2016
Annual
Report
TETR AGON FIN A NCI A L G ROUP LIMITED
2
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Contents
1 Strategic Review
Letter to Our Shareholders
Investment Objective & Strategy
Key Performance Metrics
Investment Review
Risk Factors
2 Governance
Board of Directors
Audit Committee
The Investment Manager
Directors’ Report
Directors’ Statements
The AIC Code
Additional Information
3 2016 Financial Review
Financial Highlights
Adoption of IFRS
Consolidated Statement of Income
10
13
15
16
23
28
32
33
38
41
42
47
49
50
51
Consolidated Statement of Financial Position 52
Statement of Cash Flows
IFRS to U.S. GAAP Reconciliations
4 Other Information
TFG Asset Management Overview
Corporate Responsibility
Historical Share Repurchases
Share Reconciliation and Shareholdings
Additional CLO Portfolio Statistics
Fair Value Determination of CLO Equity
Certain Regulatory Information
Equity-Based Compensation Plans
Shareholder Information
5 Audited Financial Statements
Independent Auditor's Report
Audited Financial Statements
53
54
57
66
67
68
70
72
73
74
75
77
79
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
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4
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
ZUBEEN KHAN
POLYGON
TETRAGON(1) is a closed-ended investment
company that invests in a broad range of
assets, including bank loans, real estate,
equities, credit, convertible bonds and
infrastructure and TFG Asset Management,
a diversified alternative asset management
business. Where sensible, through TFG
Asset Management, Tetragon seeks to own
all, or a portion, of asset management
companies with which it invests in order
to enhance the returns achieved on its
capital. Tetragon’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 is traded on Euronext
in Amsterdam N.V. and on the Specialist
Fund Segment of the main market of the
London Stock Exchange.
*
To view company updates visit:
www.tetragoninv.com
(1) Tetragon Financial Group Limited is referred to in this report as Tetragon.
Tetragon invests substantially all its capital through a master fund, Tetragon
Financial Group Master Fund Limited (Tetragon Master Fund), in which it holds
100% of the issued and outstanding non-voting shares. In this report, unless
otherwise stated, we report on the consolidated business incorporating both
Tetragon and the Tetragon Master Fund. References to “we” are to Tetragon
Financial Management LP, Tetragon’s investment manager.
*See note on page 7.
5
5
DOMINIC LYNCH
POLYGON
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Delivering Results Since 2005(1)
NAV Per Share Total Return(2)
+8.5%
+36%
+87%
+189%
ONE YEAR
to 31 December 2016
THREE YEARS
to 31 December 2016
FIVE YEARS
to 31 December 2016
SINCE APRIL 2007 IPO
to 31 December 2016
Investment Returns/Return on Equity (RoE)(3)
10-15%
12.7%
6.3%
ROE TARGET
Annualised Range
AVER AGE ROE
Since April 2007 IPO
2016 ROE
31 December 2016
Share Price Total Return(4)
+33%
+48%
+164%
+139%
ONE YEAR
to 31 December 2016
THREE YEARS
to 31 December 2016
FIVE YEARS
to 31 December 2016
SINCE APRIL 2007 IPO
to 31 December 2016
Dividends
5.5%
2x
DIVIDEND YIELD
31 December 2016
DIVIDEND COVER (5)
31 December 2016
Building Value
$1.9B
NET ASSET VALUE
31 December 2016
9.4%
QUARTERLY DIVIDEND
FIVE-YEAR CAGR
Per annum
to 31 December 2016
Alignment
24%
PRINCIPAL & EMPLOYEE
OWNERSHIP(6)
31 December 2016
6
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Notes
Page 5:
As of 31 December 2016, Tetragon has an overall five-star Morningstar
Rating, as well as five stars over both three and five years.
Page 6:
(1) Tetragon commenced investing as an open-ended investment
company in 2005, before its IPO in April 2007.
(2) NAV Per Share total return to 31 December 2016, for the last year,
the last three years, the last five years, and since Tetragon’s initial
Morningstar, Inc. rates investments from one to five stars based on how
public offering in April 2007 as sourced from Bloomberg. NAV Per Share
well they have performed in comparison to similar investments, after
Total Return is determined in accordance with the “NAV total return
adjusting for risk and accounting for all relevant sales charges. Within
performance” calculation as set forth on the Association of Investment
each Morningstar Category, the top 10% of investments receive five
Companies (AIC) website. Tetragon’s NAV Per Share total return is
stars, the next 22.5% four stars, the middle 35% three stars, the next
determined for any period by calculating, as a percentage return on the
22.5% two stars, and the bottom 10% receive one star. Investments
Fully Diluted NAV Per Share (NAV Per Share) at the start of such period,
are rated for up to three time periods – 3, 5, and 10 years – and these
(i) the change in NAV Per Share over such period, plus (ii) the aggregate
ratings are combined to produce an overall rating. Investments with less
amount of any dividends per share paid during such period, with any
than three years of history are not rated. Morningstar states that ratings
dividend deemed reinvested at the NAV Per Share at the month end date
are objective and based entirely on a mathematical evaluation of past
closest to the applicable ex-dividend date (i.e., so that the amount of any
performance.
Tetragon has subscribed to Morningstar EssentialsTM, for which it has paid
a fee to enable it to use the Morningstar RatingTM on Tetragon’s website
dividend is increased or decreased by the same percentage increase or
decrease in NAV Per Share from such ex-dividend date through to the
end of the applicable period). NAV Per Share is calculated as Net Assets
divided by Fully Diluted Shares Outstanding. Please refer to page 49 for
and other investor materials.
further details.
Further information is available on Morningstar’s website at
http://www.morningstar.co.uk/.
*©2016 Morningstar UK Limited. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete, or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any
use of this information. Past performance is no guarantee of future
results. For more detailed information about Morningstar Rating,
including its methodology, please go to http://corporate.morningstar.
com/US/documents/MethodologyDocuments/MethodologyPapers/
MorningstarFundRating_Methodology.pdf
(3) Tetragon seeks to deliver 10-15% Return on Equity (RoE) per annum
to shareholders. Tetragon’s returns will most likely fluctuate with LIBOR.
LIBOR directly flows through some of Tetragon’s investments and, as
it can be seen as the risk-free short-term rate, it should affect all of
Tetragon’s investments. In high-LIBOR environments, Tetragon should
achieve higher sustainable returns; in low-LIBOR environments, Tetragon
should achieve lower sustainable returns.
(4) Total shareholder return to 31 December 2016, defined as share price
appreciation including dividends reinvested, for the last year, the last
three years, the last five years, and since Tetragon’s initial public offering
in April 2007.
(5) EPS divided by Dividends per Share at 31 December 2016.
(6) Shareholdings at 31 December 2016 of the principals of Tetragon’s
investment manager and employees of TFG Asset Management, including
all deferred compensation arrangements. Please refer to the 2016 Audited
Tetragon Financial Group Master Fund Limited financial statements for
more details of these arrangements.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Company Highlights
Tetragon aims to provide stable returns to investors across various credit, equity,
interest rate, inflation and real estate cycles.
FIGURE 1
Tetragon Financial Group - Performance Summary
Net Assets
Fully Diluted NAV Per Share
Share Price(1)
Dividend
Ongoing Charges(2)
Investment Returns/Return on Equity(3)
NAV Per Share Total Return(4)
Share Price Total Return(5)
Tetragon Hurdle: LIBOR +2.65%(6)
MSCI ACWI Index(7)
FTSE All-Share Index Total Return(7)
31 December 2016
31 December 2015
$1,934.9m
$20.01
$12.30
$0.6725
1.64%
$1,987.3m
$19.08
$9.91
$0.6475
1.70%
FIGURE 2
Tetragon's NAV Per Share Total Return and Share Price Since IPO
Change
$(52.4)m
$0.93
$2.39
$0.0250
-
6.3%
8.5%
32.7%
3.4%
8.5%
16.8%
188.7%
138.5%
63.0%
43.8%
40.3%
7
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TFG NAV per Share Total Return(4)
TFG Share Price Total Return(5)
MSCI ACWI Total Return(7)
TFG Hurdle(6)
FTSE All-Share Total Return(7)
(1) Based on TFG.NA.
(2) The Ongoing Charges figure comprises all direct recurring expenses to Tetragon expressed as a percentage of average Net Assets, and includes the annual management fee of 1.5%.
(3) Please see Note 3 on page 7.
(4) Please see Note 2 on page 7.
(5) Please see Note 4 on page 7.
(6) Cumulative return determined on a quarterly compounding basis using the actual Tetragon quarterly incentive fee LIBOR-based hurdle rate. In the period from IPO to June 2008
this was 8%; thereafter, the hurdle has been determined using the three- month USD LIBOR rate on the first day of each calendar quarter plus a spread of 2.647858%.
(7) 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 ele-
ment of risk.
The indices shown here have not been selected to represent an appropriate benchmark to compare an investor's performance, but rather is 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, Tetragon's holdings may differ significantly from the securities that comprise the indices. The MSCI ACWI captures large and mid cap repre-
sentation across 23 Developed Markets and 23 Emerging Markets countries. With 2,484 constituents, the index covers approximately 85% of the global investable equity opportunity
set. Further information relating to the index constituents and calculation methodology can be found at https://www.msci.com/acwi. The FTSE All-Share Index represents 98-99% of
UK market capitalisation and is the aggregate of the FTSE 100, FTSE 250 and FTSE Small Cap indices. Further information relating to the index constituents and calculation meth-
odology can be found at http://www.ftse.com/products/indices/uk.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
200%
150%
100%
50%
0%
(50%)
(100%)
Strategic
Review
PAUL GANNON
CHIEF FINANCIAL OFFICER
Letter to Our Shareholders
We are pleased to report that 2016 was
a good year in a number of respects for
Tetragon – with an investment return on
equity (RoE) of 6.3%, a NAV Per Share
total return of 8.5% and a share price
total return of 32.7%. Although Tetragon’s RoE
is below the company’s target of 10-15%, that target is
over the long-term investment cycle; Tetragon’s 10-year
average RoE is 12.7%. Furthermore, as has been said before,
Tetragon may achieve lower sustainable returns in a low-
LIBOR environment.
The year was characterised by significant political events –
Brexit, the election of Donald Trump – and yet, despite the
uncertainty and volatility introduced by these events, many
global equity indices were near or above all-time highs. In
addition, central banks continued to support economies
through monetary easing, with the yield on U.S. 10-year
Treasuries reaching 2.4%. Globally, roughly $11 trillion of
global debt was trading with negative yields by the end of
the year. Investors, many looking for yield, continued to
purchase fixed income instruments, from investment grade
to high yield. Although Tetragon’s investment manager
does not believe that any macro-economic environment is
“easy”, the current state of increased political uncertainty
and more fully-priced assets underscores the investment
manager’s view that Tetragon’s current portfolio of
predominantly alternative investments may help to
minimise various emerging risks in global capital markets.
We expect the company’s portfolio, over the long term, to
continue to compare favourably relative to broad indices
of risk assets and also believe that the company’s portfolio
may perform well across a wide range of different macro-
economic environments.
Tetragon’s investment manager takes a deliberate approach
to investment opportunities. It believes that one of the
best ways to generate attractive returns, particularly
in the context of alternative investments, is to focus on
capacity-constrained strategies. Where sensible, the
investment manager has pursued those opportunities
through the company’s own asset management business,
leveraging Tetragon’s capital and TFG Asset Management’s
infrastructure, investment teams and risk management
processes.
The three largest contributors to performance in 2016 were
the company’s allocations to CLOs, the Equitix(1) business
that is part of TFG Asset Management, and investments
made directly on Tetragon’s balance sheet described as
“other equities and credit”. In addition, all of the company’s
major asset classes were positive.
TFG Asset Management’s major contributor was Equitix,
which continued its strong investment performance
and asset raising. Also of note, TFG Asset Management
continues to grow Tetragon Credit Income Partners (TCIP),
which is the general partner of Tetragon Credit Income II
(TCI II), a private equity vehicle that, among other things,
makes investments in CLOs created by CLO managers to
comply with risk retention rules. TCI II currently has $300.4
million of commitments from third-party investors and
Tetragon. Tetragon intends to continue to access primary
CLO equity investments through TCI II (and subsequent
vehicles of this type).
The performance of the company’s largest hedge fund
investments was particularly strong, outperforming the
HFRI benchmark indices in most instances. TFG Asset
Management’s Polygon(2) funds were recognised for a
number of industry awards for their performance in 2016.
The Polygon Convertible Opportunity Fund won the
EuroHedge Award in the Convertibles & Volatility category
for the fourth time in the last six years and was also
awarded Alt Credit Europe’s “Convertible Arbitrage” award;
the Polygon Distressed Opportunity Fund was nominated
for performance awards by EuroHedge, Alt Credit U.S. and
Allocator Investor’s Choice; and Polygon won the Alt Credit
Europe “Management Firm of the Year” award and was
nominated for the EuroHedge “Management Firm of the
Year” award for the first time.(3)
Tetragon’s share price outpaced its NAV Per Share total
return, with the share price rising by 33% on a total-
return basis. Despite this outperformance, the shares still
traded at a 39% discount to NAV Per Share at year-end.
The company and its investment manager believe that a
principal focus of activity should be on the generation of
an attractive NAV Per Share total return. If the company can
continue to do so, we hope that Tetragon’s share price will
more fully reflect its NAV Per Share.
(continued)
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Together with Tetragon’s corporate brokers, Stifel Nicolaus
Europe and Cantor Fitzgerald Europe, the investment
manager has embarked on an effort to increase investor
awareness of the company. Bloomberg and Morningstar
now publish data relevant to closed-ended investment
companies, and Tetragon has joined the Association
of Investment Companies (AIC), the trade body for
closed-ended investment companies. Tetragon also
has commissioned Edison Investment Research Limited
(Edison) to publish a report regarding the company and
expects Edison to publish updates on a quarterly basis.
The investment manager focused on the U.K. broking
community and a number of brokers have issued research
and desk notes. In addition, the investment manager
continues to meet broadly with shareholders; efforts which
will continue in 2017.
In 2016, the NAV Per Share total return was boosted by
share repurchases totaling $157.8 million (or 14.9 million
shares). Tetragon is approaching its tenth anniversary
as a public company. During that time, it has returned
$543.2 million to shareholders via share repurchases. At
the end of the year, inclusive of these share repurchases,
net cash levels in the company are $390.6 million or 20%
of the NAV. Although these cash levels may seem high,
the investment manager believes that these levels are
prudent as cash is retained for a series of uses such as:
investment commitments or expectations (e.g., GreenOak(4)
$90.9 million, TCI II $46.1 million, Hawke’s Point(5) $100
million); new businesses; opportunistic investments and
acquisitions; dividends; and fees. Cash management has
been helped by the addition of another $75 million to the
revolving credit facility in the third quarter of 2016, bringing
the total facility to $150 million.
The fourth quarter dividend was announced at 17.25 cents
per share, bringing the full-year 2016 dividend to 67.25 cents
per share, which is a 3.9% increase on 2015. Using the year-
end share price of $12.30, this gives a yield of 5.5%. Since its
IPO in 2007, Tetragon has declared cumulative dividends of
$4.78 per share.
S
T
R
A
T
E
G
I
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R
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V
I
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W
The principals of Tetragon’s investment
manager and employees of TFG
Asset Management collectively now
beneficially own or have exposure to
approximately 24% of Tetragon’s listed
shares...
The principals of Tetragon’s investment manager and
employees of TFG Asset Management collectively now
beneficially own or have exposure to approximately 24%
of Tetragon’s listed shares (including through deferred
long-term compensation plans for employees of TFG Asset
Management). The investment manager believes that
this ownership creates an alignment of interest between
the investment manager and TFG Asset Management
employees and Tetragon shareholders.
On 23 December 2016, Tetragon announced that effective
for the accounting periods ending on and after 31
December 2016, the company will adopt the International
Financial Reporting Standards as adopted by the European
Union (IFRS) as the accounting standard for preparing and
reporting Tetragon’s accounts. One benefit of this change is
that instead of presenting both “Fair Value” and audited U.S.
GAAP NAV performance metrics, Tetragon will now be able
to present a single set of audited IFRS NAV performance
metrics. We hope that investors will find the report and
accounts simpler and more informative. Tetragon also
plans to change the reporting cycle throughout the year,
providing more information on a monthly basis, and
no longer publishing the first and third quarter reports.
Investor calls will be held, going forward, on a semi-annual
cycle.
As announced in June 2016, Mr. William P. Rogers Jr. joined
Tetragon’s board of directors upon the resignation of Mr.
Byron Knief. Mr. Rogers and the remaining board members
have all been re-elected for 2017.
Throughout 2016, we had the opportunity to meet and
speak with many of our shareholders, both long-term and
new, and greatly appreciate the time that our shareholders
have made available. We look forward to continuing this
engagement and hope to see many of you at Tetragon’s
annual investor day that is scheduled to be held in London
on 8 March 2017.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
(continued)
Notes:
(1) Equitix Holdings Limited, referred to in this report as “Equitix”.
(2) Polygon Global Partners LP and Polygon Global Partners LLP (and certain
of their affiliates), managers of open-ended hedge fund and private equity
vehicles across a number of strategies that are part of TFG Asset Management,
referred to in this report as “Polygon”. Polygon Global Partners LLP is
authorised and regulated by the United Kingdom Financial Conduct Authority.
3) The Polygon Convertible Opportunity Fund won the 2016 EuroHedge Award in
the Convertibles & Volatility category. There were four other nominees for this
award. The Polygon Distressed Opportunities Fund was nominated for the 2016
EuroHedge Award in the Event Driven & Distressed category. There were eight
other nominees for this award. Polygon Global Partners LLP was nominated for
the EuroHedge “Management Firm of the Year” award. There were four 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 Hedge Fund Intelligence
Database and have at least a 12-month track record history. 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 ratio of the nominees
in their relevant peer groups. Further information about the award, including
nomination and winning criteria, is available at www.hedgefundintelligence.
com. The Polygon Convertible Opportunity Fund won the “2016 Convertible
Fund of the Year Award” at the Alt Credit Intelligence European Performance
Awards. There were two other nominees for this award. Polygon Global Partners
LLP won the “2016 Manager of the Year” at the Alt Credit Intelligence European
Performance Awards. The Alt Credit Intelligence European Performance
Awards are compiled by Alt Credit Intelligence, a publication of Pageant Media.
Information about the award, including nomination and winning criteria, is
available at https://www.eiseverywhere.com/ehome/196180/443123/.
(4) GreenOak Real Estate, LP, is referred to in this report as “GreenOak”. Tetragon
owns a 23% interest in GreenOak.
(5) Hawke’s Point, an asset management company focused on mining finance,
referred to in this report as “Hawke’s Point”.
Outlook
Tetragon’s investment manager remains positive on the
outlook for CLOs and it expects that recently-implemented
risk retention regulations may dampen new CLO issuance.
This may keep CLO liabilities relatively inexpensive and
help loan spreads to widen, both of which would benefit
CLO equity investors such as Tetragon. Furthermore, the
investment manager believes that the exposure profile
of CLO equity in a macro-economic environment of
potentially rising interest rates and wider credit spreads
effectively provides the company with a short credit spread
investment – which may be a useful exposure should
spreads begin to increase from currently tight levels.
The investment manager also remains optimistic regarding
the company’s exposure to event-driven equities,
distressed opportunities and convertible bonds through
its hedge fund investments. With respect to Tetragon’s
European event-driven investments specifically, there
are potentially compelling valuations among smaller-cap,
non-index equities which have generally lagged larger cap
peers through years of capital outflows from Europe. M&A
activity may continue to help catalyze revaluations in this
space as cross-border bidders seek to pick up attractively-
priced European assets. In distressed opportunities, where
Tetragon invests in a capacity-constrained fund, there
may be an opportunity for an increase in restructuring
opportunities as lower-quality corporates – which have
benefitted from a relatively easy and inexpensive high-yield
issuance environment – may be under refinancing pressure
in a rising interest rate environment.
TFG Asset Management continues to seek to grow its
existing businesses through performance and growth
in assets under management (AUM). In addition the
investment manager continues to look for new asset
classes and new asset managers to add to the TFG Asset
Management platform.
With Regards,
THE BOARD OF DIRECTORS
2 March 2017
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Investment Objective & Strategy
Tetragon is a closed-ended investment company that invests in a broad range
of assets, including bank loans, real estate, equities, credit, convertible bonds
and infrastructure and TFG Asset Management, a diversified alternative asset
management business. Where sensible, through TFG Asset Management, Tetragon
seeks to own all, or a portion, of asset management companies with which it invests
in order to enhance the returns achieved on its capital. Tetragon’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 is traded on Euronext in Amsterdam
N.V.(1) and on the Specialist Fund Segment(2) of the main market of the London
Stock Exchange. For more information please visit the company’s website at
www.tetragoninv.com.
Tetragon’s NAV as of 31 December 2016 was approximately $1.9 billion.
Identify
Asset Class
Structure
Investment
Identify
Asset
Managers
Own
Asset
Manager
(1) Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V., (Euronext Amsterdam).
(2) Tetragon’s ‘Home Member State’ for the purposes of the EU Transparency Directive (Directive 2004/109/EC) is the Netherlands.
13
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
STRATEGIC REVIEW asset gathering capacity. Potential profitability
and scalability of the asset management business
are also important considerations. Additionally,
the core capabilities, investment focus and
strategy of any new business should offer a
complementary operating income stream to
TFG Asset Management’s existing businesses.
Tetragon’s investment manager looks to
mitigate potential correlated risks across TFG
Asset Management’s investment managers by
diversifying its exposure across asset classes,
investment vehicles, durations, and investor types,
among other factors.
Tetragon’s asset management businesses can
operate autonomously, or on the TFG Asset
Management platform. In either case, the objective
is for them to benefit from an established
infrastructure, which can assist in critical business
management functions such as risk management,
investor relations, financial control, technology,
and compliance/legal matters, while maintaining
entrepreneurial independence.
To achieve Tetragon’s investment objective of
generating distributable income and capital
appreciation, the company’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 Tetragon’s
investment manager to negotiate favourable
terms for its investments.
– To own, where sensible, all, or a portion of, asset
management companies with which it invests
in order to enhance the returns achieved on its
capital.
In addition, the current investment
strategy is to continue to grow TFG Asset
Management – as Tetragon’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, Tetragon’s
investment manager 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
Tetragon’s capital; and/or seeks for Tetragon (via
TFG Asset Management) to own a share of the
asset management company. Tetragon aims to not
only produce asset level returns, but also aims to
enhance these returns with capital appreciation
and investment income from its investments in
asset management businesses that derive income
from external investors.
Certain considerations when evaluating the
viability of a potential asset manager typically
include performance track records, reputation,
regulatory requirements, infrastructure needs and
14
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Key Performance Metrics
Tetragon focuses on the following key metrics when assessing how value is being created for, and delivered to,
Tetragon shareholders:
ء NAV Per Share
ء Investment Returns/Return on Equity
ء Dividends
Fully Diluted NAV Per Share
FIGURE 3
NAV Per Share Total Return 2012-2016
Fully Diluted NAV Per Share (NAV Per Share) was $20.01 at 31
December 2016. NAV Per Share Total Return was 8.5% for
2016.
19.0%
15.8%
16.0%
8.1%
8.5%
2012
2013
2014
2015
2016
Investment Returns/Return on Equity*
FIGURE 4
Return on Equity 2012-2016
RoE for 2016 was 6.3%. Earnings Per Share (EPS) for 2016
was $1.37.
20.8%
Target RoE: 10-15%
Average RoE: 12.7%
*Average RoE is calculated from Tetragon’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%. Tetragon seeks to deliver 10-15% RoE per annum to shareholders.
Tetragon’s returns will most likely fluctuate with LIBOR. LIBOR directly flows
through some of Tetragon’s investments and, as it can be seen as the risk-free
short-term rate, it should affect all of Tetragon’s investments. In high-LIBOR
environments, Tetragon should achieve higher sustainable returns; in low-LIBOR
environments, Tetragon should achieve lower sustainable returns.
15.3%
14.5%
6.6%
6.3%
2012
2013
2014
2015
2016
FIGURE 5
Dividend Per Share Comparison 2012-2016 (USD)
$0.565
$0.6175
$0.6475
$0.6725
$0.470
Dividends Per Share (DPS)**
Tetragon declared a Q4 2016 dividend of $0.1725 per
share, for a full year dividend payout of $0.6725 per share,
continuing the company’s progressive dividend policy,
which targets a payout ratio of 30-50% of normalised
earnings. The cumulative DPS declared since Tetragon’s IPO
is $4.7575.
**Tetragon amended the terms of its Optional Stock Dividend Plan and Director
Share Issue Program to permit the company to satisfy its obligations thereunder
by transferring non-voting shares of Tetragon that are being held by it as treasury
shares.
15
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
2012
2013
2014
2015
2016
STRATEGIC REVIEW Investment Review
Tetragon’s Fully Diluted NAV Per Share increased from $19.08 per share as at 31 December 2015 to $20.01 per share as at 31
December 2016. Figure 6 below shows the contributions to that performance. Investment income contributed $1.83 per
share (more detail is set forth in Figures 7 and 10). Operating expenses and manager fees reduced NAV Per Share by ($0.56)
with a further ($0.01) per share reduction due to interest expense. On the capital side, dividends reduced NAV Per Share by
($0.62). The fully diluted number of shares in issue changed over the year with additional dilution due to, amongst other
things scrip dividends, additional recognition of equity-based compensation shares, increased calculated dilution with
respect to share options as a result of the increase in the Tetragon share price and dilution associated with the deferred
incentive fee paid to the investment manager. Taken in aggregate, this increased share dilution resulted in a reduction
in NAV Per Share of ($1.08). Lastly, share repurchases at discounts to NAV added $1.37 per share. See Figure 30 for a full
breakdown of the fully diluted shares outstanding.
FIGURE 6
Year on Year NAV Per Share Progression(i)
21.50
21.00
20.50
20.00
19.50
19.00
18.50
(0.56)
(0.01)
1.83
(0.62)
19.08
NAV at
31 Dec 2015
Investment
income and
gains
Operating expenses
& management fees
Interest
expense
Dividends
Other Share Dilution
Share
Repurchase
NAV at
31 Dec 2016
(1.08)
1.37
20.01
(i) With the exception of share repurchases, all of the Fully Diluted NAV Per Share movements in the table are determined by reference to the average fully diluted share count
during the year (100.4 million shares). The contribution from share repurchases is determined by reference to the specific number of fully diluted shares at the time of each
share repurchase transaction.
Net Asset Breakdown Summary
The table below shows a breakdown of the composition of Tetragon’s NAV at 31 December 2015 and 31 December 2016, and
the factors contributing to the changes in NAV over the year.
Investment performance generated $184.1 million of gross returns and was positive for all the asset classes, as can be seen
in Figure 7 below. CLOs continued to perform well, assisted by a generally benign default environment in the United States;
hedge funds were positive across the strategies, particularly noteworthy given the hedge fund industry’s performance in
2016; real estate recorded another positive year with a number of buildings sold during 2016 in the United States and Japan
in particular. TFG Asset Management’s main positive contribution was from Equitix. Lastly, “Other equities and credit”, which
comprises investments directly on the balance sheet (i.e., not through an investment vehicle), were positive again in 2016.
Note that notwithstanding the positive investment performance, the total NAV declined during the year as cash was returned
to investors via cash dividends and share repurchases as shown in Figure 6 above.
FIGURE 7
Asset Classes
Investment Structure
NAV at 31
Dec 2015
($millions)
Additions(i)
Disposals/
Receipts(i)
Gains/
Losses
NAV at 31
Dec 2016
($millions)
Bank loans
CLOs
600.8
31.2
(271.9)
99.9
460.0
Event-driven equities, distressed
opportunities and convertible bonds Hedge funds
Real estate
TFG Asset Management
Private equity-style funds
Private equity in asset
management companies
Other equities and credit
Direct balance sheet investments
Cash
Total
338.1
141.7
422.1
93.6
391.0
42.0
37.0
-
27.4
-
-
(43.2)
(35.9)
(22.5)
(0.6)
26.4
9.0
21.6
27.0
0.2
406.5
144.5
407.8
125.5
390.6
1,987.3
137.6
(374.1)
184.1
1,934.9
(i) Any gains or losses on foreign exchange hedging instruments attributable to a particular strategy or sub-asset class have been included in “additions” or “disposals/
receipts” respectively. For example, where a hedging gain or loss is made, this will result in either cash being received or paid, or cash being receivable or payable, which is
equivalent to a receipt or disposal.
16
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Net Asset Composition Summary
S
T
R
A
T
E
G
I
C
R
E
V
I
E
W
As can be seen from Figure 8 below, Tetragon’s asset class allocation has changed little over the year. The descriptions
outside each chart refer to the structure of the investment vehicle through which Tetragon has made its investments.
FIGURE 8 (1)
Net Asset Breakdown at 31 December 2015
Net Asset Breakdown at 31 December 2016
20%
Cash
Cash
Other equ-
ities & credit
5%
Direct
balance sheet
investments
30%
CLOs
Bank loans
21%
Private equity
in asset
management
companies
TFG Asset
Mgt
Event-
driven
equities
Convertible
bonds
Real
estate
Distr-
essed
opps.
7%
Private
equity-style
funds
17%
Hedge funds
20%
Cash
24%
CLOs
Cash
Bank loans
7%
Direct
balance sheet
investments
Other equ-
ities & credit
TFG Asset
Mgt
21%
Private equity
in asset
management
companies
Event-
driven
equities
Convertible
bonds
Distressed
opps.
Real
estate
21%
Hedge funds
7%
Private
equity-style
funds
(1) Cash consists of: (1) cash held directly by the Tetragon Master Fund, (2) excess margin held by brokers associated with assets held directly by the Tetragon Master Fund,
and (3) cash held in certain designated accounts related to Tetragon’s investments, which may only be used for designated purposes without incurring significant tax and
transfer costs, net of “Other Net Assets and Liabilities.”
Top 10 Holdings as of 31 December 2016
Figure 9 below describes Tetragon’s top ten holdings by value.
FIGURE 9
Holding
Asset Class
Investment Structure
1
2
3
4
5
6
7
8
9
Polygon European Equity Opportunity Fund Event-driven equities
Hedge fund
Equitix
TFG Asset Management
Private equity in asset management
company
Polygon Distressed Opportunities Fund
Distressed opportunities Hedge fund
LCM
TFG Asset Management
GreenOak Real Estate
TFG Asset Management
Polygon
TFG Asset Management
Private equity in asset management
company
Private equity in asset management
company
Private equity in asset management
company
Polygon Convertible Opportunity Fund
Convertible bonds
Hedge fund
GreenOak U.S. II Fund
Real estate
Private equity-style fund
Polygon Mining Opportunity Fund
Event-driven equities
Hedge fund
10 LCM XIX LP
Total
Bank loans
CLO
Fair Value
($millions)
192.9
172.5
106.5
106.2
% of
NAV
10.0%
8.9%
5.5%
5.5%
67.0
3.5%
59.7
3.1%
51.0
38.0
36.6
32.8
2.6%
2.0%
1.9%
1.7%
44.6%
17
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Detailed Investment Review
Figure 10 is a new table that breaks out more detail showing the effect of capital flows and performance gains and losses on
the NAV of each asset class during the course of 2016; more detailed commentary for each asset class follows.
FIGURE 10
Asset Class
Bank loans
U.S. CLOs (non-LCM)
U.S. CLOs (LCM)
European CLOs
TCI II (U.S. multi-manager CLO equity)
Event-driven equities
Polygon European Equity Opportunity Fund
Polygon Mining Opportunity Fund
Polygon Global Equities Fund
Distressed opportunities
Polygon Distressed Opportunities Fund
Convertible bonds
Polygon Convertible Opportunity Fund
Real estate
GreenOak U.S. funds & co-investments
GreenOak Europe funds & co-investments
GreenOak Asia funds & co-investments
Other real estate
GreenOak debt funds
TFG Asset Management
Equitix
LCM
GreenOak
Polygon
Hawke's Point
TCIP
Other equities & credit(ii)
Other equities
Other credit
Cash
Net cash(iii)
Total
Additions(i)
Disposals/
Receipts(i)
Gains/ Losses
NAV at
31 December
2015
($ millions)
% of NAV
NAV at 31
December
2016
($ millions)
318.3
224.1
58.5
-
139.9
38.1
20.3
95.1
44.8
47.4
34.4
29.9
26.3
3.8
173.9
110.2
70.0
67.0
0.8
0.3
90.5
3.0
391.0
1,987.3
-
15.3
-
15.9
42.0
-
-
-
-
18.7
10.5
3.9
2.0
1.9
-
-
-
-
-
-
19.1
8.3
137.6
(154.3)
(81.7)
(33.9)
(0.5)
-
-
-
-
-
(15.3)
(18.4)
(7.6)
-
(1.9)
(32.6)
(2.6)
(0.7)
-
-
-
(16.6)
(5.8)
46.3
44.3
8.5
0.7
11.0
(1.5)
(0.8)
210.3
202.0
31.6
16.1
192.9
36.6
19.5
10.9%
10.4%
1.6%
0.8%
10.0%
1.9%
1.0%
11.4
106.5
5.5%
6.2
1.5
5.3
2.6
(0.6)
0.2
31.2
(1.4)
(2.3)
(7.3)
(0.0)
1.4
25.9
1.1
51.0
52.3
31.7
28.8
27.7
3.9
172.5
106.2
67.0
59.7
0.8
1.6
118.9
6.6
2.6%
2.7%
1.6%
1.5%
1.4%
0.2%
8.9%
5.5%
3.5%
3.1%
0.0%
0.1%
6.2%
0.3%
(0.6)
(374.0)
0.2
184.1
390.6
1,934.9
20.2%
100.0%
(i) Any gains or losses on foreign exchange hedging instruments attributable to a particular strategy or sub-asset class have been included in “additions” or “disposals/
receipts” respectively. For example, where a hedging gain or loss is made, this will result in either cash being received or paid, or cash being receivable or payable,
which is equivalent to a receipt or disposal.
(ii) Assets characterised as “Other Equities & Credit” consist of investment assets held directly on the balance sheet.
(iii) Net Cash consists of: (1) cash held directly by the Tetragon Master Fund, (2) excess margin held by brokers associated with assets held directly by the Tetragon Master
Fund and (3) cash held in certain designated accounts related to Tetragon’s investments, which may only be used for designated purposes without incurring significant
tax and transfer costs, net of “Other Net Assets and Liabilities.”
18
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Bank Loans - Through CLOs
Tetragon continues to invest in CLOs by taking majority
positions in the equity tranches. CLOs had a good year
overall with performance largely shaped by a number
of key themes: (i) continued amortisation of older
vintage U.S. and European CLOs as they exited and/
or moved further beyond their reinvestment periods;
(ii) early optional redemption or sale of older vintage
CLOs during the latter half of the year to monetise rising
loan prices and reduce the “tail risk” of the CLO portfolio,
(iii) execution of refinancing and “reset” transactions on
a number of U.S. CLO 2.0 transactions to improve their
ongoing equity arbitrage levels, and (iv) rising U.S. LIBOR
rates and tightening nominal loan spreads in the context
of a relatively benign credit environment. These themes
are explored in turn in a more detailed segmentation of
Tetragon’s CLO portfolio below.
