27 for more detail.
As at 31 December 2015, the Fund held US$ 485.5 million in such investments (31 December 2014: US$ 410.4 million)
of which US$ 343.8 million was held in open ended hedge fund vehicles (31 December 2014: US$ 322.1 million). Given
applicable notice, typically liquidity in these vehicles is such that up to 25% of the investment is available on a quarterly
basis (subject to certain conditions), and the entire investment could be liquidated over four consecutive quarters. In
addition, as at 31 December 2015, the Fund held investments in closed ended real estate investment funds and vehicles
with a fair value of US$ 141.7 million (31 December 2014: US$ 88.3 million). These investments are typically held in
structures where liquidity is primarily dependent upon the sooner of the liquidation of the underlying investments and
the stated maturity of the vehicle. It is not uncommon for the expected maturity to exceed five years from the initial
investment.
The following is a reconciliation of the Fund’s assets in which significant unobservable inputs (Level 3) were used in
determining fair value at 31 December 2015.
Balance at start of year
Purchases of investments
Proceeds from sale of investments
Transfers out of level 3
Realized (loss) / gain and change in unrealized
(depreciation) / appreciation
Amortization
Balance at end of year
CLO Equity
Tranches
US$ MM
816.9
62.4
(6.5)
-
(40.2)
(233.5)
599.1
Loans
US$ MM
6.4
130.7
(6.4)
-
10.8
-
141.5
Unlisted
Stock
US$ MM
69.3
22.6
-
(10.0)
42.0
-
123.9
Total
US$ MM
892.6
215.7
(12.9)
(10.0)
12.6
(233.5)
864.5
23
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 2
ASC 820, Fair Value Measurements (continued)
The following is a reconciliation of the Fund’s assets in which significant unobservable inputs (Level 3) were used in
determining fair value at 31 December 2014.
Balance at start of year
Purchases of investments
Proceeds from sale of investments
Realized gain / change in unrealized appreciation
Amortization
Balance at end of year
CLO Equity
Tranches
US$ MM
1,120.4
84.3
(171.4)
0.3
(216.7)
816.9
Loans
US$ MM
11.1
-
(5.1)
0.4
-
6.4
Unlisted
Stock
US$ MM
28.4
2.4
-
38.5
-
69.3
Total
US$ MM
1,159.9
86.7
(176.5)
39.2
(216.7)
892.6
Quantitative information about Level 3 Fair Value Measurements
Investments in
securities
CLO Equity Tranches
Balance at 31
December 2015
US$ MM
599.1
Valuation
methodology
Unobservable
inputs
Market standard model
See investments in
CLO equity tranche
investments
Range
See below
Loans
141.5
Market standard model
Cost of financing for
loan counterparty
LIBOR +6%
- 12%
Unlisted Stock –
Global Financial Real
Estate Investment
Manager
Unlisted Stock – UK
Infrastructure Asset
Manager
Unlisted Stock – U.S.
Private Equity
Investments
70.0
Market standard model
Enterprise
Value/EBITDA
32.4
Market standard model
Market standard model
21.5
Cost adjusted by
available data points
Discounted Cash
Flows
Enterprise
Value/EBITDA
See unlisted stock
Investments in
securities
CLO Equity Tranches
Balance at 31
December 2014
US$ MM
816.9
Valuation
methodology
Unobservable
inputs
Market standard model
Loans
6.4
Market standard model
Unlisted Stock –
Global Financial Real
Estate Investment
Manager
Unlisted Stock –
Norwegian Private
Placement
66.5
Market standard model
2.8
Broker marks
24
See investments in
CLO equity tranche
investments
Cost of financing for
loan counterparty
Price / earnings ratios
Valuation as % of
assets under
management
Discount to broker
marks
12x
9.5%
5.8x
Range
See below
3 - 6%
7 - 11x
5.7 - 9.0%
10%
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 2
ASC 820, Fair Value Measurements (continued)
The fair values of the level 3 investments are sensitive to the inputs used in the valuation process. The CLO equity
valuations are sensitive to a number of different inputs to the third party model. For example, if the default rate
assumption inputs were increased, assuming all other inputs were held constant, then the fair value would decrease and
vice versa.
Equally, if the discount rates applied to projected cash flows were increased, and similarly assuming all other inputs were
held constant, then the fair value would also decrease and vice versa.
Loans
The loan investments relate to two tranches of loans advanced to Equitix as part of its acquisition by the Fund. A
mezzanine loan of £7.7 million (US$ 11.5 million) was advanced at a rate of LIBOR+6%.
Loan notes with a notional value of £79.5 million (US$ 124.9 million) and a coupon of 12% were also issued by Equitix to
the Fund as part of the transaction. Both the loan notes and the mezzanine loan have been valued at fair value plus
accrued interest.
Unlisted stock
The unlisted stock investment includes a 23% stake in GreenOak which had a fair value of US$ 70.0 million at 31
December 2015 (31 December 2014: US$ 66.5 million). The primary metric utilized to determine this valuation was an
Enterprise Value/EBITDA multiple of 12x adjusted EBITDA. The valuation calculation was prepared by a third party
valuation specialist. Given the methodology utilized, if the multiple applied to the adjusted EBITDA was decreased then
the fair value would also decrease.
It also includes the Fund’s investment in the equity of Equitix. Both a Discounted Cash Flow (“DCF”) and an Enterprise
Value/EBITDA multiple were utilised by a third party valuation specialist to determine a valuation of US$ 32.4 million. This
assumed that the Fund’s economic interest in Equitix is 74.8%, which is the level that it is expected to decline to over
time, with management owning the remainder. For the DCF a discount rate of 9.5% was applied to determine the
enterprise value before a 15% discount for lack of liquidity was applied. The Enterprise Value/EBITDA multiple was 5.8x.
As with the GreenOak valuation, if the multiple applied to the EBITDA decreased then so would the fair value. If the
discount rate applied to future cash flows was increased then the fair value would decrease.