– U.S. CLOs (non-LCM(1)): This portion of the portfolio
performed well during 2016, generating $46.3 million of
income, despite facing the headwinds of rising LIBOR
rates and tightening nominal loan spreads. U.S. LIBOR
rose steadily in the second half of the year, with 3 Month
LIBOR reaching 1.0% and 1 Month LIBOR exceeding 0.75%
by the end of the year. Given the prevalence of “LIBOR
floors” within the underlying loan portfolios, which were
generally struck at 0.75%-1.0%, rising LIBOR rates had
a negative effect on U.S. CLO equity distributions until
spot LIBOR rates exceeded the average “LIBOR floor”
levels. This is because until spot LIBOR rates exceeded
average LIBOR floor levels, they represented a direct 1:1
reduction in the effective loan spread earned by the CLOs’
loan portfolios, while the cost of funding on the CLOs’
liabilities (priced based on 3-Month LIBOR and re-set
quarterly) continued to rise with spot LIBOR rates. In
addition, nominal U.S. leveraged loan spread tightening
also had the effect of reducing the amount of CLO equity
distributions, which was partially offset by a benign loan
default environment.
In this context, Tetragon focused on managing the wind-
down path of its seasoned U.S. CLOs and on optimising
their ongoing equity arbitrage levels. In the latter half
of 2016, Tetragon took advantage of supportive loan
and CLO market conditions to execute early optional
redemptions of four non-LCM managed U.S. CLO
transactions and to sell one non-LCM managed U.S. CLO
position. All such redemptions and sales were executed
above fair value levels, generating realised gains for the
portfolio and bringing forward expected future cash flows
thereby reducing the “tail-risk” of this segment of the
portfolio. The net effect of these redemptions, sales, and
the natural amortisation of CLOs drove a 34% reduction
in the NAV of Tetragon’s non-LCM managed U.S. CLO
investments versus the end of 2015. As of the end of 2016,
Tetragon held approximately $147.2 million in fair value
of non-LCM 1.0 U.S. CLOs which we expect to continue to
amortise in the near-term.
S
T
R
A
T
E
G
I
C
R
E
V
I
E
W
Tetragon also sought to increase the value of its
investments by improving the excess interest
distributable to the equity investments via CLO debt
refinancing transactions and resets. During 2016,
Tetragon reset one non-LCM managed transaction
extending its reinvestment period and related duration
metrics by four years. Tetragon also refinanced the
liabilities of a non-LCM managed U.S. CLO transaction
in January of 2017 reducing its weighted-average cost of
funds by approximately 23 basis points.
As of the end of 2016, all of Tetragon’s non-LCM managed
U.S. CLOs were compliant with their junior-most O/C
tests.(2)
– U.S. CLOs (LCM): LCM CLOs also performed well in 2016,
generating $44.3 million of income; all of the transactions
remained compliant with their junior most O/C tests
throughout the year. During Q1 2016, Tetragon made two
opportunistic secondary LCM CLO equity purchases and
as loan market conditions improved, Tetragon sought to
monetise the loan price rally by exercising the optional
redemption rights on three LCM transactions that were
past their reinvestment periods. The execution of all
such redemptions was accretive, generating proceeds in
excess of pre-redemption fair market levels. These call
activities as well as the structural amortisation of LCM
CLOs resulted in a 10% reduction in the fair value of LCM
CLOs at the end of 2016 as compared with the end of
2015. As of the end of 2016, Tetragon held approximately
$2.8 million in fair value of LCM 1.0 U.S. CLOs, which we
expect to continue to amortise in the near-term.
Additionally, during Q4 2016, Tetragon successfully
refinanced the liabilities of an LCM transaction, reducing
its weighted average cost of funds by approximately
19 basis points and “reset” an earlier vintage LCM CLO
whereby the CLO’s debt tranches were refinanced and its
reinvestment period, maturity, weighted average life and
other related duration metrics were extended by four and
a half years.
– European CLOs: Tetragon’s European CLO portfolio
generated $8.5 million of income as it continued to
amortise during 2016 as the fair value of the European
CLO positions declined by approximately 46% from
the prior year-end. As with the U.S. CLO segment, this
reduction in exposure was achieved via a combination of
natural amortisation as well as the exercise of an optional
redemption on one transaction. As of the end of 2016,
Tetragon held approximately $31.6 million in fair value of
European CLOs, which we expect to continue to amortise
in the near-term. All of Tetragon’s European CLOs were in
compliance with their junior-most O/C tests as of the end
of Q4 2016.(3)
(1) LCM Asset Management LLC, a CLO loan manager that is part of TFG Asset
Management, referred to in this report as “LCM”.
(2) Based on the most recent trustee reports available as of 31 December 2016.
(3) Based on the most recent trustee reports available as of 31 December 2016.
19
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
– TCI II: TCI II is the multi-manager CLO equity investment
vehicle established by TCIP, a 100% owned subsidiary
of TFG Asset Management. As of 31 December 2016,
Tetragon’s commitment to TCI II stood at $62 million with
$15.9 million funded.
During the year, the vehicle continued to raise capital
and ramp its portfolio. As of 31 December 2016, TCI II
held six CLO equity investments, with three transactions
managed by LCM and three deals managed by TCI Capital
Management LLC (TCICM) and sub-advised by TCICM’s
sub-advisory partners: NYL Investors LLC, Symphony
Asset Management LLC, and Columbia Management
Investment Advisers, LLC.
The performance of the vehicle’s existing investments
was positive during the year, with no payment defaults
on any underlying loans within TCI II’s CLOs. With
average LIBOR floors on loan assets now below current
LIBOR levels, any future rate increases should, all things
being equal, have a positive effect on CLO equity cash
flows. We believe that CLO equity may provide a natural
interest rate and inflation hedge as it gives investors an
effective return over 3 Month LIBOR, which may prove an
increasingly valuable feature in the context of tightening
monetary policy and relatively rich asset valuations in
fixed income and other asset classes.
Event-driven equities, distressed opportunities and
convertible bonds - through hedge funds
Tetragon invests in event-driven equities, distressed
opportunities and convertible bonds though hedge funds.
As at year-end 2016, all these investments are through
Polygon-managed hedge funds.
Event-driven equities
– Polygon European Equity Opportunity Fund: Tetragon’s
largest exposure in this investment category is through an
investment in the Polygon European Equity Opportunity
Fund, which is a strategy focused on event-driven
investing. M&A-related trades, accounting for over
40% of the portfolio in 2016, were the main driver of
performance. These gains were somewhat offset by
corporate restructuring trades where certain positions
were impacted by disappointing results announcements
and some short-term nervousness after the outcome of
the “Brexit” referendum in June. In line with the fund’s
investment philosophy, performance drivers were
generally from company-specific catalysts.
– Polygon Mining Opportunity Fund: The investment in
the mining equity strategy resulted in a small loss for
2016. During 2016, Polygon came to believe that, despite
generating attractive levels of alpha, the fund might
not be able to deliver such returns in a consistent and
sustainable manner. Polygon was also concerned that
the opportunity set among mining companies and
mining-related businesses might not be large enough
to support the desired level of diversification within the
portfolio. In light of the foregoing concerns, amongst
others, Polygon concluded that it would be in the
best interests of investors to wind down the fund, and
informed its investors of this decision in late December
2016. Tetragon (along with all fund investors) expects to
receive distributions of cash from its investment in full by
the end of 2017.
– Polygon Global Equities Fund: Tetragon’s allocation to
this strategy this strategy remains small in relation to
its other hedge fund investments. This strategy focuses
mainly on global capital markets dislocation; the
investment made a small loss in 2016.
Distressed opportunities
– Polygon Distressed Opportunities Fund: Tetragon’s
investment in Polygon’s distressed strategy was the
largest contributor among Tetragon’s hedge fund
investments. Polygon has specifically sought to avoid
exposure to commodities names over the boom-and-bust
commodity cycle of the last two years which it believes
has helped the fund to avoid the accompanying volatility
that commodity-related investments have produced over
this period.
Convertible bonds
– Polygon Convertible Opportunity Fund: The strategy
remains focused on capital structure relative value
trades with specific rerating catalysts, is tightly hedged
and broadly diversified. 2016 was another good year for
Tetragon’s investment in this Polygon fund.
Real Estate - primarily through private equity-style
funds
Tetragon holds most of its investments in real estate
through GreenOak-managed funds and co-investment
vehicles. The majority of these GreenOak funds are
private equity-style funds concentrating on opportunistic
investments in commercial property investments based
on local knowledge and experience in each target market.
These investments all showed positive returns in 2016.
During the year, Tetragon made some additional capital
contributions to existing investment programs across
Europe, the United States and Asia. In addition, Tetragon
realised approximately $38.5 million in capital and income
through distributions from a number of GreenOak-managed
investment programs.
– GreenOak U.S.: Net income was primarily generated from
U.S. Fund I, which continued to sell assets, as well as
from a single property investment vehicle, which sold its
New York asset and distributed the proceeds. U.S. Fund I
was established in 2011 and focuses on commercial real
estate debt recapitalisation opportunities mainly focused
on office, retail and hospitality properties.
20
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
– GreenOak Europe: Net income was generated across a
number of different programs, including real estate
vehicles in the UK and Spain. GreenOak’s Europe
funds are mainly focused on realising value from value
opportunities in southern Europe.
– GreenOak Asia: Sales of assets and associated
distributions from the Japan Fund I drove net income
in Asia. GreenOak’s Asian investments focus primarily
on deep value, high-quality commercial opportunities
in Tokyo and Osaka, mainly in the retail, hospitality and
multi-family residential sectors.
– Other: In addition to the commercial real estate
investments through GreenOak-managed real estate
funds described above, Tetragon also has investments
in commercial farmland in Paraguay. Tetragon has
structured individual managed accounts for each of
several farms. These investment vehicles are managed
by Scimitar, a specialist manager in South American
farmland. These farms were bought during 2015 and 2016
and are currently valued at $27.7 million, which is cost
plus capital expenditure. The loss to date reflects ongoing
fees and expenses.
TFG Asset Management - through private equity in
asset management companies
– TFG Asset Management: Tetragon’s investment in TFG
Asset Management, which comprises a diverse portfolio
of alternative asset managers, recorded an investment
gain of $21.6 million during 2016. Tetragon’s investment
in Equitix made a significant positive contribution during
the year of approximately $31.2 million, as an increase in
fair value in local currency was locked in to U.S. dollars
through the use of forward currency hedges. This gain
reflected the underlying positive performance of this
business and the growth in AUM that happened during
the year. The value of Tetragon’s investment in TCIP also
increased as it continues to deliver against its business
plan for its first vehicle, TCI II. Tetragon’s investments in
GreenOak and LCM had small unrealised losses during
2016, reflecting a combination of factors, including
the application of less favourable market multiples
or discount rates, and a more conservative view on
elements of projected performance this year. Tetragon’s
investment in Polygon made a somewhat larger loss
during the year as its fair value declined. A combination
of a lower EBITDA caused by slower-than-anticipated
AUM growth and reduced “market multiples” as used
by the valuation agent resulted in a reduction in the
carrying value of this investment over the course of 2016.
We continue to believe that the underlying economics
and momentum of these businesses remain positive,
as measured by, among other things, EBITDA and AUM
growth, as described in the TFG Asset Management
section in this report. Please see Note 5 in the audited
2016 Tetragon Financial Group Master Fund Limited
financial statements for further details on the basis for
determining the fair value of the TFG Asset Management
investment. Additionally, please see Figure 21 for TFG
Asset Management’s pro forma operating results and
associated commentary.
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Other Equities and Credit
Most of Tetragon’s investments are made either through
investment vehicles managed externally or by managers
within TFG Asset Management. However, occasionally
Tetragon will make investments directly on its balance
sheet reflecting single strategy ideas: either co-investing
with some of its underlying managers or simply
idiosyncratic investments. During 2016, these investments
primarily comprised public equities.
– Other Equities: These assets generated net income of
$25.9 million during 2016 across a number of different
investments, all of which were profitable during the year.
The largest drivers of return were event-driven positions
in Europe that have been held for a number of years.
– Other Credit: This segment included a £3.0 million loan
to GreenOak in connection with its acquisition of Grafton
Advisors, a UK property adviser. This loan was repaid
during Q4 2016.
Cash
Tetragon’s net cash balance at 31 December 2016 was
$390.6 million. The cash is held approximately 50% in
secured arrangements, lent by a tri-party repurchase
arrangement using Bank of New York Mellon as the tri-party
agent. The other 50% is held in unsecured arrangements,
and Tetragon’s operating cash balance is held at State
Street. All of Tetragon’s cash is held at highly rated banking
institutions, in on-demand arrangements, thereby ensuring
that it is not exposed to any term risk.
The company actively manages its cash levels to cover
future commitments and to enable it to capitalise on
opportunistic investments and new business opportunities.
During the year, the company used $137.6 million of cash
to make investments, $45.9 million to pay dividends,
and $157.8 million to repurchase shares. Future cash
commitments are approximately $237.0 million, comprising:
investment commitments (GreenOak $90.9 million, TCI II
$46.1 million); potential investments (Hawke’s Point $100
million); and ongoing dividends and fees.
Tetragon currently has a $150.0 million revolving credit
facility in place, of which $38.0 million has been drawn.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Further Portfolio Metrics
Geographic Exposure:
FIGURE 11
Geographical Exposure at 31 December 2016
52%
North America
40%
Europe
3%
Latin America
5%
Asia
Assumptions:
– Event-driven equities, distressed opportunities,
convertible bonds, and other equities and credit
investments are based on the geographies of the
underlying portfolio assets.
– U.S. CLOs and TCI II are 100% U.S.
– European CLOs are 100% Europe.
– GreenOak Real Estate (TFG Asset Management) treated as
1/3 Europe, 1/3 U.S., 1/3 Asia
– Polygon (TFG Asset Management) treated as 80% Europe,
20% U.S.
– LCM (TFG Asset Management) treated as 100% U.S.
– Equitix (TFG Asset Management) treated as 100% Europe.
– TCIP (TFG Asset Management) treated as 100% U.S.
Currency Exposure:
Tetragon is a U.S. dollar-based fund and reports all of its
metrics in U.S. dollars. All investments denominated in
other currencies are hedged to U.S. dollars.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Risk Factors
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Principal Risks
The principal risks facing Tetragon as a listed investment
company are both financial and operational in nature, and
ultimately relate to both Tetragon’s issued and outstanding
non-voting shares as well as its investment portfolio.
The financial risks inherent in its portfolio are primarily
market-related or are otherwise relevant to particular
asset classes. Operational risks include those related to
Tetragon’s organisational structure, investment manager,
legal and regulatory environment, taxation and other areas
where internal or external factors could result in financial or
reputational loss.
The risks and uncertainties highlighted below are
supplemented and described in further detail on Tetragon’s
website at:
http://www.tetragoninv.com/investors/risk-factors.
Financial Risks
Risks Relating to Investing in Tetragon’s Shares
The market price of Tetragon’s non-voting shares may
fluctuate significantly and may bear no correlation to
Tetragon’s NAV, and holders may not be able to resell their
Tetragon shares at or above the price at which these were
purchased. In addition to portfolio-level and operational
risks highlighted below, factors that may cause the price of
Tetragon’s shares to vary include:
– Changes in Tetragon’s financial performance and
prospects or in the financial performance and prospects
of companies engaged in businesses that are similar to
Tetragon’s business.
– Changes in the underlying values of Tetragon’s
investments.
– Illiquidity in the market for Tetragon shares, including
given due to the liquidity of the Euronext Amsterdam N.V.
exchange and the Specialist Fund Segment of the Main
Market of the London Stock Exchange.
– Speculation in the press or investment community
regarding Tetragon’s business or investments, or factors
or events that may directly or indirectly affect its business
or investments.
– A loss of a major funding source. If Tetragon breaches the
covenants under its financing agreements it could be
forced to sell assets at price less than fair value.
– A further issuance of shares or repurchase of shares by
Tetragon.
23
– Dividends declared by Tetragon.
– Broad market fluctuations in securities markets that in
general have experienced extreme volatility often
unrelated to the operating performance or underlying
asset value of particular companies or partnerships.
– General economic trends and other external factors.
– Sales of Tetragon shares by other shareholders.
– The ability to invest in Tetragon shares or to transfer any
shares may be limited by restrictions imposed by ERISA
regulations and Tetragon’s articles of incorporation.
Risks Relating to Tetragon’s Investment Portfolio
Tetragon’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 a general matter, the portfolio is
exposed to the risk that the fair value of these investments
will fluctuate.
Risks Relating to TFG Asset Management
TFG Asset Management, as one of Tetragon’s investments,
has risks particular to an asset management business.
These include:
– The asset management business is intensely competitive.
– The performance of TFG Asset Management may be
negatively influenced by various factors, including the (i)
performance of managed funds and accounts, (ii) ability
to raise capital from third-party clients and (iii) ability to
retain key personnel.
– Certain of TFG Asset Management’s businesses have a
limited or no operating history.
– The asset management business is subject to extensive
regulation.
– Misconduct of TFG Asset Management employees or
at the companies in which TFG Asset Management has
invested could harm TFG Asset Management by impairing
its ability to attract and retain clients and subjecting it to
significant legal liability and reputational harm.
– Failure by TFG Asset Management to deal appropriately
with conflicts of interest in its investment business could
damage its reputation and adversely affect its businesses.
– Tetragon’s investment in TFG Asset Management is
illiquid.
(continued)
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Risks Relating to Other Tetragon Portfolio Investments
Tetragon otherwise currently invests or expects to invest its
capital, directly and indirectly, in:
1. bank loans, generally through subordinated, residual
tranches of CLOs;
2. real estate, generally through its joint venture with
GreenOak;
3. equity securities, particularly in event-driven strategies,
generally through the Polygon European Equity
Opportunity Fund;
4. convertible securities, mainly in the form of debt
securities that can be exchanged for equity interests,
including through the Polygon Convertible Opportunity
Fund;
5. distressed opportunities securities and instruments,
including through the Polygon Distressed Opportunities
Fund;
6. infrastructure projects through Equitix Holdings Limited;
and
7. mining-industry related equity securities and
instruments, including through Hawke’s Point.
These portfolio investments are subject to various risks,
many of which are beyond Tetragon’s control, including:
– These securities are susceptible to losses of up to 100%
of the initial investments.
– The performance of these investments may significantly
depend upon the performance of the asset manager of
funds or products in which Tetragon invests.
– Tetragon may be exposed to counterparty risk.
– The fair value of investments, including illiquid
investments, may prove to be inaccurate and require
adjustment.
– Adverse changes in international, national or local
economic and other conditions could negatively affect
investments.
– Tetragon is subject to concentration and geographic risk
in its investment portfolio.
– Tetragon’s investments are subject to interest rate
risk, which could cause its cash flow, the fair value of its
investments and its operating results to decrease.
– Tetragon’s investments are subject to currency risks,
which could cause the value of its investments in U.S.
dollars to decrease regardless of the inherent value of the
underlying investments.
– The utilisation of hedging and risk management
transactions may not be successful, which could subject
Tetragon’s investment portfolio to increased risk or lower
returns on its investments and in turn cause a decrease in
the fair value of its assets.
inherent risks of illiquid markets, wide bid/ask spreads
and market disruption.
– Leverage and financing risk and the use of options,
futures, short sales, swaps, forwards and other derivative
instruments potentially magnify losses in equity
investments.
– Market illiquidity could negatively affect these
investments.
Operational Risks
Risks Relating to Organisational Structure
Tetragon has approved a very broad investment objective
and the investment manager has substantial discretion
when making investment decisions. In addition, the
investment manager’s strategies may not achieve
Tetragon’s investment objective.
Tetragon’s listed shares do not carry any voting rights other
than limited voting rights in respect of variation of their
class rights. Tetragon’s voting shares are owned by Polygon
Credit Holdings II Limited which is a non-U.S. affiliate of
Tetragon’s investment manager and is ultimately controlled
by Reade Griffith and Paddy Dear, who also control the
investment manager. Tetragon’s voting shares control
the composition of the Board of Directors and exercise
extensive influence over Tetragon’s business and affairs.
Under Tetragon’s articles of incorporation, a majority of
its directors are required to be independent (Independent
Directors), satisfying in all material respects the U.K.
Corporate Governance Code definition of that term.
However, because the Board of Directors may generally
take action only with the approval of five of its directors,
the Board of Directors generally are not able to act without
the approval of one or more directors who are affiliated
with the holder of Tetragon’s voting shares. The holder of
the voting shares has the right to amend Tetragon’s articles
of incorporation to change these provisions regarding
Independent Directors. As a result of these provisions, the
Independent Directors are limited in their ability to exercise
influence over Tetragon’s business and affairs.
Tetragon’s organisational, ownership and investment
structure creates significant conflicts of interest that may
be resolved in a manner which is not always in the best
interests of Tetragon or its shareholders.
Tetragon’s directors and its administrator may have
conflicts of interest in the course of their duties.
The listed Tetragon entity does not have any operations,
and its only source of cash will be the investments that
it makes through the Tetragon Master Fund. Its ability to
pay its expenses and dividends will depend on it receiving
distributions from the Tetragon Master Fund.
– Tetragon engages in over-the-counter trading, which has
(continued)
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
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Risks Relating to Tetragon’s Investment Manager
Tetragon’s success depends on its continued relationship
with its 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 Tetragon’s business, investments and
results of operations.
Tetragon is reliant on the skill and judgment of its
investment manager in valuing and determining an
appropriate purchase price for its investments. Any
determinations of value that differ materially from the
values Tetragon realises at the maturity of the investments
or upon their disposal will likely have a negative impact on
Tetragon and its share price.
Tetragon’s arrangements with its investment manager
were negotiated in the context of an affiliated relationship
and may contain terms that are less favourable than those
which otherwise might have been obtained from unrelated
parties in an arm’s-length negotiation.
The holders of Tetragon’s listed shares will not be able to
terminate its Investment Management Agreement with the
investment manager, and the Investment Management
Agreement may only be terminated by Tetragon in limited
circumstances.
The liability of Tetragon’s investment manager is limited
under Tetragon’s arrangements with it, and Tetragon 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.
The investment manager does not owe fiduciary duties
to Tetragon shareholders. However, these contractual
limitations do not constitute a waiver of any obligations
that the investment manager has under applicable law,
including the U.S. Investment Advisers Act of 1940 and
related rules.
The investment manager may devote time and commitment
to other activities.
The fees payable to the investment manager are based
on changes in Tetragon’s NAV, which will not necessarily
correlate to changes in the market value of its listed shares.
Tetragon’s compensation structure with its investment
manager may encourage the investment manager to invest
in high risk investments. The management fee payable to
the investment manager also creates an incentive for it to
make investments and take other actions that increase or
maintain Tetragon’s NAV over the near term even though
other investments or actions may be more favourable.
contains significant performance-related elements, and
poor performance by Tetragon or any other entity for which
the investment manager provides services may make it
difficult for Tetragon’s investment manager to retain staff.
Tetragon’s investment manager relies on two entities
that are part of TFG Asset Management for a broad range
of services to support its activities. The services include
(i) infrastructure services such as operations, financial
control, trading, marketing and investor relations, legal,
compliance, office administration, payroll and employee
benefits and (ii) services relating to the dealing in and
management of investments, arrangement of deals and
advising on investments. TFG Asset Management has
implemented a cost-allocation methodology with the
objective of allocating service-related costs, including
to Tetragon’s investment manager, in a consistent, fair,
transparent and commercially based manner. TFG Asset
Management then charges fees to Tetragon’s investment
manager for the services allocated to it on a cost-recovery
basis that is designed to achieve full recovery of the
allocated costs. Tetragon’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.
There are conflicts of interest created by contemporaneous
trading by Tetragon’s investment manager and investment
managers that are part of TFG Asset Management.
Risks Relating to Tetragon’s Legal Environment and
Regulation
Changes in laws or regulations or accounting standards,
or a failure to comply with any laws and regulations or
accounting standards, may adversely affect Tetragon’s
business, investments and results of operations.
Tetragon has and may become involved in litigation that
may adversely affect Tetragon’s business, investments and
results of operations.
No formal corporate governance code applies to Tetragon
under Dutch law and Tetragon will not be bound to comply
with the U.K. Corporate Governance Code other than as set
forth in its articles of incorporation.
The rights of the non-voting shareholders and the fiduciary
duties owed by the Board of Directors to Tetragon will be
governed by Guernsey law and its articles of incorporation
and may differ from the rights and duties owed to
companies under the laws of other countries.
The compensation of the investment manager’s personnel
(continued)
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Tetragon’s shares are subject to restrictions on transfers to
certain shareholders located in the United States or who
are U.S. persons, which may impact the price and liquidity
of the shares.
Tetragon is not, and does not intend to become, regulated
as an investment company under the U.S. Investment
Company Act of 1940 and related rules.
Risks Relating to Taxation
United States investors may suffer adverse tax
consequences because Tetragon is treated as a passive
foreign investment company (PFIC) for U.S. federal income
tax purposes.
Changes to tax treatment of derivative instruments may
adversely affect Tetragon and certain tax positions it may
take may be successfully challenged.
Investors may suffer adverse tax consequences if Tetragon
is treated as resident in the United Kingdom or the United
States for tax purposes.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Governance
MICHAEL WOODHOUSE
OPERATIONS
Tetragon's Board of Directors
The Board of Directors currently comprises six directors, of which four are
Independent Directors.
Rupert Dorey is a member of the Tetragon Board of Directors and Audit Committee. Mr.
Dorey has over 30 years of experience in financial markets. Mr. Dorey was at CSFB for 17
years from 1988 to 2005 where he specialised in credit related products, including derivative
instruments where his expertise was principally in the areas of debt distribution, origination
and trading, covering all types of debt from investment grade to high yield and distressed
debt. He held a number of senior positions at CSFB, including establishing CSFB's high
yield debt distribution business in Europe, Fixed Income Credit Product Coordinator for
European offices and Head of UK Credit and Rates Sales. Since 2005, he has been acting
in a non-executive directorship capacity for a number of hedge funds, private equity and
infrastructure funds, for both listed and unlisted vehicles. Mr. Dorey is a former President of
the Guernsey Chamber of Commerce and is a member of the Institute of Directors. Mr. Dorey
is based in Guernsey.
Frederic Hervouet is a member of the Tetragon Board of Directors and Audit Committee.
Mr. Hervouet has over 17 years of experience in financial markets and hedge funds, including
in multi-asset class investment and risk management, structured products and structured
finance. Until September 2013, Mr. Hervouet was a Managing Director and Head of
Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring
and sales. Previously, Mr. Hervouet was a Director and Global Head of Sales at Diapason
Commodities Management SA, a partner at Systeia Capital Management, which is now part
of Amundi Asset Management, and a Director and Head of European Market Distribution
at BAREP Asset Management, the hedge fund management subsidiary of Société Générale.
Mr. Hervouet has a MSc in Applied Mathematics and International Finance and a Master's
Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the
Université Paris Dauphine. He is a member of the Institute of Directors and of the Guernsey
Chamber of Commerce. Mr. Hervouet is based in Guernsey.
David Jeffreys is a member of the Tetragon Board of Directors and Audit Committee. Mr.
Jeffreys provides directorship services to a small number of fund groups. From 1995 until
2010 Mr. Jeffreys worked with EQT, a Scandinavian-based private equity group, acting as
a director of each of its Fund general partners and, from 2006, establishing and serving as
Managing Director of EQT Funds Management Limited, its Guernsey-based management
and administration office. Between 1993 and June 2004, Mr. Jeffreys was managing director
of Abacus Fund Managers (Guernsey) Limited, where he was involved with private client
trust arrangements, corporate administration, pension schemes and fund administration.
He was a board member of Abacus' principal administration operating companies and
served on the boards of various administrated client companies. Previously, Mr. Jeffreys
worked as an auditor and accountant for 12 years with Coopers & Lybrand (and its
predecessor firms). He has an undergraduate degree in Economics and Accounting from the
University of Bristol and is a fellow of the Institute of Chartered Accountants in England and
Wales. Mr. Jeffreys is based in Guernsey.
RUPERT DOREY
Independent Director
FREDERIC M. HERVOUET
Independent Director
DAVID JEFFREYS
Independent Director
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
William P. Rogers, Jr. is a member of the Tetragon Board of Directors and Audit
Committee. Mr. Rogers retired from the Corporate Department of Cravath, Swaine &
Moore LLP in December 2015 after 36 years at the firm. His practice encompassed the
representation of both corporate and financial institution clients in a wide variety of
matters, including international securities offerings, corporate governance and SEC
compliance matters, mergers and acquisitions, and derivative financial products. He was
repeatedly cited as one of the United States’ leading practitioners in capital markets by,
among others, Chambers USA: America’s Leading Lawyers for Business; Chambers Global:
The World’s Leading Lawyers for Business; The Legal 500; and IFLR1000. Mr. Rogers regularly
advised a wide variety of clients, including Royal Dutch Shell plc, Bacardi Limited, Time
Warner Inc., Northrop Grumman Corporation, CBS Corporation, INEOS Group Limited,
Tetragon Financial Group Limited, Costamare Inc., priceline.com Incorporated, FactSet
Research Systems Inc., Morgan Stanley, Citigroup, GasLog Ltd. and Goldman Sachs. He also
regularly advised corporate clients on derivatives matters, including the implications of the
new Dodd-Frank swaps regulation. He was involved in the formation of the International
Swaps and Derivatives Association (ISDA) and, prior to his move to London, regularly
represented ISDA on legislative, regulatory and documentation matters. Mr. Rogers was
born in Bronxville, New York. He received a B.A. from Union College in 1972 and a J.D. from
Case Western Reserve School of Law in 1978. From 1998 to 2001, he served as the Managing
Partner of Cravath’s Corporate Department and, from 2001 to 2007, headed the firm’s
London office. Mr. Rogers is based in New York.
Reade Griffith co-founded Polygon in 2002 and the investment manager of Tetragon in
2005. He is a Principal of the investment manager, a member of the Tetragon Board of
Directors, the Head of the investment manager’s Investment Committee, Risk Committee
and Executive Committee, the CIO of Polygon’s European Event-Driven Equities strategy, a
member of the Investment & Management Committee of TCIP and Tetragon Credit Income
II L.P. He was previously the founder and chief executive officer of the European office of
Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998. He was a
partner and senior managing director responsible for running the Global Event-Driven
arbitrage team in Tokyo, London and Chicago for the firm. He was previously with Baker,
Nye, where he was an analyst working on an arbitrage and special situations portfolio.
Mr. Griffith holds a JD degree from Harvard Law School and an undergraduate degree in
Economics from Harvard College. He also served as an officer in the U.S. Marine Corps and
left as a Captain following the 1991 Gulf War. Mr. Griffith is based in London.
Paddy Dear co-founded Polygon in 2002 and the investment manager of Tetragon in 2005.
He is a Principal of the investment manager, a member of the Tetragon Board of Directors,
the Co-Head of TFG Asset Management, a member of the investment manager’s Investment
Committee, Risk Committee and Executive Committee, a member of the Investment &
Management Committee of TCIP and Tetragon Credit Income II L.P. Mr. Dear was previously a
Managing Director and the Global Head of Hedge Fund Coverage for UBS Warburg Equities.
Prior to this, he was co-head of European sales trading, execution, arbitrage sales and flow
derivatives. He had been with UBS since 1988, including six years in New York. Mr. Dear was
in equity sales at Prudential Bache before joining UBS and started his career as a petroleum
engineer with Marathon Oil Co. Mr. Dear holds a BSc degree in Petroleum Engineering from
Imperial College in London. Mr. Dear is based in London.
WILLIAM P. ROGERS, JR.
Independent Director
READE GRIFFITH
PADDY DEAR
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CORPORATE GOVERNANCE The Board of Directors (continued)
Size, Independence and Composition of the Board of
Directors of Tetragon and the Tetragon Master Fund
The structure, and practices and committees of the
Board of Directors of each of Tetragon and the Tetragon
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 Tetragon and the Tetragon 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 Tetragon’s website at
http://www.tetragoninv.com/investors/risk-factors.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 Tetragon’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 Tetragon and the
Tetragon Master Fund
Each member of Tetragon’s and the Tetragon Master Fund’s
Boards of Directors is elected annually by the holder of
Tetragon’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 Tetragon’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 Tetragon and the
Tetragon Master Fund
The Boards of Directors of Tetragon and the Tetragon
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 Tetragon’s voting
shares.
The Directors are responsible for the management of
Tetragon and the Tetragon Master Fund. They have
delegated to the investment manager certain functions,
including broad discretion to adopt an investment strategy
to implement Tetragon’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 of such Director’s interests 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 Tetragon or the Tetragon Master
Fund or in which Tetragon or the Tetragon 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 Tetragon or the Tetragon Master
Fund or in which Tetragon of the Tetragon Master Fund
is otherwise interested; and (c) shall not be accountable
to Tetragon or the Tetragon 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
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authorise the purchase or maintenance by Tetragon and the
Tetragon Master Fund for any Director or officer or former
Director or officer of Tetragon or the Tetragon Master Fund
of any insurance, in respect of any liability which would
otherwise attach to the Director or officer or former Director
or officer.
The Board of Directors (continued)
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 Tetragon or the Tetragon 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 Tetragon or
the Tetragon 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 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 Tetragon and
the Tetragon Master Fund from a financial point of view.
Certain Corporate Governance Rules
Tetragon and the Tetragon Master Fund are required to
comply with all provisions of The Companies (Guernsey)
Law, 2008 relating to corporate governance to the extent
the same are applicable and relevant to Tetragon’s
activities. In particular, each Director must seek to act in
accordance with the “Code of Practice-Company Directors”
and the Tetragon Master Fund must seek to apply the “Code
of Corporate Governance” issued by the Guernsey Financial
Services Commission. Tetragon reports against the AIC
Corporate Governance Guide for Investment Companies
and, as such, is deemed to meet the provisions of the Code
of Corporate Governance issued by the Guernsey Financial
Services Commission. No formal corporate governance
code applies to Tetragon or the Tetragon Master Fund under
Dutch law.
Indemnity
Each present and former Director or officer of Tetragon and
the Tetragon 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 Tetragon or
the Tetragon Master Fund. In addition, the Directors may
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The Audit Committee
The Audit Committee of Tetragon
currently comprises the four
Independent Directors and is
responsible for, among other items,
assisting and advising Tetragon's Board
of Directors with matters relating to
Tetragon's accounting and financial
reporting processes and the integrity
and audits of Tetragon'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 Tetragon's and the
Tetragon Master Fund's independent
auditor, the audit and non-audit fees
charged by the independent auditor
and the adequacy of Tetragon's and
the Tetragon Master Fund's internal
accounting controls.
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The Investment Manager
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Tetragon Financial Management LP has been appointed
the investment manager of Tetragon and the Tetragon
Master Fund pursuant to an investment management
agreement dated 26 April 2007. The investment manager’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 Tetragon’s
voting shares and are the voting members of the investment
manager’s Investment and Risk Committees. Reade Griffith
acts as the authorised representative of the general partner
and the investment manager.
Its Investment Committee is responsible for the investment
management of Tetragon and the Tetragon 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 Tetragon and the Tetragon
Master Fund and approves each significant investment by
them.
The investment manager’s Risk Committee is responsible
for the risk management of Tetragon and the Tetragon
Master Fund portfolio and performs active and regular
oversight and risk monitoring. The Risk Committee has the
same composition as the investment committee.
The investment manager's Executive Committee oversees
all key non-investment and risk activities of the investment
manager and currently consists of Reade Griffith, Paddy
Dear, David Wishnow, Stephen Prince, Paul Gannon, Sean
Côté and Greg Wadsworth.
Summary of Key Terms of Tetragon’s Investment
Management Agreement
Under the terms of the Investment Management
Agreement, the investment manager has full discretion
to invest the assets of Tetragon and the Tetragon Master
Fund in a manner consistent with the investment objective
of Tetragon. The investment manager 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 the investment
manager in its discretion. The investment manager 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 Tetragon or the Tetragon Master Fund
giving notice to the investment manager or the investment
manager giving notice to Tetragon or the Tetragon 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 Tetragon Master Fund, Tetragon or any investor
in the Tetragon Master Fund or Tetragon 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 Tetragon
or the Tetragon Master Fund, in the absence of fraud or
wilful misconduct on the part of an indemnified party,
and Tetragon and the Tetragon 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.
The investment manager may act as investment manager
or advisor to any other person, so long as its services to
Tetragon or the Tetragon Master Fund are not materially
impaired thereby, and need not disclose to Tetragon or the
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The investment manager (continued)
Tetragon 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
Tetragon or the Tetragon 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 Tetragon or the Tetragon Master Fund.
The investment manager is authorised to enter into
transactions on behalf of Tetragon and the Tetragon
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 of
Directors of Tetragon and the Tetragon 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 recognised investment bank, auditing
firm or other appropriate professional firm substantively to
the effect that the financial terms of the transaction are fair
to Tetragon and the Tetragon Master Fund from a financial
point of view.
Management and Incentive Fees; Expenses.
All fees and expenses of Tetragon and the Tetragon Master
Fund, except for the incentive fees for the investment
manager (as described below), will be paid by the Tetragon
Master Fund, including management fees relating to the
administration of Tetragon.
The investment manager is entitled to receive management
fees equal to one and one-half percent (1.5%) per annum
of the NAV of Tetragon 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 Tetragon Master Fund.
Tetragon 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 Tetragon 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 Tetragon.
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).
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 Tetragon Master Fund.
An incentive fee of $7.1 million was accrued in Q4 2016
in accordance with Tetragon’s investment management
agreement. The hurdle rate for the Q1 2017 incentive fee has
been reset at 3.646578% (Q4 2016: 3.505748%) as per the
process outlined above and in accordance with Tetragon’s
investment management agreement.
The NAV determined in accordance with IFRS includes
carrying investments in TFG Asset Management businesses
at fair value rather than being consolidated, which was how
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The investment manager (continued)
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they were previously treated under U.S. GAAP. The result of
the foregoing has been an increase in NAV and an incentive
fee payable of U.S.$25.1 million. The investment manager
has agreed to accept payment of this portion of the
incentive fee in the form of non-voting shares, which will be
held in escrow until 31 December 2021 or, at the Manager’s
option, the earlier occurrence of a realisation event with
respect to these TFG Asset Management business, and
subject to a “clawback” mechanism should the NAV of the
TFG Asset Management businesses decline at the end of the
escrow period.
Tetragon and the Tetragon 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. Tetragon and the Tetragon
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,
Tetragon granted to the investment manager options
to purchase 12,545,330 of Tetragon'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
of Tetragon’s non-voting shares to Euronext Amsterdam
and will remain exercisable until the 10th anniversary of
that date (i.e., 26 April 2017). None of the options have
been exercised. The options, if exercised, will be settled by
Tetragon on a cashless basis by issuing to the investment
manager the net shares (based on the then-current share
price) resulting from such exercise.
The Investment Manager’s Role with Respect to TFG
Asset Management.
The investment manager’s responsibilities with respect to
Tetragon and the Tetragon Master Fund include, inter alia:
– investing and reinvesting the assets of Tetragon and the
Tetragon Master Fund in securities, derivatives and other
financial instruments and other investments of whatever
nature and committing the assets of Tetragon and the
Tetragon 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 Tetragon’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 Tetragon and the Tetragon 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 Tetragon and the
Tetragon 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 Tetragon
Master Fund, and, as such, the investment manager is
responsible for exercising any of the Tetragon Master
Fund’s voting or similar rights with respect to TFG Asset
Management, as is true for the Tetragon Master Fund’s other
investments. As with any other category of investments,
the investment manager is also responsible for decisions
with respect to acquisitions and dispositions by the
Tetragon Master Fund of asset management businesses – as
investment decisions with respect to the Tetragon Master
Fund’s cash or other assets.(1) 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.
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The investment manager (continued)
The Tetragon 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. The investment manager
is responsible for any decision to invest cash into any fund
or other vehicle managed by a TFG Asset Management
business(2) 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.
The investment manager has, since its inception, relied
on two Polygon entities(3) for a broad range of services to
support its activities.(4)
Following Tetragon’s 28 October 2012 acquisition of
Polygon Management L.P., these entities have been part
of TFG Asset Management. The services provided to the
investment manager under a Services Agreement by
TFG Asset Management, through these entities, include
infrastructure 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 Tetragon’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
the investment manager, in a consistent, fair, transparent
and commercially based manner.(5)
TFG Asset Management then charges fees to the investment
manager for the services allocated to the investment
manager on a cost-recovery basis designed to achieve full
recovery of the allocated costs. In 2016 the total amount
recharged to the investment manager was $14.0 million.
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.(6)
Consequently, one of the most critical cost allocations
relates 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 the investment manager) 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 the investment manager (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 the investment manager. 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 used to process monthly
cost allocations. Such allocations are invoiced monthly to
users of the TFG Asset Management platform that are not
owned by TFG Asset Management, including the investment
manager, 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.
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The investment manager (continued)
TFG Asset Management's auditors, reporting directly to
Tetragon’s Audit Committee, are currently engaged to
periodically test that the costs allocated to (and therefore
recovered from) the investment manager have been
properly calculated in accordance with the approved cost-
allocation methodology. Tetragon’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.
(1) The investment manager has determined that Tetragon’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.
(2) The investment manager is also responsible for selecting third-party managers
who invest in asset classes appropriate for the Tetragon Master Fund.
(3) 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.
(4) 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 Tetragon’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 the investment
manager.
(5) This cost allocation methodology also applies to the other TFG Asset
Management businesses to which the Polygon entities provide services.
(6) Employee compensation will also include TFG Asset Management’s long-term
incentive plan and its other equity-based awards.
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TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2016
The Directors present to the shareholders their report together with the audited financial statements for the year ended 31
December 2016.
THE COMPANY AND ITS INVESTMENT OBJECTIVE
Tetragon Financial Group Limited was registered in Guernsey on 23 June 2005 as a company limited by shares, with
registered number 43321. All voting shares of Tetragon are held by Polygon Credit Holdings II Limited. Tetragon continues to
be registered and domiciled in Guernsey, and Tetragon’s non-voting shares are listed on Euronext in Amsterdam, a regulated
market of Euronext Amsterdam N.V., (ticker symbol: TFG.NA) and on the Specialist Fund Segment of the main market of the
London Stock Exchange plc (ticker symbol: TFG.LN). Tetragon acts as a feeder fund in a “master feeder structure” investing
substantially all of its assets in Tetragon Financial Group Master Fund Limited. The registered office of Tetragon is 1st Floor,
Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ.
Tetragon’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 Tetragon 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 2016, TFG Asset Management consisted of Polygon Global Partners LP and Polygon Global Partners LLP
(Polygon), LCM Asset Management LLC (LCM), Equitix Holdings Limited (Equitix), Hawke’s Point, Tetragon Credit Income
Partners (TCIP) and the GreenOak Real Estate LP (GreenOak).
TFG Asset Management LP and Tetragon Financial Management L.P., Tetragon’s investment manager, are both registered
as investment advisers under the U.S. Investment Advisers Act of 1940, and two of its investment management entities,
Polygon Global Partners LLP and Equitix Investment Management Limited, are authorized and regulated by the United
Kingdom Financial Conduct Authority.
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on pages 80 to 81 of the Tetragon 2016 Audited Financial Statements. A detailed review
of activities and future developments is contained in the Annual Report issued with these financial statements to the
shareholders.
On 28 September 2016, Tetragon became a member of the Association of Investment Companies (AIC), the trade body for
closed-ended investment companies.
On 23 December 2016, Tetragon and the Tetragon Master Fund announced that, effective for accounting periods ending on
or after 31 December 2016, Tetragon has adopted International Financial Reporting Standards as adopted by the European
Union (IFRS) as the accounting framework for preparing Tetragon’s reporting, audited financial statements and to calculate
the NAV for the purposes of determining the fees payable to the investment manager. Further information regarding this
change in accounting framework can be found in Notes 2 and 4 of these financial statements.
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* (resigned 14 June 2016)
William Rogers Jr.* (appointed 14 June 2016)
* Independent Directors
(continued)
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The remuneration for Directors is determined by resolution of Tetragon’s voting shareholder. Each of the Directors’ annual
fee is U.S.$100,000 (2015: U.S.$100,000) as compensation for service on the Boards of Directors of both Tetragon and the
Tetragon Master Fund, which is paid in quarterly instalments by the Tetragon 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 Tetragon instead of their quarterly Director’s fee. With respect to
the year ending 31 December 2016, Frederic Hervouet has elected to receive shares and he received 2,893 Tetragon shares in
relation to the fourth quarter fee of 2015 and such shares were issued in the first quarter of 2016. Frederic also received 2,538
shares in relation to the first quarter’s fee, 2,472 shares in relation to the second quarter’s fee and 2,254 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 2016 dividend process.
The Directors are entitled to be repaid by Tetragon 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 Tetragon or the Tetragon 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 Tetragon 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 Tetragon’s cash generation capacity in the short and medium term, (ii) the current
and anticipated performance of Tetragon, (iii) the current and anticipated operating and economic environment and (iv)
other potential uses of cash ranging from preservation of Tetragon’s investments and financial position to other investment
opportunities.
The Directors declared a dividend amounting to U.S.$0.1650 per non-voting share for the Quarter Ended 31 December 2015,
U.S.$0.1650 per non-voting share for the Quarter Ended 31 March 2016, U.S.$0.1675 per non-voting share for the Quarter
Ended 30 June 2016 and U.S.$0.1675 per non-voting share for the Quarter Ended 30 September 2016. The total dividend
declared during the year ended 31 December 2016 amounted to U.S.$61.9 million or U.S.$0.6650 per non-voting share (31
December 2015: U.S.$62.5 million or U.S.$0.64 per non-voting share). On 28 February 2017, the Directors have declared a
dividend U.S.$ 0.1725 per non-voting share for the Quarter Ended 31 December 2016.
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 accordance with IFRS 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
(continued)
continue in business.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
The Directors are responsible for keeping of proper accounting records that 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.
Tetragon is required to comply with all provisions of Guernsey company law relating to corporate governance to the extent
the same are applicable and relevant to its activities. In particular, each Director must seek to act in accordance with the
“Code of Practice – Company Directors” and Tetragon must seek to apply the “Code of Corporate Governance” issued by
the Guernsey Financial Services Commission. Tetragon reports against the AIC Corporate Governance Guide for Investment
Companies and, as such, is deemed to meet the provisions of the Code of Corporate Governance issued by the Guernsey
Financial Services Commission. No formal corporate governance code applies to Tetragon Master Fund under Dutch Law.
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 Tetragon’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 Tetragon’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:
Frederic Hervouet, Director
David Jeffreys, Director
Date: 28 February 2017
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Directors’ Statements
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The Directors of Tetragon confirm that (i) this Annual Report constitutes the Tetragon
management review for the year ended 31 December 2016 and contains a fair review
of that period and (ii) the 2016 audited financial statements accompanying this Annual
Report for Tetragon have been prepared in accordance with applicable laws and in
accordance with IFRS as adopted by the European Union.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
The AIC Code
In September 2016, Tetragon became a member of The Association of Investment Companies (AIC), the trade body for
closed-ended investment companies. Founded in 1932, the AIC represents approximately 350 members across a broad
range of closed-ended investment companies, incorporating investment trusts and other closed ended investment
companies. Tetragon is classified by the AIC in its Flexible Investment sector as a company whose policy allows it to invest
in a range of asset types. The AIC has indicated that the sector may assist investors and advisers to more easily find and
compare those investment companies which have the ability to invest in a range of assets and allow investors to compare
investment companies with similar open-ended funds.
The AIC has a Code of Corporate Governance (AIC Code) which sets out a framework of best practice in respect of the
governance of investment companies. The Board of Directors of Tetragon considers that reporting against the principles
and recommendations of the AIC Code, and by reference to the AIC Corporate Governance Guide for Investment Companies
(which incorporates the UK Corporate Governance Code), will provide better information to shareholders.
Corporate Governance Report
AIC Code Principle
Compliance Statement
1. The Chairman should be
independent.
2. A majority of the board should be
independent of the manager.
3. Directors should be submitted
for re- election at regular intervals.
Nomination for re-election should
not be assumed but based on
disclosed procedures and continued
satisfactory performance
4. The board should have a policy
on tenure, which is disclosed in the
annual report.
There is no permanent Chairman, but a chairman is elected for each meeting of the Board of
Directors. An experienced Independent Director usually performs the role of chairman. All
Directors have the opportunity to declare conflicts of interest at each meeting of the Board of
Directors; such conflicts or potential conflicts are recorded in the relevant board minutes.
Tetragon’s Articles of Incorporation require not less than a majority of the Directors to be
Independent Directors. Currently two-thirds of the Board of Directors (four out of six) are
Independent Directors. 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.
Corporate Governance Code in all material respects. The Board of Directors has undertaken an
evaluation of the independence of each of the four Independent Directors.
Directors are submitted for re-election by the Voting Shareholder at the AGM and the
procedures for re- election are disclosed in Tetragon’s Annual Report and on the Tetragon
website.
All vacancies on the Board of Directors may be filled and additional Directors may be
appointed by 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 Voting Shareholder. 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 or a
certain tenure as a Director. The Board of Directors evaluates its performance and effectiveness
by open discussion in board meetings from time to time.
Tetragon does not operate a maximum threshold for tenure, nor any guaranteed tenure.
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The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
5. There should be full disclosure of
information about the board.
Tetragon will continue to comply with this recommendation and include biographies of the
Directors in the Tetragon Annual Report. Biographies are also included on Tetragon’s website.
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The Board of Directors has established an Audit Committee comprising the four Independent
Directors and normally chaired by David Jeffreys, a qualified accountant. The Audit Committee
is responsible for, among other items, assisting and advising the Board of Directors with
matters relating to Tetragon’s accounting and financial reporting processes and the integrity
and audits of Tetragon’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 Tetragon’s independent accountants, the audit and non-audit fees charged
by the independent accountants and the adequacy of internal accounting controls. The Board
of Directors has not deemed it necessary to appoint a Nomination Committee, Remuneration
Committee or a Management Engagement Committee.
The Directors’ Statements can be found on page 41 of this Annual Report.
Tetragon is required to comply with all provisions of Guernsey company law relating to
corporate governance to the extent the same are applicable and relevant to Tetragon’s
activities. In particular, each Director must seek to act in accordance with the "Code of Practice
– Company Directors” and the Tetragon Master Fund must seek to apply the “Guernsey Finance
Sector Code of Corporate Governance” issued by the Guernsey Financial Services Commission.
Tetragon reports against the AIC Corporate Governance Guide for Investment Companies and,
as such, is deemed to meet the provisions of the Code of Corporate Governance issued by the
Guernsey Financial Services Commission. No formal corporate governance code applies to
Tetragon under Dutch law.
The current Board of Directors has an appropriate balance of skills, experience, length of
service and knowledge of the company. Bryon Knief left the board in 2016 and William J.
Rogers, Jr. was appointed in his place.
The Board of Directors conducts an annual assessment to ensure the compliance with the
Guernsey Finance Sector Code of Corporate Governance including assessing compliance
with requirements for the Board of Directors to is comprised of an appropriate balance of
skills, knowledge and competence. The Board of Directors is made up of a broad range of
professionally qualified or industry experienced personnel with relevant and suitable academic
and professional backgrounds including a majority being Independent Directors. The Board of
Directors believes this is a good blend of skill sets that is relevant to Tetragon’s activities.
The Board of Directors evaluates its own performance and effectiveness, including that of
individual Directors and committees, by open discussion in Board meetings.
6. The board should aim to have a
balance of skills, experience, length
of service and knowledge of the
company.
7. The board should undertake
a formal and rigorous annual
evaluation of its own performance
and that of its committees and
individual directors.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
8. Director remuneration should
reflect their duties, responsibilities
and the value of their time spent.
9. The independent directors should
take the lead in the appointment
of new directors and the process
should be disclosed in the annual
report.
10. Directors should be offered
relevant training and induction.
No remuneration committee has been appointed by the company.
The remuneration for Directors is determined by resolution of the Voting Shareholder.
Currently, the Directors’ annual fee is $100,000, in compensation for service on the Boards
of Directors of both Tetragon and the Tetragon Master Fund. The Tetragon Master Fund pays
the Directors’ fees. The Directors affiliated with the Voting Shareholder have waived their
entitlement to a fee. The Directors are entitled to be repaid for all travel, hotel and other
expenses reasonably incurred by them in the discharge of their duties. None of the Directors
has a contract providing for benefits upon termination of employment.
In addition, Tetragon maintains appropriate directors’ and officers’ liability insurance in respect
of legal action against its Directors on an on-going basis.
Details of the Directors’ remuneration and indemnity arrangements are described on page
39 of this report and under the headings Governance: Board of Directors: Compensation/
Indemnity on Tetragon’s website.
William J. Rogers, Jr. was appointed to the Board of Directors in 2016. Each Director is
appointed annually by the Voting Shareholder in accordance with the process disclosed on
Tetragon’s website and on page 30 of this report.
The Board of Directors has determined that each of the four Independent Directors satisfies the
standards for independence contained in The U.K. Corporate Governance Code in all material
respects.
The Directors are offered training and induction. The Independent Directors have visited
the investment manager’s offices and met with key personnel. In addition, the Directors
are regularly (at least quarterly) provided with updated, detailed information regarding the
investment manager.
11. The Chairman (and the board)
should be brought into the process
of structuring a new launch at an
early stage.
The Risk Committee of the investment manager is responsible for the risk management of
Tetragon and the Tetragon Master Fund portfolio and performs active and regular oversight
and risk monitoring. The risk committee has the same composition as the investment
committee.
The investment manager's Executive Committee oversees all key non-investment and risk
activities of the investment manager and currently consists of Reade Griffith, Paddy Dear, David
Wishnow, Stephen Prince, Paul Gannon, Sean Côté and Greg Wadsworth.
Under the terms of the Investment Management Agreement, the investment manager has full
discretion to invest in a manner consistent with the investment objective of Tetragon. The
investment manager 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
the investment manager in its discretion.
The investment manager is authorised to enter into transactions on behalf of Tetragon with
persons who are affiliates of the investment manager, provided that in connection with any
such transaction that exceeds $5 million aggregate investment, the investment manager
(continued)
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The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
(continued)
(continued)
11. The Chairman (and the board)
should be brought into the process
of structuring a new launch at an
early stage.
12. Boards and managers should
operate in a supportive, co-operative
and open environment.
13. The primary focus at regular
board meetings should be a review
of investment performance and
associated maters, such as gearing,
asset allocation, marketing/investor
relations, peer group information
and industry issues.
obtains either (i) the approval of a majority of the members of the Board of Directors of
Tetragon 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 recognised investment bank,
auditing firm or other appropriate professional firm substantively to the effect that the financial
terms of the transaction are fair to Tetragon and the Tetragon Master Fund from a financial
point of view.
In practice, transactions with a related-party component have only ever proceeded with the
unanimous approval of all of the Independent Directors.
The key terms of the Investment Management Agreement are summarised on Tetragon’s
website and on pages 33 and 34 of this report.
The process operates as described between the investment manager and the Board of
Directors.
Tetragon’s website explains the governance structure operated by Tetragon and also contains
a statement of Tetragon’s commitments to Corporate Responsibility. Although Tetragon’s
Independent Directors visit the managers’ offices from time to time they are necessarily
external to the investment manager’s office environment.
Tetragon’s investment objective is to generate distributable income and capital appreciation.
Tetragon’s investment strategy to achieve that investment objective is stated in this Annual
Report (page 13) and on its website (under the heading Investment Strategy).
The investment manager provides a detailed investment report to the Board of Directors
at quarterly board meetings across all key investment matrices including performance and
allocation. The Investment Manger also provides a risk management update to the Board of
Directors at quarterly meetings. Industry issues are raised and discussed.
Directors also have the opportunity to discuss these and any other matters with the investment
manager outside of meetings of the Board of Directors as appropriate.
14. Boards should give sufficient
attention to overall strategy.
The Board of Directors does not hold separate strategy meetings, but overall strategy is
discussed in detail at quarterly meetings of the Board of Directors and at ad hoc board
meetings when required.
15. The board should regularly
review both the performance of, and
contractual arrangements with, the
Manager (or executives of a self -
managed company).
The Board of Directors regularly considers reports from the investment manager at quarterly
meetings. Tetragon’s administrator, State Street Guernsey Limited (SSGL), circulates ad hoc
updates from Tetragon’s regulator, the GFSC, and SSGL’s compliance function monitors
performance within relevant Guernsey laws and GFSC rules and advises the Board of Directors
of any issues or likely issues (generally on a quarterly basis).
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
16. The board should agree policies
with the manager covering key
operational issues.
17. Boards should monitor the
level of the share price discount or
premium (if any) and, if desirable,
take action to reduce it.
18. The board should monitor and
evaluate other service providers.
19. The board should regularly
monitor the shareholder profile of
the company and put in place a
system for canvassing shareholder
views and for communicating the
board’s views to shareholders.
20. The board should normally
take responsibility for, and have a
direct involvement in, the content
of communications regarding major
corporate issues even if the manager
is asked to act as spokesman.
21. The board should ensure that
shareholders are provided with
sufficient information for them to
understand the risk/reward balance
to which they are exposed by holding
the Class A Shares.
The Board of Directors has delegated to the investment manager certain functions, including
broad discretion to adopt an investment strategy and key operational issues. However,
certain matters are specifically reserved for the Board of Directors under Tetragon’s Articles
of Incorporation and the Board of Directors monitors the investment manager’s performance
through quarterly and, where appropriate, ad hoc, board meetings. As a closed-ended
investment vehicle Tetragon is not subject to group policies.
The Board of Directors considers detailed reports from the investment manager at each
quarterly board meeting (including updates from Tetragon’s corporate brokers) which address
this area. The Board of Directors and the investment manager have been, and will continue to
be, proactive in addressing the discount as demonstrated by strategic actions over time.
The Board of Directors has delegated the monitoring and evaluation of service providers to the
investment manager subject to review and consideration at meetings of the Board of Directors.
The Audit Committee, comprising only the Independent Directors, satisfies itself as to the
independence and effectiveness of Tetragon’s auditors.
The investment manager has been delegated responsibility for monitoring the shareholder
profile of Tetragon and has in place a system for canvassing shareholder views and
communicating views to the shareholders. The investment manager holds regular investor
calls and an annual investor day. The investment manager provides the Board of Directors with
comprehensive shareholder reports and corporate broker updates and analysis at meetings of
the Board of Directors.
All major corporate communications are reviewed and approved by the Directors.
Tetragon’s investment strategy and risk factors are set out in detail on Tetragon’s website and
in this Annual Report.
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Additional Information
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Dividends and other distributions
Reporting
Tetragon has sought to continue to return value to its
shareholders, including through dividends and share
repurchases.
Dividends:
Tetragon 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%.(1)
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 Tetragon 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 Tetragon’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.
Tetragon has paid, and may continue to pay, scrip dividends
currently conducted through an optional dividend
reinvestment program. If the Board of Directors declares
a cash dividend payable by the company, they will also (in
their capacity as directors of the Tetragon Master Fund)
declare an equal dividend per share payable concurrently
by the Tetragon Master Fund.
Share Repurchases:
Tetragon has engaged, and may 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 Tetragon’s excess
cash and an efficient means by which to return such
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. Tetragon also continues to explore other methods of
improving the liquidity of its shares.
In accordance with applicable regulations under Dutch
law, Tetragon publishes monthly statements on its
website for the benefit of its investors containing the
following information: the total value of the investments
of the Tetragon Master Fund; a general statement of the
composition of the investments of the Tetragon Master
Fund; and the number of legal issued and outstanding
shares of Tetragon.
In addition, in accordance with the requirements of
Euronext Amsterdam and applicable regulations under
Dutch law, Tetragon 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 IFRS and audited in accordance with
international auditing standards as well as U.S. GAAS for
regulatory purposes, if applicable. The NAV of Tetragon is
available to investors on a monthly basis on the company’s
website at www.tetragoninv.com.
Statement Regarding Non-Mainstream Pooled
Investments (NMPI)
Tetragon notes the UK Financial Conduct Authority (FCA)
rules relating to the restrictions on the retail distribution
of unregulated collective investment schemes and close
substitutes (referred to as "non-mainstream pooled
investments"), which came into effect on 1 January 2014.
Tetragon has received appropriate legal advice that
confirms that Tetragon's shares do not constitute NMPI
under the FCA’s rules and are, therefore, excluded from the
FCA's restrictions that apply to non-mainstream pooled
investment products.
Tetragon expects that it will continue to conduct its affairs
in such a manner that Tetragon’s shares will continue to be
excluded from the FCA's rules relating to NMPI.
(1) Tetragon seeks to deliver 10-15% Return on Equity (RoE) per annum to
shareholders. Tetragon’s returns will most likely fluctuate with LIBOR. LIBOR
directly flows through some of Tetragon’s investments and, as it can be seen
as the risk-free short-term rate, it should affect all of Tetragon’s investments. In
high-LIBOR environments, Tetragon should achieve higher sustainable returns;
in low-LIBOR environments, Tetragon should achieve lower sustainable returns.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
2016 Financial
Review
ABHISHEK AGRAWAL and SANTOS PALACIOS
POLYGON
2016 Financial Review
This section shows consolidated financial data for Tetragon and the Tetragon Master Fund. In this section, where
applicable, the comparative data stated is as reported by Tetragon in its previous Annual Reports. The financial
data and metrics have not been restated to reflect what they would have been had Tetragon reported under IFRS
at the time.
FIGURE 12
Financial Highlights
Tetragon Financial Group
Financial Highlights Through 2014 - 2016
Reported GAAP net income ($MM)
Fair Value net income ($MM)
Reported GAAP EPS
Fair Value EPS
Fair Value return on equity
Net Assets ($MM)
GAAP number of shares outstanding (millions)
NAV Per Share
Fully diluted shares outstanding (millions)
Fully diluted NAV Per Share
NAV Per Share total return
DPS
2016
2015
2014
$116.5
$125.9
$1.26
$1.37
6.3%
$127.3
$263.9
$1.31
$2.72
14.5%
$95.1
$118.1
$1.00
$1.24
6.6%
$1,934.9
$1,987.3
$1,818.5
87.1
$22.21
96.7
$20.01
8.5%
95.9
$20.73
104.2
$19.08
16.0%
$0.6725
$0.6475
95.9
$18.96
106.6
$17.05
8.1%
$0.618
Tetragon uses the following metrics, among others, to understand the progress and performance of the business:
– Net Income ($125.9 million): Please see Figure 13 for a breakdown of this.
– Return on Equity (6.3%): Net Income ($125.9 million) divided by Net Assets at the start of the year ($1,987.3 million).
– Fully Diluted Shares Outstanding (96.7 million): Adjusts the IFRS or GAAP shares(i) outstanding (87.1 million) for
various dilutive factors (9.6 million shares). Please see Figure 30 for more details.
– EPS ($1.37): Calculated as Net Income ($125.9 million) divided by weighted-average IFRS or GAAP shares(i) during the
period (92.1 million).
– Fully Diluted NAV Per Share ($20.01): Calculated as Net Assets ($1,934.9 million) divided by Fully Diluted Shares
Outstanding (96.7 million).
(i) The time-weighted average daily GAAP Shares outstanding during the applicable year.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
2016 FINANCIAL REVIEW Adoption of IFRS
As previously announced, Tetragon has adopted IFRS as the
accounting standard for preparing and reporting its audited
financial statements, and this has resulted in all of its
investments now being carried at fair value. This accounting
methodology is equivalent to the one used by Tetragon to
determine its Fair Value NAV as reported in prior periods
and, therefore, the reported NAV and the IFRS NAV are now
equivalent. Going forward, this should mean that Tetragon’s
reported net assets are equivalent to its audited net assets.
In addition, Tetragon will calculate its NAV on the basis
of IFRS for purposes of determining fees payable to the
investment manager. As a result of an increase in Tetragon’s
NAV as of 31 December 2016 relating to the NAV of certain
TFG Asset Management businesses being determined in
accordance with IFRS, an incentive fee of $25.1 million will
be payable to the investment manager. The investment
manager has agreed to accept payment of this incentive fee
in the form of deferred 2,018,270 Tetragon shares.(1) From
an accounting perspective in relation to this deferred fee,
there is no liability included in the net assets (for both IFRS
and reported NAV) but there is a dilution for the full amount
of the shares in the diluted share count. In prior periods,
when Tetragon had reported fair value net assets and NAV
Per Share, it had accounted for the equivalent incentive
fee on the expectation of cash settlement and therefore
as a liability, rather than as deferred shares. On a like-for-
like basis, the current treatment of this fee, compared
to previously, results in an increase in net assets (+$25.1
million), but a reduction in NAV Per Share on a fully diluted
basis (-$0.16 per share).
(1) The deferred Tetragon shares will be held in escrow until 31 December 2021 or, at
the investment manager’s option, the earlier occurrence of a realisation event with
respect to these TFG Asset Management businesses, and subject to a “clawback”
mechanism should the NAV of these TFG Asset Management businesses decline at
the end of the escrow period.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Consolidated Statement of Comprehensive Income
FIGURE 13
Tetragon Financial Group
Consolidated Statement of Comprehensive Income 2015 - 2016
Net gain on financial assets at fair value through profit or loss
Net gain on derivative financial assets and liabilities
Interest income
Fee income
Other income - cost recovery
Insurance recovery
Dividend income
Investment income
Management and performance fees
Other operating and administrative expenses
Interest expense
Amortisation of intangible assets
Total operating expenses
Net Investment income
Net change in unrealised appreciation in investments
Realised gain on investments
Realised and unrealised losses from hedging and fx
Net realised and unrealised gains from investments and fx
Net income before tax
Income tax
Net income
2
0
1
6
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R
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V
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W
2016
($millions)
2015
($millions)
167.5
14.9
1.7
-
-
-
-
184.1
(49.8)
(6.9)
(1.5)
-
(58.2)
125.9
-
-
-
-
125.9
-
125.9
-
-
134.7
34.2
9.9
9.8
0.1
188.7
(92.3)
(43.6)
-
(29.7)
(165.6)
23.1
157.4
90.5
(6.2)
241.7
264.8
(0.9)
263.9
This table shows a consolidated view of the annual comprehensive income for both Tetragon and the Tetragon Master Fund.
For the full year 2016, the difference between net income as shown here and IFRS net income on a consolidated basis is the
removal of share-based compensation of $9.4 million relating to the 2012 acquisition of TFG Asset Management LP.
This has been excluded from the net income here, as it is considered by Tetragon to be an acquisition cost rather than an
ongoing expense. The full year 2015 comparative column reflects the Fair Value Statement of Operations as reported at the
time.
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TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Consolidated Statement of Financial Position
FIGURE 14
Tetragon Financial Group
Consolidated Statement of Financial Position as at 31 December 2015 and 2016
ASSETS
Investments
Cash and cash equivalents
Amounts due from brokers
Derivative financial assets
Other receivables
Total assets
LIABILITIES
Other payables and accrued expenses
Loans and Borrowings
Deferred tax liability and income tax payable
Derivative financial liabilities
Total Liabilities
NET ASSETS
2016
($millions)
2015
($millions)
1,487.4
425.2
51.0
22.2
0.6
1,543.0
402.7
59.9
19.4
3.1
1,986.4
2,028.1
9.4
38.0
-
4.1
51.5
36.0
-
4.1
0.7
40.8
1,934.9
1,987.3
This table shows a consolidated view of the Financial Position of Tetragon and the Tetragon Master Fund.
Although the consolidated net assets are identical to the IFRS net assets reported by Tetragon Financial Group Limited, the
split between investments and cash is different. Under IFRS, certain investments and cash contained within non-investment
fund-controlled subsidiaries are aggregated as an investment and reported at fair value.
Instead, this table looks through to the underlying investments and cash, and accounts for each separately, at fair value. This
approach has the impact of increasing cash by $32.6 million and decreasing investments by $32.6 million. This treatment is
consistent with how Tetragon has reported these investments in prior periods.
52
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Statement of Cash Flows Through 2014 - 2016
FIGURE 15
Tetragon Financial Group
Statement of Cash Flows Through 2014 and 2016
2016
($millions)
2015
($millions)
2014
($millions)
2
0
1
6
F
I
N
A
N
C
I
A
L
R
E
V
I
E
W
OPER ATING ACTIVITIES
Operating cash flows after incentive fees and before
movements in working capital
Purchase of fixed assets
Decrease / (increase) in amount due from brokers
Decrease in net receivables
Cash flows from operating activities
INVESTMENT ACTIVITIES
Proceeds on sales of investments
- Proceeds from sale of CLOs
- Net proceeds from derivative financial instruments
- Proceeds from investments
- Proceeds from realisation of real estate investments
- Proceeds from GreenOak working capital repayment
Purchase of investments
- Purchase of CLOs
- Purchase of loans
- Purchase of real estate investments
- Investments in asset managers
- Investments in European Equity Opportunity Fund
- Investments in Convertible Opportunity Fund
- Investments in Distressed Opportunities Fund
- Investments in Other
Cash flows from operating and investing activities
Proceeds from issue of Shares
Net purchase of shares
Dividends paid to shareholders
Borrowings
Cash flows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Adjustment to cash balance upon deconsolidation
Effect of exchange rate fluctuations on cash and cash
equivalents
220.7
-
8.9
(1.1)
228.5
33.0
14.2
10.9
38.5
-
(31.2)
(8.3)
(36.0)
-
(42.0)
-
-
(19.3)
188.3
0.1
(157.8)
(45.9)
38.0
(165.6)
22.7
402.7
-
(0.2)
315.0
(0.1)
(7.8)
(19.6)
287.5
6.5
7.7
73.3
46.8
6.4
(62.4)
-
(81.4)
(133.1)
(5.0)
-
(5.0)
(22.0)
119.3
0.1
(60.9)
(50.5)
-
(111.3)
8.0
402.0
(7.6)
0.3
290.9
(0.1)
(10.2)
(0.4)
280.2
171.5
-
17.3
56.3
5.1
(84.3)
(1.4)
(77.0)
-
-
(15.0)
(30.0)
(62.6)
260.1
-
(50.9)
(52.0)
-
(102.9)
157.2
245.9
-
(1.1)
Cash and cash equivalents at end of period
425.2
402.7
402.0
53
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
IFRS Consolidated Comprehensive Statement of Income to U.S. GAAP Consolidated
Statement of Operations Reconciliation*
FIGURE 16
Tetragon Financial Group
IFRS Consolidated Comprehensive Statement of Income to U.S. GAAP Consolidated Statement of Operations Reconciliation 2016
IFRS
($millions)
Adjustments
($millions)
U.S. GAAP
($millions)
Net gain on financial assets at fair value through profit or loss
Net gain on derivative financial assets and liabilities
Interest income
Fee income
Other income - cost recovery
Dividend income
Investment income
Management and performance fees
Other operating and administrative expenses
Share based employee compensation
Interest expense
Amortisation of intangible assets
Total operating expenses
Net Investment income
Net change in unrealised appreciation in investments
Realised gain on investments
Realised and unrealised losses from hedging and fx
Net realised and unrealised gains from investments and fx
Net income before tax
Income tax
Net income
167.5
14.9
1.7
-
-
-
184.1
(49.8)
(6.9)
(9.4)
(1.5)
-
(67.6)
116.5
-
-
-
-
116.5
-
116.5
(167.5)
(14.9)
105.0
72.7
15.4
4.1
14.8
(3.1)
(80.2)
(13.6)
-
(3.4)
(100.3)
(85.5)
43.7
44.2
(2.9)
85.0
(0.5)
0.8
0.3
-
-
106.7
72.7
15.4
4.1
198.9
(52.9)
(87.1)
(23.0)
(1.5)
(3.4)
(167.9)
31.0
43.7
44.2
(2.9)
85.0
116.0
0.8
116.8
This table reconciles Tetragon’s IFRS Consolidated Statement of Comprehensive Income to Tetragon’s 2016 U.S. GAAP
Consolidated Statement of Operations.