The unlisted stock investment also includes two private equity investments and these have been valued by reference to
recently available data points. For the first investment this includes an implied valuation by reference to a new round of
funding. For the second investment this includes a valuation document produced for the company by an investment bank.
CLO equity tranches
As disclosed in Note 1, a mark to model approach has been adopted to determine the value of the equity tranche CLO
investments. 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 these CLO equity investments. Since this involves modeling, 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 the CLO equity investments, the Fund
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. Although seeking to utilize,
where possible, observable market data, for certain assumptions the Investment Manager may be required to make
subjective judgements and forward-looking determinations, and its experience and knowledge is instrumental in the
valuation process.
25
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 2
ASC 820, Fair Value Measurements (continued)
CLO equity tranches (continued)
As at 31 December 2015, some of the modeling assumptions used are disclosed below. The modeling assumptions
disclosed below are a weighted average (by U.S. Dollar amount) of the individual deal assumptions, aggregated by
geography (i.e. U.S. and European). Each individual deal’s assumptions may differ from this geographical average and vary
across the portfolio.
U.S. CLO equity tranche investments –
Constant Annual Default
Rate (“CADR”)
31 December 2015
Approximately 2.2%, which is 1.0x the
original Weighted Average Rating Factor
(“WARF”) derived base-case default rate
for the life of the transaction.
31 December 2014
Approximately 2.2%, which is 1.0x the
original Weighted Average Rating Factor
(“WARF”) derived base-case default rate
for the life of the transaction.
Recovery Rate
Prepayment Rate
Reinvestment Price and
Spread
73%, which is 1.0x of the original base-case
assumed weighted-average recovery rate,
for the life of the transaction.
73%, which is 1.0x of the original base-case
assumed weighted-average recovery rate,
for the life of the transaction.
20% p.a., the original base-case prepayment
rate with a 0% prepayment rate on bonds
throughout the life of the transaction.
20% p.a., the original base-case prepayment
rate with a 0% prepayment rate on bonds
throughout the life of the transaction.
Assumed reinvestment price is par for the
life of the transaction, with an effective
spread over LIBOR of approximately 375
bps on broadly U.S. syndicated loan deals
in their reinvestment
which are still
periods. Middle Market loan deals are all
through their reinvestment period.
Assumed reinvestment price is par for the
life of the transaction, with an effective
spread over LIBOR of approximately 294
bps on broadly U.S. syndicated loan deals
in their reinvestment
which are still
periods. Middle Market loan deals are all
through their reinvestment period.
European CLO equity tranche investments -
Constant Annual Default
Rate (“CADR”)
31 December 2015
Approximately 2.1%, which is 1.0x the
original WARF derived base-case default
rate for the life of the transaction.
31 December 2014
Approximately 2.1%, which is 1.0x the
original WARF derived base-case default
rate for the life of the transaction.
Recovery Rate
Prepayment Rate
68%, which is 1.0x of the original base-case
assumed weighted-average recovery rate,
for the life of the transaction.
68%, which is 1.0x of the original base-case
assumed weighted-average recovery rate,
for the life of the transaction.
20% p.a., the original base-case prepayment
rate with a 0% prepayment rate on bonds
throughout the life of the transaction.
20% p.a., the original base-case prepayment
rate with a 0% prepayment rate on bonds
throughout the life of the transaction.
Reinvestment Price and
Spread
All European deals are through their
reinvestment period.
All European deals are through their
reinvestment period.
When determining the fair value of the equity tranches a discount rate is applied to the expected future cash flows
derived from the third party valuation model. The discount rate applied to those future cash flows reflects the perceived
level of risk that would be used by another market participant in determining fair value. In determining the discount rates
to use an analysis of the observable risk premium data as well as the individual deal’s structural strength and credit quality
is undertaken.
26
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 2
ASC 820, Fair Value Measurements (continued)
As at 31 December 2015, for the pre-2010 vintage U.S. equity tranches, the Fund applied a 12.0% discount rate to the
expected future cashflows (31 December 2014: 12.0%). The European equity tranches are all discounted at 13.0% (31
December 2014: 13.0%). For both U.S. and European deals the aforementioned discount rates represent a significant
spread over observed yields on the applicable BB-rated CLO tranches for each geographical region at that date.
For the post-2010 vintage U.S. equity tranches, an increased level of transparency over certain data points and metrics
associated with such deals has enabled the determination of a generic discount rate for this sub-asset class. As at 31
December 2015, a discount rate of 11.0% is applied to the future projected cash flows of seasoned U.S. CLO 2.0 deals.
More recently-issued U.S. CLO 2.0 deals (within 12 months of deal closing) continue to be discounted at their respective
deal IRRs. The weighted average IRR for deals discounted using deal specific IRRs was 15.6% at 31 December 2015 (31
December 2014: 13.1%). The IRRs for such deals ranged from 14.9% to 16.1% (31 December 2014: 12.1% to 14.1%) and
the fair value of deals discounted using deal specific IRRs was 9.8% (31 December 2014: 9.9%) of the CLO equity portfolio
by fair value.
Note 3
Derivatives
The fund uses derivative financial instruments to either gain new economic exposure to an underlying asset or to hedge
an existing economic exposure.
As at 31 December 2015, the Fund had a number of forward foreign exchange contracts in place with original maturities
ranging from three months to approximately five years. The Fund typically agrees to sell foreign currency and buy U.S.
Dollars in order to hedge long non-U.S. Dollar investment positions. The total open balance as at the end of the year was
net long U.S. Dollars US$ 323.0 million, having executed 73 transactions during the year at an average notional of US$
10.5 million. (31 December 2014: net long U.S. Dollars US$ 206.9 million, having executed 59 transactions during the year
at an average notional of US$ 22.2 million).
The Fund enters into swaps and CFDs with financial institutions. The Fund utilizes these swap or CFD agreements as an
efficient means of hedging or of obtaining exposure to certain underlying investments. The Fund is subject to the risk of
the inability or refusal to perform with respect to such contracts on the part of counterparties trading with it, as well as
risks relating to the creditworthiness of the swap counterparty, market, liquidity, interest rate, fx and operations risk.