IFRS net income derives from an aggregation of the net income of Tetragon and the Tetragon Master Fund.
The consolidated U.S. GAAP net income has been prepared on the assumption that (i) Tetragon and the Tetragon Master
Fund are investment companies, and (ii) that the Polygon, LCM, Hawke’s Point and TCIP businesses are all considered
"service providers" and have been consolidated rather than reported at fair value.
This basis of presentation is consistent with the basis of presentation in the 2015 Audited Financial Statements.
*The 2016 U.S. GAAP assumptions, and net income and expenses are unaudited.
54
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
IFRS Consolidated Comprehensive Statement of Financial Position to U.S. GAAP
Consolidated Statement of Assets and Liabilities Reconciliation*
FIGURE 17
Tetragon Financial Group
IFRS Consolidated Statement of Financial Position to U.S. GAAP Consolidated Statement of Assets and Liabilities Reconciliation
as at 31 December 2016
2
0
1
6
F
I
N
A
N
C
I
A
L
R
E
V
I
E
W
ASSETS
Investments
Intangible assets
Cash and cash equivalents
Amounts due from brokers
Derivative financial assets
Fixed assets
Deferred tax assets and income tax receivable
Other receivables
Total assets
LIABILITIES
Other payables and accrued expenses
Loans and Borrowings
Deferred tax liability and income tax payable
Derivative financial liabilities
Total Liabilities
NET ASSETS
IFRS
($millions)
Adjustments
($millions)
U.S. GAAP
($millions)
1,520.0
(201.8)
1,318.2
-
392.6
51.0
22.2
-
-
0.6
20.0
65.6
-
-
0.6
7.9
31.7
20.0
458.2
51.0
22.2
0.6
7.9
32.3
1,986.4
(76.0)
1,910.4
9.4
38.0
-
4.1
51.5
42.3
-
7.7
-
50.0
51.7
38.0
7.7
4.1
101.5
1,934.9
(126.0)
1,808.9
This table reconciles Tetragon’s IFRS Consolidated Statement of Financial Position to Tetragon’s 2016 U.S. GAAP
Consolidated Statement of Assets and Liabilities.
The consolidated U.S. GAAP net income has been prepared on the assumption that (i) Tetragon and the Tetragon Master
Fund are investment companies and (ii) that the Polygon, LCM, Hawke’s Point and TCIP businesses are all considered
"service providers" and have been consolidated rather than fair valued.
This basis of presentation is consistent with the basis of presentation in the 2015 Audited Financial Statements.
*The 2016 U.S. GAAP assumptions, assets and liabilities are unaudited.
55
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Other
Information
GUILLAUME WOLFF and MANUELA RATH
LCM
Other Information TFG Asset Management
FIGURE 18 (1)
Bank Loans
TM
LCM Asset Management – a CLO asset management company.
$6.6 billion
– LCM currently manages
14 CLOs
Real Estate Joint Venture
TM
The GreenOak Real Estate joint venture – a real estate-focused principal
investing, lending and advisory firm.
$20B
ASSETS UNDER
MANAGEMENT(2)
31 December 2016
$7.1 billion
– Japan Fund I
– Asia Fund II
– UK Debt Fund I
– Europe Fund I Spain
– U.S. Fund I
– U.S. Fund II
– Global Advisory
– Grafton Advisors
Hedge Funds & Private Equity
TM
Polygon Global Partners – a manager of open-ended hedge fund and
private equity vehicles across a number of strategies.
$1.6 billion
– Mining Opportunity Fund
– European Equity Opportunity
– Global Equities Fund
Fund
– Convertible
Opportunity Fund
– Distressed Opportunities Fund
– Recovery Fund
Infrastructure
TM
Equitix – an integrated core infrastructure asset management and
primary project platform.
$2.5 billion
– Fund I
– Fund II
– Fund III
– Fund IV
– Managed Account
– Energy Saving Investments
– Energy Efficiency Fund
Mining Finance
TM
Hawke’s Point – an asset management company focused on mining
finance that seeks to provide capital to companies in the mining and
resource sectors.
CLO Equity
Startup
Bank Loans
Tetragon Credit Income Partners (TCIP) – TCIP acts a general partner of
a private equity vehicle focusing on CLO investments created by CLO
managers to comply with risk retention rules, including majority stakes
in CLO equity tranches.
$0.3 billion
– Tetregon Credit Income II L.P.
TCI Capital Management LLC - (TCICM) – a CLO loan manager.
$1.4 billion
(1) 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.
57
OFFICE LOCATIONS
London | New York
Plus GreenOak locations
260
APPROX HEADCOUNT
Including GreenOak
GLOBAL OPER ATING
PLATFORM
TFG Asset Management Overview
One of Tetragon’s significant investments is TFG Asset Management, a diversified alternative
asset manager that owns majority and minority private equity stakes in asset management
companies. As at 31 December 2016, TFG Asset Management comprised LCM, the GreenOak
joint venture, Polygon, Equitix, Hawke’s Point, TCIP and TCICM. TFG Asset Management has
approximately $19.5 billion of AUM(2) and approximately 260 employees globally. Figure 19 shows
the breakdown of the AUM by business and Figure 20 depicts the growth of that AUM over the
last five years. Each of the asset managers on the platform is privately held.
TFG Asset Management comprises:
– LCM Asset Management – a CLO asset management company.
– 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 – an asset management company focused on mining finance that seeks to provide capital to companies in
the mining and resource sectors.
– Tetragon Credit Income Partners (TCIP) – TCIP acts a general partner of a private equity vehicle that focuses on CLO
investments created by CLO managers to comply with risk retention rules, including majority stakes in CLO equity
tranches.
– TCI Capital Management LLC (TCICM) – a CLO loan manager.
AUM for TFG Asset Management as of 31 December 2016 totalled approximately $19.5 billion.(2)
FIGURE 19 (2)
TFG Asset Management AUM by Business
at 31 December 2016 ($billions)
FIGURE 20 (2)
TFG Asset Management AUM
at 31 December 2012-2016 ($billions)
$1.4
TCICM
$0.3
TCIP
$2.5
Equitix
$1.6
Polygon
$19.5
$17.1
$6.6
LCM
$9.2
$7.7
$11.1
$7.1
GreenOak
Q4 2012
Q4 2013
Q4 2014
Q4 2015
Q4 2016
LCM
GreenOak
Polygon
Equitix
TCIP
TCICM
(2) Includes GreenOak funds and advisory assets, LCM, Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity
Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon Distressed Opportunities Master
Fund, Equitix, TCI II, and TCICM as calculated by the applicable administrator for value date 31 December 2016. Includes, where relevant, investments by the Tetragon
Master Fund and TCI II (in the case of LCM and TCICM). TFG Asset Management AUM as used in this report includes the AUM of several investment advisers, including
Tetragon Asset Management L.P., and GreenOak, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940. Figures for GreenOak
and TCI II may also include committed capital. TCICM utilises the investment expertise of certain third-party sub-advisors to assist in the management of its CLOs. Such
sub-advisors will typically earn a substantial portion of the management fees from the CLOs.
58
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
FIGURE 21
TFG Asset Management Overview (continued)
Tetragon Financial Group
TFG Asset Management Pro Forma Statement of Operations (excluding GreenOak)(i)
2016
($millions)
2015
($millions)
2014
($millions)
Management fee income
Performance and success fees(ii)
Other fee income
Interest income
Total income
Operating, employee and administrative expenses
Minority Interest
Net income - "EBITDA equivalent"
64.9
55.1
16.3
2.7
139.0
(83.3)
(8.7)
47.0
55.0
52.1
19.1
2.4
128.6
(75.4)
(6.6)
46.6
O
T
H
E
R
I
N
F
O
R
M
A
T
I
O
N
42.9
19.0
19.2
0.2
81.3
(58.2)
0.0
23.1
(i) This table includes the income and expenses attributable to Tetragon’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 Tetragon’s acquisition of Equitix. Although Tetragon 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 Tetragon backed out through the minority interest line.
GreenOak is not included. The EBITDA equivalent is a non-GAAP measure and is designed to reflect the operating performance of the TFG Asset Management businesses
rather than what was reflected in Tetragon’s financial statements.
(ii) The performance and success fees include some realised and unrealised Polygon performance fees. These represent the fees calculated by the applicable administrator
of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining NAV at the reporting date. Similar amounts, if any,
from LCM are recognised when received. Tetragon is generally able to invest at a preferred level of fees. Success fees also include fees earned by Equitix on successfully
completing certain primary projects and delivering de-risked investments into their secondary funds; these are recognised once Equitix is entitled to recover them.
– Overview: Figure 21 shows a pro forma statement of operations that reflects the operating performance of the majority-
owned asset management companies within TFG Asset Management. GreenOak, in which Tetragon holds a minority
interest, is not currently included in the calculation of pro forma EBITDA. Included in the fee income includes some
amounts which was earned on capital invested in certain funds by Tetragon. During 2016, this included $4.8 million of
management fees and $3.6 million of performance and success fees.
– EBITDA: During Q4 2016, TFG Asset Management’s EBITDA was $16.6 million, resulting in a year-to-date 2016 EBITDA
equivalent of $47.0 million. This represents a small increase over the 2015 full year EBITDA and reflects a strong end to
the year. Total income grew 8% year on year, and although operating expenses also grew at a similar rate, management
fee income outstripped both by growing at 18%. We believe that this growth in management fees is an indication of an
improvement in the quality of income.
– Management fee income: Management fee income continued to increase year on year as shown in Figure 21. In
particular, fee income generated in the Equitix business grew as capital was invested, thereby earning full fees, and fee-
paying AUM increased in new fund vehicles.
– Performance and success fees: Performance and success fees have also grown year on year. In this case, performance
fees from the hedge funds were the key drivers of the increase, which more than offset a decline in the U.S. Dollar value of
Equitix primary fee income, which, in local currency, did not change year on year.
– Other fee income: This category includes a number of different income streams, including third-party CLO management
fee income relating to certain U.S. CLO 1.0 transactions. As expected and previously noted, this stream continued to
decline as these transactions amortised down. Income generated by Equitix on certain management services contracts,
increased year on year as this business continued to grow. Other fee income also includes certain cost recoveries from
Tetragon relating to seeded Polygon hedge funds. The cost recoveries decreased year on year, although the teams
supporting those seeded funds continued to grow. As these businesses mature and build third-party capital, we expect
that such cost recoveries should decrease.
– Operating expenses: This category of expenses was $7.9 million higher in 2016 than 2015, reflecting a number of different
factors, which were discussed in the Q3 2016 report. Firstly, TCIP is a new and growing business that was not recording
any material level of expenses during the comparable period in 2015. Secondly, Equitix continues to grow its business,
including the management services segment, resulting in an increase in both costs and revenues. Finally, TFG Asset
Management continued to invest by increasing headcount in a number of areas, which will support any continued growth
of the platform.
59
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TFG Asset Management Company Overviews
The following pages provide a summary of each asset management company
and a review of AUM growth and underlying strategies and investment vehicles.
All data is at 31 December 2016, unless otherwise stated.
Description of Business
TM
– LCM is a specialist in below-investment grade U.S. broadly-syndicated leveraged loans.
– The business was established in 2001 and has offices in New York and London.
– Tetragon owns 100% of LCM.
– Further information on LCM is available at www.lcmam.com.
FIGURE 22
LCM AUM History(i) ($billions)
LCM's AUM was $6.6 billion at 31 December 2016.
$4.3
$4.2
$5.3
$6.1
$6.6
YE 2012
YE 2013
YE 2014
YE 2015
YE 2016
CLO 1.0
CLO 2.0
(i) Includes, where relevant, investments from the Tetragon Master Fund and TCI II.
60
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TFG Asset Management Company Overviews (continued)
Description of Business
O
T
H
E
R
I
N
F
O
R
M
A
T
I
O
N
TM
– GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks
to create long-term value for its investors and provide strategic advice to its clients.
– The business was established in 2010 as a joint venture with Tetragon and has a presence
in New York, London, Tokyo, Los Angeles, Madrid, and Seoul.
– Tetragon owns 23% of the joint venture.
– GreenOak currently has funds with investments focused on the United States, Japan,
Spain, and the United Kingdom.
– Further information on GreenOak is available at www.greenoakrealestate.com.
FIGURE 23
GreenOak AUM History(i) ($billions)
GreenOak's AUM was $7.1 billion at 31 December 2016.
$7.1
$6.6
$4.4
$3.6
$2.3
(i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2016. Tetragon owns a 23% stake in GreenOak. AUM includes all third-party
YE 2012
YE 2013
YE 2014
YE 2015
YE 2016
Europe
U.S.
Japan
interests and total projected capital investment costs.
FIGURE 24
GreenOak Real Estate Investment Vehicles
Region
Vehicle
Investment Period
Equity Raised ($m)(i)
Assets Acquired ($m)(ii)
United States
U.S. Fund I & Co-Investments
U.S. Fund II & Co-Investments
U.S. Fund III
425 Park/Other
U.S. Subtotal
Europe
UK Investment Program
Spanish Tactical Program
Europe Fund I (Spain) & Co-Investments
Europe Fund II & Co-Investments
Credit/Senior Debt Program
Europe Subtotal
Asia
Japan Fund I & Co-Investments
Asia Fund II & Co-Investments
Other
Asia Subtotal
TOTAL
2011-2013
2013-2016
2017-present
2012-2015
2012-2015
2013-2014
2014-2016
2016-present
2013-present
2012-2014
2015-pres
2011-2015
356
924
340
738
2,358
296
86
349
180
1,514
2,425
324
748
53
1,125
5,908
1,314
2,477
--
1,544
5,335
420
172
607
126
488(iii)
1,813
1,297
511
128
1,936
9,084
(i) Local currencies converted to USD based on exchange rate at time of closings. Source :GreenOak. (ii) Represents all-in cost as of 31 December 2016 for assets acquired by
GreenOak from inception to date. Includes final all-in cost of assets purchased that have since been monetised. (iii) Loans committed.
61
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TFG Asset Management Company Overviews (continued)
Description of Business
– Polygon manages open-ended hedge fund and private equity vehicles across a number of
strategies.
TM
– Polygon was established in 2002 and has offices in New York and London.
– Tetragon owns 100% of the business.
– Further information on Polygon is available at www.polygoninv.com.
FIGURE 25
Polygon AUM History(i) ($millions)
Polygon's AUM was $1.6 billion for all funds and $1.4 billion for open strategies at 31 December 2016.
$1,375
$1,248
$1,113
$855
$529
YE 2012
YE 2013
YE 2014
YE 2015
YE 2016
Convertible Opportunity Fund
Distressed Opportunities Fund
European Equity Opportunity Fund
Global Equities Fund
Mining Opportunity Fund
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon
Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund
administrator at 31 December 2012, 2013, 2014, 2015, and 2016. Includes, where relevant, investments by the Tetragon Master Fund.
FIGURE 26
Polygon Funds Summary*
Fund
Convertible Opportunity Fund(2)
European Equity Opportunity Fund(3)
Mining Opportunity Fund(4)
Distressed Opportunities Fund(5)
Global Equities Fund6)
Total AUM - Open Funds
Recovery Fund(7)
TOTAL AUM
*Please see the next page for important notes.
AUM at
31 Dec 2016
($millions)(1)
Q4 2016 Net
Performance
2016
Net Performance
Annualised Net
LTD Performance
$487.5
$675.9
$69.6
$119.6
$22.3
$1,374.8
$176.3
$1,551.1
2.5%
(2.8%)
(12.3%)
2.6%
0.6%
12.0%
6.7%
2.4%
14.3%
3.3%
16.4%
10.6%
3.1%
7.2%
13.5%
Estimated approx.
LTD Multiple
N/A
N/A
1.86x
62
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Notes
O
T
H
E
R
I
N
F
O
R
M
A
T
I
O
N
(1) The AUM noted includes investments in the relevant strategies by Tetragon,
other than in respect of the Recovery Fund, where there is no such investment.
The Recovery Fund, at the time of the Polygon transaction and currently, remains a
closed investment strategy. Past performance or experience (actual or simulated)
does not necessarily give a guide for the future and no representation is being
made that the funds listed will or are likely to achieve profits or losses similar
to those shown. Except as otherwise noted, all performance numbers provided
herein reflect the actual net performance of the funds net of management and
performance fees, as well as any commissions and direct expenses incurred by
the funds, but before withholding taxes, and other indirect expenses. All returns
include the reinvestment of dividends, if any. Differences in account size, timing of
transactions and market conditions prevailing at the time of investment may lead
to different results. Differences in the methodology used to calculate performance
may also lead to different performance results than those shown.
(2) The Polygon Convertible Opportunity Fund began trading with Class B shares,
which carry no incentive fees, on 20 May 2009. Class A shares of the fund were first
issued on 1 April 2010 and returns from inception through March 2010 have been
pro forma adjusted to match the fund's Class A share terms as set forth in the
Offering Memorandum (1.5% management fee, 20% incentive fee over a hurdle
and other items, in each case, as set forth in the Offering Memorandum). From
April 2010, forward, the reported returns reflect actual Class A share performance
on the terms set forth in the Offering Memorandum. The return and AUM figures
shown are final values as calculated by the applicable fund administrator. All
performance numbers provided herein with respect to the fund reflects the actual
net performance of the fund net of management and performance fees, as well as
any commissions and direct expenses incurred by the fund, but before withholding
taxes, and other indirect expenses. All returns include the reinvestment of
dividends, if any. Differences in account size, timing of transactions and market
conditions prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown. (i) The fund began trading with
Class B shares, which carry no incentive fees, on 20 May 2009.
(3) The Polygon European Equity Opportunity Fund began trading 8 July 2009 with
Class B shares, which carry no incentive fee. Class A shares commenced trading
on 1 December 2009. Returns from inception through November 2009 for Class
A shares have been pro forma adjusted to match the fund's Class A share terms
as set forth in the Offering Memorandum (1.5% management fee, 20% incentive
fee and other items, in each case, as set forth in the offering Memorandum). From
December 2009 to February 2011, reported performance reflects actual Class
A share performance on the terms set forth in the Offering Memorandum. From
March 2011, forward, the table reflects actual Class A1 share performance on
the terms set forth in the Offering Memorandum. Class A1 share performance is
equivalent to Class A share performance for prior periods. The return and AUM
figures shown are final values as calculated by the applicable fund administrator.
All performance numbers provided herein with respect to the fund reflects the
actual net performance of the fund net of management and performance fees,
as well as any commissions and direct expenses incurred by the fund, but before
withholding taxes, and other indirect expenses. All returns include the reinvestment
of dividends, if any. Differences in account size, timing of transactions and market
conditions prevailing at the time of investment may lead to different results.
Differences in the methodology used to calculate performance may also lead to
different performance results than those shown.
(4) The Polygon Mining Opportunity Fund began trading with Class B1 shares,
which carry no incentive fees, on 1 June 2012. Returns shown here through
October 2013 have been pro forma adjusted to account for a 2.0% management
fee, a 20% incentive fee, and non trading expenses capped at 1%, in each case,
as set forth in the Offering Memorandum. Class A1 shares of the fund were first
issued on 1 November 2013. From November 2013, forward, reported performance
reflects actual Class A1 share performance on the terms set forth in the Offering
Memorandum. The return and AUM figures are final values as calculated by
the applicable fund administrator. All performance numbers provided herein
with respect to the fund reflects the actual net performance of the fund net
of management and performance fees, as well as any commissions and direct
expenses incurred by the fund, but before withholding taxes, and other indirect
expenses. All returns include the reinvestment of dividends, if any. Differences in
account size, timing of transactions and market conditions prevailing at the time of
investment may lead to different results. Differences in the methodology used to
calculate performance may also lead to different performance results than those
shown.
(5) The Polygon Distressed Opportunities Fund began trading on 2 September
2013. Returns shown are for offshore Class A shares, reflecting the terms set forth
in the Offering Memorandum (2.0% management fee, 20% incentive fee and other
items, in each case). The return and AUM figures are final values as calculated
by the applicable fund administrator. All performance numbers provided herein
with respect to the fund reflects the actual net performance of the fund net
of management and performance fees, as well as any commissions and direct
expenses incurred by the fund, but before withholding taxes, and other indirect
expenses. All returns include the reinvestment of dividends, if any. Differences in
account size, timing of transactions and market conditions prevailing at the time
of investment may lead to different results. Differences in the methodology used to
calculate performance may also lead to different performance results than those
shown.
(6) 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.
(7) The manager of the Polygon Recovery Fund L.P. (PRF) is a subsidiary of Tetragon.
The management fees earned in respect of PRF are included in the TFG Asset
Management business segment described herein. PRF is a limited-life vehicle
seeking to dispose of its portfolio securities prior to the expiration of its term.
PRF’s term was extended to March 2018 with a potential further one year extension
thereafter. Individual investor performance will vary based on their high water
mark. Currently the majority of Class C share class investors have not reached their
high water mark, so their performance is the same as their gross performance.
AUM figure and net performance is for PRF as calculated by the applicable fund
administrator. All performance numbers provided herein with respect to the
fund reflects the actual net performance of the fund net of management and
performance fees, as well as any commissions and direct expenses incurred by
the fund, but before withholding taxes, and other indirect expenses. All returns
include the reinvestment of dividends, if any. Differences in account size, timing of
transactions and market conditions prevailing at the time of investment may lead
to different results. Differences in the methodology used to calculate performance
may also lead to different performance results than those shown. P&L in 2016
for PRF was -$13.1 million before FX movements of -$8.1 million, and net P&L
was therefore -$21.2 million. P&L is +$139.4 million from closing date net asset
value before FX movements of -$47.3 million, and net P&L was therefore +$11.7
million. PRF is generally precluded from hedging FX exposure. PRF has made life
to date distributions of approximately $630 million to its partners. The estimated
approximate LTD multiple is based on the fund’s year-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 1.72 x. Each of these multiples will be different from the multiples
reflected for specific limited partners in the fund, which would be calculated
with respect to relevant class of partners in accordance with the fund’s limited
partnership agreement.
63
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TFG Asset Management Company Overviews (continued)
Description of Business
TM
– Equitix is an integrated core infrastructure asset management and primary project
platform.
– Equitix was established in 2007 and is based in London.
– Tetragon owns 85% of the business; over time, Tetragon’s economic interest is expected
to decline to approximately 74.8%. Equitix management owns the balance.
– Equitix typically invests in infrastructure projects in the United Kingdom with long-
term revenue streams across the healthcare, education, social housing, highways & street
lighting, offshore transmission and renewable and waste sectors.
– Further information on Equitix is available at www.equitix.co.uk.
FIGURE 27
Equitix AUM History(i) (£millions)
Equitix's AUM was £2.1 billion ($2.5 billion(i)) at 31 December 2016.
£2,065
£1,880
£1,328
£1,027
£493
YE 2012
YE 2013
YE 2014
YE 2015
YE 2016
Equitix Fund I
Equitix Fund II
Equitix Fund III
Equitix Fund IV
Energy Efficiency Funds
Managed Account
(i)USD-GBP exchange rate at 31 December 2016.
Description of Business
TM
– Hawke’s Point is an asset management company focused on mining finance, established
by TFG Asset Management in 2014 that seeks to provide capital to companies in the
mining and resource sectors.
– TFG Asset Management owns 100% of the business.
– Hawke’s Point is currently actively evaluating a range of mine financing opportunities.
64
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TFG Asset Management Company Overviews (continued)
Description of Business
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– TCIP acts as a general partner of a private equity vehicle that, among other things, makes
investments in CLOs relating to risk retention rules.(i)
– The business was established at the end of 2015 and is managed out of New York and
London.
– Tetragon owns 100% of the business.
– TCIP currently acts as general partner of Tetragon Credit Income II L.P. (TCI II), which
focuses on CLO investments relating to risk retention rules, including majority stakes in
CLO equity tranches of transactions managed by LCM or sub-advised by third-party CLO
managers. TCI II is structured with a management fee and carried interest over a preferred
return (each on non-LCM investments). It has a multi-year investment period and a term
of seven years (subject to potential extensions and otherwise as required by applicable
regulatory requirements).
– TCI Capital Management LLC (TCICM) is a specialist in below-investment grade U.S.
broadly-syndicated leveraged loans. TCICM was established as a Delaware limited
liability company in November 2015 and is a subsidiary of TCI II and recently commenced
operations. It acts as a CLO collateral manager and sponsor for certain CLO investments.
It utilises, and has access to, the TFG Asset Management platform, including personnel
from Polygon Global Partners and LCM Asset Management LLC.
– Currently, TCICM manages loan assets exclusively through CLOs (which includes
warehouse vehicles created in anticipation of future CLOs), which are long-term, multi-
year investment vehicles. At this time, TCICM utilises, and expects to continue to utilise,
the investment expertise of certain third-party sub-advisors to assist in the management
of its CLOs. Such sub-advisors will typically earn a substantial portion of the management
fees from the CLOs.
– Further information on TCIP and TCICM is available at www.tetragoninv.com.
(i) For additional information on Tetragon’s CLO equity investments, including its buy and hold strategy, please refer to
http://www.tetragoninv.com/portfolio/clo-equity.
Committted Capital and AUM(i):
TCI II’s total committed capital was $253.4 million at 31 December 2016. In January, TCI II
complete its fourth close, bringing total committed capital to over $300 million.
TCI II invests in CLOs managed by LCM and TCICM.
As of 31 December 2016, TCICM had AUM of approximately $1.4 billion.
(i) Includes, where relevant, investments from TCI II. TCICM utilises, and expects to continue to utilise, the investment expertise
of certain third-party sub-advisors to assist in the management of its CLOs. Such sub-advisors will typically earn a substantial
portion of the management fees from the CLOs.
65
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Corporate Responsibility
Tetragon 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:
Syncona Limited
Royal Court Theatre
TFG Asset Management continues to be the largest
contributor to Syncona Limited (“Syncona”, formerly
known as BACIT Limited) a UK-based charitable investment
vehicle.(1) Syncona invests in what they describe as “leading
long only and alternative investment funds with proven
managers and across multiple asset classes and life
science investments.” It intends to be invested in at least
15 distinct investments or managed account strategies,
with the composition of the investment portfolio varying
over time. Many of these investments are made on a “gross
return” basis, meaning Syncona and its subsidiaries do
not bear the impact of management or performance fees
on its investments. Investing on a “gross return basis” is
achieved by the relevant manager or fund agreeing not
to charge Syncona management or performance fees.
Syncona creates and invests in standalone life sciences
companies. To capture the significant value opportunity in
UK life science and medical innovation, Syncona intends
to hold and finance its life science investments until they
reach commercialisation. In addition, Syncona holds a
majority interest in the CRT Pioneer Fund (the “Pioneer
Fund”), a venture capital fund with exclusive rights to
certain innovations emerging from Cancer Research UK.
Syncona donates 0.3% of its NAV each year to charity (50%
to The Institute of Cancer Research and 50% to The BACIT
Foundation). Further information on this initiative can be
found on the company’s website, www.synconaltd.com.
Hedge Funds Care | Help for Children
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.
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.
Alternative Investment Management Association
(AIMA) and Hedge Fund Standards Board (HFSB)
TFG Asset Management’s Polygon business is a member of
the Alternative Investment Management Association and is
a signatory of the Standards of the Hedge Fund Standards
Board.
ESG Policies
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: www.equitix.co.uk/sri.html.
(1) As of BACIT Limited’s November 2016 Factsheet.
66
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Historical Share Repurchases
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FIGURE 28
Tetragon Share Repurchase History
Tetragon Financial Group
Share Repurchase History
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
TOTAL
Amount repurchased
$millions
Cumulative amount
($millions)
Number of shares
($millions)
Cumulative number of
shares ($millions)
$2.2
$12.4
$6.6
$25.5
$35.2
$175.6
$16.1
$50.9
$60.9
$157.8
$543.2
$2.2
$14.5
$21.2
$46.7
$81.9
$257.5
$273.6
$324.5
$385.4
$543.2
0.3
2.6
2.4
5.7
5.1
18.7
1.4
4.9
6.0
14.9
62.0
0.3
2.9
5.3
11.0
16.1
34.8
36.2
41.1
47.1
62.0
Share Repurchases:
The below graph shows historical share repurchases by Tetragon from inception to 31 December 2016.(1)
FIGURE 29
$543.2
$273.6
$324.5
$385.4
Inception - 2013
2014
2015
2016
Cumulative TFG Share Repurchase ($MM)
(1) Tetragon has engaged, and may 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 Tetragon’s excess cash and an efficient means to return such 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. Tetragon also continues to
explore other methods of improving the liquidity of its shares.
67
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Share Reconciliation and Shareholdings
FIGURE 30
IFRS to Fully Diluted Shares Reconciliation
Legal Shares Issued and Outstanding
Less: Shares Held in Subsidiary
Less: Shares Held in Treasury
Less: Total Escrow Shares(1.i)
IFRS Shares Outstanding
Add: Dilution for Share Options(1.ii)
Add: Dilution for Deferred Incentive Fee payable in Shares
Add: Certain Escrow Shares(1.iii)
Add: Dilution for equity-based awards(1.iv)
Fully Diluted Shares Outstanding
2016 shares
(millions)
139.7
-
(43.3)
(9.3)
87.1
3.4
2.0
3.2
0.9
96.7
Shareholdings
Persons affiliated with Tetragon maintain significant interests in Tetragon shares. For example, as of 31 December 2016, the
following persons own (directly or indirectly) interests in shares in Tetragon in the amounts set forth below:
Individual
Mr. Reade Griffith(2)
Mr. Paddy Dear(2)
Mr. David Wishnow
Mr. Jeff Herlyn
Mr. Rupert Dorey
Mr. Michael Rosenberg
Mr. Frederic Hervouet
Mr. William Rogers
Other Tetragon / Polygon employees
Equity-based awards(3)
Shareholding at
31 December 2016
10,786,601
3,595,220
347,286
170,904
144,410
175,593
30,419
1,000
3,192,175
5,097,936
(1.i) The Total Escrow Shares of 9.3 million consists of 3.2 million shares which have been used as consideration for the acquisition of Polygon and
applicable stock dividends relating thereto, as well as 6.1 million shares held in a separate escrow account in relation to equity-based compensation.
(1.ii) This comprises: a) The number of shares corresponding to the applicable intrinsic value of the options issued to the investment manager at the
time of Tetragon’s IPO with a strike price of $10.00, to the extent such options are in the money at period end. At the reporting date, this was 0.7 million
shares. The intrinsic value of the manager (IPO) share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in
the relevant period over (y) $10.00 (being the exercise price per share) times (z) 12,545,330 (being a number of shares subject to the options before the
application of potential anti-dilution). The terms of exercise under the options allow for exercise using cash, as well as, with the consent of the board of
Tetragon, certain forms of cashless exercise. Each of these prescribed methods of exercise may give rise to the issuance of a different number of shares
than the approach described herein. If the options were to be surrendered for their intrinsic value with the board’s consent, rather than exercised, the
number of shares issued would equal the intrinsic value divided by the closing price of the shares as of the final trading day in the relevant period. This
approach has been selected because we currently believe it is more reasonably illustrative of a likely outcome if the options are exercised. The options
are exercisable until 26 April 2017. b) The number of shares corresponding to the applicable intrinsic value of the remaining unexercised options issued
to the GreenOak Founders in relation to the acquisition of a 10% stake in GreenOak in September 2010. At the reporting date, this was 0.9 million. The
intrinsic value of the GreenOak share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant
period over (y) $5.50 (being the exercise price per share) times (z) 1,954,120 (being a number of shares subject to the options.
(1.iii) Certain Escrow Shares (3.2 million), which have been used as consideration for the acquisition of Polygon and applicable stock dividends relating
thereto, and which are held in escrow and are expected to be released and incorporated into the NAV Per Share over the next two years.
(continued on next page)
68
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Share Reconciliation and Shareholdings (continued)
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(1.iv) Dilution in relation to equity-based awards by TFG Asset Management for certain senior employees. At the reporting date, this was 0.9 million. The
basis and pace of recognition is expected to match the rate at which service is being provided to TFG Asset Management in relation to these shares.
Please see Equity Based Compensation Plans on page 74 for more details.
(2) 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 2016, certain employees of subsidiaries of Tetragon and other affiliated persons own in the aggregate approximately
3.2 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any Tetragon shares held by the GreenOak
principals or employees.
As previously disclosed, non-voting shares of Tetragon (together with accrued dividends and previously vested shares, (the “Vested Shares”)) that were
issued pursuant to Tetragon’s acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates
(the “Polygon Transaction”) have vested with certain persons (other than Messrs. Griffith and Dear), all of whom are employees or partners of Tetragon-
owned or affiliated entities, pursuant to the Polygon Transaction.
Certain of these persons may from time to time enter into purchases or sales trading plans (each, a “Fixed Trading Plan”) providing for the sale of Vested
Shares or the purchase of Tetragon shares in the market, or may otherwise sell their Vested Shares or purchase Tetragon shares, subject to applicable
compliance policies. Applicable brokerage firms may be authorised to purchase or sell Tetragon 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 Tetragon 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 16 to the 2016
Tetragon Financial Group Master Fund Limited audited financial statements.
Rule 10b5-1 provides a “safe harbor” that is designed to permit individuals to establish a pre-arranged plan to buy or sell company stock if, at the time
such plan is adopted, the individuals are not in possession of material, non-public information.
Prior to publicly announcing their Q4 2016 tender offer, Tetragon (through the Tetragon Master Fund) entered into an agreement to repurchase
approximately 593,653 non-voting shares of Tetragon (plus scrip dividend shares payable in respect of the Q3 2016 dividend) held by Michael Humphries,
a manager of certain Polygon funds, in connection with the winding up of a swap transaction between the Tetragon Master Fund and Michael Humphries
with respect to the relative values of Tetragon shares and interests in the Polygon funds following the acquisition of Polygon in 2012. The purchase price
for these shares of $11.03 was determined on the basis of the volume-weighted average price per share for the first 10 trading days in November 2016.
(3) Equity-based awards are intended to give certain senior employees of TFG Asset Management long-term exposure to Tetragon stock (with vesting
subject to forfeiture and certain restrictions). Where shares have vested but not yet been released they have been removed from this line and included in
shares owned by “Other Tetragon/Polygon employees”. Please see page 74 for further details.
69
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Additional CLO Portfolio Statistics
FIGURE 31
Tetragon's CLO Portfolio Details as of 31 December 2016
Deal
Transaction(i)
Transaction 1
Transaction 2
Transaction 5
Transaction 10
Transaction 86
EUR CLO Subtotal (outstanding transactions only):
Status(ii)
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Type
EUR CLO
EUR CLO
EUR CLO
EUR CLO
EUR CLO
Primary or
Secondary
Investment(iii)
Primary
Primary
Primary
Primary
Secondary
Year of
Original
End of Wtd Avg
Deal
Invest. Cost Closing
Reinv
($MM USD) (iv ) Date Maturity Period
2014
2007
2013
2006
2014
2007
2012
2006
2012
2006
2024
2023
2022
2022
2022
Original
Spread Cost of Funds
(bps) (v )
(bps) (v i)
55
348
52
359
60
397
50
347
50
347
54
364
37.5
29.7
36.9
27.0
3.6
134.7
Transaction 13
Transaction 14
Transaction 15
Transaction 16
Transaction 22
Transaction 32
Transaction 34
Transaction 36
Transaction 47
Transaction 61
Transaction 63
Transaction 64
Transaction 66
Transaction 68
Transaction 69
Transaction 75
Transaction 77
Transaction 78
Transaction 79
Transaction 80
Transaction 81
Transaction 82
Transaction 83
Transaction 84
Transaction 85
Transaction 87
Transaction 88
Transaction 89
Transaction 90
Transaction 91
Transaction 92
Transaction 93
Transaction 94
Transaction 95
US CLO Subtotal (outstanding transactions only):
Outstanding
Outstanding
Outstanding
Called
Outstanding
Outstanding
Called
Outstanding
Outstanding
Outstanding
Outstanding
Called
Outstanding
Outstanding
Outstanding
Called
Outstanding
Outstanding
Called
Called
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
U.S. CLO
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Secondary
Secondary
Primary
Total CLO Portfolio (outstanding transactions only):
2006
2007
2007
2006
2007
2007
2006
2007
2006
2007
2007
2007
2006
2006
2007
2011
2011
2012
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2015
2015
2015
2014
2016
2018
2021
2021
2020
2021
2021
2020
2021
2021
2021
2021
2021
2020
2020
2019
2022
2023
2023
2022
2022
2024
2022
2025
2023
2025
2026
2024
2026
2026
2027
2027
2027
2026
2029
2012
2014
2014
2013
2014
2014
2012
2013
2013
2014
2013
2013
2013
2013
2013
2014
2016
2015
2015
2016
2016
2016
2017
2017
2017
2018
2018
2018
2018
2019
2020
2019
2018
2022
15.2
26.0
28.1
23.5
37.4
24.0
22.2
28.4
28.3
29.1
27.3
15.4
21.3
19.3
28.2
32.7
14.5
22.9
19.4
22.7
21.7
25.4
20.8
24.6
1.0
23.0
30.1
33.6
20.7
27.8
34.6
6.1
6.6
2.6
628.5
763.2
314
346
350
NA
359
316
NA
309
348
352
336
NA
309
307
324
NA
343
338
NA
NA
356
353
382
350
349
357
349
353
360
363
362
363
353
375
345
348
47
49
52
46
53
59
50
46
47
45
53
38
49
48
44
168
212
217
215
185
216
206
193
183
170
199
199
195
203
215
199
215
215
194
126
114
Current
Cost of Funds
(bps) (v ii)
223
123
91
165
165
152
Current Jr-
Most O/C
Cushion(v iii)
10.4%
4.6%
7.5%
19.1%
19.1%
10.3%
Jr-Most O/C
Cushion at
Close(ix )
3.9%
3.6%
5.7%
4.5%
3.1%
4.4%
Annualized
(Loss) Gain
of Cushion(x )
-
0.7%
9.7%
0.1%
10.8%
0.2%
1.0%
1.4%
1.5%
8.8%
0.6% 5.5%
ITD Cash
Received as
IRR (x i) % of Cost(x ii)
54.1%
143.7%
149.7%
60.8%
51.1%
101.3%
108
129
96
NA
128
98
NA
127
75
90
213
NA
102
62
94
NA
246
179
NA
NA
193
173
215
199
171
199
200
195
178
209
199
209
195
194
155
154
24.8%
6.1%
7.0%
NA
13.2%
6.7%
NA
7.3%
2.1%
5.2%
14.6%
NA
9.2%
12.1%
35.6%
NA
13.7%
5.6%
NA
NA
3.7%
2.5%
5.2%
3.1%
4.5%
3.3%
2.7%
2.8%
3.2%
2.6%
3.3%
2.6%
2.8%
4.4%
7.7%
8.2%
4.8%
5.6%
4.2%
4.4%
5.0%
5.6%
6.7%
5.2%
4.3%
4.0%
4.8%
NA
4.0%
4.4%
5.6%
4.0%
5.0%
4.0%
4.0%
4.2%
4.0%
4.0%
6.2%
4.0%
5.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
3.6%
3.3%
4.4%
4.5%
4.5%
1.9%
0.1%
0.3%
NA
0.8%
0.1%
NA
0.2%
(0.2%)
0.1%
1.0%
NA
0.5%
0.8%
3.1%
NA
1.7%
0.3%
NA
NA
(0.1%)
(0.3%)
(0.2%)
(0.2%)
(0.1%)
(0.2%)
(0.5%)
(0.5%)
(0.4%)
(0.8%)
(0.5%)
(0.6%)
(0.2%)
0.0%
0.2%
21.8%
19.2%
29.7%
22.7%
21.9%
22.2%
19.6%
18.8%
22.6%
17.8%
19.3%
25.6%
22.9%
28.4%
27.0%
14.2%
11.2%
16.6%
10.2%
11.9%
7.5%
8.6%
14.4%
19.0%
10.3%
5.1%
11.3%
13.3%
13.7%
13.0%
14.8%
14.3%
12.5%
13.4%
17.5%
243.9%
233.6%
310.9%
288.0%
239.5%
245.9%
243.9%
205.3%
255.0%
202.8%
214.8%
365.6%
254.8%
315.1%
287.0%
154.8%
80.3%
109.9%
137.2%
140.1%
66.4%
69.0%
77.0%
87.7%
72.9%
53.0%
60.3%
57.7%
42.5%
38.1%
34.0%
18.7%
18.5%
0.0%
154.0%
0.3%
15.4%
144.7%
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. The transactions continue to be held as of the date of this report.
"Outstanding" refers to investments in CLOs which have not yet been optionally redeemed, sold, or wound down to less-than-material remaining
expected value. "Called" refers to investments in CLOs where Tetragon initiated or approved an optional redemption, and "wound down" refers to
CLOs which have amortised or repaid without an optional redemption, in both cases with less-than-material remaining expected value.
(ii)
(iii) "Primary" refers to investments made in the new issuance CLO market, whereas "Secondary" refers to investments made after the original issue date
of the CLO.
(iv) 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
Tetragon's financial statements.
(v) Par weighted average spread over LIBOR or EURIBOR (as appropriate) of the underlying loan assets in each CLO's portfolio.
(vi) 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.
(vii) 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.
(viii)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.
(ix) The junior-most O/C cushion at close is the excess (or deficit) of the junior-most O/C test ratio over the test requirement that was expected on each
deal's closing date (or date of purchase, if later). Please note that two of Tetragon's investments are so called "par structures" which don't include a
junior-most O/C test. They have been marked by an "N/A" in the relevant junior-most O/C test columns.
(x) Calculated by annualizing the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion.
(xi) Calculated from Tetragon's investment date. For outstanding investments, includes both historical cash flows received to-date and prospective
cash flows expected to be received, based on Tetragon's base case modelling assumptions. Refer to www.tetragoninv.com for more information on
Tetragon's modelling assumptions and methodology. For all other investments, includes only historical realised cash flows received to date.
(xii) Inception to report date cash flow received on each transaction as a percentage of its original cost.
70
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Additional CLO Portfolio Statistics (continued)
FIGURE 32
O
T
H
E
R
I
N
F
O
R
M
A
T
I
O
N
$120
$100
$80
$60
$40
$20
$0
$250
$200
$150
$100
$50
$0
16
14
12
10
8
6
4
2
0
$46.4
2017
$0.0
2017
$15.2
2018
Reinvestment End Date of Outstanding Investments
Based on Original Investment Size ($ Millions)
$113.9
2018
$33.9
2019
$34.6
2020
$0.0
2021
CLO Deal Maturities of Outstanding Investments
Based on Original Investment Cost ($ Millions)
$228.5
$28.2
$40.6
$92.9
$91.8
$89.3
$83.9
$68.5
$21.8
2019
2020
2021
2022
2023
2024
2025
2026
2027
Current Junior-Most O/C Test Cushion Distribution of Outstanding Investments
(by Number of Transactions)
15
12
6
0
<= 0%
0
0% to 2%
2% to 4%
4% to 6%
Over 6%
71
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Fair Value Determination of CLO Equity Investments
In accordance with the valuation policies set forth on Tetragon’s website, the values of Tetragon’s CLO equity investments
are determined using a third-party cash flow modelling tool. The model contains certain assumption inputs that are
reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined
through, for example, forward- looking observable data) might impact the performance of Tetragon’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 IFRS compliant fair value of Tetragon’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.
U.S. 1.0 CLO Equity – discount rates reduced from 12% to 11%
In determining the applicable rates to use to discount projected cash flows, an analysis of observable risk premium data is
undertaken. These data points include the absolute and relative levels of spreads on the BBB and BB tranches, as well as
observable generic equity yield ranges for the applicable asset sub-class. Taken in aggregate, it was concluded that these
data points for U.S. 1.0 CLOs supported a recalibration to a lower discount rate of 11%, which is in line with the rate applied
to seasoned U.S. 2.0 CLOs. The impact of this change was to increase fair value by $3.0 million.
U.S. 2.0 CLO Equity – discount rates unchanged at 11.0%
European CLO Equity – discount rates reduced from 13% to 11%
Similar to the U.S. CLOs, the discount rate analysis for European 1.0 CLOs includes an analysis of observable risk premium
data. European BB-rated tranche yields are broadly in-line with the same tranche yields for U.S. 1.0 CLOs, and the
observable generic equity yield range for this sub asset class indicates that the mid-point has decreased by approximately a
couple of percentage points since the first half of the year. When viewed as a whole, it was concluded that these data points
for European CLOs supported a recalibration to a lower discount rate of 11%, which is in line with the rate applied to both
seasoned U.S. 2.0 CLOs and U.S. 1.0 CLOs. The impact of this change was to increase fair value by $1.9 million.
FIGURE 33
U.S. CLOs Modelling Assumption
Variable
CADR
Recovery Rate
Prepayment Rate
Reinvestment Price
European CLOs Modelling Assumption
Variable
CADR
Recovery Rate
Prepayment Rate
Reinvestment Price
Discount Rates
CLO Type
U.S. 1.0
European 1.0
U.S. 2.0 - seasoned
Year
Current Assumptions
Until deal maturity
1.0x WARF-implied default rate (2.3%)
Until deal maturity
73%
Until deal maturity
20.0% p.a. on loans; 0.0% on bonds
Until deal maturity
100%
Year
Current Assumptions
Until deal maturity
1.0x WARF-implied default rate (2.1%)
Until deal maturity
68%
Until deal maturity
20.0% p.a. on loans; 0.0% on bonds
Until deal maturity
100%
Q4 2016
Q4 2015
11.0%
11.0%
11.0%
12.0%
13.0%
11.0%
Deal IRR
U.S. 2.0 - less than 12 months old
Deal IRR
72
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Certain Regulatory Information
O
T
H
E
R
I
N
F
O
R
M
A
T
I
O
N
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.
This annual report is made public by means of a press
release, which contains inside information within the
meaning of Article 7(1) of the EU Market Abuse Regulation,
and has been filed with the Netherlands Authority for
the Financial Markets (Autoriteit Financiële Markten).
In addition, this report is also made available to the
public by way of publication on the Tetragon website
(www.tetragoninv.com).
An investment in Tetragon 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 Tetragon.
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
Tetragon have not been and will not be registered under
the U.S. Securities Act of 1933, 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. Tetragon 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,
Tetragon 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. Tetragon
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.
Tetragon shares are subject to legal and other restrictions
on resale and the Euronext Amsterdam and SFS trading
markets are less liquid than other major exchanges, which
could affect the price of the shares.
There are additional restrictions on the resale of Tetragon
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
73
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Equity-Based Compensation Plans
In the fourth quarter of 2015, Tetragon bought back
approximately 5.65 million of its non-voting shares in a
tender offer to hedge against (or otherwise offset the future
impact of) grants of shares under an equity-based long-
term incentive plan and other equity awards by TFG Asset
Management for certain senior employees (excluding the
principals of the investment manager).
Awards under the long-term incentive plan, along with
other equity-based awards, are typically spread over
multiple vesting dates up to 2024 which may vary for each
employee and are subject to forfeiture provisions. The
arrangements may also include additional periods, beyond
the vesting dates, during which employees gain exposure
to the performance of the Tetragon shares, but the shares
are not issued to the employees. Such periods may range
from one to five years beyond the vesting dates. The shares
underlying these equity-based incentive programs typically
will be held in escrow until they vest and will be eligible to
receive shares under the Tetragon Optional Stock Dividend
Plan (DRIP Shares).
As Tetragon has contributed these shares, under IFRS TFG
Asset Management is considered to be the settling entity
and as a result in Tetragons’ accounts the imputed value of
the shares contributed to escrow is recorded as a credit to
a share-based compensation reserve in the year in which
the shares were acquired for this purpose. For the purposes
of determining the Fully Diluted NAV Per Share, the dilutive
effect of the equity-based compensation plans will be
reflected in the fully diluted share count over the life of the
plans. Such dilution will include, among other things and in
addition to the award shares, any DRIP Shares and shares
that will be required to cover employer taxes. At the end of
2016, approximately 0.9 million shares were included in the
fully diluted share count.
74
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Shareholder Information
O
T
H
E
R
I
N
F
O
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M
A
T
I
O
N
Registered Office of Tetragon and the
Tetragon 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
Yuko Thomas
ir@tetragoninv.com
Press Inquiries
Prosek Partners
Andy Merrill / Ryan Fitzgibbon
pro-tetragon@prosek.com
Auditors
KPMG Channel Islands Limited
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 in Amsterdam, a regulated market of Euronext
Amsterdam N.V.
– London Stock Exchange (Specialist Fund Segment)
Administrator and Registrar
State Street (Guernsey) Limited
1st Floor Dorey Court
Admiral Park
St. Peter Port, Guernsey
Channel Islands GY1 6HJ
75
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Audited Financial
Statements
ELIZABETH RASSKAZOVA
POLYGON
I
N
D
E
P
E
N
D
E
N
T
A
U
D
I
T
O
R
S
R
E
P
O
R
T
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 2016 which comprise the Statement of Financial Position, the Statement of Profit or Loss and Other
Comprehensive Income, the Statement of Changes in Equity, the Statement of Cash Flows, and the related notes. The
financial reporting framework that has been applied in their preparation is applicable law and International Financial
Reporting Standards as adopted by the European Union.
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 page 39, 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 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
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 2016 and of its results for the year then
ended;
– are in accordance with International Financial Reporting Standards as adopted by the European Union; and
– comply with the Companies (Guernsey) Law, 2008.
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 28, 2017
77
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
An investment in Tetragon 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 Tetragon.
This release contains inside information within
the meaning of Article 7(1) of the EU Market Abuse
Regulation.
This release does not contain or constitute an offer to sell
or a solicitation of an offer to purchase securities in the
United States or any other jurisdiction. The securities of
Tetragon have not been and will not be registered under
the U.S. Securities Act of 1933, 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. Tetragon 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,
Tetragon 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. Tetragon
is registered in the public register of the Netherlands
Authority for the Financial Markets under Section 1:107
of the Financial Markets Supervision Act as a collective
investment scheme from a designated country.
Tetragon is not responsible for the contents of any third-
party website noted in this report.
78
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
2016 AUDITED FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December 2016
Note
31 Dec 2016
US$ MM
31 Dec 2015
US$ MM
1 Jan 2015
US$ MM
Assets
Financial asset at fair value through profit or loss
Total assets
Liabilities
Accrued incentive fee
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Capital reserve in respect of share options
Share-based employee compensation reserve
Retained earnings
Shares outstanding
Number of shares
5
9
10
7
10
1,942.0
1,942.0
2,020.2
2,020.2
1,959.2
1,959.2
7.1
7.1
32.8
32.8
28.7
28.7
1,934.9
1,987.4
1,930.5
0.1
1,344.0
(530.5)
12.0
100.0
1,009.3
1,934.9
Millions
87.1
0.1
1,307.2
(385.4)
12.3
90.5
962.7
1,987.4
Millions
95.9
0.1
1,253.8
(324.5)
12.3
47.6
941.2
1,930.5
Millions
95.9
Net Asset Value per share
US$ 22.21
US$ 20.72
US$ 20.13
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Frederic Hervouet,
Director
Date: 28 February 2017
David Jeffreys,
Director
80 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2016
Net gain on financial asset at fair value through profit or loss
Total revenue
Incentive fee
Total operating expenses
Profit and total comprehensive income for the year
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 2016
US$ MM
Year ended
31 Dec 2015
US$ MM
5
9
13
13
13
13
138.5
138.5
(22.0)
(22.0)
116.5
US$ 1.26
US$ 1.09
Millions
92.1
106.8
130.9
130.9
(39.4)
(39.4)
91.5
US$ 0.94
US$ 0.87
Millions
97.1
105.5
81 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2016
As at 1 January 2015
Profit and total comprehensive
income for the year
Transactions with owners recognized
directly in equity
Share-based employee
compensation
Shares released from Escrow
Cash dividends
Stock dividends
Dividends on shares released from
Escrow
Issue of shares
Purchase of treasury shares
Total
Issued
shares
US$ MM
0.1
Share
premium
US$ MM
1,253.8
Retained
earnings
US$ MM
941.2
Treasury
shares
US$ MM
(324.5)
Capital
reserve
US$ MM
12.3
Share-based
reserve
US$ MM
47.6
Total
US$ MM
1,930.5
-
-
-
-
-
-
-
-
-
-
91.5
-
33.8
-
12.0
7.5
0.1
-
53.4
-
-
(50.5)
(12.0)
(7.5)
-
-
(70.0)
-
-
-
-
-
-
-
(60.9)
(60.9)
-
-
-
-
-
-
-
-
-
-
91.5
76.6
(33.8)
-
-
-
-
-
42.9
76.6
-
(50.5)
-
-
0.1
(60.9)
(34.6)
As at 31 December 2015
0.1
1,307.2
962.7
(385.4)
12.3
90.5
1,987.4
As at 1 January 2016
Profit and total comprehensive
income for the year
Transactions with owners recognized
directly in equity
Deferred incentive fee
Shares released from Escrow
Dividends on shares released from
Escrow
Share-based employee
compensation
Cash dividends
Stock dividends
Issue of shares
Purchase of treasury shares
Capital reserve in respect of share
options
Total
Issued
shares
US$ MM
0.1
Share
premium
US$ MM
1,307.2
Retained
earnings
US$ MM
962.7
Treasury
shares
US$ MM
(385.4)
Capital
reserve
US$ MM
12.3
Share-based
reserve
US$ MM
90.5
Total
US$ MM
1,987.4
-
-
-
-
-
-
-
-
-
-
-
-
116.5
-
25.0
8.1
-
-
11.4
0.1
-
(7.8)
36.8
-
-
(8.1)
-
(45.9)
(16.0)
-
-
-
(69.9)
-
-
-
-
-
-
4.6
-
(157.8)
8.1
(145.1)
-
-
-
-
-
-
-
-
-
(0.3)
(0.3)
-
116.5
25.1
(25.0)
-
9.4
-
-
-
-
-
9.5
25.1
-
-
9.4
(45.9)
-
0.1
(157.8)
-
(169.0)
As at 31 December 2016
0.1
1,344.0
1,009.3
(530.5)
12.0
100.0
1,934.9
The accompanying notes are an integral part of the financial statements.
82 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CASH FLOWS
For the year ended 31 December 2016
Operating activities
Dividend received from Master Fund to finance the dividend liability to
Shareholders
Dividend received from Master Fund to settle the incentive fee liability
Incentive fee paid
Investing activities
Proceeds from redemption of shares of Master Fund
Financing activities
Purchase of treasury shares
Dividends paid to Shareholders*
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 2016
US$ MM
Year ended
31 Dec 2015
US$ MM
45.9
22.6
(22.6)
45.9
157.8
157.8
(157.8)
(45.9)
(203.7)
-
-
-
50.5
35.2
(35.2)
50.5
60.9
60.9
(60.9)
(50.5)
(111.4)
-
-
-
The accompanying notes are an integral part of the financial statements.
*The gross dividend payable to shareholders was US$ 61.9 million (2015: US$ 62.5 million) with value equivalent to US$
16.0 million (2015: US$ 12.0 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.
83 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2016
Note 1
Corporate Information
The Company was registered and incorporated in Guernsey on 23 June 2005 as a company limited by shares, with
registered number 43321. The registered office of the Company is 1st Floor Dorey Court, Admiral Park, St. Peter Port,
Guernsey, Channel Islands, GY1 6HJ. The Company continues to be registered and domiciled in Guernsey.
The nature of the Company’s operations, its principal activities and Voting Shareholder are detailed in the Directors’
Report.
These separate financial statements of the Company are its only financial statements.
Note 2
Significant Accounting Policies
Statement of Compliance
The financial statements of the Company have been prepared in accordance with IFRS and comply with The Companies
(Guernsey) Law, 2008 and give a true and fair view.
Basis of Preparation
The financial statements have been prepared on a historical cost basis, except for investments held at fair value through
profit or loss (“FVTPL”) that have been measured at fair value.
The accounting policies have been consistently applied to all periods presented in these financial statements.
The financial statements are presented in United States Dollars (“USD”), which is the functional currency of the
Company, expressed in USD millions as the Board of Directors determined that this reflects the Company’s primary
economic environment.
In previous financial years the financial statements of the Company were prepared in accordance with applicable US
Generally Accepted Accounting Principles (“US GAAP”). Information on the effect of the transition to IFRS is detailed in
Note 4, First Time Adoption of IFRS.
The Company is an investment entity and, as such, does not consolidate the entities it controls where they are deemed
to be investments, in accordance with IFRS 10. Instead, interests in subsidiaries are classified as FVTPL. Investments in
associates are also classified as FVTPL. Refer to Note 3 Significant Accounting Judgments, Estimates and Assumptions
for the judgments and assumptions made in determining that the Company meets the definition of an investment entity.
After making enquiries and given the nature of the Company and its investment, the Directors are satisfied that it is
appropriate to continue to adopt the going concern basis in preparing these Financial Statements and, after due
consideration, the Directors consider that the Company is able to continue for the foreseeable future and at least twelve
months from the date of this report.
Financial Asset at Fair Value through Profit or Loss
The Company’s investment in Tetragon Financial Group Master Fund Limited ("Master Fund") is classified as financial
asset at FVTPL and is measured at fair value.
The Company’s Statement of Comprehensive Income includes its net gain or loss on investment in the Master Fund. The
audited financial statements of the Master Fund are attached. As at 31 December 2016, the Company had 100% (31
December 2015: 100%) economic ownership interest in the Master Fund.
84 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 2
Significant Accounting Policies (continued)
Fair Value Measurement
The value of the investment in the Master Fund is 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. Based on
management’s assessment, NAV represents the fair value of the investment. The performance of the Company is directly
affected by the performance of the Master Fund.
Net Gain / (Loss) on Financial Assets at FVTPL
Net gains or losses on financial assets at FVTPL are changes in the fair value of financial assets at FVTPL.
Expenses
Expenses are recognized in the Statement of Comprehensive Income on an accruals basis.
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.
Dividend distribution
Dividends from shares are recognized in the statement of changes in equity, when the shareholders’ right to receive the
payment is established.
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 the capital reserve. 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 the capital reserve
in respect of share options.
If and when the share options are exercised there will be a transfer from the capital reserve to the share capital and share
premium accounts or treasury shares.
Share-based Payment Transactions
Share-based compensation expense for all equity settled share-based payment awards granted is determined based on
the grant-date fair value. The entity receiving the services (e.g., Master 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 graded vesting basis over the requisite service period of the award.
These compensation costs are determined at the individual vesting tranche level for serviced-based awards.
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, or treasury
shares, where appropriate. Any associated stock dividends accrued on the original award are debited against retained
earnings and credited to share capital and share premium, or treasury shares, where appropriate using the value
determined by the stock reference price at the date of each applicable dividend.
85 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 2
Significant Accounting Policies (continued)
Joint arrangements
The Master Fund entered into a joint arrangement with the Company through the establishment of TFG Holdings I. The
Master Fund and the Company each transferred shares previously held as treasury shares 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 Statement of Financial Position.
During 2016, TFG Holdings I was closed, with all shares held transferred to treasury shares account.
Operating Segments
An operating segment is a component of the Company that engages in business activities from which it may earn
revenues and incur expenses, whose operating results are regularly reviewed by the Company's chief operating decision
makers and for which discrete financial information is available. The chief operating decision makers for the Company
are the Investment Manager and the Directors. The Company has considered the information reviewed by the
Company's chief operating decision makers and determined that there is only one operating segment in existence.
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.
New standards issued but not yet effective
The Company has considered all the standards and interpretations that are issued, but not yet effective, up to the date of
issuance of the Company’s financial statements. Standards and interpretations that are relevant to the Company are
disclosed below. The Company intends to adopt these standards, if applicable, when they become effective.
IFRS 9 Financial instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments:
Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the
accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9
is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge
accounting, retrospective application is required, but the provision of comparative information is not compulsory. For
hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
The Company plans to adopt the new standard on the required effective date. The Company expects that this standard
will not have a significant impact on the financial statements as it expects to continue measuring at fair value all financial
assets currently held at fair value.
Note 3
Significant accounting judgments, estimates and assumptions
The preparation of the Company’s financial statements requires management to make judgments, estimates and
assumptions that affect the reported amounts recognized in the financial statements and disclosure of contingent
liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected in future periods.
86 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 3
Significant accounting judgments, estimates and assumptions (continued)
Judgments
In the process of applying the Company’s accounting policies, management has made the following judgments, which
have the most significant effect on the amounts recognized in the financial statements:
Assessment as investment entity
Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries at fair
value through profit or loss rather than consolidate them. The criteria which define an investment entity are, as follows:
• An entity that obtains funds from one or more investors for the purpose of providing those investors with
investment management services;
• An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and
• An entity that measures and evaluates the performance of substantially all of its investments on a fair value
basis.
In determining whether the Company meets the definition of an investment entity, the Company considered the master-
feeder structure as a whole. In particular, when assessing the existence of investment exit strategies and whether the
Company has more than one investment, the Company takes into consideration the fact that the Master Fund was
formed in connection with the Company in order to hold investments on behalf of the Company.
The Company concluded that the Company and the Master Fund each meet the definition of an investment entity.
Consequently, the Company concluded that the Company should not consolidate the Master Fund and therefore
measures its investment at FVTPL.
Estimates and assumptions
The key estimate is the fair value of the Master Fund. Information about assumptions and estimation uncertainties that
have significant risk of resulting in a material adjustment in the year ended 31 December 2016 is included in Note 6.
Note 4
First time adoption of IFRS
These financial statements, for the year ended 31 December 2016, are the first the Company has prepared in accordance
with IFRS. For periods up to and including the year ended 31 December 2015, the Company prepared its financial
statements in accordance with US GAAP. Accordingly, the Company has prepared financial statements that comply with
IFRS applicable as at 31 December 2016, together with the comparative period data for the year ended 31 December
2015, as described in the summary of significant accounting policies. In preparing the financial statements, the
Company’s opening Statement of Financial Position was prepared as at 1 January 2015, the Company’s date of transition
to IFRS. This note explains the principal adjustments made by the Company in restating its US GAAP financial
statements, including the Statement of Financial Position as at 1 January 2015 and the financial statements for the year
ended 31 December 2015.
Exemptions applied
IFRS 1, First-Time Adoption of International Financial Reporting Standards, allows first-time adopters exemptions from
the retrospective application of certain requirements under IFRS. None of the areas where retrospective revisions are
precluded apply to the Company and therefore, the Company has not applied any of these exemptions.
87 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 4
First time adoption of IFRS (continued)
Reconciliation of equity
Share premium and treasury shares balances are shown separately on the face of the Statement of Financial Position
under IFRS. These balances were netted off in Share Premium account under US GAAP. As a result of Master Fund
presenting its financial statements under IFRS, the NAV of the Master Fund and subsequently the carrying value in
Company's Statement of Financial Position has increased.
Under US GAAP, share options issued to GreenOak founders were carried in capital reserve at their fair value on vesting
date of US$ 16.3 million. Under IFRS, these share options are carried in capital reserve at their fair value at grant date of
US$ 0.5 million.
Under US GAAP, the Company recognized share-based compensation expense for each award on a straight line basis
whereas IFRS requires the share-based compensation expense to be recognized on a graded vesting basis where an
award has multiple tranches. Although this does not impact the overall charge or the number of shares awarded, where
awards are granted in multiple tranches it does have the effect of accelerating the expense recognition in the early years
of the arrangements. In relation to the expense associated with the acquisition of TFG Asset Management, (described in
detail in Note 7) US$ 16.3 million of the total value of US$ 98.5 million would have been recognized earlier under IFRS in
the period from acquisition to 31 December 2014 with a corresponding increase in the Share-Based Compensation
Reserve. Furthermore, under IFRS there was a reduction of US$ 2.8 million relating to share-based compensation
expense in the Master Fund for the year ended 31 December 2015. The Company credits the expense recognized by the
Master Fund in share-based compensation reserve.
The following table presents the accounting effect by time period arising from the adoption of IFRS on share-based
employee compensation concerning the acquisition of TFG Asset Management.
Share-based compensation
expense under US GAAP (straight
line basis)
Share-based compensation
expense under IFRS (graded
vesting basis)
P&L difference by year
Cumulative difference
2012
US$MM
2013
US$MM
2014
US$MM
2015
US$MM
2016
US$MM
2017
US$MM
Total
US$MM
3.8
23.1
23.1
22.0
15.9
10.5
98.5
6.1
2.3
2.3
34.9
11.8
14.1
25.3
2.2
16.3
19.2
(2.8)
13.5
9.4
(6.5)
7.0
3.5
(7.0)
-
98.5
-
Reconciliation of total comprehensive income
Under US GAAP, the statement of comprehensive income presented the income and expense line items allocated from
the Master Fund. Under IFRS, these line items were not presented, instead “net gain on financial assets at fair value
through profit or loss” from the investment in the Master Fund was recognized. The net gain on Master Fund recognized
under IFRS is different from US GAAP due to the change in NAV of the Master Fund on first-time adoption of IFRS in its
financial statements.
Under US GAAP ASC 718 Equity-based Payments to Employees, shares granted to TFG Asset Management for equity-
based awards were recognized on a straight line basis with nil charge in the year to 31 December 2015. Under IFRS, these
awards were treated as contribution to the investment in Master Fund and the full value of award, US$ 57.4 million,
debited to investment in Master Fund with a corresponding credit to share-based compensation reserve. This resulted in
a reduction of profits for the year ended 31 December 2015 of US$ 57.4 million. There was no effect on the NAV.
88 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 4
First time adoption of IFRS (continued)
Reconciliation of total comprehensive income (continued)
The change from US GAAP to IFRS also impacted the incentive fees payable to the Investment Manager. Please refer to
Note 9 for details of the change in incentive fees.
Reconciliation of statement of cash flows
The transition from US GAAP to IFRS has not had a material impact on the statement of cash flows.
Note 5
Fair value measurement
Fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within
the fair value hierarchy, described as follows:
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.
As at 31 December 2016, 2015, and 1 January 2015, the fair value measurement of shares held by the Company in the
Master Fund is categorized in Level 3.
The fair value hierarchy of the Master Fund’s financial assets and liabilities are disclosed in the audited financial
statements of the Master Fund.
Level 3 reconciliation
The following is a reconciliation of the Company’s assets in which significant unobservable inputs (Level 3) were used in
determining fair value at 31 December 2016 and 31 December 2015.
Balance at start of year
Additions
Redemption of Master Fund’s shares
Realized gain and change in unrealized appreciation
Balance at end of year
Total gains and losses for the period included in profit or loss for
assets held at the end of the reporting period
31 December 2016
US$ MM
2,020.2
9.5
(157.8)
70.1
1,942.0
31 December 2015
US$ MM
1,959.2
76.7
(60.9)
45.2
2,020.2
54.0
33.2
Dividend income from the Master Fund amounted to US$ 84.5 million (2015: US$ 97.7 million).
89 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 5
Fair value measurement (continued)
Valuation technique
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined
on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3
measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes observable requires significant judgement by the Company. The Company
considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and
verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The Company’s investment in the Master Fund has been valued on the basis of the NAV of the Master Fund without
adjustment, which the Company believes is an appropriate measurement of fair value as at the year end date. The
investment in Master Fund does not have any redemption restriction.
The Company’s investment in the Master Fund is classified as Level 3 (2015: Level 3) due to the fact that the NAV of the
Master Fund was not observable on the market.
The Master Fund prepares its financial statements and NAV under IFRS and the period of the financial statements is co-
terminus with the Company. As the value of the Master Fund is not based on a valuation model, no sensitivity analysis in
respect of valuation model assumptions can be provided. However, if the NAV of the Master Fund moved up or down by
1%, the NAV of the Company would move up or down by US$ 19.4 million with a corresponding change in the Statement
of Comprehensive Income through net gain on financial assets at fair value through profit or loss.
Note 6
Financial Risk Review
All of the Company’s financial assets are invested in the shares of Master Fund. The Company can redeem the Master
Fund shares without restrictions but subject to approval from the Voting Shareholder which is the same entity for the
Company and the Master Fund.
The Company’s investment in the Master Fund is subject to the following risks:
Market Risk
‘Market risk’ is the risk that changes in market prices, such as interest rates, foreign exchange rates, equity prices and
credit spreads, will affect the Company’s income or the fair value of its holdings of financial instruments.
(i) Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates. The Company does not hold any interest bearing securities and as such it is not directly
exposed to significant interest rate risk. The Company will incur indirect exposure to interest rate risk, whereby the value
of a security may fluctuate as a result of a change in interest rates through its investment in the Master Fund.
The Master Fund’s exposure to interest rate risk is detailed in Note 8 of the Master Fund’s financial statements.
90 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 6
Financial Risk Review (continued)
(ii) Currency Risk
The Company’s only investment in the Master Fund is denominated in US Dollars which is also the functional currency of
the Company. The Master Fund invests in Euro, Sterling, Norwegian Krone and Japanese Yen in addition to US Dollar.
The Master Fund’s exposure to currency risk rate risk is detailed in Note 8 of the Master Fund’s financial statements.
(iii) Other Price Risk
Other price risk arises in respect of the Company’s investment in the shares issued by the Master Fund. The fair value of
the investment at 31 December 2016 was US$ 1,942.0 (2015: US$ 2,020.2).
As at 31 December 2016, a reasonably possible strengthening in the price of the shares in Master Fund of 1% will increase
the net assets and profit and total comprehensive income by US$ 19.4 million for (31 December 2015: US$ 20.2 million).
A weakening of price by 1% will have an equal but opposite effect.
Liquidity Risk
The Company does not maintain a bank account. The Company’s only liability is to pay incentive fees to the Investment
Manager. The Company receives dividends from the Master Fund to fulfil this liability. The Master Fund holds sufficient
cash to pay a dividend to cover this liability.
Management of liquidity risk in Master Fund is detailed in Note 8 of the Master Fund’s financial statements.
Note 7
Share-Based Payments
On 28 October 2012, TFG Asset Management LP and certain of its affiliates, were acquired by the Master Fund in exchange
for consideration of approximately 11.7 million non-voting shares of the Company to the sellers (the “Aggregate
Consideration”).
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 to 2016 with the remainder being released over the
period 2017.
Under IFRS 3 Business Combination, these shares were treated as payment for post combination services rather than
upfront consideration and have been accounted for under IFRS 2 share-based Payments (“IFRS 2”). The Master Fund
recognizes the individual compensation costs on a graded vesting basis over the relevant service period of each award if the
vesting performance conditions are met. The Company settles the shares and recognizes this as an equity settled
transaction through the share-based employee compensation reserve. The charge for the year ended 31 December 2016
amounted to US$ 9.4 million (31 December 2015: US$ 19.2 million).
In December 2015, the Company implemented some equity-based compensation plans for certain senior employees of TFG
Asset Management. In aggregate, these awards are spread over multiple vesting dates, up to and including 2024, although
they may vary for each employee and are also subject to forfeiture provisions. The arrangements may also include
additional periods, beyond the vesting dates, during which employees gain exposure to the performance of the Company's
shares, but the shares are not issued to the employees. Such periods may range from one to five years beyond the vesting
dates. The shares underlying these equity-based incentive programs typically will be held in escrow until they vest and will
be eligible to receive shares under the Company's optional stock dividend plan.