Through swaps or CFDs the Fund can in effect be exposed to increases or decreases in the value of an equity or index or
to decreases or increases in the value of a related equity or index. Depending on how they are used, the agreements may
increase or decrease the overall volatility of the portfolio and performance of the Fund. During the year to 31 December
2015, the Fund had a weighted average notional exposure of US$ 215.2 million through swaps referencing underlying
individual equity positions (31 December 2014: US$ 259.2 million).
The Fund enters into credit default swaps in order to hedge certain risks or economic exposures. As at 31 December
2015, the Fund had single name credit default protection of US$ 65.2 million notional with an average notional of US$
16.3 million, having executed seven transactions during the year. By comparison as at 31 December 2014, the Fund had
purchased single name credit default protection of US$ 151.3 million notional with an average notional of US$ 15.1 million
and having executed 10 transactions during the year.
Note 4
Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk
The Fund holds certain investments in CLO equity tranches which consist of interests in and / or economic exposures to
limited recourse securities that are subordinated in right of payment and ranked junior to other securities that are
secured by the same pool of assets. In the event of default by an issuer in relation to such investments, holders of the
issuer’s more senior securities will be entitled to payments in priority to the Fund.
27
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 4
Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk (continued)
Some of the Fund’s investments may also have structural features that divert payments of interest and / or principal to
more senior classes secured by the same pool of assets when the delinquency or loss experience of the pool exceeds
certain levels. This may lead to interruptions in the income stream that the Fund anticipates receiving from its investment
portfolio. To the extent that actual losses on the underlying collateral exceed the level of assumed losses used to
determine the fair value of the investment, the value of the investment may be reduced.
The Fund has also made investments into certain collective investment schemes. These include real estate investment
vehicles and hedge funds which have exposure to securities including equities, convertible bonds and derivatives. These
underlying investments may be in securities or assets which are illiquid and / or in different geographies around the world.
These investments may be subject to counterparty risk. Capital invested into the investment vehicles may be subject to
lock ups and gates, or subject to the realization of the underlying investments and assets. The Fund has also made
investments into equities which are directly held. These investments are subject to market and liquidity risk.
The Fund is exposed to credit risk through its investment in GreenOak investment funds and bankruptcy or insolvency of
GreenOak may cause the Fund’s rights with respect to the investment funds to be delayed or limited.
The Fund is also exposed to Equitix through a combination of the mezzanine loan, loan notes and equity investment that it
holds with respect to this entity. The loans are subordinate to another third party loan and in the event of bankruptcy or
insolvency of Equitix this may impact upon the amount which is recoverable with respect to these loans. The maximum
aggregate exposure to Equitix is disclosed in Note 6.
The Fund is exposed to counterparty risk in a number of ways. Some of the Fund's assets, including cash and cash
equivalents are held by a custodian and other financial institutions, and the Fund is exposed to the credit risk of these
counterparties. The Fund has also entered into derivative transactions which results in credit exposure to the applicable
counterparties. Concentration risk could arise as a result, notwithstanding the fact that the derivative counterparties are
major financial institutions. This risk is monitored on an ongoing basis and is managed through collateral management
including master netting agreements.
The Fund is required to disclose the impact of offsetting assets and liabilities represented in the statements of assets
liabilities to enable evaluation of the effect or potential effect of netting arrangements on its financial position for
recognized assets and liabilities.
As of 31 December 2015, the Fund holds financial instruments and derivative instruments that are eligible for offset in the
statements of assets and liabilities and are subject to a master netting arrangement. The master netting arrangement
allows the counterparty to net any collateral held on behalf of the Fund or liabilities or payment obligations of the
counterparty against any liabilities or payment obligations of the Fund to the counterparty.
28
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 4
Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk (continued)
The following table provides disclosure regarding the potential effect of offsetting of recognized assets presented in the
statement of assets and liabilities:
Gross Amounts
Offset in the
Statements of
Assets and
Liabilities
US$ MM
31 December 2015
Net Amounts
Presented in
the Statements
of Assets and
Liabilities
US$ MM
Gross
Amount of
Recognized
Assets
US$ MM
Financial
instruments
eligible for
netting
US$ MM
Cash
Collateral
received/
posted
Net
Amount
US$ MM US$ MM
19.4
19.4
0.7
0.7
-
-
-
-
19.4
19.4
0.7
0.7
(0.7)
(0.7)
(0.7)
(0.7)
-
-
-
-
18.7
18.7
-
-
Gross Amounts
Offset in the
Statements of
Assets and
Liabilities
US$ MM
31 December 2014
Net Amounts
Presented in
the Statements
of Assets and
Liabilities
US$ MM
Gross
Amount of
Recognized
Assets
US$ MM
Financial
instruments
eligible for
netting
US$ MM
Cash
Collateral
received/
posted
Net
Amount
US$ MM US$ MM
19.2
19.2
5.8
5.8
-
-
-
-
19.2
19.2
5.8
5.8
(2.1)
(2.1)
(2.1)
(2.1)
-
-
17.1
17.1
(3.7)
(3.7)
-
-
Description
Assets
Derivatives
Total
Liabilities
Derivatives
Total
Description
Assets
Derivatives
Total
Liabilities
Derivatives
Total
Note 5
Management Contracts
During 2012, the Fund acquired TFG Asset Management L.P. and certain of its affiliates. Of the assets that were
purchased, intangible assets consisting of management contracts for hedge funds and private equity funds were
identified.
29
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 5
Management Contracts (continued)
These are tested for impairment on a regular basis and are amortized over an estimated useful life as detailed below.