91 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 7
Share-Based Payments (continued)
The Company has accounted for this plan as equity-settled group share-based compensation under IFRS 2. The entities
receiving the services, affiliates of TFG Asset Management, recognize the expense in their financial statements. The
Company has granted 5.7 million shares to TFG Asset Management in December 2015 and held them in an escrow account.
In 2015, the Company recognized the full value of the award of US$ 57.4 million as increase in investment in Master Fund
with a corresponding credit to share-based compensation reserve. None of the shares related to this plan were issued to
the employees in the year to 31 December 2016 (31 December 2015: nil).
Please refer to note 10 for movements in shares held in escrow.
The table below shows the number of non-vesting Company shares which are currently expected to vest over the period to
2017, including accrued stock dividends up to the end of December 2016. 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 non-vesting Company shares from escrow, the Master Fund will issue an identical number of shares to the
Company.
2017
2016
2017
Vesting Schedule – Shares as at 31 December 2016
Shares MM
3.2
3.2
Vesting Schedule – Shares as at 31 December 2015
Shares MM
3.6
3.0
6.6
US$ MM
12.6
12.6
US$ MM
16.6
12.6
29.2
Note 8
Share Options Issued to GreenOak Founders
On 16 September 2010, the Master Fund entered into a transaction with GreenOak whereby the Master Fund 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 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 IAS 32 Financial Instruments: Presentation, the share options issued are classified as equity as capital reserve in
respect of share options.
The options are split approximately as follows: 50% were exercised during 2016; 25% are exercisable from 1 January 2017,
expiring a year later; 25% are exercisable from 1 January 2018, expiring a year later.
During the year to 31 December 2016, 0.8 million (31 December 2015: nil) shares with fair value at grant date of US$ 0.3
million, were issued as a result of options being exercised.
92 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 9
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.
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 NAV determined in accordance with IFRS includes carrying certain investments in TFG Asset Management
businesses at fair value rather than being consolidated, which was how they were previously treated under U.S. GAAP.
The result of the foregoing has been an increase in NAV and an incentive fee payable of US$ 25.1 million.
The Investment Manager has agreed to accept payment of this portion of the incentive fee in the form of shares, which
will be held in escrow until 31 December 2021 or, at the Manager’s option, the earlier occurrence of a realization event
with respect to these TFG Asset Management business, and subject to a “clawback” mechanism should the NAV of the
TFG Asset Management businesses decline at the end of the escrow period. The expense has been recognized in full in
the year in which the NAV event occurred through equity and the share-based compensation reserve.
The incentive fee for the year ended 31 December 2016 was US$ 22.0 million (31 December 2015: US$ 39.4 million). As at
31 December 2016, US$ 7.1 million was outstanding (31 December 2015: US$ 32.8 million).
Note 10
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.
93 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 10
Share Capital (continued)
Voting shares (continued)
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.
Share Transactions
Voting Shares Non-Voting Shares
No. MM
No.
Shares
US$ MM
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
Issued in lieu of stock dividend
Issued through release of tranche of Escrow shares
Issue through exercise of GreenOak options
Shares purchased during the year
Shares in issue at 31 December 2016
Optional Stock Dividend
10
-
-
-
10
-
-
-
-
10
95.9
1.2
4.8
(6.0)
95.9
1.5
3.8
0.8
(14.9)
87.1
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$ 61.9 million (31 December 2015: US$ 62.5 million) was declared, of which US$ 45.9
million was paid out as a cash dividend (31 December 2015: US$ 50.5 million), and the remaining US$ 16.0 million (31
December 2015: US$ 12.0 million) was reinvested under the Optional Stock Dividend Plan.
Treasury Shares and Share Repurchases
On 30 November 2007, the Company announced the implementation of a share repurchase program of their outstanding
shares and this was renewed on several occasions. As at 31 December 2016, there was no share repurchase program in
place.
94 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 10
Share Capital (continued)
Treasury Shares and Share Repurchases (continued)
When the program was in operation, the Master Fund undertook to repurchase an identical number of its own shares
from the Company as and when the Company repurchased its own shares in the open market. The Master Fund
matched the price per share paid by the Company. The shares are held in treasury shares allowing them to potentially
be resold back to the Company if it resells its own shares back into the market at a later date. Although they are held by
the Master Fund and the Company, the shares are neither eligible to receive dividends nor are they included in the shares
outstanding on the Statement of Financial Position.
During 2016, the Company and the Master Fund announced that under the terms of two “modified Dutch auctions”, the
Company had accepted for purchase approximately 14.3 million Company non-voting shares at an aggregate cost of US$
151.1 million, including applicable fees and expenses of US$ 1.1 million. Additionally, the Fund entered into an
agreement to repurchase 0.6 million shares for US$ 6.7 million from Michael Humphries, a manager of certain Polygon
funds, in connection with the winding up of a swap transaction between him and the Fund with respect to the relative
values of the Feeder’s shares and interest in the Polygon funds following the acquisition of Polygon in 2012. The
Company exchanged an equivalent number of Master Fund shares for the Company shares which had been repurchased.
Escrow Shares
As part of the acquisition of TFG Asset Management, 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 Company shares, the Master Fund agreed to issue an identical number of shares to the
Company. During the year 3.8 million shares (31 December 2015: 4.7 million shares) were issued to the Company as a
result of an equivalent number of shares being released from escrow.
Of these approximately 3.0 million (31 December 2015: 4.0 million) shares were deemed to be in relation to the original
Company escrow shares, and a value of US$ 25.0 million (31 December 2015: US$ 33.8 million) was debited against
share-based compensation reserves, using the transaction share price of US$ 8.43.
In addition, approximately 0.4 million shares (31 December 2015: 0.7 million shares) were deemed to be related to the
stock dividends awarded on the original shares released and an amount of US$ 8.1 million (31 December 2015: US$ 7.5
million) was released against Retained Earnings, based on the stock reference price at each applicable dividend date.
A second escrow account was opened during 2015 to hold shares which will form part of an equity-based awards
program for certain employees of TFG Asset Management. These shares are eligible to participate in the stock dividend
and during the period, 0.3 million (2015: nil) shares were allocated to this account, resulting in a total of 6.0 million shares
as at 31 December 2016 (31 December 2015: 5.7 million).
95 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 10
Share Capital (continued)
Escrow Shares (continued)
Shares brought forward at 31 December 2014
Shares purchased during the year
Stock Dividend
Vested and released
Shares at 31 December 2015
Shares purchased during the year
Stock Dividend
Transfer to Treasury
Other transactions settled from Treasury
Vested and released
Shares at 31 December 2016
Capital Reserve
Treasury
Shares
Shares
No. MM
12.8
-
-
-
12.8
4.3
-
27.0
(0.8)
-
43.3
Shares held in
TFG Holdings I
Shares
No. MM
16.6
0.4
-
-
17.0
10.0
-
(27.0)
-
-
-
Escrow shares –
TFG Asset
Management
acquisition
Shares
No. MM
10.7
-
0.6
(4.7)
6.6
-
0.4
-
-
(3.8)
3.2
Escrow Shares -
LTIP
Shares
No. MM
-
5.7
-
-
5.7
-
0.3
-
-
-
6.0
The capital reserve is in relation to the GreenOak and Investment Manager options. Please see note 11 for details
regarding these share options.
Share-Based Compensation Reserve
The balance in share-based compensation reserve is related to the grant of shares related to acquisition of TFG Asset
Management and the equity-based compensation plan of TFG Asset Management.
Note 11
Related-Party Transactions
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 9.
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).
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 26 April 2017. 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 five 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.
96 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 11
Related-Party Transactions (continued)
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.
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.
With respect to the year ended 31 December 2016, Frederic Hervouet has elected to receive shares and received 2,538
shares in relation to the first quarter’s fee, 2,472 shares in relation to the second quarter’s fee and 2,254 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 2016 dividend process.
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, Frederic Hervouet and William Rogers - all Directors of the Company and the
Master Fund – maintained (directly or indirectly) interests in shares of the Company as at 31 December 2016, with
interests of 2,576,801, 8,411,075, 144,410, 30,419 and 1,000 shares respectively (31 December 2015: 1,401,647, 3,752,486,
102,717, 10,133 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 7, TFG Asset Management., 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, Reade Griffith and Paddy Dear, as founders
of Polygon, were awarded consideration in shares which vest between 2015 and 2017.
In particular, Reade Griffith and Paddy 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 2016, 2,375,526 shares were held in
escrow on behalf of Reade Griffith (31 December 2015: 4,443,375 shares) and 838,419 on behalf of Paddy Dear (31
December 2015: 1,568,250 shares).
It was contractually agreed as part of the Acquisition that to the extent any annual compensation actually paid to each of
Reade Griffith and Paddy Dear in respect of his employment with Master Fund and its subsidiaries exceeds an annual base
salary of US$ 100,000, they would promptly return such excess amount to the Master Fund. During the year ended 31
December 2016 total compensation paid to them each in aggregate was US$ 100,000 (31 December 2015: US$ 100,000).
97 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 12
Dividends
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
Quarter ended 31 December 2015 of US$ 0.165 per share
Quarter ended 31 March 2016 of US$ 0.165 per share
Quarter ended 30 June 2016 of US$ 0.1675 per share
Quarter ended 30 September 2016 of US$ 0.1675 per share
31 Dec 2016
US$
MM
-
-
-
-
15.9
16.1
14.6
15.3
61.9
31 Dec 2015
US$
MM
15.1
15.2
15.7
16.5
-
-
-
-
62.5
The fourth quarter dividend of US$ 0.1725 per share was approved by the Directors on 28 February 2017.
Note 13
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 – TFG Asset Management
acquisition
Share-based employee compensation – equity based awards
Share options
Deferred incentive fee shares
Weighted average number of shares for the purposes of diluted earnings
per share
Year ended
31 Dec 2016
US$ MM
Year ended
31 Dec 2015
US$ MM
116.5
92.1
3.2
6.0
3.5
2.0
91.5
97.1
6.6
-
1.7
-
106.8
105.5
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 – TFG Asset Management acquisition, 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 in 2017.
In respect of share options, the intrinsic value of the options 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.
98 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2016
Note 13
Earnings per Share (continued)
In respect of share options issued to GreenOak, (see Note 8) a similar intrinsic value calculation is used to determine the
number of shares to include in the dilution calculation.
Note 14
Segment information
The Company has adopted IFRS 8 Operating Segments. The standard requires a ‘management approach’, under which
segment information is presented on the same basis as that used for internal reporting purposes.
For management purposes, the Company is organized into one main operating segment – its investment portfolio -
which invests, either directly or via fund vehicles in a range of alternative asset classes including equity securities, debt
instruments, real estate, infrastructure, loans and related derivatives. The Company’s investment activities are all
determined by the Investment Manager in accordance with the Company’s investment objective. All of the Company’s
activities are interrelated, and each activity is dependent on the others. Accordingly, all significant operating decisions
are based upon analysis of the Company as one segment. The financial results from this segment are equivalent to the
financial statements of the Company as a whole.
The shares in issue are in the US Dollar. The Company's only investment is in Master Fund which is domiciled in
Guernsey. The Master Fund's investment geographical exposure is as follows:
Region
North America
Europe
Asia
Latin America
Note 14
Subsequent Events
31 Dec 2016
51.6%
40.8%
5.0%
2.6%
31 Dec 2015
56.0%
36.8%
4.8%
2.4%
The Directors have evaluated the period up to 28 February 2017, 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
statements.
Note 15
Approval of Financial Statements
The Directors approved and authorized for issue the financial statements on 28 February 2017.
99 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT
For the year ended 31 December 2016
The Directors present to the shareholders their report together with the audited financial statements for the year ended
31 December 2016.
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 is a closed-ended investment company that invests in a broad range of assets, including bank loans, real
estate, equities, credit, convertible bonds and infrastructure and TFG Asset Management (“TFG Asset Management”), a
diversified alternative asset management business. Where sensible, through TFG Asset Management, the Fund seeks to
own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on
its capital. The 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.
As at 31 December 2016, TFG Asset Management’s investments 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, Tetragon Credit Income Partners (“TCIP”) and the GreenOak Real Estate (“GreenOak”).
TFG Asset Management and Tetragon Financial Management L.P., the Fund’s investment manager (the “Investment
Manager”), are both registered as investment advisers under the U.S. Investment Advisers Act of 1940, and two of TFG
Asset Management’s
Investment
Management Limited, are authorised and regulated by the United Kingdom Financial Conduct Authority.
investment management entities, Polygon Global Partners LLP and Equitix
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on page 80. A detailed review of activities and future developments is contained in
the Annual Report issued with these financial statements to the shareholders of Tetragon Financial Group Limited (the
“Feeder”).
On 28 September 2016, the Feeder became a member of the Association of Investment Companies (the “AIC”), the trade
body for closed ended investment companies.
On 23 December 2016, the Fund announced that, for its 31 December 2016 Financial Statements and subsequently, the
Fund would for the first time adopt International Financial Reporting Standards as adopted by the European Union
(“IFRS”) as the accounting framework for preparing the Fund and the Feeder’s respective financial statements and the
Fund would calculate the Net Asset Value of the Feeder on the basis of IFRS, as applied to the Feeder for the purposes of
determining the fees payable to the Investment Manager. Further information regarding this change in accounting
framework can be found in Notes 2 and 4 of these financial statements.
100 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2016
DIRECTORS
The Directors who held office during the year were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet*
David Jeffreys*
Byron Knief* (resigned 14 June 2016)
William Rogers Jr.* (appointed 14 June 2016)
* Independent 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
instalments by the Fund. Paddy Dear and Reade Griffith have waived their entitlement to a Director’s fee.
The Directors have the option to elect to receive shares in the Feeder instead of their quarterly Director’s fee. With
respect to the year ended 31 December 2016, Frederic Hervouet has elected to receive shares and he received 2,538 shares
in relation to the first quarter’s fee, 2,472 shares in relation to the second quarter’s fee and 2,254 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 Shareholder 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$ 0.1650 per Share for the Quarter Ended 31 December 2015, US$ 0.1650 per Share for the Quarter Ended 31 March
2016, US$ 0.1675 per Share for the Quarter Ended 30 June 2016 and US$ 0.1675 per Share for the Quarter Ended 30
September 2016. The total dividend declared during the year ended 31 December 2016 amounted to US$ 61.9 million or
US$ 0.6650 per Share (31 December 2015: US$ 62.5 million or US$ 0.6400 per Share). On 28 February 2017, the Directors
have declared a dividend amounting to US$ 0.1725 per Share for the Quarter Ended 31 December 2016.
The Fund paid a dividend of US$ 22.6 million (31 December 2015: US$ 35.2 million) to the Feeder in lieu of incentive fees
liability.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with
applicable law and regulations.
101 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2016
STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued)
The Companies (Guernsey) Law, 2008, requires the Directors to prepare financial statements for each financial year.
Accordingly, the Directors have elected to prepare the financial statements in conformity with IFRS 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 the relevant financial 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.
The Master Fund is required to comply with all provisions of Guernsey company law relating to corporate governance to
the extent the same are applicable and relevant to its activities. In particular, each Director must seek to act in
accordance with the “Code of Practice – Company Directors” and the Master Fund must seek to apply the “Code of
Corporate Governance” issued by the Guernsey Financial Services Commission. Tetragon reports against the AIC
Corporate Governance Guide for Investment Companies and, as such, is deemed to meet the provisions of the Code of
Corporate Governance issued by the Guernsey Financial Services Commission. No formal corporate governance code
applies to the Master Fund under Dutch Law.
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:
Frederic Hervouet,
Director
Date: 28 February 2017
David Jeffreys,
Director
102 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
Independent auditor’s report to the members of Tetragon Financial Group Master Fund Limited
We have audited the financial statements of Tetragon Financial Group Master Fund Limited (the “Fund”) for the year
ended 31 December 2016 which comprise the Statement of Financial Position, the Statement of Comprehensive Income,
the Statement of Changes in Equity, the Statement of Cash Flows, and the related notes. The financial reporting
framework that has been applied in their preparation is applicable law and International Financial Reporting Standards
as adopted by the European Union.
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 101 and 102, 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 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 Fund’s circumstances and
have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made
by the 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 Fund’s affairs as at 31 December 2016 and of its profit for the year then
ended;
• are in accordance with International Financial Reporting Standards as adopted by the European Union; and
•
comply with The Companies (Guernsey) Law, 2008.
103 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
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.
KPMG Channel Islands Limited
Chartered Accountants, Guernsey
28 February 2017
104 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December 2016
Note
31 Dec 2016 31 Dec 2015
US$ MM
US$ MM
1 Jan 2015
US$ MM
Assets
Financial assets at fair value through profit or loss
Derivative financial assets
Other receivables and prepayments
Amounts due from brokers
Cash and cash equivalents
Total assets
Liabilities
Loans and borrowings
Derivative financial liabilities
Other payables and accrued expenses
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Retained earnings
Capital contribution
Shares outstanding
Number of shares
Net Asset Value per share
5
8
9
10
11
13
8
12
14
14
1,520.0
22.2
0.6
51.0
392.6
1,986.4
38.0
4.1
2.3
44.4
1,584.1
19.4
0.2
59.9
360.3
2,023.9
-
0.7
3.0
3.7
1,532.0
19.2
6.9
52.1
359.8
1,970.0
-
5.8
5.0
10.8
1,942.0
2,020.2
1,959.2
0.1
1,311.1
(538.6)
1,151.9
17.5
1,942.0
0.1
1,266.5
(385.4)
1,105.9
33.1
2,020.2
0.1
1,213.1
(324.5)
1,022.9
47.6
1,959.2
Millions
Millions
Millions
14
87.1
95.9
95.9
US$ 22.29
US$ 21.07
US$ 20.43
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Frederic Hervouet,
Director
Date: 28 February 2017
David Jeffreys,
Director
105 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2016
Note
Year ended
31 Dec 2016
US$ MM
Year ended
31 Dec 2015
US$ MM
Net gain on non-derivative financial assets at fair value through profit or loss
Net gain on derivative financial assets and liabilities
Insurance recovery
Interest income
Net foreign exchange gain
Total revenue
Management fees
Share-based employee compensation
Legal and professional fees
Audit fees
Other operating and administrative expenses
Operating expenses
Operating profit before finance costs
Finance costs
Profit and total comprehensive income for the year
2
2
19
18
16
18
13
167.5
14.9
-
1.7
-
184.1
(27.8)
(9.4)
(4.0)
(0.3)
(2.6)
(44.1)
140.0
(1.5)
138.5
223.8
10.7
9.8
0.3
0.5
245.1
(28.3)
(19.2)
(5.5)
(0.4)
(3.4)
(56.8)
188.3
-
188.3
The accompanying notes are an integral part of the financial statements.
106 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2016
As at 1 January 2015
Profit and total comprehensive
income for the year
Transactions with owners
recognized directly in equity
Stock dividends
Shares released from Escrow
Dividends on shares released from
Escrow
Share-based compensation
Dividends paid to shareholders
Dividends paid to Feeder in lieu of
incentive fee liability
Issue of shares
Purchase of treasury shares
Total
Share
capital
US$ MM
Share
premium
US$ MM
Treasury
shares
US$ MM
Retained
earnings
US$ MM
Capital
contribution
US$ MM
Total
US$ MM
0.1
1,213.1
(324.5)
1,022.9
47.6
1,959.2
188.3
-
188.3
-
-
-
-
-
-
-
-
-
-
12.0
33.8
7.5
-
-
-
0.1
-
53.4
-
-
-
-
-
-
-
(12.0)
-
(7.5)
-
(50.5)
(35.2)
(60.9)
(60.9)
-
(105.3)
-
(33.8)
-
19.2
-
-
-
(14.5)
-
-
-
19.2
(50.5)
(35.2)
0.1
(60.9)
(127.3)
As at 31 December 2015
0.1
1,266.5
(385.4)
1,105.9
33.1
2,020.2
As at 1 January 2016
Profit and total comprehensive
income for the year
Transactions with owners
recognized directly in equity
Stock dividends
Shares released from Escrow
Dividends on shares released from
Escrow
Share-based compensation
Dividends paid to shareholders
Dividends paid to Feeder in lieu of
incentive fee liability
Issue of shares
Purchase of treasury shares
Total
Share
capital
US$ MM
Share
premium
US$ MM
Treasury
shares
US$ MM
Retained
earnings
US$ MM
Capital
contribution
US$ MM
Total
US$ MM
0.1
1,266.5
(385.4)
1,105.9
33.1
2,020.2
-
-
-
-
-
-
-
-
-
-
-
-
138.5
-
138.5
11.4
25.0
8.1
-
-
-
0.1
-
44.6
4.6
-
-
-
-
-
-
(157.8)
(153.2)
(16.0)
-
(8.1)
-
(45.9)
(22.6)
-
-
(92.5)
-
(25.0)
-
9.4
-
-
-
-
(15.6)
-
-
-
9.4
(45.9)
(22.6)
0.1
(157.8)
(216.7)
As at 31 December 2016
0.1
1,311.1
(538.6)
1,151.9
17.5
1,942.0
The accompanying notes are an integral part of the financial statements.
107 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF CASH FLOWS
For the year ended 31 December 2016
Operating activities
Profit for the year
Adjustments for:
Gains on investments and derivatives
Amortization of CLOs
Share-based employee compensation
Operating cash flows before movements in working capital
(Increase) / decrease in receivables
Decrease in payables
Decrease / (increase) in amounts due from brokers
Cash generated from operating activities
Investing activities
Proceeds from sale / prepayment / maturity of investments
Net proceeds on derivative financial instruments
Purchase of investments
Net cash used in investing activities
Financing activities
Proceeds from loans and borrowings
Proceeds from issue of shares
Repurchase of 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
Cash and cash equivalents at end of year
Year ended
31 Dec 2016
US$ MM
Year ended
31 Dec 2015
US$ MM
138.5
188.3
(37.3)
132.7
9.4
243.3
(0.4)
(0.7)
8.9
251.1
87.0
14.2
(131.8)
(30.6)
38.0
0.1
(157.8)
(45.9)
(22.6)
(188.2)
32.3
360.3
392.6
(71.3)
220.9
19.2
357.1
6.8
(2.0)
(7.8)
354.1
93.2
7.6
(307.9)
(207.1)
-
0.1
(60.9)
(50.5)
(35.2)
(146.5)
0.5
359.8
360.3
The accompanying notes are an integral part of the financial statements.
* The gross dividend payable to shareholders was US$ 61.9 million (2015: US$ 62.5 million) with a value equivalent to
US$ 16.0 million (2015: US$ 12.0 million) elected to be taken by the dividend recipient in shares rather than cash.
108 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS
As at 31 December 2016
Note 1
Corporate Information
The Fund was registered and incorporated in Guernsey on 23 June 2005 as a company limited by shares, with registered
number 43322. The registered office of the Fund is 1st Floor Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel
Islands, GY1 6HJ. The Fund continues to be registered and domiciled in Guernsey.
The nature of the Fund’s operations, its principal activities and voting shareholder are detailed in the Directors’ Report.
Information on the Feeder, the Fund’s ultimate parent company, is presented in Note 18, Related-Party Disclosures.
Note 2
Significant Accounting Policies
Statement of Compliance
The financial statements of the Fund have been prepared in accordance with IFRS and comply with The Companies
(Guernsey) Law, 2008 and give a true and fair view.
Basis of Preparation
The financial statements have been prepared on a historical cost basis, except for derivative financial instruments and
certain non-derivative financial assets and financial liabilities held at fair value through profit or loss (“FVTPL”) that have
been measured at fair value.
The accounting policies have been consistently applied to all periods presented in these financial statements.
The financial statements are presented in United States Dollars (“USD”), which is the functional currency of the Fund,
expressed in USD millions (unless otherwise noted). The Share Capital of the Fund and the majority of its investments
are denominated in USD. Most of the expenses and fees paid by the Fund are in USD. Hence, the Board of Directors
determined that USD as functional and presentational currency reflects the Fund's primary economic environment.
In previous financial years the financial statements of the Fund were prepared in accordance with applicable US
Generally Accepted Accounting Principles (“US GAAP”). Information on the effect of the transition to IFRS is detailed in
Note 4, First Time Adoption of IFRS.
The Fund is an investment entity and, as such, does not consolidate the entities it controls where they are deemed to be
investments, in accordance with IFRS 10. Instead, interests in subsidiaries are classified as FVTPL. Investments in
associates are also classified as FVTPL. Refer to Note 3 Significant Accounting Judgments, Estimates and Assumptions
for the judgments and assumptions made in determining that the Fund meets the definition of an investment entity.
Foreign Currency Translation
Transactions in foreign currencies are translated to the Fund’s functional currency at the foreign currency exchange rate
ruling at the date of the transaction.
All assets and liabilities denominated in foreign currencies are translated to USD 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 as net foreign exchange gain / (loss) in the Statement of Comprehensive
Income except for those arising on financial instruments at FVTPL and derivative instruments which are recognized as
component of net gain or loss on financial assets and liabilities at FVTPL.
109 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 2
Significant Accounting Policies (continued)
Financial Instruments
(i) Classification
The Fund classifies its financial assets and financial liabilities at initial recognition into the following categories, in
accordance with IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”) and other relevant standards.
Financial assets and liabilities at FVTPL
The category of financial assets and liabilities at FVTPL is sub-divided into:
•
•
Financial assets and liabilities held for trading under IAS 39: financial assets are classified as held for trading if
they are acquired with the expectation of being sold and / or re-purchased in the near term. This category
includes derivatives. Financial liabilities attached to derivative instruments are classified as held for trading.
The Fund’s policy is not to apply hedge accounting.
Financial instruments designated as at FVTPL upon initial recognition under IAS 39: investments in CLOs, loans,
unlisted stock and investment funds and vehicles. These financial assets and liabilities are designated upon
initial recognition on the basis that they are part of a group of financial assets that are managed and have their
performance evaluated on a fair value basis, in accordance with the risk management and investment
strategies of the Fund.
• Other financial instruments at FVTPL:
•
•
Investment in subsidiaries: In accordance with the exemption under IFRS 10 Consolidated Financial
Statements, as an investment entity the Fund does not consolidate subsidiaries which are managed as
investments in the financial statements. Investments in subsidiaries are accounted for as financial
instruments at FVTPL.
Investment in associates: In accordance with the exemption within IAS 28 Investments in Associates and
Joint Ventures, the Fund does not account for its investments in associates using the equity method.
Instead, the Fund has determined that it qualifies to elect to measure its investments in associates at FVTPL.
Financial assets at amortized cost
•
Loans and receivables: loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. The Fund includes in this category cash and cash
equivalents, amounts due from broker, receivable for securities sold and other sundry receivables.
Other financial liabilities at amortized cost
This category includes all financial liabilities, other than those classified as at FVTPL. The Fund includes in this category
loans and borrowings and other short-term payables.
(ii) Recognition
The Fund recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the
instrument. Purchases or sales of financial assets that require delivery of assets within the time frame generally
established by regulation or convention in the market place (regular way trades) are recognized on the trade date (i.e.,
the date that the Fund commits to purchase or sell the asset).
110 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 2
Significant Accounting Policies (continued)
(iii) Initial measurement
Financial assets and financial liabilities, for subsequent measurement at FVTPL, are recorded in the Statement of
Financial Position at fair value. All transaction costs for such instruments are recognized immediately through profit or
loss.
Financial assets and liabilities (other than those classified as at FVTPL) are measured initially at their fair value adjusted
for any directly attributable incremental costs of acquisition or issue.
(iv) Subsequent measurement
After initial measurement, the Fund re-measures financial instruments which are classified as at FVTPL at fair value.
Subsequent changes in the fair value of those financial instruments are recorded in net gain or loss on financial assets
and liabilities at FVTPL in the Statement of Comprehensive Income.
Loans and receivables are carried at amortized cost less any allowance for impairment with any impairment losses
arising being included in profit or loss.
Financial liabilities, other than those classified as at FVTPL, are measured at amortized cost using the effective interest
method.
(v) Derecognition
A financial asset (or, where applicable, a part of a financial asset or a part of a group of similar financial assets) is
derecognized where (i) the rights to receive cash flows from the asset have expired, or (ii) the Fund has either transferred
its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without
material delay to a third party under a pass-through arrangement and in either cases in (ii):
(a) the Fund has transferred substantially all of the risks and rewards of the asset; or
(b) the Fund has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred
control of the asset.
When the Fund has transferred its right to receive cash flows from an asset (or has entered into a pass-through
arrangement), and has neither transferred nor retained substantially all of the risks and rewards of the asset nor
transferred control of the asset, the asset is recognized to the extent of the Fund’s continuing involvement in the asset.
In that case, the Fund also recognizes an associated liability. The transferred asset and the associated liability are
measured on a basis that reflects the rights and obligations that the Fund has retained.
The Fund derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expired.
(vi) Impairment
The Fund assesses at each reporting date whether a financial asset, except those classified as FVTPL, is impaired. A
financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or
more events that have occurred after the initial recognition of the asset (an incurred loss event) and that loss event has
an impact on the estimated future cash flows of the financial asset that can be reliably estimated.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position if,
and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle
on a net basis, or to realize the asset and settle the liability simultaneously.
111 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 2
Significant Accounting Policies (continued)
Fair value measurement
The Fund measures all its investments and derivatives, at fair value at each reporting date.
IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based on the
presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the
asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The
principal or the most advantageous market must be accessible to the Fund. The fair value of an asset or a liability is
measured using the assumptions that market participants would use when pricing the asset or liability, assuming that
market participants act in their economic best interest.
The fair value for financial instruments traded in active markets at the reporting date is based on their quoted price (bid
price for long positions and ask price for short positions), without any deduction for transaction costs. A market is
regarded as “active” if transactions for the asset or liability take place with sufficient frequency and volume to provide
pricing information on an on-going basis.
For all other financial instruments not traded in an active market, the fair value is determined by using valuation
techniques deemed to be appropriate in the circumstances. Valuation techniques include using recent arm’s length
market transactions adjusted as necessary, and reference to the current market value of another instrument that is
substantially the same, discounted cash flow analysis making as much use of available and supportable market data as
possible and third party valuation models.
For assets and liabilities that are measured at fair value on a recurring basis, the Fund identifies transfers between levels
in the hierarchy by re-assessing the categorization (based on the lowest level input that is significant to the fair value
measurement as a whole), and deems transfers to have occurred at the end of each reporting period.
Amounts due from brokers
Amounts due from brokers include margin accounts which represent cash pledged as collateral on the forward contracts
and equity swaps. Refer to the accounting policy for loans and receivables for recognition and measurement.
Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents comprise of short-term highly liquid investments that are
readily convertible to known amounts of cash and 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.
Net gain or loss on financial assets and liabilities at FVTPL
Net gains or losses on financial assets and liabilities at FVTPL are changes in the fair value of financial assets and
liabilities at FVTPL and include interest and foreign exchange gains or losses.
Interest Income
Interest income arising on cash balances and tri-party repurchase agreements are recognised in the Statement of
Comprehensive Income using the effective interest method.
Expenses
Expenses and fees, including Directors’ fees, are recognized through profit or loss in the Statement of Comprehensive
Income on an accruals basis.
112 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 2
Significant Accounting Policies (continued)
Taxation
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.
Dividend distribution
Dividends from shares are recognized in the Statement of Changes in Equity, when the shareholders’ right to receive the
payment is established.
Share-based payment transactions
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 graded vesting basis over the requisite service period of the award. These compensation costs are
determined at the individual vesting tranche level for serviced-based awards.
Where the Feeder issues the shares to the employees or providers of employment like services and the Fund is deemed
to receive the related services, the Fund recognizes share-based payments expense in the Statement of Comprehensive
Income and corresponding capital contribution in equity.
The Feeder has entered into share-based employee reward schemes with the Fund’s subsidiary, TFG Asset Management
L.P. The Fund has accounted for this in TFG Asset Management where the service is being provided.
Joint arrangements
The Fund entered into an arrangement with the Feeder through the establishment of TFG Holdings I. The Fund and the
Feeder transferred shares previously held as treasury shares 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
Statement of Financial Position.
During 2016, TFG Holdings I was closed, with all shares held transferred to treasury shares account.
New standards issued but not yet effective
A number of new standards and amendments to the standards are effective for annual periods beginning after 1 January
2017 and earlier adoption is permitted; however the Fund has not early applied the new or amended standards in
preparing these financial statements. The standards potentially relevant to the Fund are discussed below. The Fund
does not plan to adopt these standards early.
IFRS 9 Financial instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments:
Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the
accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9
is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge
accounting, retrospective application is required, but the provision of comparative information is not compulsory. For
hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.
113 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 2
Significant Accounting Policies (continued)
New standards issued but not yet effective (continued)
The Fund plans to adopt the new standard on the required effective date. Given the majority of the Fund’s assets are
classified as FVTPL, the Fund expects no significant impact on its Statement of Financial Position and Statement of
Comprehensive Income.
(a) Classification and measurement
The Fund does not expect a significant impact on its balance sheet from applying the classification and measurement
requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value.
Other receivables are held to collect contractual cash flows. Thus, the Fund expects that these will continue to be
measured at amortized cost under IFRS 9. However, the Fund will analyze the contractual cash flow characteristics of
those instruments in more detail before concluding whether all those instruments meet the criteria for amortized cost
measurement under IFRS 9.
(b) Impairment
IFRS 9 requires the Fund to record expected credit losses on financial assets not measured at FVTPL, either on a 12-
month or lifetime basis. Given the limited exposure of the fund to credit risk on such financial assets, this amendment is
not expected to have a significant impact on the financial statements.
(c) Hedge accounting
The Fund has not applied hedge accounting under IAS 39 and will not apply hedge accounting under IFRS 9 either.
IAS 7 Disclosure Initiative – Amendments to IAS 7
The amendments to IAS 7 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and require an entity to
provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing
activities, including both changes arising from cash flows and non-cash changes. On initial application of the
amendment, entities are not required to provide comparative information for preceding periods.
These amendments are effective for annual periods beginning on or after 1 January 2017, with early application
permitted. Application of amendments will result in additional disclosure provided by the Fund.
Note 3
Significant Accounting Judgments, Estimates and Assumptions
The preparation of the Fund’s financial statements requires management to make judgments, estimates and
assumptions that affect the reported amounts recognized in the financial statements and disclosure of contingent
liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected in future periods.
Judgments
In the process of applying the Fund’s accounting policies, management has made the following judgments, which have
the most significant effect on the amounts recognized in the financial statements:
114 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 3
Significant Accounting Judgments, Estimates and Assumptions (continued)
Investment entity status
Entities that meet the definition of an investment entity within IFRS 10 are generally required to measure their
subsidiaries at FVTPL rather than consolidate them. IFRS 10.27 defines an investment entity as an entity that:
• obtains funds from one or more investors for the purpose of providing those investors with investment
management services;
•
commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation,
investment income, or both; and
• measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Fund’s investment objective is to generate distributable income and capital appreciation.
The Fund reports to its investors via monthly, semi-annual and annual investor information, and to its management, via
internal management reports, on a fair value basis. All investments are reported at fair value to the extent allowed by
IFRS in the Fund’s annual reports. The Fund has a documented exit strategy for all of its investments.
The Fund was formed as part of a Master-Feeder structure and therefore, referencing IFRS 10.IE15, the Fund considers
itself and the Feeder together when evaluating its status under IFRS 10. The Fund has also concluded that it meets
certain additional characteristics of an investment entity, either directly or indirectly through the Master-Feeder
structure, in that it has more than one investment; the Fund’s ownership interests are predominantly in the form of
equities or similar securities; the Feeder has more than one investor; and it has investors who are not related parties.
The Fund has therefore concluded that it meets the definition of an investment entity. These conclusions will be
reassessed on an annual basis.
Assessment of investment funds and CLOs as structured entities
The Fund has also assessed whether the funds in which it invests should be classified as structured entities. The Fund
has considered the voting rights and other similar rights afforded to investors in these funds, including, among other
things, the rights to remove the fund manager or to redeem holdings. The Fund has concluded as to whether these
rights are the dominant factor in controlling the funds, or whether the contractual agreement with the fund manager is
the dominant factor in controlling these funds. The Fund has concluded that investment funds are structured entities
because the relevant activities are directed by means of the contractual agreement rather than the voting rights or other
similar rights.
The Fund has concluded that CLOs in which it invests, meet the definition of structured entities because:
•
•
•
the voting rights in the CLOs are not the dominant rights in deciding who controls them, as they relate to
administrative tasks only;
each CLO’s activities are restricted by its prospectus; and
the CLOs have narrow and well-defined objectives to provide investment opportunities to investors.
115 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 3
Significant Accounting Judgments, Estimates and Assumptions (continued)
Assessment of investment funds and CLOs as structured entities (continued)
The Fund also assessed whether the structured entities should be considered as subsidiaries. To meet the definition of a
subsidiary under IFRS 10, the investor has to control the investee within the meaning of IFRS 10. The Fund controls an
investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee. As all investments are measured at FVTPL, the assessment is
only of relevance to the disclosures arising under IFRS 12 Disclosure of Interest in Other Entities.
The Fund has concluded that certain CLOs and investment funds in which it is invested are considered to be subsidiaries
since the Fund has control over the decisions made by the managers of such investments. However, such subsidiary
undertakings are still deemed to be part of the overall investment pool and are therefore measured at FVTPL.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that
have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next
financial year, are discussed below. The Fund based its assumptions and estimates on parameters available when the
financial statements were prepared. However, existing circumstances and assumptions about future developments may
change due to market changes or circumstances arising beyond the control of the Fund. Such changes are reflected in
the assumptions when they occur.
Measurement of fair values
For detailed information on the fair value of financial instruments including information on their leveling please refer to
Note 5.
Note 4
First Time Adoption of IFRS
These financial statements, for the year ended 31 December 2016, are the first the Fund has prepared in accordance with
IFRS. For periods up to and including the year ended 31 December 2015, the Fund prepared its financial statements in
accordance with US GAAP. Accordingly, the Fund has prepared financial statements that comply with IFRS applicable as
at 31 December 2016, together with the comparative period data for the year ended 31 December 2015, as described in
the summary of significant accounting policies. In preparing the financial statements, the Fund’s opening Statement of
Financial Position was prepared as at 1 January 2015, the Fund’s date of transition to IFRS. This note explains the
principal adjustments made by the Fund in restating its US GAAP financial statements, including the Statement of
Financial Position as at 1 January 2015 and the financial statements for the year ended 31 December 2015.
Exemptions applied
IFRS 1, First-Time Adoption of International Financial Reporting Standards, allows first-time adopters exemptions from
the retrospective application of certain requirements under IFRS. None of the areas where retrospective revisions are
precluded apply to the Fund and therefore, the Fund has not applied any of these exemptions.
116 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 4
First Time Adoption of IFRS (continued)
Reconciliation of equity as at 1 January 2015 (date of transition to IFRS)
Assets
Investments, at fair value
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
Treasury shares
Retained earnings
Capital contribution
Note
US GAAP as at
1Jan 2015
US$ MM
IFRS
Adjustments
US$ MM
IFRS as at
1 Jan 2015
US$ MM
A
A
E
A
A
A
A
A
A
A
C
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
1,834.9
0.1
1,213.1
(324.5)
914.8
31.4
1,834.9
175.8
(29.7)
(42.2)
-
-
(0.1)
(10.0)
(0.6)
(25.9)
-
(45.5)
(2.9)
(8.6)
-
-
-
108.1
16.2
1,532.0
-
359.8
52.1
19.2
-
-
-
6.9
1,970.0
5.8
5.0
-
-
10.8
1,959.2
0.1
1,213.1
(324.5)
1,022.9
47.6
1,959.2
117 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 4
First Time Adoption of IFRS (continued)
Reconciliation of equity as at 31 December 2015
Note
US GAAP as at
31 Dec 2015
US$ MM
IFRS Adjustments
US$ MM
IFRS as at
31 Dec 2015
US$ MM
Assets
Investments, at fair value
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
Treasury shares
Retained earnings
Capital contribution
A
A
E
A
A
A
A
A
A
A
C
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
1,877.4
0.1
1,266.5
(385.4)
976.6
19.6
1,877.4
219.4
(23.4)
(80.1)
-
-
(0.5)
(9.2)
-
(21.3)
-
(45.5)
(5.8)
(6.6)
-
-
-
129.3
13.5
1,584.1
-
360.3
59.9
19.4
-
-
-
0.2
2,023.9
0.7
3.0
-
-
3.7
2,020.2
0.1
1,266.5
(385.4)
1,105.9
33.1
2,020.2
118 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 4
First Time Adoption of IFRS (continued)
Reconciliation of total comprehensive income for the year ended 31 December 2015
Note
US GAAP for the
year ended
31 Dec 2015
US$ MM
IFRS Adjustments
US$ MM
IFRS for the year
ended
31 Dec 2015
US$ MM
Net gain on non-derivative financial assets at FVTPL
Net gain on derivative financial assets and liabilities
Interest income
Fee income
Other income – cost recovery
Other income
Insurance recovery
Net foreign exchange gain
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 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
Total comprehensive income
B
B
D
A
A
A
C
A
B
B
B
B
B
B
-
-
134.7
70.2
17.3
0.1
9.8
-
232.1
(58.6)
(28.3)
(22.0)
(7.2)
(6.3)
(0.4)
(21.2)
(144.0)
82.7
4.8
4.9
(0.3)
8.0
(11.1)
89.0
177.1
(10.1)
167.0
223.8
10.7
(134.4)
(70.2)
(17.3)
(0.1)
-
0.5
58.6
-
2.8
1.7
6.3
-
17.8
(82.7)
(4.8)
(4.9)
0.3
(8.0)
11.1
10.1
223.8
10.7
0.3
-
-
-
9.8
0.5
245.1
-
(28.3)
(19.2)
(5.5)
-
(0.4)
(3.4)
(56.8)
-
-
-
-
-
-
-
188.3
-
188.3
119 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 4
First Time Adoption of IFRS (continued)
Notes to the reconciliation of equity as at 1 January 2015 and 31 December 2015 and total comprehensive income for the
year ended 31 December 2015
A Investment entity
When the Fund reported under US GAAP, certain controlled subsidiaries were deemed to be “service providers” to the
Fund as they were managing investments of the Fund. Such controlled subsidiary service providers were therefore
consolidated, despite both the Fund’s status as an investment company under US GAAP and the fact that such
subsidiaries were considered to be investments by the Investment Manager. This accounting treatment was applied to
Polygon, LCM, Hawke’s Point and TCIP. As a result the operating expenses and income from such businesses were
included in the Statement of Operations under US GAAP.
IFRS 10.31 requires an investment entity that has subsidiaries (i.e., a parent investment entity (“Parent IE”)) to generally
measure its investments in subsidiaries at FVTPL. Generally, the Parent IE does not consolidate its subsidiaries, with one
limited exception specified in paragraph 32 of IFRS 10. IFRS 10.32 specifies that a Parent IE consolidates subsidiaries (a)
that are not investment entities; and (b) whose main purpose and activities are providing services that relate to the
Parent IE’s investment activities. The formerly consolidated entities within TFG Asset Management are managed as
investments and their main purpose and activities are not to provide services to the Fund’s investment activities.
Consequently they are accounted for at fair value under IFRS 10.31. Therefore the various adjustments marked “A” relate
to the de-consolidation of subsidiaries and their measurement instead at FVTPL.
B Gain or loss on investments at FVTPL and derivative transactions
Under US GAAP, the realized and unrealized portion of gain or loss from investments and foreign currency transaction
were shown separately. Under IFRS, a separate disclosure of realized and unrealized gains and losses and related foreign
exchange movements from financial instruments measured at FTVPL is not required. Therefore, the Fund now does not
present these separately and presents them together under two lines being net gain / (loss) on financial assets at FVTPL
and net gain / (loss) on derivative financial assets and liabilities in the Statement of Comprehensive Income.
C Share-based employee compensation
Under US GAAP, the Fund recognized share-based compensation expense for each award on a straight line basis,
whereas IFRS requires the share-based compensation expense to be recognized on a graded vesting basis where an
award has multiple tranches. Although this does not impact the overall charge or the number of shares awarded, where
awards are granted in multiple tranches it does have the effect of accelerating the expense recognition in the early years
of the arrangements. In relation to the expense associated with the acquisition of TFG Asset Management (described in
detail in Note 16), US$16.3 million of the total value of US$ 98.5 million would have been recognized earlier under IFRS in
the period from acquisition to 31 December 2014 with a corresponding increase in the Share-Based Compensation
Reserve. Furthermore, under IFRS there was a reduction of US$ 2.8 million relating to share-based compensation in the
Statement of Comprehensive Income for the year ended 31 December 2015.
The following table presents the accounting effect by time period arising from the adoption of IFRS on share-based
employee compensation concerning the acquisition of TFG Asset Management.
120 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 4
First Time Adoption of IFRS (continued)
C Share-based employee compensation (continued)
Share-based compensation
expense under US GAAP (straight
line basis)
Share-based compensation
expense under IFRS (graded
vesting basis)
P&L difference by year
Cumulative difference
D Interest Income
2012
US$MM
2013
US$MM
2014
US$MM
2015
US$MM
2016
US$MM
2017
US$MM
Total
US$MM
3.8
23.1
23.1
22.0
15.9
10.5
98.5
6.1
2.3
2.3
34.9
11.8
14.1
25.3
2.2
16.3
19.2
(2.8)
13.5
9.4
(6.5)
7.0
3.5
(7.0)
-
98.5
-
Under US GAAP, in accordance with ASC 325, an effective yield was determined for each CLO investment, based on the
IRR of each such investment. At each coupon date, such IRRs were recalculated and the new IRR was used to recognize
interest income on each investment until the following coupon date using the effective yield method. Other returns on
each CLO investment were then reported as a realized or unrealized gain or loss on investments.
Under IFRS, no such effective yield is calculated on CLO equity investments and therefore no interest income is reported
separately. Instead the total return for each CLO investment is reported under “Net gain / (loss) on financial assets and
financial liabilities at fair value through profit or loss”.
E Statement of Cash Flows
Following de-consolidation of subsidiaries as discussed in Note A above, the IFRS Statement of Cash Flows no longer
presents the related cash flows from previously consolidated subsidiaries.
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss
Fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within
the fair value hierarchy, described as follows:
Level 1 - Quoted in active markets for identical instruments
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.
121 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss
Fair value hierarchy (continued)
The following table shows financial instruments measured at fair value by the level in fair value hierarchy as of 31
December 2016:
Recurring fair value measurement of assets and liabilities
Financial assets at FVTPL
CLO Equity Tranches
CLO Mezzanine
Loans
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management (note 7)
Total financial assets at FVTPL
Financial assets held for trading
Forward foreign exchange contracts (asset)
Equity total return swaps (asset)
Total financial assets held for trading
Financial liabilities held for trading
Forward foreign exchange contracts (liability)
Credit default swaps
Total financial liabilities held for trading
Level 1
US$ MM
-
-
-
12.7
-
-
-
12.7
-
-
-
-
-
-
Level 2
US$ MM
-
1.8
6.6
-
18.3
369.9
-
396.6
11.1
11.1
22.2
(3.2)
(0.9)
(4.1)
Level 3
US$ MM
443.7
-
-
-
25.0
234.2
407.8
1,110.7
-
-
-
-
-
-
Total
Fair Value
US$ MM
443.7
1.8
6.6
12.7
43.3
604.1
407.8
1,520.0
11.1
11.1
22.2
(3.2)
(0.9)
(4.1)
The following table shows financial instruments measured at fair value by the level in fair value hierarchy as of 31
December 2015:
Recurring fair value measurement of assets and liabilities
Financial assets at FVTPL
CLO Equity Tranches
CLO Mezzanine
Loans
Unlisted Stock
Investment funds and vehicles
TFG Asset Management
Total financial assets at FVTPL
Financial assets held for trading
Forward foreign exchange contracts (asset)
Credit default swaps
Equity total return swaps (asset)
Total financial assets held for trading
Financial liabilities held for trading
Forward foreign exchange contracts (liability)
Total financial liabilities held for trading
Level 1
US$ MM
-
-
-
-
-
-
-
-
-
-
-
-
Level 2
US$ MM
-
1.7
3.0
10.0
299.7
-
314.4
10.8
1.0
7.6
19.4
(0.7)
(0.7)
Level 3
US$ MM
599.1
-
-
21.5
226.9
422.2
1,269.7
-
-
-
-
-
-
Total
Fair Value
US$ MM
599.1
1.7
3.0
31.5
526.6
422.2
1,584.1
10.8
1.0
7.6
19.4
(0.7)
(0.7)
122 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
The following table shows financial instruments measured at fair value by the level in fair value hierarchy as of 1 January
2015:
Recurring fair value measurement of assets and liabilities
Financial assets at FVTPL
CLO Equity Tranches
CLO Mezzanine
Loans
Unlisted Stock
Listed Stock
Investment funds and vehicles
TFG Asset Management
Total financial assets at FVTPL
Financial assets held for trading
Interest rate swaptions
Forward foreign exchange contracts (asset)
Equity total return swaps (asset)
Total financial assets held for trading
Financial liabilities held for trading
Forward foreign exchange contracts (liability)
Credit default swaps
Equity total return swaps (liability)
Total financial liabilities held for trading
Transfers between levels
Level 1
US$ MM
-
-
-
-
29.4
-
29.4
-
-
-
-
-
-
-
-
Level 2
US$ MM
-
1.7
22.1
2.8
-
278.3
-
304.9
0.6
11.5
7.1
19.2
(1.5)
(4.1)
(0.2)
(5.8)
Level 3
US$ MM
816.9
-
-
-
-
142.6
238.2
1,197.7
-
-
-
-
-
-
-
Total
Fair Value
US$ MM
816.9
1.7
22.1
2.8
29.4
420.9
238.2
1,532.0
0.6
11.5
7.1
19.2
(1.5)
(4.1)
(0.2)
(5.8)
During the year ended 31 December 2015, an unlisted stock valued at US$ 10 million transferred from level 3 to level 2 as a
result of a regularly observable price becoming available. The transfer between levels is reflected at the end of the period.
There were no transfers between level 1 and level 2 during the years 2016, 2015 and 2014.
Other financial assets and liabilities
For all other financial assets and liabilities, the carrying value is an approximation of fair value, including other receivables,
amounts due from brokers, cash and cash equivalents and other payables.
Valuation process (framework)
State Street (Guernsey) Limited serves as TFG’s independent administrator and values the investments of the Fund on an
ongoing basis in accordance with the valuation principles and methodologies approved by the Audit Committee of
independent directors from time to time. For certain investments, such as TFG Asset Management, a third party
valuation agent is also used. However, the Board of Directors is responsible for the valuations and may, at its discretion,
permit any other method of valuation to be used if it considers that such method of valuation better reflects value and is
in accordance with IFRS.
123 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Level 3 reconciliation
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 2016.
Balance at start of year
Purchases of investments
Proceeds from sale of investments
Realized (loss) / gain and change in
unrealized (depreciation) /
appreciation
Amortization*
Balance at end of year
Total gains and losses for the period
included in profit or loss for assets
held at the end of the reporting
period
CLO Equity
Tranches
US$ MM
599.1
15.3
(33.0)
(5.0)
(132.7)
443.7
Unlisted
Stock
US$ MM
21.5
-
-
3.5
-
25.0
Investment
Funds and
Vehicles
US$ MM
226.9
52.9
(48.0)
TFG Asset
Management
US$ MM
422.2
-
-
2.4
-
234.2
(14.4)
-
407.8
Total
US$ MM
1,269.7
68.2
(81.0)
(13.5)
(132.7)
1,110.7
99.9
3.5
2.4
(14.4)
91.4
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
Realized (loss) / gain and change in
unrealized (depreciation) /
appreciation
Amortization*
Balance at end of year
Total gains and losses for the period
included in profit or loss for assets
held at the end of the reporting
period
CLO Equity
Tranches
US$ MM
816.9
62.4
(6.5)
(40.2)
(233.5)
599.1
Unlisted
Stock
US$ MM
-
20.2
-
1.3
-
21.5
Investment
Funds and
Vehicles
US$ MM
142.6
76.7
(10.1)
TFG Asset
Management
US$ MM
238.2
133.1
(3.3)
17.7
-
226.9
54.2
-
422.2
Total
US$ MM
1,197.7
292.4
(19.9)
33.0
(233.5)
1,269.7
91.9
1.3
11.5
54.2
158.9
* Amortization for CLOs is the deemed repayment of principal
Unrealised gains / losses arising on level 3 assets are included in net gains on financial assets at fair value through profit or
loss.
124 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques
CLO equity tranches
A mark to model approach using discounted cash flow analysis (“DCF 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, 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 judgments and forward-looking determinations, and its experience and
knowledge is instrumental in the valuation process.
As at 31 December 2016, key modeling assumptions used are disclosed below. The modeling assumptions disclosed below
are a weighted average (by USD 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”)
Approximately 2.3% (2015: 2.2%, 2014: 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
73% (2015: 73%, 2014: 73%), which is 1.0x of the original base-case assumed weighted-
average recovery rate, for the life of the transaction.
Prepayment Rate
20% p.a. (2015: 20%, 2014: 20%), the original base-case prepayment rate with a 0%
prepayment rate on bonds throughout the life of the transaction.
Reinvestment Price and
Spread
Assumed reinvestment price is par for the life of the transaction, with an effective spread
over LIBOR of approximately 365 bps (2015: 375, 2014: 294) on broadly U.S. syndicated
loan deals which are still in their reinvestment periods. Middle Market loan deals are all
through their reinvestment period.
125 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques (continued)
CLO equity tranches (continued)
European CLO equity tranche investments –
Constant Annual Default
Rate (“CADR”)
Approximately 2.1% (2015: 2.1%, 2014: 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% (2015: 68%, 2014: 68%), which is 1.0x of the original base-case assumed weighted-
average recovery rate, for the life of the transaction.
20% p.a. (2015: 20%, 2014: 20%), 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.
At 31 December 2016, when determining the fair value of the equity tranches, a discount rate of 11% (or the deal IRR if the
deal was less than 12 months old for U.S. 2.0 CLOs) 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.
At 31 December 2015 and 1 January 2015, the Fund applied 12.0%, 11.0% (or the deal IRR if the deal was less than 12
months old for U.S. 2.0 CLOs) and 13.0% for the U.S. 1.0 CLO, the U.S. 2.0 CLO and the European equity tranches,
respectively.
Sensitivity Analysis:
The discount rate used has a significant impact on the fair value of CLO equity tranches. A reasonable possible alternative
assumption is to use a discount rate of 10% and 12%. Changing the discount rate to 10% and keeping all other variables
constant would increase the net assets and profits by US$ 12.2 million. An increase of the discount rate to 12% would result
in a reduction of NAV and profits by US$ 14.3 million.
TFG Asset Management (private equity in asset management companies)
The Fund holds majority and minority private equity stakes in asset management companies that are part of TFG Asset
Management. The valuation calculation for these investments was prepared by a third party valuation specialist engaged
by the Fund’s Audit Committee. Equitix, LCM and Polygon are valued using combination of DCF approach and quoted
market multiples (“Market Multiple Approach”) based on comparable companies to determine an appropriate valuation
range. GreenOak is valued using Market Multiple Approach and cross-checked using blended EBITDA.
The DCF Approach estimates the value of each business based on the value of the cash flows the business is expected to
generate in the future. The DCF Approach estimates the enterprise value of the investments by discounting estimates of
expected future free cash flows to the company (to both equity and debt holders), and the terminal value, at a weighted
average cost of capital (“WACC”) that captures the risk inherent in the projections. From the enterprise value derived by the
DCF Approach, net debt is deducted to arrive at the equity value. An adjustment is made to account for a discount for lack
of liquidity (“DLOL”), generally in range of 15% to 20%.
126 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques (continued)
TFG Asset Management (continued)
The Market Multiple Approach applies a multiple considered to an appropriate and reasonable indicator of value to certain
metrics of the business, such as earnings or asset under management, to derive the equity value. The multiple applied in
each case is derived by considering the multiples of quoted comparable companies. The multiple is then adjusted to
ensure that it appropriately reflects the specific business being valued, considering its business activities, geography, size,
competitive position in the market, risk profile, and earnings growth prospects of the business. The valuation specialist
considered a multiple of price-to-assets under management, and / or a multiple of earnings such as EBITDA, to perform this
analysis.
Certain business lines in TFG Asset Management are in an early stage of their development and therefore they have low
levels of assets under management and a limited record of profitability. In these cases, the valuation specialist has
determined that, while a low or zero value might be applied to such a business due to the level of uncertainty, a market
participant might also ascribe value to the existence of a functioning team with infrastructure and they might be willing to
pay the cost incurred in establishing the team.
The following table shows the unobservable inputs used by third party valuation specialist in valuing various investments
within TFG Asset Management. Please see note 7 for more information on these investments.
Investment
Valuation methodology
Significant unobservable inputs
Equitix
LCM
Polygon
DCF and Market
Multiples, Debt at par +
accrued interest
DCF and Market
Multiples
DCF and Market
Multiples
Discount rate 9.5%, EBITDA multiple 6.0x, DLOL 15%
(2015: 9.5%, 5.8x, 15%; 2014: 9.5%, 5.8x, 15%)
Discount rate 11.5%, P/AUM multiple 1.6%, DLOL 15%
(2015: 12.5%, 1.7%, 15%; 2014: 12.5%, 1.7%, 15%)
Discount rate 12.5%, EBITDA multiple 7.0x, DLOL 20% (2015:
13%, 7.7x, 20%; 2014: 13%, 7.7x, 20%)
GreenOak
Market Multiples
Blended EBITDA multiple 11.7x (2015: 12.0x, 2014: 12.0x)
127 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques (continued)
Sensitivity Analysis:
For the investments listed above, changing one or more of the assumptions to a reasonably possible alternatives would
have the following effects on the net assets and profits:
Investment
Favorable
Unfavorable
Equitix
LCM
Polygon
GreenOak
US$ 17.5m
EBITDA multiple 6.5x , 40% primary
unsecured revenues, 75% fund management
unsecured revenues
US$ 15.8m
P/AUM multiple 1.9%, Discount rate 10.5%
(US$ 17.5m)
EBITDA multiple 5.5x , 30% primary unsecured
revenues, 50% fund management unsecured
revenues
(US$ 15.8m)
P/AUM multiple 1.4%, Discount rate 12.5%
US$ 4.1m
EBITDA multiple 7.4x , Discount rate 12%
(US$ 4.1m)
EBITDA multiple 6.6x , Discount rate 13%
US$ 2.0m
Carry revenue multiple 1.5x and probability
of recurrence of carry 20%
(US$ 2.0m)
Carry revenue multiple 1.0x and probability
of recurrence of carry 15%
Investment Funds and Vehicles
Investments in unlisted investment funds are valued utilizing the net asset valuations provided by the managers of the
underlying funds and / or their administrators, where based on management assessment these valuations are the fair
value of these investments. In determining any adjustments necessary to the net asset valuations, management has
considered the date of the valuation provided, evidence of trading for open ended funds and redemption restrictions. No
adjustment was deemed material following this review.
Sensitivity analysis:
A 1% increase in net asset value of the funds included in level 3 will increase net assets and profits of the Fund by US$ 2.4
million. A decrease in net asset value of the funds will have an equal and opposite effect.
Unlisted stock
The unlisted stock investment 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.
Listed stock
For listed stock, the closing exchange price is utilized as the fair value price.
128 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques (continued)
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.
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.
Swaptions
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.
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.
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.
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 the DCF Approach, as appropriate. Unrealized
gains are reported as an asset and unrealized losses are reported as a liability in the Statement of Financial Position.
129 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 5
Financial Assets and Liabilities at Fair Value through Profit and Loss (continued)
Valuation techniques (continued)
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 hours’ 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 repurchase
agreements is recorded as cash and cash equivalents in the Statement of Financial Position, with interest receivable
accrued and recognized as interest income in the Statement of Comprehensive Income.
Note 6
Interest in Other Entities
Investment in unconsolidated structured entities
IFRS 12 defines a structured entity as an entity that has been designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when any voting rights relate to the administrative tasks only and the
relevant activities are directed by means of contractual agreements. Disclosures are required where an interest is held in a
structured entity and where, for example, the investor has been involved in the setting up of the structured entity and the
investor would have exposure to potential losses or costs over and above the amount actually invested.
As explained in note 2, the Fund considers the fund investments and its investments in CLOs to meet the definition of a
structured entity.
The Fund holds various investments in CLOs and investment funds. The fair value of the CLOs and investment funds is
recorded in the “Financial assets at fair value through profit or loss” line in the Statement of Financial Position. The Fund’s
maximum exposure to loss from these investments is equal to their total fair value. Once the Fund has disposed of its
holding in any of these investments, the Fund ceases to be exposed to any risk from that investment. The Fund has not
provided, and would not be required to provide any financial support to these investees. The investments are non-
recourse.
Below is a summary of the Fund’s holdings in subsidiary unconsolidated structured entities:
As at 31 December 2016:
CLO Equity
U.S. CLOs*
Investment Funds
No. of
investments
Range of
nominal
US$ MM
Average
nominal US$
MM
Fair value of
Fund’s Holding
US$ MM
15
33.0 - 721.1
457.6
202.0
Equities
Polygon European Equity Opportunity Fund**
Polygon Mining Opportunity Fund**
Polygon Global Equities Fund**
Credit
Polygon Distressed Opportunities Fund**
Polygon Convertible Opportunity Fund**
Tetragon Credit Income II**
1
1
1
1
1
1
Total GAV
US$ MM
455.3
69.6
22.3
119.6
487.5
66.0
n/a
n/a
n/a
n/a
n/a
n/a
192.9
36.6
19.5
106.5
50.9
16.1
130 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 6
Interest in Other Entities (continued)
As at 31 December 2015:
CLO Equity
U.S. CLOs*
Investment Funds
No. of
investments
Range of
nominal
US$ MM
Average
nominal
US$ MM
Fair value of
Fund’s Holding
US$ MM
19
33.0 - 721.1
320.1
224.1
Equities
Polygon European Equity Opportunity Fund**
Polygon Mining Opportunity Fund**
Polygon Global Equities Fund**
Credit
Polygon Distressed Opportunities Fund**
Polygon Convertible Opportunity Fund**
1
1
1
1
1
Total GAV
US$ MM
443.9
70.0
23.2
100.0
417.9
Range of
nominal
US$ MM
n/a
n/a
n/a
n/a
n/a
139.9
38.1
20.3
95.1
44.8
Average
nominal
US$ MM
Fair value of
Fund’s Holding
US$ MM
No. of
investments
19
10.2 - 721.1
376.4
208.3
As at 1 January 2015:
CLO Equity
U.S. CLOs*
Investment Funds
Equities
Polygon European Equity Opportunity Fund**
Polygon Mining Opportunity Fund**
Polygon Global Equities Fund**
Credit
Polygon Distressed Opportunities Fund**
Polygon Convertible Opportunity Fund**
1
1
1
1
1
Total GAV
US$ MM
350.2
66.7
22.4
96.3
413.0
n/a
n/a
n/a
n/a
n/a
120.8
37.6
19.5
95.5
42.5
*This includes all U.S. CLOs deemed to be controlled by the Fund. U.S. CLOs are domiciled in Cayman Islands.
** Polygon Hedge Funds and Tetragon Credit Income II (“TCI II”) are domiciled in the Cayman Islands. Given the
applicable notice, liquidity up to 25% of the investment in Polygon Hedge Funds is available on a quarterly basis (subject
to certain conditions), and the entire investment could be liquidated over four consecutive quarters.
Please refer to Note 17 for details of unfunded capital commitments.
131 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 6
Interest in Other Entities (continued)
Below is a summary of the Fund’s holding in non-subsidiary unconsolidated structured entities:
As at 31 December 2016:
CLO Equity
U.S. CLOs*
European CLOs*
Real Estate
GreenOak – U.S.**
GreenOak – Europe **
GreenOak – Asia**
Other Real Estate
As at 31 December 2015:
CLO Equity
U.S. CLOs*
European CLOs*
Real Estate
GreenOak – U.S.**
GreenOak – Europe **
GreenOak – Asia**
Other Real Estate
As at 1 January 2015:
CLO Equity
U.S. CLOs*
European CLOs*
Real Estate
GreenOak – U.S.**
GreenOak – Europe **
GreenOak – Asia**
No. of
investments
Range of
nominal
US$ MM
Average
nominal US$
MM
Fair value of
Fund’s Holding
US$ MM
27
6
5
9
3
4
No. of
investments
33
8
6
8
4
4
22.2 - 417.2
36.4 - 213.0
Total AUM
US$ MM
4,037.0
2,062.6
1,029.2
27.7
Range of
nominal
US$ MM
22.2 - 483.1
36.4 - 296.7
Total AUM
US$ MM
4,252.5
1,408.0
905.1
26.3
153.8
103.8
n/a
n/a
n/a
n/a
208.5
31.6
52.3
35.8
28.8
27.7
Average
nominal
US$ MM
Fair value of
Fund’s Holding
US$ MM
209.3
121.9
n/a
n/a
n/a
n/a
316.6
58.5
47.4
38.2
29.9
26.3
No. of
investments
Range of
nominal
US$ MM
Average
nominal
US$ MM
Fair value of
Fund’s Holding
US$ MM
47
10
7
6
4
18.2 - 513.7
118.8 - 486.3
Total AUM
US$ MM
2,239.8
1,359.5
805.9
231.9
242.1
n/a
n/a
n/a
486.5
120.1
46.1
21.9
20.3
* Includes all externally managed CLOs that are outside the Fund’s control. U.S. CLOs are domiciled in Cayman Islands. European CLOs are
domiciled in Ireland, Luxembourg and Netherlands.
** GreenOak funds hold real estate investments in the U.S., Japan and various countries in Europe. The full scale of the region presented
above contains all assets under management in structured entities. The number of vehicles where the Fund has investments is listed above.
The Fund's investment in these funds can only be redeemed in the form of capital distributions when the underlying real estate assets are
sold.
Please refer to Note 17 for details of unfunded capital commitments.
132 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 7
TFG Asset Management
TFG Asset Management is a diversified alternative asset management business that owns majority and minority private
equity stakes in asset management companies. The Fund owns 100% holdings and voting rights in TFG Asset Management.
As at 31 December 2016, TFG Asset Management investments were comprised of LCM, Polygon, Equitix, Hawke’s Point, TCIP
and a minority stake in GreenOak.
Equitix
LCM
Polygon
GreenOak
TCIP
Hawke’s Point
Investments in TFG Asset Management
LCM
31 Dec 2016
US$ MM
172.5
106.2
59.7
67.0
1.6
0.8
407.8
31 Dec 2015
US$ MM
173.9
110.2
67.0
70.0
0.3
0.8
422.1
1 Jan 2015
US$ MM
-
99.8
68.6
69.8
-
-
238.2
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. 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) and
the prepayment rate of the underlying loan assets, as well as post-reinvestment period reinvestment flexibility and
weighted average life constraints.
The Fund owns 100% of LCM through its investment in TFG Asset Management.
Polygon
Polygon manages open-ended hedge fund and private equity vehicles across a number of strategies. Polygon was
established in 2002 and has offices in New York and London.
The Fund owns 100% of the Polygon business through its investment in TFG Asset Management.
Equitix
Equitix is an integrated core infrastructure asset management and primary project platform. Equitix was established in
2007 and is based in London. 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 of £60.0 million (US$ 92.3 million) before fees 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.
133 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 7
TFG Asset Management (continued)
Hawke’s Point
Hawke’s Point is a mining finance company which seeks to provide capital to companies in the mining and resource
sectors. TFG Asset Management established Hawke’s Point in the fourth quarter of 2014 and the Fund owns 100% of
Hawke’s Point through its investment in TFG Asset Management.
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. The business was established at the end of 2015 and is managed out of New York and London.
The Fund owns 100% of TCIP through its investment in TFG Asset Management.
GreenOak
GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks to create long-term value for its
investors and provide strategic advice to its clients . The business was established in 2010 and has a presence in New York,
London, Tokyo, Los Angeles, Madrid and Seoul. The Fund, through its investment in TFG Asset Management, owns a 23%
interest (2015: 23%) in GreenOak.
Note 8
Financial Risks Review
Financial Risk Review:
The Fund has exposure to the following risks from financial instruments:
- Credit risk;
-
Liquidity risk; and
- Market risks
This note presents information about the Fund’s objectives, policies and processes for measuring and managing risk.
Risk Management Framework:
The Fund’s 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. The
Fund’s investment strategy is to seek to identify asset classes that offer excess returns relative to their investment risk, or
‘intrinsic alpha’.
The Investment Manager analyses the risk/reward, correlation, duration and liquidity characteristics of each potential
capital use to gauge its attractiveness and increment impact on the Fund. As part of the Fund’s investment strategy, the
Investment Manager may employ hedging strategies and leverage in seeking to provide attractive returns while
managing risk.
The Investment Manager’s risk committee is responsible for risk management of the Fund and performs active and
regular oversight and risk monitoring.
Credit risk
‘Credit risk’ is the risk with a counterparty to a financial instrument will fail to discharge an obligation or commitment
that it has entered into the Fund, resulting in a financial loss to the Fund. It arises principally from the loan portfolio held,
and also from derivative financial assets, cash and cash equivalents and balances due from brokers.
134 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
Credit risk (continued)
Credit risk is monitored on an ongoing basis by the Investment Manager in accordance with the policies and procedures
in place.
The Fund’s activities may give rise to settlement risk. ‘Settlement risk’ is the risk of loss due to the failure of an entity to
honour its obligations to deliver cash, securities or other assets as contractually agreed.
For the majority of transactions, the Fund mitigates this risk by conducting settlements through a broker to ensure that a
trade is settled only when both parties have fulfilled their contractual settlement obligations. The Fund conducts
diligence on its brokers and financing counterparties before entering into trading or financing relationships. The Fund
also actively monitors and manages settlement risk by diversifying across counterparties and by monitoring
developments in the perceived creditworthiness of financing counterparties.
The carrying value of financial assets through profit or loss, derivatives, other receivables, amounts due from brokers and
cash and cash equivalents, as disclosed in the Statement of Financial Position, represents the Fund’s maximum credit
exposure, hence, no separate disclosure is provided.
i. Analysis of Credit Quality
The Fund’s exposure to credit risk arises in respect of the following financial instruments:
Cash and cash equivalents
The cash and cash equivalents, including reverse sale and repurchase agreements, are held with three (2015: one)
financial institutions with credit ratings between A and BBB+ (S&P). The Investment Manager monitors these credit
ratings and spreads of credit default swaps on a daily basis and actively moves balances between counterparties when
deemed appropriate.
Amounts due from brokers
Balances due from brokers represent margin accounts, cash collateral for borrowed securities and sales transactions
awaiting settlement. Credit risk relating to unsettled transactions is considered small due to the short settlement period
involved and the high quality of the brokers used. As at the reporting date, the balance was concentrated among three
brokers (2015: three) with S&P’s credit ratings between A and BBB+ (2015: A and BBB+). Please refer to Note 10 for a
breakdown of balances held with each broker.
Loans portfolio
The Fund is exposed to Equitix through a combination of a mezzanine loan, loan notes and equity investment that it
holds with respect to this entity. The loans are subordinated to another third party loan and in the event of bankruptcy
or insolvency of Equitix, this may impact the amount that is recoverable with respect to these loans. The maximum
aggregate exposure to Equitix is disclosed in Note 7.