31 December 2015
Weighted
average
amortization
period
Gross
carrying
amount
US$ MM
Weighted
average
outstanding
amortization
period
Accumulated
amortization
Net
carrying
amount
US$ MM US$ MM
Amortizing intangible assets:
Management contracts – hedge funds
Management contracts – private
equity
Total
10 years
3 years
34.3
10.2
44.5
31 December 2014
Weighted
average
amortization
period
Gross
carrying
amount
US$ MM
Amortizing intangible assets:
Management contracts – hedge funds
Management contracts – private
equity
Total
10 years
3 years
34.3
10.2
44.5
6 years 10
months
-
Weighted
average
outstanding
amortization
period
7 years 10
months
10 months
10.9
10.2
21.1
23.4
-
23.4
Accumulated
amortization
Net
carrying
amount
US$ MM US$ MM
7.4
7.4
14.8
26.9
2.8
29.7
Aggregate amortization expense for amortizing intangible assets was US$ 6.3 million for the year ended 31 December
2015 (31 December 2014: US$ 6.8 million). Estimated annual amortization expense for the next seven years is US$ 3.4
million in years 2016 to 2021 and US$ 3.0 million in 2022.
Note 6
Equitix
On 2 February 2015, the Fund completed the acquisition of Equitix for a total enterprise value of £159.5 million (US$
239.9 million). After giving effect to all aspects of the sale and purchase agreement, the total consideration was £160.4
million (US$ 241.2 million) with the Fund directly funding £88.3 million (US$ 132.8 million) and the remainder being
funded through an external loan before fees of £60.0 million (US$ $92.3m) and a rollover of certain purchase
consideration by the Equitix management team.
The Fund’s investment is structured through the holding of a mezzanine loan, 12% ‘A’ loan notes and an equity stake.
Although the Fund currently effectively receives 85% of the economics through the percentage of loan notes that it
holds, upon repayment of the loan notes its effective economic equity share would be expected to decline to 74.8%,
with the Equitix management team owning the balance.
The purchase agreement also provided for some additional contingent consideration of up to £15.0 million, payable in
early 2017 and subject to Equitix outperforming certain elements of its business plan. This contingent payment, should
it become payable, will be contractually due from Equitix rather than the Fund and therefore is not an obligation of the
Fund.
30
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 6
Equitix (continued)
Loan notes
Mezzanine loan
Equity
Total
Note 7 GreenOak
The Fund owns a 23% interest in GreenOak which it carries at fair value.
The following table outlines the movement in fair value of the investment in GreenOak.
Opening fair value
Change in unrealized appreciation
Closing fair value
31 Dec 2015
Cost
US$ MM
119.7
10.7
2.4
132.8
Fair Value
US$ MM
130.1
11.4
32.4
173.9
31 Dec 2015
US$ MM
66.5
3.5
70.0
31 Dec 2014
US$ MM
28.4
38.1
66.5
The Fund provided GreenOak with working capital of up to US$ 10.0 million in the form of a seven year non-recourse
loan facility. Under the terms of this facility, the first US$ 5.0 million earned an annual interest rate of 3% and the balance
earned an annual interest rate of 6%. During the year, GreenOak repaid the remaining balance on the loan.
The following table outlines the movement in the fair value of the unsecured working capital facility provided by the Fund
to GreenOak.
Opening fair value
Unrealized appreciation
Paydown of loan
Closing fair value
Note 8
Cash and Cash Equivalents
Cash and current deposits with banks
Foreign currency cash with banks (cost: US$ 28.3 million (31 December 2014: US$
30.3 million))
31 Dec 2015
US$ MM
6.4
0.1
(6.5)
-
31 Dec 2014
US$ MM
11.1
0.4
(5.1)
6.4
31 Dec 2015 31 Dec 2014
US$ MM
372.7
US$ MM
412.9
27.5
440.4
29.3
402.0
Of this cash balance, US$ 225.0 million relates to amounts loaned to counterparties and secured against collateral
through tri-party agreements (31 December 2014: US$ Nil). These all have at least overnight liquidity. In addition,
approximately US$ 5.5 million was held with respect to certain capital requirements in regulated entities (31
December 2014: US$ 5.5 million).
31
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 9
Amounts Due From Brokers
The amounts due from brokers is cash pledged as collateral on the forward contracts and equity swaps. As at 31
December 2015, the collateral cash balance with UBS AG was US$ 10.7 million (31 December 2014: US$ 2.0 million),
BNP Paribas was US$ 10.3 million (31 December 2014: US$ 13.3 million) Morgan Stanley was US$ 1.4 million (31
December 2014: US$ 1.4 million) and Bank of America Merrill Lynch was US$ 37.5 million (31 December 2014: US$
35.4 million).
Note 10 Other Receivables
Accrued fee income
Cost recovery receivable
Amounts due from affiliated funds
Prepayments
Rent deposits on properties
Other receivables
Note 11 Other Payables and Accrued Expenses
Employee costs
Amounts owing to former Polygon partners (see Note 23)
Other operating and administrative expenses
Note 12 Share Capital
Authorized
31 Dec 2015
US$ MM
10.6
-
-
2.3
1.6
7.0
21.5
31 Dec 2014
US$ MM
12.1
2.2
5.8
1.9
1.7
9.1
32.8
31 Dec 2015
US$ MM
39.6
3.5
5.4
48.5
31 Dec 2014
US$ MM
41.1
3.5
5.9
50.5
The Fund has an authorized share capital of US$ 1.0 million divided into 10 voting shares, having a par value of US$ 0.001
each and 999,999,990 non-voting shares (which are the “Shares” referred to herein), having a par value of US$ 0.001
each.
Voting Shares
All of the Fund’s voting shares are issued at par and are beneficially owned by the Voting Shareholder, a non-U.S. affiliate
of the Investment Manager. The voting shares will be the only shares entitled to vote for the election of Directors and on
all other matters put to a vote of shareholders, subject to the limited rights of the Shares described below. The voting
shares are not entitled to receive dividends.
Non-Voting Shares
The Shares carry a right to any dividends or other distributions declared by the Fund. The Shares are not entitled to vote
on any matter other than limited voting rights in respect of variation of their own class rights.
Dividend Rights
Dividends may be paid to the holders of Shares at the sole and absolute discretion of the Directors. The voting shares
carry no rights to dividends.
32
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 12 Share Capital (continued)
Share Transactions
Shares in issue at 31 December 2013
Issued in lieu of stock dividend
Issued through release of tranche of Escrow Shares
Shares purchased during the year
Shares in issue at 31 December 2014
Issued in lieu of stock dividend
Issued through release of tranche of Escrow Shares
Shares purchased during the year
Shares in issue at 31 December 2015
Treasury Shares
Voting Shares
No.
Shares
No. MM
Shares
US$ MM
10
-
-
-
10
-
-
-
10
98.9
0.6
1.2
(4.9)
95.9
1.2
4.8
(6.0)
95.9
0.1
-
-
-
0.1
-
-
-
0.1
The Fund has entered into a joint arrangement with the Feeder through the establishment of TFG Holdings I. The Fund
may transfer, and has transferred, Shares previously held in a Treasury Account to TFG Holdings I. Where this occurs
the status of the Shares is unchanged from an accounting perspective and they are not included in the Shares
outstanding on the Consolidated Statements of Assets and Liabilities.
On 30 November 2007, the Feeder announced the implementation of a share repurchase program of their outstanding
Shares and this was renewed on several occasions. As at 31 December 2015, there was no share repurchase program
in place.
When the program was in operation, the Fund undertook to repurchase an identical number of its own Shares from
the Feeder as and when it made these repurchases in the open market. The Fund matched the price per Share paid by
the Feeder. The Shares are held in a Treasury Account or in TFG Holdings I allowing them to potentially be resold
back to the Feeder if it resells its own shares back into the market at a later date. Whilst they are held by the Fund
(whether directly or via TFG Holdings I), the Shares are neither eligible to receive dividends nor are they included in
the Shares outstanding on the Statements of Assets and Liabilities.
On 15 December 2015, the Feeder and the Fund announced that under the terms of a “modified Dutch auction” (the
“Tender Offer”), the Fund had accepted for purchase approximately 6.0 million Feeder non-voting shares at a purchase
price of US$ 10.00 per share and an aggregate cost of US$ 60.9 million, including applicable fees and expenses. The
Feeder exchanged an equivalent number of Fund Shares for the Feeder shares which had been repurchased. Of those
6.0 million Shares, 0.35 million Shares were transferred to TFG Holdings I and the remainder were cancelled.
As at 31 December 2015, 17.0 million Shares are held in TFG Holdings I (31 December 2014: 16.6 million) and 12.8
million Shares in the Treasury Account (31 December 2014: 12.8 million) with an aggregate attributed cost of US$
264.6 million (31 December 2014: US$ 261.0 million).
Escrow Shares
As part of the acquisition to acquire TFG Asset Management (see Note 22), the Aggregate Consideration of 11.7
million Feeder shares was moved to an escrow account where they were to be held before being released in
conjunction with the agreed vesting schedule, subject to certain forfeiture conditions. Upon the release of the Feeder
shares, the Fund agreed to issue an identical number of Shares to the Feeder. During the year 4.7 million Shares were
issued to the Feeder as a result of an equivalent number of Feeder Shares being released from escrow. Of these
approximately 4.0 million Shares were deemed to be in relation to the original Feeder escrow shares, and a value of
US$ 33.8 million was debited against Capital Contribution, using the transaction share price of US$ 8.43.
33
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 12 Share Capital (continued)
Escrow Shares (continued)
In addition, approximately 0.7 million shares were deemed to be related to the stock dividends awarded on the original
shares released and an amount of US$ 7.5 million was released against Retained Earnings, based on the stock reference
price at each applicable dividend date.
Additionally the Feeder opened a second escrow account during 2015. This is intended to hold Shares which will form
part of a long term incentive plan for certain employees of TFG Asset Management and during 2015, 5.65 million
shares were moved into this account. As and when these Feeder shares are released, the Fund has agreed to issue an
identical number of Shares to the Feeder.
Other Share Transactions
Shares brought forward at 31 December 2013
Shares purchased during the year
Shares at 31 December 2014
Shares purchased during the year
Shares at 31 December 2015
Note 13
Share Premium
Balance at start of year
Premium arising from issuance of Shares
Discount arising from purchase of Shares
Balance at end of year
Note 14 Dividends
Quarter ended 31 December 2013 of US$ 0.15 per share
Quarter ended 31 March 2014 of US$ 0.15 per share
Quarter ended 30 June 2014 of US$ 0.155 per share
Quarter ended 30 September 2014 of US$ 0.155 per share
Quarter ended 31 December 2014 of US$ 0.1575 per share
Quarter ended 31 March 2015 of US$ 0.1575 per share
Quarter ended 30 June 2015 of US$ 0.1625 per share
Quarter ended 30 September 2015 of US$ 0.1625 per share
Treasury Shares
Shares
No. MM
7.9
4.9
12.8
-
12.8
Shares held in TFG Holdings I
Shares
No. MM
16.6
-
16.6
0.4
17.0
31 Dec 2015
US$ MM
888.6
53.4
(60.9)
881.1
31 Dec 2014
US$ MM
922.4
17.1
(50.9)
888.6
31 Dec 2015
US$ MM
-
-
-
-
15.1
15.2
15.7
16.5
62.5
31 Dec 2014
US$ MM
14.8
14.1
14.6
14.9
-
-
-
-
58.4
The fourth quarter dividend of US$ 0.165 per share was approved by the Directors on 25 February 2016 and has not
been included as a liability in these consolidated financial statements.
The Fund also pays a dividend to the Feeder that is sufficient to pay their incentive fee liability. In the year ended 31
December 2015, US$ 35.2 million (31 December 2014: US$ 51.5 million) was paid.
34
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 15 Retained Earnings
Balance at start of year
Net income resulting from operations for the year
Dividends paid to shareholders
Stock dividends on Shares released from Escrow
Dividends paid to Feeder
Balance at end of year
Note 16 Capital contribution
31 Dec 2015
US$ MM
914.8
167.0
(62.5)
(7.5)
(35.2)
976.6
31 Dec 2014
US$ MM
906.6
119.5
(58.4)
(1.4)
(51.5)
914.8
Balance at start of year
Capital contribution relating to share based compensation
Release of Feeder Escrow Shares
Balance at end of year
Note 17
Income and Deferred Tax Expense
Note
1
31 Dec 2015
US$ MM
31.4
22.0
(33.8)
19.6
31 Dec 2014
US$ MM
17.6
23.1
(9.3)
31.4
Income tax for the year ended 31 December 2015 and 31 December 2014 consists of:
Year ended 31 December 2015:
U.S. Federal and local
UK
Year ended 31 December 2014:
U.S. Federal and local
UK
Current
US$ MM
12.0
(0.7)
11.3
Current
US$ MM
14.7
1.7
16.4
Deferred
US$ MM
0.6
(1.8)
(1.2)
Deferred
US$ MM
(3.1)
(0.7)
(3.8)
Total
US$ MM
12.6
(2.5)
10.1
Total
US$ MM
11.6
1.0
12.6
US$ 5.8 million of current tax was payable at the end of the year (31 December 2014: US$ 2.9 million) with US$ Nil
receivable (31 December 2014: US$ 0.6 million).
Tax Rate Reconciliation
Income tax expense was US$ 10.1 million for the year ended 31 December 2015 (31 December 2014: US$ 12.6
million) and differed from the amounts computed by applying the U.S. Federal income tax of 35% to pretax increase in
the net assets as a result of the following:
Net increase in operations before tax
Computed “expected” tax expense at 35% (2014: 35%)
Deduction in income taxes resulting from:
Income not subject to U.S. tax
State and local income taxes
Total income and deferred tax expense
35
31 Dec 2015
US$ MM
177.1
31 Dec 2014
US$ MM
132.1
62.0
(55.1)
3.2
10.1
46.2
(37.7)
4.1
12.6
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 17
Income and Deferred Tax Expense (continued)
Deferred Tax
Deferred tax assets
Employee compensation payments
Loss carried forward
Total deferred tax assets
Deferred tax liabilities
Undistributed earnings
Intangible assets
Total deferred tax liabilities
Net deferred tax assets
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
9.2
-
9.2
0.8
5.8
6.6
2.6
10.0
-
10.0
0.8
7.8
8.6
1.4
Deferred tax assets include US$ 9.2 million (31 December 2014: US$ 10.0 million) relating to amounts accrued for
employee compensation in 2015 which will only be an allowable expense in 2016 for tax purposes.
US$ 5.8 million (31 December 2014: US$ 7.8 million) is being recognized as a deferred tax liability due to the
amortization on management contracts being a disallowable expense for tax purposes. This will be released over time
as the management contracts are amortized. US$ 0.8 million has also been recognized as a liability with respect to
applicable undistributed earnings at a withholding rate of 5%.
Note 18
Interest Income
Debt securities – CLO equity tranches and mezzanine tranches
Debt securities – Loans
Debt securities – Unsecured loans
Cash and other
Note 19
Fee Income
Management fees
CLO
Hedge Funds and private equity
Performance fees
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
119.5
0.6
14.4
0.2
134.7
150.5
1.3
0.4
0.3
152.5
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
30.3
25.6
14.3
70.2
33.1
28.5
19.5
81.1
CLO management fee income generally comprises senior and subordinated fees and in aggregate these fees currently
range from 25 bps to 50 bps per annum of collateral under management. In addition to fee income earned on CLOs
directly managed it also includes fee income derived from a number of one-off and recurring fee sharing arrangements
with third parties. In the year to 31 December 2015 these third party fees generated US$ 8.6 million (31 December 2014:
US$ 11.7 million).
Hedge fund management fees charged to external investors are typically 150 bps of net assets under management and
depending upon the applicable fund and share class certain other expenses may also be recovered. Management fees paid
in connection with the private equity style vehicle are either 200 bps of net assets under management or a fixed declining
management fee depending on the applicable class.
36
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 19
Fee Income (continued)
Performance or incentive fees may be earned on hedge fund vehicles contingent upon the terms of each vehicle and the
share class where applicable. They may also be earned through management of CLO vehicles once the vehicle has
generated a specified return for the equity, or subordinated, tranche. During the year, such fees totaling US$ 14.3 million
were earned (31 December 2014: US$ 19.5 million).
Where the Fund invests in Polygon hedge fund or other investment vehicles, it is able to invest at a preferred level of fees.
The fees received by such affiliated managers from the Fund’s investment are included and recognized in fee income
reported in the Fund’s Consolidated Statements of Operations. During the year, these fee income amounts were US$ 4.4
million of management fees (31 December 2014: US$ 4.3 million) and US$ 1.8 million of performance fees (31 December
2014: US$ 1.8 million). The Fund also invests on preferred fee terms with its other affiliated asset managers (i.e. LCM and
GreenOak).
Where the Fund is seeding an investment vehicle or otherwise supporting its development, the vehicle’s investment
manager may also recharge certain additional costs or fee equivalents, to the Fund’s investment in that vehicle. In 2015 the
amount of fee equivalents recharged under these arrangements by Polygon hedge fund managers was US$ 6.5 million
(2014: US$ 7.0 million).
Note 20 Other income
These include costs which are allocated to, and recovered from, the Investment Manager, GreenOak and Polygon Private
Investment Partners LP pursuant to applicable separate services agreements, as well as the recovery of certain premises
related costs from third party tenants.
See Note 24 for a full explanation of the cost allocation methodology as well as the amounts charged to each of the
related parties.
Employee costs
Legal and professional fees
Technology
Premises
Other
Note 21 Other operating and administrative expenses
Premises
Technology
Other
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
12.1
0.3
1.6
2.5
0.8
17.3
16.4
0.4
2.5
3.3
1.0
23.6
31 Dec 2015
US$ MM
31 Dec 2014
US$ MM
8.9
6.0
6.3
21.2
9.5
6.3
6.0
21.8
Note 22 Share Based Employee Compensation
On 28 October 2012, TFG Asset Management L.P. and certain of its affiliates were acquired in exchange for consideration
of approximately 11.7 million non-voting shares of the Feeder to the sellers (the “Aggregate Consideration”).
37
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 22 Share Based Employee Compensation (continued)
The Aggregate Consideration is held in escrow (along with accrued stock dividends), by the escrow agent pursuant to the
terms of the escrow agreement. The first tranches were released in 2013, 2014 and 2015 with the remainder to be
released over the period 2016 and 2017.
Under ASC 805 - Business Combinations ("ASC 805") these shares were treated as payment for post combination
services rather than upfront consideration. The Fund recognizes the individual compensation costs on a straight line basis
over the relevant service period of each award if the vesting performance conditions are met. These are reflected in the
Consolidated Statements of Operations as share based employee compensation and through Equity as a separate reserve.
The charge for the year ended 31 December 2015 amounted to US$ 22.0 million (31 December 2014: US$ 23.1 million).
The table below shows the number of Feeder shares which are currently expected to vest over the period to 2017,
including accrued stock dividends up to the end of December 2015. These shares are all entitled to any future stock
dividends prior to their release from escrow and so the actual amount of shares vesting each year may be higher. Upon
the release of the Feeder shares from escrow, the Fund will issue an identical number of Shares to the Feeder.
Vesting Schedule – Shares as at 31 December 2015
2016
2017
2015
2016
2017
Shares MM
3.6
3.0
6.6
Vesting Schedule – Shares as at 31 December 2014
Shares MM
4.5
3.4
2.8
10.7
US$ MM
16.6
12.6
29.2
US$ MM
23.1
16.6
12.6
52.3
Note 23 Contingencies and Commitments
On 16 September 2010, the Fund committed to GreenOak to provide a co-investment commitment of up to US$ 100.0
million into GreenOak investment vehicles. As at 31 December 2015, in relation to this particular co-investment
commitment, GreenOak had given the Fund notice totalling US$ 79.5 million across multiple investment vehicles, of which
US$ 51.2 million had actually been drawn down and funded (31 December 2014: US$ 40.2 million). In certain cases, the
Fund has also made additional commitments outside of the co-investment agreement and in aggregate, the Fund has
estimated total unfunded commitments of US$ 103.8 million in respect of GreenOak investment vehicles (31 December
2014: US$ 84.6 million). The total actual amount ultimately drawn may be lower than this estimated maximum amount.
Future minimum lease payments under noncancelable operating leases as of 31 December 2015 are:
2015
2016
2017
2018
2019
2020
2021
2022
31 Dec 2015
US$ MM
-
5.3
5.5
3.0
2.8
2.8
2.8
2.5
24.7
38
31 Dec 2014
US$ MM
5.5
5.5
4.8
0.2
-
-
-
-
16.0
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 23 Contingencies and Commitments (continued)
During 2015, the amount paid with respect to such leases was US$ 5.4 million (31 December 2014: US$ 5.7 million).
Note 24 Related Party Transactions
The Feeder, a Guernsey based closed-ended investment company, invests substantially all of its assets in the Fund, and has
the same Investment Manager as the Fund.
All fees and expenses of the Feeder and the Fund (including management fees), except for the incentive fees, are paid by
the Fund and allocated to the Feeder. An incentive fee may be paid to the Investment Manager by the Feeder.
The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’
annual fee is US$ 100,000 as compensation for service on the Boards of Directors of both the Feeder and the Fund. The
Directors have the option to elect to receive shares in the Feeder instead of the quarterly fee.
With respect to the year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and received 2,564
Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in
relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be
determined as part of the fourth quarter 2015 dividend process.
The Fund will pay the Directors’ fees. Paddy Dear and Reade Griffith have waived their entitlement to a fee in respect of
their services as Directors. The Directors are entitled to be repaid by the Fund for all travel, hotel and other expenses
reasonably incurred by them in the discharge of their duties. None of the Directors has a contract with the Feeder or the
Fund providing for benefits upon termination of employment.
The Voting Shareholder, which holds all of the voting shares, was an affiliate of Polygon and continues to be an affiliate of
the Investment Manager. As a result of its ownership and the degree of control that it exercises, the Voting Shareholder
will be able to control the appointment and removal of the Fund’s and Feeder’s Directors (subject to applicable law).
Affiliates of the Voting Shareholder also control the Investment Manager and, accordingly, control the Fund’s business and
affairs.
TFG Asset Management L.P., including Polygon’s asset management businesses and infrastructure platform and interests in
LCM and GreenOak, were acquired on 28 October 2012 (the “Acquistion”). As part of the Acquisition, Reade Griffith
and Paddy Dear, as founders of Polygon, were awarded consideration in non-voting shares of the Feeder, which vest
between 2016 and 2017.
It was contractually agreed as part of the Acquisition that to the extent any annual compensation actually paid to each of
Mr. Griffith and Mr. Dear in respect of his employment with the Fund exceeds an annual base salary of US$ 100,000, they
would promptly return such excess amount to the Fund. During the year ended 31 December 2015 total compensation
paid to them each in aggregate was US$ 100,000 (31 December 2014: US$ 100,000).
As at 31 December 2015, in connection with the Acquisition, US$ 3.5 million in aggregate is owed to Reade Griffith and
Paddy Dear, directly or via an entity to which they may direct payment (31 December 2014: US$ 3.5 million). This payable
primarily relates to the repayment of certain rent deposits funded through Polygon entities by Messrs Griffith and Dear
before the Acquisition. Under the terms of the sale and purchase agreement relating to the Acquisition, Messrs Griffith
and Dear retained the economic rights to such deposits.
Reade Griffith and Paddy Dear continue to hold membership interests in Polygon Global Partners LLP (the “UK
Investment Manager” or "PGP LLP") which collectively entitle them to exercise all of the voting rights in respect of the
UK Investment Manager. As part of the Acquisition, each of Mr. Griffith and Mr. Dear has agreed that he will (i) exercise
his voting rights in a manner that is consistent with the best interests of the Fund and (ii) upon the request of the Fund,
for nominal consideration, sell, transfer and deliver his membership interests in the UK Investment Manager to the Fund.
39
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 24 Related Party Transactions (continued)
Reade Griffith and Paddy Dear also hold membership interests in Pace Cayman Holdco Limited (“Pace Holdco”), an entity
through which the Fund ultimately owns its equity stake in Equitix. These membership interests collectively entitle them
to exercise all of the voting rights in respect of Pace Holdco. Each of Mr. Griffith and Mr. Dear has agreed that he will (i)
exercise his voting rights in a manner that is consistent with the best interests of the Fund and (ii) upon the request of the
Fund, for nominal consideration, sell, transfer and deliver his membership interests in the Pace Holdco to the Fund.
Polygon Global Partners LLP and Polygon Global Partners LP (together the “Service Providers”) provide operational,
financial control, trading, marketing and investor relations, legal, compliance, administrative, payroll and employee benefits
and other services to the Investment Manager in exchange for fees payable by the Investment Manager to the Services
Providers. One of these entities, Polygon Global Partners LLP, which is authorized and regulated by the United Kingdom
Financial Conduct Authority, also provides services to the Investment Manager relating to the dealing in and management
of investments, arranging of deals and advising on investments. In addition, the Services Providers also provide certain
operating, infrastructure and administrative services to GreenOak and Polygon Private Investment Partners LP, an affiliate
of the Voting Shareholder, pursuant to applicable separate services agreements.
TFG Asset Management, through the Service Providers has implemented a cost-allocation methodology with the objective
of allocating service-related costs, including to the Investment Manager. TFG Asset Management then charges fees for the
services allocated on a cost-recovery basis that is designed to achieve full recovery of the allocated costs. In the year the
amount recharged to the Investment Manager was US$ 13.9m (31 December 2014: US$ 16.4 million), GreenOak US$ 2.4
million (31 December 2014: US$ 5.4 million) and Polygon Private Investment Partners LP US$ 0.1 million (31 December
2014: US$ 0.1 million). As at 31 December 2015, the amount (payable) / receivable relating to these recharges was US$
(0.1) million (31 December 2014: US$ 2.1 million).
The Fund holds CLO equity investments in CLOs which are managed by LCM. During the year end it purchased a portion
of the equity tranche in LCM XVIII at a cost of US$ 27.8 million and LCM XIX at a cost of US$ 34.6 million. In total, as at
31 December 2015, it held CLO equity tranche investments in 14 CLOs managed by LCM with a fair value of US$ 224.1
million (31 December 2014: US$ 208.3 million).
At 31 December 2015, the Fund held investments across several hedge funds managed by Polygon. These hedge funds
employ investment strategies involving investing in equities, convertible bonds, credit and derivatives. As at 31 December
2015, the fair value of these investments was US$ 338.1 million (31 December 2014: US$ 315.9 million). The fees paid on
these investments are disclosed as per Note 20.
The Fund owns a 23% equity interest in GreenOak. As part of the original transaction to acquire a share in GreenOak,
the Fund provided a US$ 100.0 million coinvestment commitment and a US$ 10.0 million working capital loan
commitment to GreenOak, with the Feeder issuing 3.9 million share options to the GreenOak founders. On 28 October
2012, as a result of the Acquisition the Fund increased its working capital loan commitment by an additional US$ 0.5
million by assuming the acquiree’s remaining unfunded commitment. During 2015, the working capital loan was fully
repaid.
The Fund has made investments across several real estate investment vehicles managed by GreenOak. As at 31
December 2015, these investments referenced real estate in the United States, Japan and Europe with a combined net
asset value of US$ 115.4 million (31 December 2014: US$ 88.3 million). These investments are typically illiquid where the
Fund will only receive distributions on liquidation of the investment vehicle’s underlying assets and in some cases this may
not be for several years. In addition, based on projected capital raised (subject to change), the Fund had estimated
unfunded commitments of up to US$ 103.8 million with respect to the investment vehicles (31 December 2014: US$ 84.6
million).
40
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2015
Note 25 Other Matters
The Fund has recovered from insurers costs relating to shareholder derivative actions, details of which were referred
to in note 25 of the 2014 Fund audited consolidated financial statements. During the year US$ 9.8 million was received
(31 December 2014: US$ 1.0 million). The Fund does not expect to recover any further costs in relation to these
actions.
Note 26
Subsequent Events
The Directors have evaluated the period up to 25 February 2016, which is the date that the financial statements were
approved, and have concluded that there are no material events that require disclosure or adjustment to the financial
statement.
Note 27 Recent changes to U.S. GAAP
In May 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to address diversity in practice
related to how certain investments measured at net asset value (“NAV”) are reported within the financial statement
footnotes. The new guidance removes the requirement to categorise investments measured under the current NAV
practical expedient within the fair value hierarchy for all investments. The amendments also remove the requirement
to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV practical
expedient.
Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using
that practical expedient. The guidance will be effective in the first quarter of 2016 and is required to be applied
retrospectively, although early adoption is permitted. The Fund has evaluated the effect of this guidance and has opted
to early adopt with the results of this change being disclosed in Note 2.
In August 2014, the FASB issued guidance to address diversity in the accounting for differences in the measurement of
the fair values of financial assets and liabilities of consolidated financing VIEs. The new guidance provides an alternative
for consolidated financing VIEs to elect: (1) to measure their financial assets and liabilities separately under existing U.S.
GAAP for fair value measurement with any differences in such fair values reflected in earnings; or (2) to measure both
their financial assets and liabilities using the more observable of the fair value of the financial assets or the fair value of
the financial liabilities. The guidance will be effective in the first quarter of 2016, with early adoption permitted. The
Fund is evaluating the effect of this guidance on its financial statements.
Note 28 Approval of Financial Statements
The Directors approved the consolidated financial statements on 25 February 2016.
41