The Fund also has investments in debt securities of US$ 6.6 million (2015: US$ 3.0 million) with Moody’s credit ratings
between B2 and Caa1 (2015: B2 and Caa1).
CLOs
The Fund's portfolio is partly invested in CLO equity tranches which are subject to potential non-payment risk. The Fund
will be in a first loss position with respect to realized losses on the collateral in each CLO investment.
135 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
i. Analysis of Credit Quality (continued)
The Investment Manager assesses the credit risk of the CLOs on a look-through basis to the underlying loans in each CLO
investment. The Investment Manager seeks to provide diversification in terms of underlying assets, geography and CLO
managers.
Derivatives
The table below shows an analysis of derivative financial assets and liabilities outstanding at 31 December 2016.
OTC
Derivative assets
Derivative liabilities
Fair Value
US$ MM
22.2
Notional
411.5
Fair Value
US$ MM
(4.1)
Notional
363.5
The table below shows an analysis of derivative financial assets and liabilities outstanding at 31 December 2015.
OTC
Derivative assets
Derivative liabilities
Fair Value
US$ MM
19.4
Notional
695.4
Fair Value
US$ MM
(0.7)
Notional
30.1
The table below shows an analysis of derivative financial assets and liabilities outstanding at 1 January 2015.
OTC
Derivative assets
Derivative liabilities
Fair Value
US$ MM
19.2
Notional
685.8
Fair Value
US$ MM
(5.8)
Notional
187.6
ii. Concentration of credit risk
The Fund’s credit risk is concentrated in cash and cash equivalents and Equitix through the loan that it has made to that
entity. The table below shows a breakdown of credit risk per investment type:
Investment Type
CLOs
Cash and cash equivalents
Equitix loan
Other loans
Total
31 Dec 2016
31 Dec 2015
45%
40%
14%
1%
100%
54%
33%
13%
-%
100%
None of the Fund’s financial assets were considered to be past due or impaired in 2016, 2015 and 2014.
iii. Collateral and other credit enhancements, and their financial effects
The Fund mitigates the credit risk of derivatives and reverse sale and repurchase agreements through collateral
management including master netting agreements.
Derivative transactions are either transacted on an exchange, or entered into under International Derivative Swaps and
Dealers Association (“ISDA”) master netting agreements. Under
in certain
circumstances, for example, when a credit event such as a default occurs, all outstanding transactions under the
agreement are terminated, the termination value is assessed and only a single net amount is due or payable in
settlement of all transactions. The amount of collateral accepted in respect of derivative assets is shown in Note 8(iv).
ISDA master netting agreements
The Fund’s reverse sale and repurchase transactions are covered by master agreements with netting terms similar to
those of ISDA master netting agreements.
136 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
iii. Collateral and other credit enhancements, and their financial effect (continued)
The table below shows the amount of reverse sale and repurchase agreements.
Receivables from reverse sale and repurchase agreements
No individual trades are under-collaterized.
31 Dec 2016
US$ MM
201.0
31 Dec 2015
US$ MM
225.0
Collateral accepted includes investment-grade securities that the Fund is permitted to sell or repledge. The Fund has
not recognized these securities in the Statement of Financial Position.
iv. Offsetting financial assets and liabilities
The Fund has not offset any financial assets and financial liabilities in the Statement of Financial Position. The
disclosures set out in the tables below include financial assets and financial liabilities that are subject to an enforceable
master netting or similar agreement that covers financial instruments.
31 Dec 2016
Gross Amount
of Recognized
Assets /
Liabilities
Gross Amounts
Offset in the
Statement of
Financial
Position
Net Amounts
Presented in the
Statement of
Financial Position
Financial
instruments
eligible for
netting
Description
US$ MM
US$ MM
US$ MM
US$ MM
Cash
Collateral
received/
posted
US$ MM
Net Amount
US$ MM
Assets
Derivatives
Total
Liabilities
Derivatives
Total
22.2
22.2
4.1
4.1
-
-
-
-
22.2
22.2
4.1
4.1
(4.1)
(4.1)
(4.1)
(4.1)
-
-
-
-
18.1
18.1
-
-
137 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
iv. Offsetting financial assets and liabilities (continued)
Gross Amount
of Recognized
Assets /
Liabilities
Gross Amounts
Offset in the
Statement of
Financial Position
31 Dec 2015
Net Amounts
Presented in the
Statement of
Financial Position
Financial
instruments
eligible for
netting
Cash Collateral
received/
posted
Description
US$ MM
US$ MM
US$ MM
US$ MM
US$ MM
Assets
Derivatives
Total
Liabilities
Derivatives
Total
19.4
19.4
0.7
0.7
-
-
-
-
19.4
19.4
0.7
0.7
(0.7)
(0.7)
(0.7)
(0.7)
-
-
-
-
Gross Amount
of Recognized
Assets /
Liabilities
Gross Amounts
Offset in the
Statement of
Financial Position
1 Jan 2015
Net Amounts
Presented in the
Statement of
Financial Position
Financial
instruments
eligible for
netting
Cash Collateral
received/
posted
Description
US$ MM
US$ MM
US$ MM
US$ MM
US$ MM
Assets
Derivatives
Total
Derivatives
Total
Liquidity risk
19.2
19.2
5.8
5.8
-
-
-
-
19.2
19.2
5.8
5.8
(2.1)
(2.1)
(2.1)
(2.1)
-
-
(3.7)
(3.7)
Net
Amount
US$ MM
18.7
18.7
-
-
Net
Amount
US$ MM
17.1
17.1
-
-
‘Liquidity risk’ is the risk that the Fund will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or other financial assets.
The Fund’s policy and the Investment Manager’s approach to managing liquidity is to ensure, as far as possible, that it
will always have sufficient liquidity to meet its liabilities when due.
The Fund’s financial assets include some investments which are considered illiquid. These investments include TFG
Asset Management, CLO Equity tranches, real estate funds and vehicles and unlisted equities. The Fund also holds
investments in hedge funds and private equity funds, which are subject to redemption restrictions such as notice periods
and, in certain circumstances, redemption gates. As a result, the Fund may not be able to liquidate these investments
readily.
138 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
Liquidity risk (continued)
The Fund’s liquidity risk is managed on a daily basis by the Investment Manager in accordance with the policies and
procedures in place. The Fund also has access to a revolving credit facility of US$ 150.0 million. Details of the facility and
the undrawn and drawn balance are disclosed in Note 13.
The Fund is not exposed to the liquidity risk of meeting shareholder redemptions as the Fund’s capital is in the form of
non-redeemable shares.
The following were the contractual maturities of financial liabilities at the reporting date. The amounts are gross and
undiscounted.
Derivative financial liabilities – Credit
default swaps
Derivative financial liabilities –
Forward foreign currency exchange
contracts
Loans and borrowings
Expenses payable
Derivative financial liabilities –
Forward foreign currency exchange
contracts
Expenses payable
Derivative financial liabilities – Credit
default swaps
Derivative financial liabilities – Total
return equity swaps
Derivative financial liabilities –
Forward foreign currency exchange
contracts
Expenses payable
31 Dec 2016
Within 1
month
US$ MM
1 – 3
months
US$ MM
3 months –
1 year
US$ MM
1 – 5 years
US$ MM
Greater
than 5
years
US$ MM
Total
US$ MM
-
0.2
-
2.3
2.5
-
1.3
-
-
1.3
-
0.9
1.7
-
-
1.7
-
38.0
-
38.9
31 Dec 2015
-
-
-
-
-
0.9
3.2
38.0
2.3
44.4
Within 1
month
US$ MM
1 – 3
months
US$ MM
3 months –
1 year
US$ MM
1 – 5 years
US$ MM
Greater
than 5
years
US$ MM
Total
US$ MM
-
3.0
3.0
0.7
-
0.7
-
-
-
-
-
-
-
-
-
0.7
3.0
3.7
1 Jan 2015
Within 1
month
US$ MM
1 – 3
months
US$ MM
3 months –
1 year
US$ MM
1 – 5 years
US$ MM
Greater
than 5
years
US$ MM
Total
US$ MM
-
0.2
-
5.0
5.2
-
-
0.7
-
0.7
-
-
0.8
-
0.8
-
-
-
-
-
4.1
-
-
-
4.1
4.1
0.2
1.5
5.0
10.8
139 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
Liquidity risk (continued)
The tables below analyse the Fund’s financial derivative instruments that will be settled on a gross basis into relevant
maturity groupings based on the remaining period at the financial year end date to the contractual maturity date.
Within 1
month
US$ MM
92.6
244.0
140.1
Inflows
1 – 3
months
US$ MM
87.0
74.7
77.8
3 months
– 1 year
US$ MM US$ MM
1 – 5
years
236.2
36.3
29.3
-
9.4
10.4
Outflows
Within 1
month
US$ MM
(90.7)
(236.3)
(133.7)
1 – 3
months
US$ MM
(84.7)
(73.7)
(74.4)
3 months –
1 year
US$ MM
(232.5)
(35.4)
(29.2)
1 – 5
years
US$ MM
-
(8.9)
(10.3)
31 Dec 2016
31 Dec 2015
1 Jan 2015
The Fund manages its liquidity risk by holding sufficient cash and cash equivalents to meet its financial liabilities. Cash
and cash equivalents balance as at reporting date and as percentage of NAV is disclosed in the table below:
Cash and cash equivalents (U.S.$ MM)
Percentage of NAV
Market Risk
31 Dec 2016
392.6
20.22%
31 Dec 2015
360.3
17.83%
1 Jan 2015
359.8
18.36%
‘Market risk’ is the risk that changes in market prices, such as interest rates, foreign exchange rates, equity prices and
credit spreads, will affect the Fund’s income or the fair value of its holdings of financial instruments.
The Fund’s strategy for the management of market risk is driven by the Fund’s investment objective of generating
distributable income and capital appreciation.
The Fund employs hedging strategies, from time to time as deemed necessary, to manage its exposure to foreign
currency, interest rate and other price risks. The Fund does not apply hedge accounting.
i. Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of
financial instruments.
The fair value of certain Fund’s investments may be significantly affected by changes in interest rates. The Fund’s
investments in leveraged loans through CLOs and TCI II generate LIBOR plus returns and are sensitive to interest rate
levels and volatility. Although CLOs are structured to hedge interest rate risk to some degree through the use of matched
funding, there may be some difference between the timing of LIBOR resets on the liabilities and assets of a CLO, which
could have a negative effect on the amount of funds distributed to residual tranche holders. In addition, many obligors
have the ability to choose their loan base from among various terms of LIBOR and the Prime Rate thereby generating an
additional source of potential mismatch. Furthermore, in the event of a significant rising interest rate environment and /
or economic downturn, loan defaults may increase and result in credit losses that may be expected to affect Tetragon’s
cash flow, fair value of its assets and operating results adversely.
Change in interest rates may also affect the value of the Fund’s investment in Polygon Convertible Opportunity Fund
(“PCOF”) and the Polygon Distressed Opportunities Fund (“PDOF”, together the “Polygon Funds”). Generally, the value of
convertible bonds and other fixed rate instruments will change inversely with changes in interest rates. The investment
managers of the Polygon Funds manage interest rate risk by, among other things, entering into interest rate swaps and
other derivatives as and when required.
140 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
i. Interest Rate Risk (continued)
The table below shows the sensitivity analysis for interest rates movement on the investment portfolio held by the Fund.
Fair Value as at
31 Dec 2016
US$ MM
151.8
260.6
31.6
51.0
106.5
16.1
617.6
Effects of +100bps
Change in Interest rate
on net assets
US$ MM
4.6
10.9
(0.9)
(0.8)
(2.1)
1.1
Effects of -100bps Change
in Interest rate on net
assets
US$ MM
2.4
18.2
(0.2)
0.9
2.7
0.7
12.8
24.7
U.S. CLOs 1.0
U.S. CLOs 2.0
European CLOs
PCOF
PDOF
TCI II
ii. Currency Risk
The Fund invests in financial instruments and enters into transactions that are denominated in currencies other than its
functional currency, primarily in Euro (“EUR”), Sterling (“GBP”), Norwegian Krone (“NOK”) and Japanese Yen (“JPY”).
Consequently, the Fund is exposed to risk that the exchange rate of its currency relative to other foreign currencies may
change in a manner that has an adverse effect on the fair value or future cash flows of the Fund’s financial assets or
financial liabilities denominated in currencies other than USD.
The Fund hedges against its currency risk, mainly by employing forward currency contracts. The currency exposure is
monitored and managed on a daily basis.
Exposure:
At the reporting date, the carrying amount of the Fund’s net financial assets and financial liabilities held in individual
foreign currencies, expressed in USD and as a percentage of its net assets, were as follows. The sensitivity analysis sets
out the effect on the net assets and profit for the year of reasonably possible weakening of USD against EUR, GBP, NOK
and JPY by 5%. The analysis assumes that all other variables, in particular interest rates, remain constant.
EUR
GBP
NOK
JPY
31 Dec 2016
Net Monetary and
Non-Monetary
Assets and Liabilities
US$ MM
61.9
263.0
18.3
16.0
Forward foreign
currency exchange
hedging
US$ MM
(61.9)
(242.3)
(19.9)
(16.3)
Effect of +/- 5%
on exchange
rate
US$ MM
-
(1.0)
0.1
-
Net exposure
US$ MM
-
20.7*
(1.6)
(0.3)
359.2
(340.4)
18.8
0.9
141 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
ii. Currency Risk (continued)
EUR
GBP
NOK
JPY
EUR
GBP
NOK
JPY
31 Dec 2015
Net Monetary and
Non-Monetary
Assets and Liabilities
US$ MM
97.9
202.7
10.9
15.4
Forward foreign
currency exchange
hedging
US$ MM
(97.7)
(188.9)
(9.8)
(16.5)
Effect of +/- 5%
on exchange
rate
US$ MM
-
(0.7)
(0.1)
0.1
Net exposure
US$ MM
0.2
13.8*
1.1
(1.1)
326.9
(312.9)
14.0
(0.7)
1 Jan 2015
Net Monetary and
Non-Monetary
Assets and Liabilities
US$ MM
151.4
44.7
2.8
4.2
Forward foreign
currency exchange
hedging
US$ MM
(144.0)
(44.3)
(2.8)
(4.3)
Effect of +/- 5%
on exchange
rate
US$ MM
0.4
-
-
-
Net exposure
US$ MM
7.4*
0.4
-
(0.1)
203.1
(195.4)
7.7
0.4
A strengthening of the USD against the above currencies would have resulted in an equal but opposite effect to the
amounts shown above.
*These exposures have arisen primarily due to a difference in timing between determining the year end value of level 3
investments and executing the relevant currency hedge.
iii. Other Price Risk
‘Other price risk’ is the risk that the fair value of the financial instrument will fluctuate as a result of changes in market
prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an
individual investment or its issuer or by factors affecting all instruments traded in the market.
The Investment Manager manages the Fund’s price risk and monitors its overall market positions on a regular basis in
accordance with Fund’s investment objectives and policies.
142 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 8
Financial Risks Review (continued)
iii. Other Price Risk (continued)
The following table sets out the concentration of the investment assets and liabilities, excluding derivatives held by the
Fund as at the reporting date.
Asset Class
CLO Equity Tranches
CLO Mezzanine
Loans
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management
% of net assets as at
31 Dec 2016
22.8%
0.1%
0.3%
0.7%
2.2%
31.1%
21.0%
% of net assets as at
31 Dec 2015
29.7%
0.1%
0.2%
-
1.6%
26.1%
20.9%
% of net assets as at
1 Jan 2015
41.7%
0.1%
1.1%
1.5%
0.1%
21.5%
12.2%
The Investment Manager reviews the above percentages on a monthly basis against the limits which are set and
reviewed periodically. Please refer to Note 5 for a sensitivity analysis of fair value of investments.
Note 9
Other Receivables and Prepayments
Prepayments
Interest receivables
Other receivables
31 Dec 2016
US$ MM
0.1
0.1
0.4
0.6
31 Dec 2015
US$ MM
0.1
0.1
-
0.2
1 Jan 2015
US$ MM
0.1
0.5
6.3
6.9
Other receivables and prepayments are expected to be settled within 12 months.
Note 10
Amounts Due From Brokers
The amounts due from brokers is cash pledged as collateral on the forward contracts and equity swaps. The following
table details amount held by brokers.
UBS AG
BNP Paribas
Morgan Stanley
Bank of America Merrill Lynch
Note 11 Cash and Cash Equivalents
Cash and current deposits with banks
31 Dec 2016
US$ MM
11.2
8.8
-
31.0
51.0
31 Dec 2015
US$ MM
10.7
10.3
1.4
37.5
59.9
1 Jan 2015
US$ MM
2.0
13.3
1.4
35.4
52.1
31 Dec 2016
US$MM
392.6
392.6
31 Dec 2015
US$ MM
360.3
360.3
1 Jan 2015
US$ MM
359.8
359.8
143 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 11
Cash and Cash Equivalents (continued)
Of this cash balance, US$ 201.0 million relates to amounts loaned to counterparties and secured against collateral
through tri-party agreements (31 December 2015: US$ 225.0 million; 1 January 2015: US$ Nil). These all have at least
overnight liquidity.
Certain controlled subsidiaries, related to real estate investments, owned by the Fund contain cash and cash equivalents
balance of US$ 32.6 million as at 31 December 2016 (31 December 2015: US$ 42.4 million; 1 January 2015: US$ 12.1 million).
This cash balance is included in the fair value of these subsidiaries.
Note 12 Other Payables and Accrued Expenses
Accrued expenses
All other payables and accrued expenses are due within one year.
Note 13
Credit Facility
31 Dec 2016
US$ MM
2.3
2.3
31 Dec 2015
US$ MM
3.0
3.0
1 Jan 2015
US$ MM
5.0
5.0
On 5 April 2016, the Fund obtained an unsecured US$ 75.0 million revolving credit facility (the “Revolving Credit Facility”)
with a stated maturity date of 1 October 2019. This stated maturity date will automatically be extended by six months on
1 April and 1 October in each year unless the lender provides a written notice to the Fund withholding consent to such an
extension.
During the third quarter, the Fund increased the size of its Revolving Credit Facility from US$ 75.0 million to US$150.0
million with the addition of a second lender to the facility.
The facility is subject to a minimum usage fee which is equivalent to a 4% coupon on 25% of the total notional amount of
the facility. In addition, there is a non-usage fee of 1% which is applied to the undrawn notional amount, excluding the
notional amount which is subject to the minimum usage fee. Any drawn portion will incur interest at a rate of 1M US
LIBOR plus a spread of 4%.
During the year, the Fund utilised US$ 38.0 million of the credit facility. As at 31 December 2016, US$ 112.0 million of the
facility remained undrawn.
144 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 14 Share Capital
Authorized
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.
Share Transactions
Shares in issue at 1 January 2015
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
Issued in lieu of stock dividend
Issued through release of tranche of Escrow shares
Issue through exercise of GreenOak options
Shares purchased during the year
Shares in issue at 31 December 2016
Treasury Shares
Voting Shares Non-Voting Shares
No. MM
No.
Shares
US$ MM
10
-
-
-
10
-
-
-
-
10
95.9
1.2
4.8
(6.0)
95.9
1.6
3.2
0.7
(14.3)
87.1
0.1
-
-
-
0.1
-
-
-
-
0.1
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 2016, there was no share repurchase program in
place.
145 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 14 Share Capital (continued)
Treasury Shares (continued)
When the program was in operation, the Fund undertook to repurchase an identical number of its own shares from the
Feeder as and when the Feeder repurchased its own shares in the open market. The Fund matched the price per Share
paid by the Feeder. The shares are held in Treasury shares 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, the shares are neither eligible
to receive dividends nor are they included in the shares outstanding on the Statement of Financial Position.
During 2016, the Feeder and the Fund announced that under the terms of two “modified Dutch auction” tender offers
(the “Tender Offers”), the Fund had accepted for purchase approximately 14.3 million Feeder non-voting shares at an
aggregate cost of US$ 151.1 million, including applicable fees and expenses of US$ 1.1 million. Additionally, the Fund
entered into an agreement to repurchase 0.6 million shares for US$ 6.7 million from Michael Humphries, a manager of
certain Polygon funds, in connection with the winding up of a swap transaction between him and the Fund with respect
to the relative values of the Feeder's shares and interest in the Polygon funds following the acquisition of Polygon in
2012. The Feeder exchanged an equivalent number of Fund shares for the Feeder shares which had been repurchased.
Escrow Shares
As part of the acquisition of TFG Asset Management, the Aggregate Consideration (as defined in Note 16) 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 3.8 million shares (31 December 2015: 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 3.0 million shares (31 December 2015: 4.0 million shares) were deemed to be in relation
to the original Feeder escrow shares, and a value of US$ 25.0 million (31 December 2015: US$ 33.8 million) was debited
against Capital Contribution, using the transaction share price of US$ 8.43.
In addition, approximately 0.8 million shares (31 December 2015: 0.7 million shares) were deemed to be related to the
stock dividends awarded on the original shares released and an amount of US$ 8.1 million (31 December 2015: US$ 7.5
million) was released against Retained Earnings, based on the stock reference price at each applicable dividend date.
Other Share Transactions
Shares at 31 December 2014
Shares purchased during the year
Shares at 31 December 2015
Shares purchased during the year
Shares transferred to Treasury
Other transactions settled from Treasury
Shares at 31 December 2016
* TFG Holdings I was closed during 2016.
Treasury Shares
Shares
No. MM
Shares held in TFG Holdings I*
Shares
No. MM
12.8
-
12.8
4.3
27.0
(0.8)
43.3
16.6
0.4
17.0
10.0
(27.0)
-
-
146 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 14 Share Capital (continued)
Capital Management
The Fund’s capital is represented by the ordinary share capital, share premium, and accumulated retained earnings, as
disclosed in the Statement of Financial Position. The Fund’s capital is managed in accordance with its investment
objective of generating distributable income and capital appreciation which aims to provide stable returns to investors
across various credit, equity, interest rate, inflation and real estate cycles.
The Fund is not subject to externally imposed capital requirements and has no legal restrictions on the issue, repurchase
or resale of its shares.
Note 15
Dividends
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
Quarter ended 31 December 2015 of US$ 0.165 per share
Quarter ended 31 March 2016 of US$ 0.165 per share
Quarter ended 30 June 2016 of US$ 0.1675 per share
Quarter ended 30 September 2016 of US$ 0.1675 per share
31 Dec 2016
US$ MM
-
-
-
-
15.9
16.1
14.6
15.2
61.9
31 Dec 2015
US$ MM
15.1
15.2
15.7
16.5
-
-
-
-
62.5
The fourth quarter dividend of US$ 0.1725 per share was approved by the Directors on 28 February 2017 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 its incentive fee liability. In the year ended 31
December 2016, US$ 22.6 million (31 December 2015: US$ 35.2 million) was paid.
Note 16
Share-based Payment Plan
On 28 October 2012, TFG Asset Management L.P. and certain of its affiliates, were acquired by the Fund in exchange for
consideration of approximately 11.7 million non-voting shares of the Feeder, with an aggregate fair value at grant date of
US$ 98.5 million, to the sellers (the “Aggregate Consideration”).
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 to 2016 with the remainder to be released in 2017,
as set out in the following table.
Vesting schedule of Aggregate
Consideration escrow shares (million
shares)
2012
2013
2014
2015
2016
2017
Total
0
1.2
1.2
3.7
3.0
2.5
11.7
These shares were treated as payment for post combination services rather than upfront consideration and have been
accounted for under IFRS 2 Share-based Payments. The Fund recognizes the individual compensation costs on a graded
vesting basis over the relevant service period of each award. These are reflected in the Statement of Comprehensive Income
as share-based employee compensation and through Equity as a capital contribution. The charge for the year ended 31
December 2016 amounted to US$ 9.4 million (31 December 2015: US$ 19.2 million).
147 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 16
Share-based Payment Plan (continued)
Share-based compensation expense
under IFRS (graded vesting basis) (US$
mm)
2012
2013
2014
2015
2016
2017
Total
6.1
34.9
25.3
19.2
9.4
3.5
98.5
Movements during the year
The following tables illustrate the movements in shares during the year:
Balance at 1 January
New awards
Vested during the period
Stock dividends
Balance at 31 December
31 Dec 2016
Shares MM
31 Dec 2015
Shares MM
6.6
-
(3.8)
0.4
3.2
10.7
-
(4.7)
0.6
6.6
The table below shows the number of Feeder shares which are currently expected to vest over the next year, including
accrued stock dividends up to the end of December 2016. 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.
2017
2016
2017
Vesting Schedule – Shares as at 31 Dec 2016
Shares MM
3.2
3.2
Vesting Schedule – Shares as at 31 Dec 2015
Shares MM
3.6
3.0
6.6
US$ MM
12.6
12.6
US$ MM
16.6
12.6
29.2
The Fund also pays one of its directors in the form of shares in the Feeder. Please refer to the Director’s report and Note
18 for details of this payment.
Note 17
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 2016, in relation to this particular co-investment
commitment, GreenOak had given the Fund notice totaling US$ 101.4 million across multiple investment vehicles, of which
US$ 60.6 million had actually been drawn down and funded (31 December 2015: US$ 51.2 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$ 90.9 million in respect of GreenOak investment vehicles (31 December 2015:
US$ 103.8 million). The total actual amount ultimately drawn may be lower than this estimated maximum amount.
148 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 17
Contingencies and Commitments (continued)
The Fund has committed capital to Tetragon Credit Income II LP. As at 31 December 2016, total committed capital by the
Fund is US$ 62.0 million (31 December 2015: US$ 35.0 million, 1 January 2015: US$ Nil). As at 31 December 2016, the Fund
has total unfunded commitments of US$ 46.1 million (31 December 2015: US$ 35.0 million, 1 January 2015: US$ Nil).
Note 18
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. The Feeder is the parent company of the Fund, as it owns 100% of the Fund’s
shares.
All fees and expenses of the Feeder and the Fund (including management fees paid to the Investment Manager), except for
the incentive fees, are paid by the Fund and allocated to the Feeder. Any incentives fees are paid to the Investment
Manager by the Feeder. During year ended 31 December 2016, US$ 22.0 million (31 December 2015: US$ 39.6 million) was
paid as incentive fees.
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 non-voting shares in the Feeder instead of the quarterly fee.
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.
With respect to the year ended 31 December 2016, Frederic Hervouet has elected to receive shares and received 2,538
shares in relation to the first quarter’s fee, 2,472 shares in relation to the second quarter’s fee and 2,254 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 2016 dividend process.
The Voting Shareholder, which holds all of the voting shares of the Fund, is 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 which owns Polygon’s asset management businesses and infrastructure platform and interests in
LCM and GreenOak, was acquired on 28 October 2012 (the “Acquisition”). 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
2015 and 2017.
It was contractually agreed as part of the Acquisition that to the extent any annual compensation actually paid to each of
Reade Griffith and Paddy 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 2016 total compensation
paid to them each in aggregate was US$ 100,000 (31 December 2015: US$ 100,000).
Reade Griffith and Paddy Dear continue to hold membership interests in Polygon Global Partners LLP (the “U.K. Investment
Manager”) which collectively entitle them to exercise all of the voting rights in respect of the U.K. 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 U.K. Investment Manager to the Fund.
149 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 18
Related-Party Transactions (continued)
The U.K. Investment Manager 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
Service Providers. One of these entities, the U.K. Investment Manager, 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 Service Providers also
provide infrastructure services to GreenOak and operating, infrastructure and administrative services to Polygon Private
Investment Partners LP, an affiliate of the Voting Shareholder, pursuant to applicable separate services agreements. The
Service Providers are held at fair value.
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$ 14.0 million (31 December 2015: US$ 13.9 million), GreenOak US$
0.6 million (31 December 2015: US$ 2.4 million) and Polygon Private Investment Partners LP US$ 0.2 million (31 December
2015: US$ 0.1 million).
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.
The Fund holds CLO equity investments in CLOs which are managed by LCM. In total, as at 31 December 2016, it held CLO
equity tranche investments in 14 CLOs managed by LCM with a fair value of US$ 202.0 million (31 December 2015: US$ 208.3
million).
At 31 December 2016, 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$ 406.4 million (31 December 2015: US$ 338.1 million).
The Fund owns a 23% equity interest in GreenOak. As part of the original transaction to acquire an ownership stake in
GreenOak, the Fund provided a US$ 100.0 million co-investment 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
2016, these investments referenced real estate in the United States, Japan and Europe with a combined net asset value of
US$ 116.7 million (31 December 2015: US$ 115.4 million). These investments are typically illiquid, and the Fund will only
receive distributions on liquidation of the investment vehicle’s underlying assets, which in some cases 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$ 90.9 million with respect to the investment vehicles (31 December 2015: US$ 103.8 million).
TCIP is the general partner of TCI II. The Fund owns 100% of TCIP. As at 31 December, the Fund's investment in TCI II is fair
valued at US$ 16.1 million (31 December 2015: nil). Please refer to note 17 for details of unfunded commitment related to
TCI II.
150 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2016
Note 19
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's audited financial statements. During the year to 31 December 2015, US$ 9.8 million was
received. The Fund did not receive any amount in the year to 31 December 2016 and does not expect to recover any further
costs in relation to these actions.
Note 20
Subsequent Events
The Directors have evaluated the period up to 28 February 2017, 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 21
Approval of Financial Statements
The Directors approved and authorized for issue the financial statements on 28 February 2017.
151 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONDENSED SCHEDULE OF INVESTMENTS
As at 31 December 2016
Security Description
United States CLO Equity
Cayman Islands
Broadly Syndicated Senior Secured Loans
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
Listed Stock
United Kingdom – Equity Investments
Unlisted Stock
Norway – Equity Investments
United States – Private Equity
Investment Funds and Vehicles
United States – Real Estate
Japan – Real Estate
Latin America – Real Estate
Spain – Real Estate
United Kingdom – Real Estate
Cayman Islands – CLO Equity Fund
United Kingdom – Private Equity
Global – Hedge Funds – Equities
Polygon European Equity Opportunity Fund
Polygon Distressed Opportunities Fund
Global – Hedge Funds – Credit and Convertible Bonds
TFG Asset Management
United Kingdom Infrastructure Asset Management Business
Global Financial Real Estate Manager
Global Hedge Fund Manager
United States CLO Manager
Other
Total Investments
Nominal
MM
Cost
US$ MM
Fair Value
US$ MM
% of Net
Assets
1,004.5
133.2
1,137.7
917.9
123.9
1,041.8
390.9
21.2
412.1
20.13%
1.09%
21.22%
78.3
78.3
71.1
71.1
24.0
24.0
1.8
1.8
6.4
6.4
94.0
94.0
84.2
84.2
31.8
31.8
1.1
1.1
6.6
6.6
12.5
12.5
5.3
20.0
25.3
42.9
19.8
30.0
8.5
20.8
15.9
5.2
55.0
181.2
95.0
35.0
509.3
132.9
10.7
49.9
44.0
-
237.5
2,044.1
13.8
13.8
7.5
7.5
10.3
10.3
1.8
1.8
6.6
6.6
12.7
12.7
18.3
25.0
43.3
90.3
30.7
27.7
9.4
18.5
16.1
4.9
56.1
192.9
106.5
51.0
604.1
172.5
67.0
59.7
106.2
2.4
407.8
1,520.0
0.71%
0.71%
0.38%
0.38%
0.53%
0.53%
0.09%
0.09%
0.34%
0.34%
0.65%
0.65%
0.94%
1.30%
2.24%
4.66%
1.58%
1.43%
0.48%
0.95%
0.83%
0.25%
2.89%
9.93%
5.48%
2.63%
31.11%
8.89%
3.45%
3.07%
5.47%
0.12%
21.00%
78.27%
152 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONDENSED SCHEDULE OF INVESTMENTS
As at 31 December 2016
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
7.9
(0.9)
11.1
18.1
0.41%
(0.04%)
0.57%
0.94%
392.6
11.3
1,942.0
20.22%
0.57%
100.00%
153 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONDENSED SCHEDULE OF INVESTMENTS – (continued)
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 States Broadly Syndicated Senior Secured Loans
Unlisted Stock
Norway – Equity Investments
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
TFG Asset Management
United Kingdom Infrastructure Asset Management Business
Global Financial Real Estate Manager
Global Hedge Fund Manager
United States CLO Manager
Other
Nominal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
18.4
1,125.1
17.3
133.2
1,294.0
17.6
1,028.8
16.6
123.9
1,186.9
-
510.8
-
29.8
540.6
0.00%
25.34%
0.00%
1.48%
26.82%
100.4
100.4
71.1
71.1
24.0
24.0
1.8
1.8
3.4
3.4
121.5
121.5
84.3
84.3
31.8
31.8
1.1
1.1
3.4
3.4
3.7
20.2
23.9
43.7
31.3
28.1
12.8
27.6
60.9
139.2
95.0
35.0
473.6
132.8
10.7
49.9
44.0
-
237.4
20.3
20.3
23.3
23.3
14.9
14.9
1.7
1.7
3.0
3.0
10.0
21.5
31.5
68.3
50.4
26.2
12.5
25.7
64.0
139.7
95.1
44.7
526.6
173.9
70.0
67.0
110.2
1.1
422.2
1.01%
1.01%
1.16%
1.16%
0.74%
0.74%
0.08%
0.08%
0.15%
0.15%
0.49%
1.07%
1.56%
3.39%
2.50%
1.30%
0.62%
1.27%
3.18%
6.94%
4.72%
2.22%
26.14%
8.61%
3.46%
3.32%
5.45%
0.05%
20.89%
Total Investments
2,163.9
1,584.1
78.41%
154 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
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 % of Net
Assets
0.50%
0.38%
0.05%
0.93%
US$ MM
10.1
7.6
1.0
18.7
360.3
57.1
2,020.2
17.83%
2.83%
100.00%
155 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONDENSED SCHEDULE OF INVESTMENTS – (continued)
As at 1 January 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 States Broadly Syndicated Senior Secured Loans
Listed Stock
United Kingdom – Equity Investments
Unlisted Stock
Norway – Equity Investments
Investment Funds and Vehicles
United States – Real Estate
Japan – 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
TFG Asset Management
Global Financial Real Estate Manager
Global Hedge Fund Manager
United States CLO Manager
Nominal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
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
-
32.65%
-
2.91%
35.56%
100.4
100.4
121.5
121.5
71.1
71.1
24.0
24.0
1.8
1.8
22.4
22.4
84.3
84.3
31.8
31.8
1.1
1.1
22.0
22.0
33.3
33.3
2.4
2.4
44.9
21.4
10.9
12.7
61.0
134.2
90.0
35.0
410.1
14.0
49.9
44.0
107.9
53.0
53.0
46.8
46.8
20.3
20.3
1.7
1.7
22.1
22.1
29.4
29.4
2.8
2.8
49.5
27.5
9.5
12.3
63.3
120.8
95.5
42.5
420.9
69.8
68.6
99.8
238.2
2.71%
2.71%
2.39%
2.39%
1.04%
1.04%
0.09%
0.09%
1.13%
1.13%
1.50%
1.50%
0.14%
0.14%
2.53%
1.40%
0.48%
0.63%
3.23%
6.17%
4.87%
2.17%
21.48%
3.56%
3.50%
5.10%
12.16%
Total Investments
2,007.9
1,532.0
78.20%
156 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
CONDENSED SCHEDULE OF INVESTMENTS – (continued)
As at 1 January 2015
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 % of Net
Assets
0.03%
0.51%
(0.21)%
0.35%
0.68%
US$ MM
0.6
10.0
(4.1)
6.9
13.4
359.8
54.0
1,959.2
18.36%
2.76%
100.00%
157 TETRAGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT