2017 Annual Report
TE TR AGON FIN A NCI A L G ROUP LIMITED
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 of Corporate Governance
Additional Information
3 2017 Financial Review
Financial Highlights
Consolidated Statement of Income
10
15
17
18
27
32
36
37
42
45
46
51
53
54
Consolidated Statement of Financial Position 55
4 Other Information
TFG Asset Management Overview
Corporate Responsibility
Share Repurchases & Distributions
Share Reconciliation and Shareholdings
Additional CLO Portfolio Statistics
Certain Regulatory Information
Equity-Based Compensation Plans
Shareholder Information
5 Audited Financial Statements
Independent Auditor's Report
Audited Financial Statements
57
68
69
70
71
73
74
75
78
82
SVEN KROGIUS
LEGAL, REGULATORY & COMPLIANCE
4
TETR AGON FINANCIAL GROUP LIMITED 2016 ANNUAL REPORT
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, private equity, infrastructure and
TFG Asset Management, a diversified
alternative asset management business.
Where appropriate, 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 8.
Delivering Results Since 2005(1)
NAV PER SHARE TOTAL RETURN(2)
9.0% 11.1% 11.4% 11.3% 215%
2017 FULL YEAR
THREE YEARS ANNUALISED
FIVE YEARS ANNUALISED
SINCE IPO ANNUALISED
SINCE IPO
INVESTMENT RETURNS/RETURN ON EQUITY(3)
8.9% 10-15% 12.4%
2017 ROE
ROE TARGET
ANNUAL AVER AGE
SINCE IPO
DIVIDENDS
$0.1775 $0.7000
5.2%
3x
8.3%
Q4 2017 DIVIDEND
2017 DIVIDENDS
DIVIDEND YIELD
DIVIDEND COVER (4)
DIVIDEND 5-YEAR CAGR
NET ASSET VALUE
OWNERSHIP(5)
$2.0 billion
31 DECEMBER 2017
27%
PRINCIPAL & EMPLOYEE OWNERSHIP
AT 31 DECEMBER 2017
(1) (2) (3) (4) (5) Please see important notes on page 8.
6 TETR AGON FINANCIAL GROUP LIMITED
NAV PER SHARE TOTAL RETURN(2)
9.0% 11.1% 11.4% 11.3% 215%
2017 FULL YEAR
THREE YEARS ANNUALISED
FIVE YEARS ANNUALISED
SINCE IPO ANNUALISED
SINCE IPO
INVESTMENT RETURNS/RETURN ON EQUITY(3)
8.9% 10-15% 12.4%
2017 ROE
ROE TARGET
ANNUAL AVER AGE
SINCE IPO
DIVIDENDS
$0.1775 $0.7000
5.2%
3x
8.3%
Q4 2017 DIVIDEND
2017 DIVIDENDS
DIVIDEND YIELD
DIVIDEND COVER (4)
DIVIDEND 5-YEAR CAGR
NET ASSET VALUE
OWNERSHIP(5)
$2.0 billion
31 DECEMBER 2017
27%
PRINCIPAL & EMPLOYEE OWNERSHIP
AT 31 DECEMBER 2017
250%
200%
150%
100%
50%
0%
(50%)
(100%)
2017 Snapshot
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 Total Return(7)
FTSE All-Share Index Total Return(7)
31 December 2017
31 December 2016
$1,994.5m
$1,934.9m
$21.08
$13.55
$0.7000
1.74%
$20.01
$12.30
$0.6725
1.64%
FIGURE 2
Tetragon's NAV Per Share Total Return and Share Price Since IPO to 31 December 2017
Change
$59.6m
$1.07
$1.25
$0.0275
8.9%
9.0%
16.3%
3.9%
24.6%
13.1%
215%
177%
85%
75%
49%
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TFG N AV per share (T R)
TFG S hare Price (TR)
MSCI ACWI (TR)
TFG LIBOR-based performance hurdle
FTSE All-S hare Index (TR)
(1) (2) (3) (4) (5) (6) (7) Please see important notes on page 8.
2017 ANNUAL REPORT 7
Notes
Page 5:
As of 31 December 2017, Tetragon has an overall five-star Morningstar
Rating, as well as five stars over both three and five years.
(4) EPS divided by Dividends per Share at 31 December 2017.
(5) Shareholdings at 31 December 2017 of the principals of Tetragon’s
investment manager and employees of TFG Asset Management, including
all deferred compensation arrangements. Please refer to the 2017 Audited
Tetragon Financial Group Master Fund Limited financial statements for
Morningstar, Inc. rates investments from one to five stars based on how
more details of these arrangements.
well they have performed in comparison to similar investments, after
Page 7:
adjusting for risk and accounting for all relevant sales charges. Within
each Morningstar Category, the top 10% of investments receive five
(1) Based on TFG.NA.
stars, the next 22.5% four stars, the middle 35% three stars, the next
(2) Annual calculation as at 31 December 2017. The ongoing charges figure
22.5% two stars, and the bottom 10% receive one star. Investments
is calculated as defined by the AIC, and comprises all direct recurring
are rated for up to three time periods – 3, 5, and 10 years – and these
expenses to Tetragon expressed as a percentage of average Net Assets,
ratings are combined to produce an overall rating. Investments with less
and includes the annual management fee of 1.5%.
than three years of history are not rated. Morningstar states that ratings
are objective and based entirely on a mathematical evaluation of past
performance.
(3) Please see Note 3 for Page 6.
(4) Please see Note 2 for Page 6.
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
and other investor materials.
(5) 2017 total shareholder return, defined as share price appreciation
including dividends reinvested, as sourced from Bloomberg.
(6) Cumulative return determined on a quarterly compounding basis
Further information is available on Morningstar’s website at
using the actual Tetragon quarterly incentive fee LIBOR based hurdle rate.
www.morningstar.co.uk/.
(7) Any indices and other financial benchmarks are provided for
*©2018 Morningstar UK Limited. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
illustrative purposes only. Comparisons to indices have limitations
because, for example, indices have volatility and other material
providers; (2) may not be copied or distributed; and (3) is not warranted
characteristics that may differ from the fund. Any index information
to be accurate, complete, or timely. Neither Morningstar nor its content
contained herein is included to show general trends in the markets in
providers are responsible for any damages or losses arising from any
the periods indicated, is not meant to imply that these indices are the
use of this information. Past performance is no guarantee of future
only relevant indices, and is not intended to imply that the portfolio or
results. For more detailed information about Morningstar Rating,
investment was similar to any particular index either in composition
including its methodology, please go to http://corporate.morningstar.
or element of risk. The indices shown here have not been selected
com/US/documents/MethodologyDocuments/MethodologyPapers/
to represent an appropriate benchmark to compare an investor's
MorningstarFundRating_Methodology.pdf.
Page 6:
(1) Tetragon commenced investing as an open-ended investment
company in 2005, before its inital public offering in April 2007.
(2) NAV per share total return (NAV Total Return) to 31 December 2017, for
the last year, the last three years, the last five years, and since Tetragon’s
initial public offering in April 2007. NAV Total Return is determined in
accordance with the “NAV total return performance” calculation as
set forth on the Association of Investment Companies (AIC) website.
Tetragon’s NAV Total Return is determined for any period by calculating,
as a percentage return on the Fully Diluted NAV per Share (NAV per share)
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, the Fund's holdings may differ significantly from the securities
that comprise the indices. The MSCI ACWI captures large and mid cap
representation across 23 Developed Markets and 24 Emerging Markets
countries. With 2,499 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 methodology can be found at
at the start of such period, (i) the change in NAV per share over such
www.ftse.com/products/indices/uk.
period, plus (ii) the aggregate amount of any dividends per share paid
during such period, with any dividend deemed reinvested at the NAV per
share at the month end date closest to the applicable ex-dividend date
(i.e. so that the amount of any dividend is increased or decreased by the
same percentage increase or decrease in 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 53 for further details.
(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.
8 TETR AGON FINANCIAL GROUP LIMITED
Strategic
Review
FARBOUD TAVANGAR
LCM
Letter to Our Shareholders
In 2017, Tetragon delivered an
investment return on equity (RoE) of
8.9%, a NAV Per Share total return
of 9.0%, and the share price total
return was 16.3%. It also declared 70 cents
of dividends per share for the year. We are pleased
with the company’s performance given the continued
low LIBOR environment during the year and the fact
that the company has maintained conservative cash
balances (representing approximately 17.9% of NAV
at year end). Since Tetragon’s initial public offering in
2007, Tetragon’s average annual RoE has been 12.4%,
which remains within the company’s target of 10-15%.
Additionally, over the past ten years the company has
returned $1.2 billion to shareholders in the form of
share repurchases and dividends.
Financial markets globally produced strong returns
during the year. The MSCI ACWI Index(1) was up
24.6%. High-yield credit spreads – a measure
of credit conditions reflected by the difference
between the yield of U.S. Treasury bonds and that
of riskier bonds – ended the year at 3.4% which
helped generate profits for those invested in the
credit markets. The solid performance of these and
other asset classes was likely due to a number of
OUR EVOLUTION
250%
positive economic developments: the U.S. economy
continued its recovery that began in 2009; other
major economies showed various degrees of growth
or recovery; unemployment rates continued to fall in
many countries; and, worldwide, inflation generally
remained in check, which meant that central bankers
were able to maintain their loose monetary policies.
Active investing requires considering fundamentals
relative to asset prices. At times, asset prices are so
disconnected from fundamentals – often when asset
prices are distressed – that investors are offered a
highly attractive risk/reward opportunity and capital
deployment decisions become easier. Notwithstanding
rising asset prices, this does not seem to be one of
those times. Applying a range of valuation metrics,
we seem to be in the upper ranges of historic asset
prices ‒ Robert Shiller’s analysis of U.S. equity prices,
for example, submits that the S&P is trading at about
a 100% premium to the long-run median.(2) However,
there are several reasons to believe that global
fundamentals will continue to improve, and as a
result, that asset prices (while perhaps stretched) may
continue to rise. On the other hand, valuations may
be so high that prospective returns in global markets
may be modest or negative even if corporate earnings
continue to grow.
Admitted for trading
on London Stock
Exchange SFS –
9 November 2015
Acquired
February 2015
(established 2007)
215%
177%
Joint venture established
August 2010
Acquired
October 2012
Established
Q4 2014
IPO on Euronext
19 April 2007 of approx.
$1bn
Acquired January 2010
(established 2001)
Established as a
private fund, August
2005; $78m launch,
$600m at end 2005
Established
December 2015
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Joined AIC
September 2016
200%
150%
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50%
0%
(50%)
(100%)
Source: Bloomberg, Tetragon. Label numbers have been rounded.
10 TETR AGON FINANCIAL GROUP LIMITED
TFG NAV per share (TR)
TFG Share Price (TR)
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“Since Tetragon’s initial public offering
in 2007, Tetragon’s average annual
RoE has been 12.4%, which remains
within the company’s target of 10-15%.
Additionally, over the past ten years
the company has returned $1.2 billion
to shareholders in the form of share
repurchases and dividends.”
– Paddy Dear, Co-Founder of Tetragon’s investment manager
Tetragon’s investment manager has attempted to
construct a portfolio that can generate positive returns
in a variety of economic environments. It also takes
the view that, particularly in the current environment,
a portfolio diversified by asset class, geography,
strategy and liquidity has a greater likelihood of
producing returns within the company’s long-term
target. Certainly, there may be market conditions in
the future where the risk/reward of a particular asset
class is such that the we will favour a slightly less
diversified portfolio; however, we do not believe that
we are in that environment right now.
The portfolio’s performance in 2017 exemplified
this approach. First, gains were broad-based, with
many different drivers of performance across the
portfolio. Second, the investment manager, through
its management of a number of limited partnership
investments and through the company’s ownership of
TFG Asset Management, was able to source and invest
in a number of discrete and profitable direct balance
sheet investments.
There were four asset classes and three investments
that each produced more than $10 million in gains
during the year. These included Equitix(3) and
LCM(4) which are part of TFG Asset Management;
allocations to CLO equity; direct private equity;
equity investments; credit investments; and the
company’s allocation to the Polygon European Equity
Opportunity Fund managed by Polygon(5). It should be
noted that we have decided to break out and provide
more information regarding Tetragon's private equity
investments (historically, these investments were
part of “other equities and credit”). Among the asset
classes mentioned above, two are worth highlighting.
During the year, direct investments produced nearly
25% of Tetragon’s investment income. These direct
investments ran the gamut from private equity
positions in two growth companies (one of which was
monetised during the year), several distressed credit
positions and a number of listed equities investments.
These positions often have the following attributes in
common: (1) there is a strong degree of investment
confidence regarding the potential risk and reward
(where, for example, the situation has sourcing, legal
or evaluation complexity); and (2) the long-term nature
of Tetragon’s capital puts the company in a favourable
position versus other potential investors. The
investment manager will continue to seek out these
opportunities and will strive for an investment process
that is as replicable as practicable around these types
of investments.
TFG Asset Management businesses produced nearly
43% of the company’s investment income during the
year, with the bulk of the gains coming from Equitix
and LCM. The Equitix business continues to grow
and execute better than its business plan targets.
Between that and favourable market multiples in
the sector, Equitix increased in value by more than
$54 million during the year. Equitix also completed
the refinancing of its existing debt facilities in 2017,
resulting in £67.8 million of proceeds to Tetragon.
LCM increased in value during the year by almost
$40 million, due to its continued execution against
its business plan, higher multiples in its sector, and
changes to the U.S. corporate tax rate. Additionally,
TFG Asset Management’s CLO equity business,
TCIP(6), continues to gain traction. In May 2017, TCIP’s
TCI II(7) investment vehicle had its final close, and in
December, its next investment vehicle, TCI III(8) had its
first close. The TCIP strategy now has over $600 million
of committed capital. In February of this year a U.S.
Appellate Court issued an important decision that may
result in U.S. risk retention requirements no longer
applying to collateral managers of open market CLOs.
Although this decision may have a major impact on the
regulatory framework for CLO managers in the United
States, we do not expect it to materially affect our CLO
equity business, including our TCIP strategy, which has
since inception been based on investing in majority
stakes in primary CLO equity.
As we have spoken and written about in the past,
where appropriate, the investment manager looks for
the company to own a portion of the asset managers
2017 ANNUAL REPORT 11
in which it invests. Whether these businesses operate
autonomously or on the TFG Asset Management
platform, the objective is for these businesses 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.
These businesses can also benefit from investment
capital, working capital and strategic resources.
During the year, the investment manager saw over
100 new asset management opportunities. Through
these opportunities and through organic growth of
existing businesses on the platform, Tetragon seeks
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 over the next several
years. Ultimately, the size of TFG Asset Management,
market conditions, and other factors will dictate the
execution of this possible option.
Since the inception of TFG Asset Management with
Tetragon’s acquisition of LCM in 2010, Tetragon’s
alternative asset management platform has grown
to have six distinct asset management brands
and aggregate client assets of $23 billion, with
approximately 300 employees and main offices in
New York and London. The investment manager’s
approach in growing TFG Asset Management, like with
its other investments, takes into account the risk and
reward of the opportunity and seeks to generate an
attractive return on capital. As in all capital allocation
activities, not all investments produce results
within expectations. Within TFG Asset Management,
maintaining the discipline to close businesses that
do not perform to their business plan is as important
as finding new businesses to add to the platform.
Towards the end of 2017, TFG Asset Management
elected to close the Polygon Distressed Opportunities
Fund. Although the fund’s returns from inception were
positive and attractive on a relative basis to its peers,
we determined that Tetragon’s expected returns as an
investor in the fund and as an owner of its investment
manager, in light of other current uses of its capital,
did not support continuing its investment in the fund
and maintaining the manager as part of the TFG Asset
Management platform.
Tetragon’s share price total return rose by 16.3%
during the year. The share price ended the year at a
12 TETR AGON FINANCIAL GROUP LIMITED
“Tetragon’s investment manager has
attempted to construct a portfolio that
can generate positive returns in a variety
of economic environments. It also takes
the view that, particularly in the current
environment, a portfolio diversified by
asset class, geography, strategy and
liquidity has a greater likelihood of
producing returns within the company’s
long-term target.”
– Reade Griffith, Co-Founder of Tetragon’s investment manager
36% discount to its NAV per share, which compares
to a discount of 39% at the end of 2016. As has
been articulated in the past, the company and
its investment manager continue to believe that
the primary focus of activity should be relative to
Tetragon’s key performance metrics and less with the
share price per se. Notwithstanding that, we continue
to meet broadly with long term and new shareholders,
having travelled to Bristol, Exeter, Leeds, York, Dublin,
Toronto, Liverpool and Manchester for the first time, in
addition to meeting with investors in London and New
York. These meetings have been well-received and,
as a result, we intend to continue this programme.
Tetragon’s annual investor day is scheduled to be held
in London during October 2018, where we hope to see
many of you. Additionally, the company expects to
offer a sterling quote in 2018.
Principal and employee ownership increased during
2017 to 27% of the company’s shares. According to a
Canaccord Genuity “Skin in the Game” research piece,
this is the second highest amongst 279 UK-listed
companies.(9) We believe that this ownership creates
an alignment of interest between the investment
manager, TFG Asset Management and Tetragon
shareholders.
In the fourth quarter, the company repurchased
4.9 million of its shares for $66.4 million (including
applicable fees and expenses). At the end of the year,
net cash balances were $357.2 million, or 17.9% of
the company’s NAV. Notwithstanding that high cash
balances have the effect of muting the company’s
Iinvestment returns, we believe these cash balances
“There is a particular and uncommon
set of attributes that drive Tetragon’s
ability to build asset management
businesses: long duration investment
capital, global infrastructure within
TFG Asset Management, and
Tetragon’s experience in building asset
management businesses.”
– Stephen Prince, Head of TFG Asset Management
are prudent to fund both known and unknown
investment opportunities. Prospectively, the manager
expects the following approximate investment
commitments, including: GreenOak(10) $126.0 million,
TCI III $65.0 million, Hawke’s Point(11) $87.2 million,
and two private equity commitments totalling $8.6
million. Additionally, it maintains these cash levels to
fund new businesses, opportunistic investments and
acquisitions, dividends and fees. The company still
maintains its $150 million revolver, of which $38 million
has been drawn.
The fourth quarter dividend was announced at 17.75
cents per share, bringing the full-year 2017 dividend to
70 cents per share, which is a 4.1% increase on 2016.
Using the year-end share price of $13.55(12), this gives a
yield of 5.2%. Dividend coverage at the end of the year
was 3x. As a reminder, Tetragon’s progressive dividend
policy targets a payout ratio of 30-50% of normalised
earnings.
Outlook
The investment manager remains positive on its
allocations to CLO equity. In the current environment,
there are a number of aspects to CLO equity which
we find attractive. First, with reasonable near-term
expectations of higher interest rates, CLO equity
provides investors with relatively short duration, and
therefore less sensitivity to potentially rising interest
rates. Additionally, CLO equity provides investors with
optionality on spread widening. With fixed liabilities
and floating-rate assets, CLO equity can benefit
from spread widening, provided loan defaults are
well-managed.
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We also remain optimistic about the allocation to
European event-driven equities. The economic
recovery in Europe still remains a few years
behind that of the United States, with margins in
Europe having room to expand further and with an
increasingly stable political background. Although
positive performance from the allocation to European
event-driven equities is not contingent upon a strong
economic backdrop (and in fact the investment has
been profitable during weak economic times and/or
unstable political environments), the manager believes
that a more favourable economic environment could
provide a tailwind to the strategy.
We will continue to seek out balance sheet
investments that are idiosyncratic, across debt and
equity, both private and public. In addition, as noted
above, the investment manager plans to continue
building out its direct investing capabilities to further
take advantage of the deal flow generated by its third-
party manager relationships.
TFG Asset Management continues to seek to grow its
existing businesses through performance and growth
in assets under management. There is a particular
and uncommon set of attributes that drive Tetragon’s
ability to build asset management businesses: long-
duration investment capital, global infrastructure
within TFG Asset Management, and Tetragon’s
experience in building asset management businesses.
Tetragon has the ability to focus on the most sensible
compelling business opportunities at any time, taking
into account valuation and the current investment
environment.
We are optimistic that these four areas of focus above,
as well as many of the company’s other allocations,
positions the company well for the coming year.
With Regards,
THE BOARD OF DIRECTORS
27 February 2018
2017 ANNUAL REPORT 13
Notes:
(1) Please see Note 7 on page 8.
(2) www.multpl.com/shiller-pe/
(3) Equitix Holdings Limited, referred to in this report as “Equitix”.
(4) LCM Asset Management LLC, a CLO loan manager that is part of TFG
Asset Management, referred to in this report as “LCM”.
(5) 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.
(6) Tetragon Credit Income Partners Limited, referred to in this report as
“TCIP”, is the holding company of the general partner entities for the
TCI II and TCI III investment vehicles.
(7) Tetragon Credit Income II L.P.
(8) Tetragon Credit Income III L.P.
(9) “Investment Companies - Skin in the game”, Canaccord Genuity, 21
February 2017.
(10) GreenOak Real Estate, LP, is referred to in this report as “GreenOak”.
Tetragon owns a 23% interest in GreenOak.
(11) Hawke’s Point Manager LP, an asset management company focused
on mining finance, referred to in this report as “Hawke’s Point”.
(12) TFG NA share price at 29 December 2017.
Tetragon Financial Group was nominated for the 2017 Investment Company
of the Year Award in the “Flexible” category. There were five other nominees
for this award. The Investment Company of the Year Award is organised by
Investment Week magazine, a publication of Incisive Media, in association
with the AIC (Association of Investment Companies). Investment companies
are nominated by the award organisers using performance data provided by
the AIC, using Morningstar Data, and FE Limited. Shortlists are constructed
using a mixture of AIC data/research as well as from the submissions made by
managers in the sector categories. As with the sector categories, winners are
decided during the qualitative judging process. Submission for consideration
for this category is by invitation only. Full details of the award methodology
are available at www.investmentcompanyawards.com/static/methodology.
14 TETR AGON FINANCIAL GROUP LIMITED
Investment Objective & Strategy
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Tetragon is a closed-ended investment company that invests in a broad range
of assets, including bank loans, real estate, equities, credit, convertible bonds,
private equity, infrastructure and TFG Asset Management, a diversified alternative
asset management business. Where appropriate, 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.
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.
2017 ANNUAL REPORT 15
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 appropriate, 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
asset gathering capacity. Potential profitability
16 TETR AGON FINANCIAL GROUP LIMITED
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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
Fully Diluted NAV per share (NAV per share) was $21.08 at
31 December 2017. NAV per share total return was 9.0% for
2017.
FIGURE 3
NAV Per Share Total Return 2013-2017
15.8%
16.0%
8.1%
8.5%
9.0%
Investment Returns/Return on Equity*
RoE for 2017 was 8.9%. Earnings Per Share (EPS) for 2017
was $1.90.
FIGURE 4
Return on Equity 2013-2017
15.3%
14.5%
Target RoE: 10-15%
Average RoE: 12.4%
2013
2014
2015
2016
2017
*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.
Dividends Per Share (DPS)
Tetragon declared a Q4 2017 dividend of $0.1775 per
share, for a full year dividend payout of $0.7000 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 $5.4575.
6.6%
6.3%
8.9%
2013
2014
2015
2016
2017
FIGURE 5
Dividend Per Share Comparison 2013-2017 (USD)
$0.6175
$0.5650
$0.6475
$0.6725
$0.7000
2013
2014
2015
2016
2017
2017 ANNUAL REPORT 17
Investment Review
NAV Per Share
Tetragon’s Fully Diluted NAV Per Share increased from $20.01 per share as at 31 December 2016 to $21.08
per share as at 31 December 2017. Figure 6 below shows the contributions to that performance.
FIGURE 6
Year on Year NAV Per Share Progression (USD)(i)
22.50
22.25
22.00
21.75
21.50
21.25
21.00
20.75
20.50
20.25
20.00
19.75
(0.70)
2.48
(0.03)
(0.70)
(0.34)
0.36
21.08
20.01
NAV at 31
December 2016
Investment income
and gains
Operating
expenses and
management fees
Interest expense
Dividends
Other share
dilution
Share repurchase
NAV at 31
December 2017
(i) Progression from 31 December 2016 to 31 December 2017 is an aggregate of each of the 12 months’ NAV progressions. With the exception of share
repurchases, all of the aggregate monthly Fully Diluted NAV Per Share movements in the table are determined by reference to the fully diluted share
count at the start of each month.
18 TETR AGON FINANCIAL GROUP LIMITED
Net Asset Breakdown Summary
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Net Asset Breakdown Summary
The table shows a breakdown of the composition of Tetragon’s NAV at 31 December 2016 and 31
December 2017, and the factors contributing to the changes in NAV over the period.
FIGURE 7
All figures below are in millions of U.S. dollars.
Asset Classes(i)
Investment Structure
NAV at
31 Dec 2016
Additions(ii) Disposals/
Receipts(ii)
Gains/
Losses
NAV at
31 Dec 2017
Bank loans
Event-driven equities,
distressed opportunities,
convertible bonds and
quantitative strategies
CLOs
Hedge funds
Real estate
Private equity-style funds
TFG Asset Management
Private equity
Other equities and credit
Net cash
Total
Private equity in asset
management companies
Private equity funds and
direct balance sheet
investments
Direct balance sheet
investments
460.0
406.5
144.5
407.8
29.9
95.6
390.6
115.4
55.0
(243.3)
(35.4)
42.3
23.7
63.1
12.9
51.2
(57.6)
(94.4)
12.3
104.4
(13.4)
11.1
41.2
(38.6)
-
(39.1)
43.1
5.7
374.4
449.8
162.3
430.7
78.8
141.3
357.2
1,934.9
338.8
(521.8)
242.6
1,994.5
(i) The asset class ‘private equity’ was previously included within ‘other equities and credit’.
(ii) 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.
2017 ANNUAL REPORT 19
Net Asset Composition Summary
As can be seen from Figure 8 below, Tetragon’s asset class allocation has changed little over the year. Bank loans
and net cash have declined, with all other asset classes marginally increasing their share of NAV. The descriptions
outside each chart refer to the asset class or strategy, and the coloured legend shows the structure of the
investment vehicle through which Tetragon has made its investments.
FIGURE 8 (i)
Net Asset Breakdown at 31 December 2016
Net Asset Breakdown at 31 December 2017
Net cash
Bank loans
Net cash
Bank loans
20%
24%
Private equity
18%
19%
Private equity
2%
Other equities & credit
5%
Other equities & credit
4%
7%
Event-driven equities
21%
21%
7%
TFG Asset Management
Distressed opportunities
TFG Asset Management
22%
8%
Event-driven equities
22%
Distressed opportunities
Convertible bonds
Quantitative strategies
Real estate
Convertible bonds
Real estate
CLOs
Hedge funds
Private equity-style funds
Private equity in asset management companies
Direct balance sheet investments
Private equity
Cash
(i) 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, some of 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 by Value as of 31 December 2017
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
LCM
Polygon Distressed Opportunities
Fund
GreenOak Real Estate
TCI II
Polygon
TFG Asset
Management
TFG Asset
Management
Distressed
opportunities
TFG Asset
Management
Bank loans
TFG Asset
Management
Private equity in asset management
company
Private equity in asset management
company
Hedge fund
Private equity in asset management
company
CLO fund
Private equity in asset management
company
Polygon Convertible Opportunity Fund Convertible bonds
Hedge fund
Private investment
Private equity
Direct balance sheet investment
10 GreenOak US II Fund
Real estate
Private equity-style fund
Total
Value
($millions)
% of
NAV
234.8
11.8%
152.2
7.6%
144.3
7.2%
114.6
5.7%
69.6
3.5%
68.1
56.0
55.3
41.9
38.7
3.4%
2.8%
2.8%
2.1%
1.9%
48.8%
20 TETR AGON FINANCIAL GROUP LIMITED
Detailed Investment Review
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Figure 10 breaks out more detail showing the effect of capital flows and performance gains and losses on the NAV of each
asset class during 2017; more detailed commentary for each asset class follows.
FIGURE 10
Asset Class
Bank loans
U.S. CLOs (LCM)
U.S. CLOs (non-LCM)
TCI II
European CLOs
Event-driven equities
Polygon European Equity Opportunity Fund
Polygon Global Equities Fund
Polygon Mining Opportunity Fund
Distressed opportunities
Polygon Distressed Opportunities Fund
Convertible bonds
Polygon Convertible Opportunity Fund
Quantitative strategies
QT Fund Ltd
Real estate
GreenOak U.S. funds & co-investments
GreenOak Europe funds & co-investments
GreenOak Asia funds & co-investments
GreenOak debt funds
Other real estate
TFG Asset Management
Equitix
LCM
GreenOak
Polygon
TCIP
Hawke's Point
Private equity
Direct
Funds & co-investments
Other equities & credit(ii)
Other equities
Other credit
Cash
Net cash(iii)
Total
NAV at
31 Dec 2016
($ millions)
Additions(i)
Disposals/
Receipts(i)
Gains/ Losses
% of NAV
NAV at
31 Dec 2017
($ millions)
202.0
210.3
16.1
31.6
192.9
19.5
36.6
106.5
51.0
-
52.3
31.7
28.8
3.9
27.7
172.5
106.2
67.0
59.7
1.6
0.8
25.0
4.9
89.0
6.6
45.7
8.3
58.6
2.8
30.0
-
-
-
-
25.0
7.4
36.1
12.6
4.9
2.1
12.9
-
-
-
-
-
15.0
36.2
13.5
27.7
(84.2)
(114.2)
(8.8)
(36.1)
-
-
(35.4)
-
-
-
(8.7)
(20.5)
(25.3)
(3.1)
-
(87.4)
(1.2)
(5.8)
-
-
-
(13.2)
(0.2)
(19.2)
(19.4)
28.4
2.7
2.2
9.0
11.9
0.1
(1.2)
8.1
4.3
0.5
4.1
0.3
7.8
0.5
(0.4)
54.2
39.3
8.4
(3.7)
6.2
-
16.8
(5.7)
24.0
19.1
191.9
107.1
68.1
7.3
234.8
19.6
-
9.6%
5.4%
3.4%
0.4%
11.8%
1.0%
0.0%
114.6
5.7%
55.3
25.5
55.1
47.7
23.9
6.2
29.4
152.2
144.3
69.6
56.0
7.8
0.8
43.6
35.2
107.3
34.0
2.8%
1.3%
2.8%
2.4%
1.2%
0.3%
1.5%
7.6%
7.2%
3.5%
2.8%
0.4%
0.0%
2.2%
1.8%
5.4%
1.7%
390.6
1,934.9
-
338.8
(39.1)
(521.8)
5.7
242.6
357.2
1,994.5
17.9%
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. For certain contracts for difference (CFD), gross value or
required margin is used. Under IFRS, these CFDs are held at fair value which is the unrealised gain or loss at the reporting date.
(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, some of which may only be used for designated purposes without incurring
significant tax and transfer costs, net of “Other Net Assets and Liabilities.”
2017 ANNUAL REPORT 21
Detailed Investment Review (continued)
Bank loans - through CLOs
Tetragon continues to invest in CLOs by taking majority
positions in the equity tranches. The CLO portfolio (made
up of 22 direct transactions that were still outstanding at
the end of the year and two investments in CLO investment
vehicles underlying the TCIP business) was a steady
performer during 2017, with the year characterised by low
credit losses in the underlying loan portfolios and spread
tightening, for both loans and CLO debt tranches. Tetragon’s
trailing 12-month loan default rate for its directly held CLO
investments ended the year at 1.8%.(1) This compares to the
broader U.S. market’s default rate of 2.1%, which remains
below its recent historical average of 2.7% since the end
of 2007.(2) Asset spreads for Tetragon’s direct CLO portfolio
ended the year at 313 bps over LIBOR (see Figure 30 for
more details).
With loan asset and CLO liability spreads falling during the
year, Tetragon exercised optional redemption and refinance
rights on certain CLO transactions in order to either
monetise higher loan prices or to decrease the CLO debt
costs of our investments that were still in their reinvestment
periods. Tetragon also made new U.S. CLO investments
both via the TCIP platform and directly.
We continue to view CLOs as an attractive tool to gain long-
term exposure to the bank loan asset class. Furthermore,
we believe that taking majority equity positions may allow
Tetragon to enhance its returns by controlling optional
redemptions, refinancings, indenture amendments, and
other certain CLO structural features.
– U.S. CLOs (LCM): LCM CLOs produced $28.4 million of
income in 2017 and the fair value of this segment declined
by 5%. All LCM CLO transactions were compliant with their
junior-most overcollateralisation tests (“O/C”) tests as of
the end of 2017.(3)
During 2017, Tetragon exercised optional redemption
rights on two LCM CLOs. Tetragon also made investments
in the majority of the equity tranche of one new
issue LCM-managed CLO during the year and add-on
investments in the equity tranche of one LCM-managed
CLO that was “reset” (restructuring of an existing CLO
that refinances its liabilities and increases the duration of
the reinvestment period and structure). Finally, we also
refinanced the debt tranches of one LCM-managed CLO
during 2017.
As with non-LCM CLOs, we expect to make most of our
new issue LCM CLO equity investments via the TCIP
platform, but continue to look for opportunities to
optimise the capital structures of existing LCM CLOs
(whether through a refinancing of the debt tranches or a
“reset”) or to make new issue investments directly, when
appropriate.
22 TETR AGON FINANCIAL GROUP LIMITED
– U.S. CLOs (non-LCM): Non-LCM-managed CLOs generated
$2.7 million of income in 2017. The fair value of this
segment declined by 46% from the prior year-end, driven
by the natural amortisation of deals and our exercise of
optional redemption rights. At the end of 2016, pre-crisis
CLOs made up over 70% of this segment, compared to
53% at the end of 2017. Such deals were well past the
end of their reinvestment periods and significantly de-
leveraged. Thus, the fair value gains (income) for such
assets were dependent on their net liquidation values,
which were, on average, in line with their fair values at the
end of 2016, rather than excess spread generation.
As of the end of 2017, all non-LCM CLOs were compliant
with their junior-most overcollateralisation tests.(4)
Tetragon exercised optional redemption rights on six non-
LCM CLOs in 2017, and we continue to expect the fair value
of this segment to reduce further in the near term. No new
non-LCM investments or “reset” transactions were made
by Tetragon directly in 2017.
– TCI II and TCI III: TCI II and TCI III are the CLO investment
vehicles established by TCIP, a 100% owned subsidiary
of TFG Asset Management. As of 31 December 2017,
Tetragon’s commitment to TCI II was $70.0 million, which
was fully funded by year-end. During 2017, Tetragon’s
investment in TCI II generated $2.2 million in income.
TCI II made its final CLO investment in November 2017.
With CLO liability spreads tightening dramatically over the
year, we believe that TCI II will seek to refinance certain of
its transactions’ CLO liabilities as their non-call periods
end.
On 18 December 2017, TCIP’s newly-established CLO
investment vehicle, TCI III, had a first close of $254.8
million. Tetragon’s commitment to TCI III was $65.0
million, which was undrawn as of the end of 2017. Shortly
before the end of the year, TCI III made a commitment to
purchase the majority of the equity tranche of a LCM-
managed CLO, which closed on 23 January 2018.
– European CLOs: European CLOs had income of $9.0
million in 2017. As of the end of the year, the total fair
value of this segment stood at $7.3 million, down 77%
from the end of 2016, as we continued to exercise our
optional redemption rights on investments in this
segment. As of the end of 2017, all of our European CLOs
have sold materially all of their underlying loan assets
and we expect to receive our final cash distributions from
these investments over the next few months.
(1) Based on the most recent trustee reports available as of 31 December 2017.
(2) Source: S&P/LCD Quarterly Review Q4 2017.
(3) Based on the most recent trustee reports available as of 31 December 2017.
Throughout this report, we refer to overcollateralisation or “O/C” tests,
which are CLO-specific tests that measure the par amount of underlying CLO
collateral (adjusted in certain cases for defaults or other “stressed” asset
types) against the par value of the rated CLO debt tranches. The failure of an
overcollateralisation test generally results in the temporary cessation of cash
flows to the CLO’s equity tranche.
(4) Based on the most recent trustee reports available as of 31 December 2017.
Detailed Investment Review (continued)
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Event-driven equities, distressed opportunities,
convertible bonds and quantitative strategies -
through hedge funds
Tetragon invests in event-driven equities, distressed
opportunities, convertible bonds and quantitative
strategies through hedge funds. At year-end 2017, these
investments are primarily through Polygon-managed hedge
funds.
Event-driven equities
– Polygon European Equity Opportunity Fund: This
investment, which focuses on event-driven European
equity strategies, represents Tetragon’s largest position
at year end. Tetragon added $30.0 million to this position
in Q4 2017. The fund had a strong first half, driven by
M&A and corporate restructuring trades; the second half
was more challenging as there was some pressure on
Greek bank trades, which began to recover in December.
News flow at the end of the year was dominated by
corporate activity developments in the market. M&A
trades remained the largest strategy type in the fund at
approximately 43% of the book.
– Polygon Global Equities Fund: Tetragon’s allocation to this
strategy remains small in relation to its other hedge fund
investments. The investment was flat during 2017.
– Polygon Mining Opportunity Fund: The fund completed
its liquidation schedule ahead of the targeted timeframe
and made its final distribution to investors in November.
Tetragon received $35.4 million as a result and had a zero
balance in this position at year-end.
Distressed opportunities
– Polygon Distressed Opportunities Fund: The investment
in the Distressed Opportunities Fund generated a net
income of $8.1 million for the year. After trading flat for
most of the year, 2017 net performance in its flagship
share class ended up 8.9%, driven by gains in December
based on positive events in its position in the Cobalt
International Energy strategy.
Convertible bonds
– Polygon Convertible Opportunity Fund: Tetragon’s
investment in this fund continues to produce consistent,
low volatility gains for the portfolio, with a Sharpe ratio
of 2.7 from the fund’s inception to 31 December 2017. In
February 2018, the fund won the 2017 EuroHedge Award
in the Convertibles and Volatility category; it is the fifth
time it has won this category, having been nominated
seven times. In addition, it was nominated for the second
time in the Long-Term Performance (5 years): Macro,
Fixed Income & Relative Value category.(5) The fund
continues to focus on idiosyncratic trades which seek to
exploit relative value capital structural mispricings most
commonly found in complex, underfollowed, or poorly
understood securities.
Quantitative Strategies
– QT Fund Ltd: Tetragon initiated this position in a third
party-managed quantitative hedge fund in February 2017.
The QT Fund aims to deliver uncorrelated, low volatility
returns by developing and deploying systematic data-
driven investment strategies and is managed by a team
at Credit Suisse. Performance from point of investment
through 31 December 2017 is slightly positive.
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 targeting middle-market opportunities in the
United States, Europe and Asia, where GreenOak believes it
can increase value and produce positive unlevered returns
by sourcing off-market opportunities where it sees pricing
discounts and market inefficiencies.
– GreenOak U.S. funds and co-investments: In the United
States, GreenOak seeks to identify market dislocation and
inefficiencies in major coastal gateway cities where it can
acquire underperforming assets in dynamic submarkets.
Property types have included office, multifamily, retail
and hotel properties in New York, Los Angeles, Boston,
San Francisco, Washington, D.C. and Miami. In 2017,
these investments generated net income of $4.1 million
for Tetragon, driven by a combination of the upward
revaluation and sales of certain investment properties in
U.S. Fund II.
(5) The Polygon Convertible Opportunity Fund won the 2017 EuroHedge Award in
the “Convertibles & Volatility” category. There were three other nominees for
this award. The Polygon Convertible Opportunity Fund was nominated for the
2017 EuroHedge Award in the “Long Term Performance (5 years) – Macro, Fixed
Income & Relative Value” category. There were seven 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 of
the nominees in their relevant peer groups. Further information about the award,
including nomination and winning criteria, is available at
www.hedgefundintelligence.com.
2017 ANNUAL REPORT 23
Detailed Investment Review (continued)
– GreenOak Europe funds and co-investments: GreenOak’s
Europe-focused products primarily target distressed
opportunities and deep value acquisitions in markets
with solid underlying fundamentals. The majority of
assets acquired by GreenOak’s European team since the
firm’s inception are concentrated in London, Madrid,
Barcelona and Milan, with the remaining assets located in
other established cities throughout Spain and the United
Kingdom. Many of the investments focus on office space
and logistics. An increase in value was recognised on
a certain Madrid-based commercial property, partially
offset by decreased valuation on a London property.
Europe Fund II requested an initial capital call from
investors, in which Tetragon participated.
– GreenOak Asia funds and co-investments: The Asia-
focused GreenOak investments primarily target
investment opportunities in Tokyo and other major
urban markets in Japan, focusing on balance sheet
restructurings and other distress-related factors that
motivate sellers. With net income of $7.8 million, Asia-
based investments were the most significant drivers
of net income for Tetragon’s investment gains in real
estate during 2017. GreenOak Japan Fund I saw gains
from the sale of a certain investment property and from
the refinancing of investments in Okinawa-based resort
hotels. In Q3 2017, the last remaining investment in Japan
Fund I was sold, as was one of the assets in GreenOak
Asia II, resulting in distributions to investors, including
Tetragon.
– GreenOak debt funds: GreenOak provides loans secured
by commercial real estate throughout the United
Kingdom and Europe and focuses on transitional assets
or locations; repositioning or redeveloping plays; rapid
reaction debt; higher leverage loans and subordinated
loans. Tetragon’s investments in this segment
are currently small relative to its other real estate
investments; $0.5 million of net income was generated in
2017.
– Other real estate: In addition to the commercial real
estate investments through GreenOak-managed
real estate funds, Tetragon also has investments in
commercial farmland in Paraguay, via individual managed
accounts managed by Scimitar, a specialist manager
in South American farmland. The loss to date shown in
Figure 10 reflects ongoing fees and expenses.
24 TETR AGON FINANCIAL GROUP LIMITED
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 $104.4 million during 2017, with positive contributions
from most of the businesses.
– Equitix: Tetragon’s investment in Equitix made a
significant positive contribution of $54.2 million, which
reflected a number of factors, including continued strong
performance of the business. In July, Equitix Fund IV hit its
hard cap and raised £758 million of commitments. Fund
IV was selected as one of five “Unlisted Infrastructure
Funds to Watch” by the 2017 Preqin Performance Monitor
in October.(6) Capital raising assumptions have increased
based on Equitix moving ahead of its capital raising
target. In addition, market multiples in the sector have
moved positively during the year. In Q3 2017, Equitix
refinanced its existing external debt, resulting in $87.4
million being distributed to Tetragon. Equitix had limited
exposure and impact relating to the Carillion bankruptcy
announced in January 2018.
– LCM: LCM was the next most significant contributor
with an investment gain of $39.3 million, driven by a
combination of factors. A continuation of its ability to
issue deals and raise capital, with a lower than market
average default rate, combined with a positive move
in average market multiples in the sector increased
the enterprise value. In addition, there was a positive
valuation impact from the reduced federal tax rate in the
United States, which became effective on 1 January 2018.
– GreenOak: The investment in GreenOak recorded a
gain of $8.4 million, which reflected the crystallisation
and distribution of carried interest from early vintage
investments as well as continued growth of the business,
despite a slight downward trend in market multiples in
the sector. GreenOak’s performance remained strong
through the year, being ahead of budgeted net recurring
profit projections.
(6) Equitix Fund IV was named as one of the infrastructure market’s likely top-
performing funds by the 2017 Preqin Performance Monitor in April 2017. The
Fund was selected as one of five ‘Unlisted Infrastructure Funds to Watch’ with
a current multiple of 1.48x. Preqin’s Infrastructure Online features net-to-LP
performance data for more than 220 named unlisted infrastructure funds. To
determine which funds to watch over the coming year, Preqin takes the returns
generated by vintage 2014-2016 funds that have at least 20% of their committed
capital called up. Of the 38 funds fitting the criteria, the five funds that generated
the highest net multiple were selected. Further information about the Preqin
“Infrastructure Funds to Watch” is available at https://www.preqin.com/
blog/0/18032/infrastructure-funds-to-watch.
Detailed Investment Review (continued)
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– Polygon: Tetragon’s investment in Polygon recorded an
investment loss of $3.7 million, reflecting the impact
on profitability of lower than forecast performance and
capital raising.
– TCIP: In May, TCI II had its final close with total capital
committed of $350 million, and as at year end, the vehicle
has deployed all of its capital. This flowed through to
a higher fair value for TCIP, the holding company of the
general partners of the vehicles, which increased by $6.2
million. In December, TCI III had a first close of $254.8
million and it is expected that it will start to have a
positive impact on valuation from Q1 2018.
– Hawke’s Point: The NAV of this business currently remains
small, and the valuation is unchanged year on year,
although we continue to have a substantial investment
commitment to Hawke's Point.
Please see Note 4 in the 2017 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, for further colour
on the underlying performance of the asset managers
please see Figure 18 for TFG Asset Management’s pro forma
operating results and associated commentary.
Private Equity
As mentioned in the Letter to Shareholders, we have
decided to break private equity investments out as
a separate asset class, with sub-categories of “fund
investments” and “direct”. These investments were
previously part of the “other equities” line item in Figure 10.
– Direct: Investments in direct private equity stakes
generated net income of $16.8 million in 2017. This
category currently comprises two investments in growth
companies in North America, one of which was partially
monetised in 2017.
– Funds: At 31 December 2017, Tetragon had a small (less
than 2% of NAV) allocation to investments in various
private equity funds, including some managed by third
parties and a first investment in Hawke’s Point in an early-
stage gold miner. This asset class generated a loss of $5.7
million in 2017. New commitments were made in Q4 2017
to two third party-managed funds focusing on technology
companies.
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 which it believes are
attractive, but may be unsuitable for inclusion in TFG Asset
Management vehicles. We believe this ability to invest
flexibly is a benefit of Tetragon’s structure. This category
was a strong performer in 2017, with total net income of
$43.1 million.
– Other equities: This segment generated net income
of $24.0 million, with all but one of five investments
generating positive returns. These investments
comprised European-listed public equities; private equity
investments, which were previously in this category, have
been moved to “private equity: direct”.
– Other credit: All three investments in this segment,
comprising loans and corporate bonds, generated
positive returns in 2017.
Cash
Tetragon’s net cash balance, which is cash adjusted
for net liabilities, was $357.2 million at 31 December
2017. Approximately 62% of the cash is held in secured
arrangements. The remaining balance is held in unsecured
arrangements, with Tetragon’s operating cash balance 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 2017, the company used $338.8 million of cash to
make investments and $47.2 million to pay dividends.
Future cash commitments are approximately $286.8
million, comprising: hard and soft investment commitments
(GreenOak $126.0 million, Hawke’s Point $87.2 million, TCI III
$65.0 million and private equity funds $8.6 million).
Tetragon currently has a $150.0 million revolving credit
facility in place, of which $38.0 million has been drawn.
2017 ANNUAL REPORT 25
Further Portfolio Metrics
Geographic Exposure:
FIGURE 11
Geographical Exposure at 31 December 2017
6%
Asia Pacific
2%
Latin America
43%
Europe
49%
North America
Assumptions:
– Event-driven equities, distressed opportunities, convertible bonds,
quantitative strategies, private equity 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.
26 TETR AGON FINANCIAL GROUP LIMITED
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, financing 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 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 fluctuates
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 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.
– 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 bank loans, real estate, equities,
credit, convertible bonds, private equity, infrastructure
and TFG Asset Management, a diversified alternative asset
management business. 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 private equity in 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.
2017 ANNUAL REPORT 27
Risks Relating to Other Tetragon Portfolio Investments
– Leverage and financing risk and the use of options,
Tetragon otherwise currently invests or expects to invest its
capital, directly and indirectly, in:
futures, short sales, swaps, forwards and other derivative
instruments potentially magnify losses in equity
investments.
1. bank loans, generally through subordinated, residual
– Market illiquidity could negatively affect these
tranches of CLOs;
investments.
2. real estate, generally through private equity-style funds
and 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,
6. private equity, through fund investments and direct
investments.
7. infrastructure projects through Equitix Holdings Limited;
8. 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.
– Tetragon engages in over-the-counter trading, which has
inherent risks of illiquid markets, wide bid/ask spreads
and market disruption.
28 TETR AGON FINANCIAL GROUP LIMITED
– These investments may be subject to medium and long-
term commitments with restrictions on redemptions or
returns of capital.
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.
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.
The compensation of the investment manager’s personnel
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.
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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 reports against the AIC
Corporate Governance Guide for Investment Companies
(which incorporates the UK Corporate Governance Code) on
a voluntary basis only.
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.
2017 ANNUAL REPORT 29
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’s shares are not intended for European retail
investors. Tetragon anticipates that its typical investors
will be institutional and professional investors who wish
to invest for the long term in a predominantly income-
producing investment and who have experience in investing
in financial markets and collective investment undertakings
and are capable themselves of evaluating the merits and
risks of Tetragon shares and who have sufficient resources
both to invest in potentially illiquid securities and to be
able to bear any losses (which may equal the whole amount
invested) that may result from the investment.
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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Governance
PEYTON COLEMAN
OFFICE MANAGEMENT
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. He is
based in Guernsey.
Frederic Hervouet is a member of the Tetragon Board of Directors and Audit Committee.
Mr. Hervouet has over 18 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 (IoD) and of the
Guernsey Chamber of Commerce. He 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. He is based in Guernsey.
RUPERT DOREY
Independent Director
FREDERIC M. HERVOUET
Independent Director
DAVID JEFFREYS
Independent Director
32 TETR AGON FINANCIAL GROUP LIMITED
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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. He is based in New York.
Reade Griffith co-founded the investment manager of Tetragon in 2005 and Polygon
in 2002. He is a member of Tetragon’s Board of Directors, the head of the investment
manager’s Investment Committee and Risk Committee, and the CIO of Polygon’s European
Event-Driven Equities strategy, in addition to other roles. Mr. Griffith 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. Prior to that, he was with Baker, Nye, where he was an analyst
working on an arbitrage and special situations portfolio. Mr. Griffith holds an A.B. degree in
Economics from Harvard College and a J.D. degree from Harvard Law School. Mr. Griffith is
currently a member of the Financial Sector Forum at the Bank of England and the Dean’s
Advisory Board at Harvard Law School. Mr. Griffith also served as an officer in the U.S.
Marine Corps and left as a Captain following the 1991 Gulf War. He is based in London.
Paddy Dear co-founded the investment manager of Tetragon in 2005 and Polygon in
2002. He is a member of Tetragon’s Board of Directors and a member of the investment
manager’s Investment Committee and Risk Committee, in addition to other roles. Mr.
Dear was previously a Managing Director and the Global Head of Hedge Fund Coverage for
UBS Warburg Equities. Prior to that, 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. He is based in London.
2017 ANNUAL REPORT 33
WILLIAM P. ROGERS, JR.
Independent Director
READE GRIFFITH
PADDY DEAR
The Board of Directors (continued)
Size, Independence and Composition of the Board of
Directors of Tetragon and the Tetragon Master Fund
The structure, 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 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 holder of Tetragon's voting shares.
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
34 TETR AGON FINANCIAL GROUP LIMITED
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 Board of Directors (continued)
the ground of any such interest or benefit or because such
Director is present at or participates in the meeting of the
Directors that approves such transaction or arrangement,
provided that (i) the material facts as to the interest of such
Director in such transaction or arrangement have been
disclosed or are known to the Directors and the Directors
in good faith authorise the transaction or arrangement
and (ii) the approval of such transaction or arrangement
includes the votes of a majority of the Directors that are
not interested in such transaction or such transaction is
otherwise found by the Directors (before or after the fact)
to be fair to 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.
Compensation
The remuneration for Directors is determined by resolution
of the holder of Tetragon’s voting shares. 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
Directors’ fees. The Directors affiliated with the holder of
Tetragon’s voting shares have waived their entitlement to
a fee. 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. Directors of the
Tetragon Master Fund are compensated and reimbursed on
the same basis. None of the Directors has a contract with
Tetragon or the Tetragon Master Fund providing for benefits
upon termination of employment.
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
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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
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.
2017 ANNUAL REPORT 35
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.
36 TETR AGON FINANCIAL GROUP LIMITED
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.
TFM’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
Tetragon Master Fund anything that comes to its attention
2017 ANNUAL REPORT 37
The investment manager (continued)
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.
38 TETR AGON FINANCIAL GROUP LIMITED
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. (In
Tetragon’s initial public offering in April 2007, the Hurdle
Rate was fixed at 8% per annum for the 12-month period
following IPO with it then being adjusted as specified
above. The referenced hurdle spread of 2.647858% is the
difference between 8% and the average three-month U.S.
Dollar LIBOR at 11:00 a.m. London time on the 20 London
business days preceding the IPO pricing date.)
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 $13.9 million was accrued in Q4 2017 in
accordance with TFG’s investment management agreement.
The hurdle rate for the Q1 2018 incentive fee has been reset
at 4.344788% (Q4 2017: 3.983418%) as per the process
outlined above and in accordance with TFG’s investment
management agreement.
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The investment manager (continued)
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
they were previously treated under U.S. GAAP. The result
of the foregoing was an increase in NAV and an incentive
fee payable of U.S.$25.1 million recognised in previous
periods. 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.
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.
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.
2017 ANNUAL REPORT 39
The investment manager (continued)
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 2017 the total amount
recharged to the investment manager was $17.3 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
40 TETR AGON FINANCIAL GROUP LIMITED
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’s 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.
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.
The investment manager (continued)
Notes:
(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 2017
The Directors present to the shareholders their report together with the audited financial statements for the year ended 31
December 2017.
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 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 bank loans, real estate, equities, credit, convertible
bonds, private equity, infrastructure and TFG Asset Management, a diversified alternative asset management business.
As at 31 December 2017, TFG Asset Management investments consisted of Polygon Global Partners LP and Polygon Global
Partners LLP, LCM Asset Management LLC, Equitix Holdings Limited, Hawke’s Point Manager LP, Tetragon Credit Income
Partners Limited and GreenOak Real Estate LP.
TFG Asset Management LP and Tetragon Financial Management LP, 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 authorised and regulated by the United
Kingdom Financial Conduct Authority.
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on page 2 of the Tetragon 2017 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.
DIRECTORS
The Directors who held office during the year were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet*
David Jeffreys*
William Rogers Jr.*
*Independent Directors
The remuneration for Directors is determined by resolution of the holder of Tetragon's voting shares. Each of the Director’s
annual fee is US$ 100,000 as compensation for service on the Board 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 Director’s fee.
42 TETR AGON FINANCIAL GROUP LIMITED
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The Directors have the option to elect to receive shares in Tetragon instead of their quarterly Director’s fee. With respect
to the year ended 31 December 2017, Frederic Hervouet has elected to receive shares in lieu of his full compensation as
director. William Rogers has elected to receive shares in lieu of half of his compensation from Q1 2017. During the year,
Frederic Hervouet and William Rogers received 7,879 and 2,938 shares respectively. 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 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 holder of Tetragon's voting shares 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 US$ 0.1725 per share for the Quarter Ended 31 December 2016, US$ 0.1725
per share for the Quarter Ended 31 March 2017, US$ 0.1750 per share for the Quarter Ended 30 June 2017 and US$ 0.1750 per
share for the Quarter Ended 30 September 2017. On 26 February 2018, the Directors have declared a dividend amounting to
US$ 0.1775 per share for the Quarter Ended 31 December 2017. The total dividend declared for the year ended 31 December
2017 amounted to US$ 0.7000 per share (31 December 2016: US$ 0.6725 per share).
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.
Accordingly, the Directors have elected to prepare the financial statements in conformity with International Financial
Reporting Standards as adopted by the EU and applicable law.
The financial statements are required by law to give a true and fair view of the state of affairs of Tetragon and its profit or
loss for the relevant financial period.
In preparing these 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;
• assess Tetragon’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate Tetragon or to cease operations, or have
no realistic alternative but to do so.
2017 ANNUAL REPORT 43
The Directors are responsible for the keeping of proper accounting records which disclose with reasonable accuracy at
any time the financial position of Tetragon and to enable them to ensure that the financial statements comply with the
Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have
general responsibility for taking such steps as are reasonably open to them to safeguard the assets of Tetragon 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
Tetragon’s website, and for the preparation and dissemination of the financial statements. Legislation in Guernsey governing
the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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.
The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial
position, results and cash flows of Tetragon as required by the Disclosure Guidance and Transparency Rules (“DTR”) 4.1.12R
and by the Section 5.25c of the Financial Supervision Act of the Netherlands and are in compliance with the requirements
set out in the Companies (Guernsey) Law, 2008 as amended.
The annual report includes a fair review of the information required by DTR 4.1.8R and DTR 4.1.11R of the Disclosure
Guidance and Transparency Rules and the Financial Supervision Act of the Netherlands, which provides an indication of
important events that have occurred since the end of the financial year and the likely future development of Tetragon and a
description of principal risks and uncertainties during the year.
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.
AUDITOR
KPMG Channel Islands Limited are the appointed independent auditors of Tetragon and they have expressed their
willingness to continue in office. A resolution for the re-appointment of KPMG Channel Islands Limited as auditor of Tetragon
is to be proposed at the forthcoming Annual General Meeting.
Signed on behalf of the Board of Directors by:
Rupert Dorey, Director
David Jeffreys, Director
Date: 26 February 2018
44 TETR AGON FINANCIAL GROUP LIMITED
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 2017 and contains a fair review
of that period and (ii) the 2017 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.
2017 ANNUAL REPORT 45
The AIC Code of Corporate Governance
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.
Tetragon’s reporting against the principles and recommendations of the AIC Code is also set out on Tetragon’s website at
www.tetragoninv.com/site-services/aic/aic-code.
Corporate Governance Report
AIC Code Principle
Compliance Statement
1. The Chairman should be
independent.
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.
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.
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 holder of Tetragon's voting shares 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 holder of Tetragon's voting shares. 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 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.
46 TETR AGON FINANCIAL GROUP LIMITED
The AIC Code (continued)
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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.
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 45 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 “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.
The Board of Directors conducts an annual assessment of Compliance with the Guernsey
Finance Sector Code of Corporate Governance including assessing compliance with
requirements for the Board of Directors to comprise 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.
2017 ANNUAL REPORT 47
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
8. Director remuneration should
No remuneration committee has been appointed by the Company.
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.
The remuneration for Directors is determined by resolution of the holder of Tetragon's voting
shares. 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 holder of Tetragon's voting shares 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
42 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 holder of Tetragon's voting shares in accordance with the process
disclosed on Tetragon’s website and on page 34 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)
48 TETR AGON FINANCIAL GROUP LIMITED
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
(continued)
(continued)
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11. The Chairman (and the board)
should be brought into the
process of structuring a new
launch at an early stage.
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 37 and 38 of this report.
12. Boards and managers should
operate in a supportive, co-
operative and open environment.
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.
13. The primary focus at regular
board meetings should be a
review of investment performance
and associated matters, such
as gearing, asset allocation,
marketing/investor relations, peer
group information and industry
issues.
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 on page 15 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 manager 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).
2017 ANNUAL REPORT 49
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.
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.
17. Boards should monitor the level
of the share price discount or
premium (if any) and, if desirable,
take action to reduce it.
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.
18. The board should monitor and
evaluate other service providers.
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.
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.
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.
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.
50 TETR AGON FINANCIAL GROUP LIMITED
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.
2017 ANNUAL REPORT 51
2017
Financial
Review
GREG WADSWORTH
BUSINESS DEVELOPMENT
2017 Financial Review
This section shows consolidated financial data for Tetragon and the Tetragon Master Fund. 2015 comparatives
remain as reported in the 2015 Annual Report.
2
0
1
7
F
I
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A
N
C
I
A
L
R
E
V
I
E
W
FIGURE 12
Financial Highlights
Tetragon Financial Group
Financial Highlights Through 2015 - 2017
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 (MM)
NAV per share
Fully diluted shares outstanding (MM)
Fully diluted NAV per share
NAV per share total return
DPS
2017
2016
2015
$167.8
$171.3
$1.86
$1.90
8.9%
$116.5
$125.9
$1.26
$1.37
6.3%
$127.3
$263.9
$1.31
$2.72
14.5%
$1,994.5
$1,934.9
$1,987.3
90.1
$22.13
94.6
$21.08
9.0%
87.1
$22.21
96.7
$20.01
8.5%
95.9
$20.73
104.2
$19.08
16.0%
$0.7000
$0.6725
$0.6475
Tetragon uses the following metrics, among others, to understand the progress and performance of the business:
– Net Income ($171.3 million): This is after making an adjustment to IFRS net income of $3.5 million. Please see Figure 13
for more details and a breakdown of the net income.
– Return on Equity (8.9%): Net Income ($171.3 million) divided by Net Assets at the start of the year ($1,934.9 million).
– Fully Diluted Shares Outstanding (94.6 million): Adjusts the IFRS or GAAP shares outstanding (90.1 million) for
various dilutive factors (4.5 million shares). Please see Figure 28 for more details.
– EPS ($1.90): Calculated as Net Income ($171.3 million) divided by the time-weighted average IFRS or GAAP shares during
the period (90.0 million).
– Fully Diluted NAV Per Share ($21.08): Calculated as Net Assets ($1,994.5 million) divided by Fully Diluted Shares
Outstanding (94.6 million).
2017 ANNUAL REPORT 53
Consolidated Statement of Comprehensive Income
FIGURE 13
Tetragon Financial Group
Consolidated Statement of Comprehensive Income Total Year 2016 - Total Year 2017
Net gain on financial assets at fair value through profit or loss
Net (loss) / gain on derivative financial assets and liabilities
Other income
Investment income
Management and incentive fees
Other operating and administrative expenses
Interest expense
Total operating expenses
Net income
2017
($millions)
2016
($millions)
247.9
(11.0)
5.7
242.6
(61.8)
(6.4)
(3.1)
(71.3)
171.3
167.5
14.9
1.7
184.1
(49.8)
(6.9)
(1.5)
(58.2)
125.9
This table shows a consolidated view of the comprehensive income for both Tetragon and the Tetragon Master
Fund.
For 2017, the difference between net income as shown here and IFRS net income on a consolidated basis is the
removal of share-based compensation of $3.5 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 2016 comparative column reflects the IFRS net income on a consolidated basis also
adjusted to remove share-based compensation expense of $9.4 million.
During the period, an incentive fee of $32.2 million was expensed, of which $13.9 million remains outstanding at
31 December 2017.
54 TETR AGON FINANCIAL GROUP LIMITED
Consolidated Statement of Financial Position
FIGURE 14
Tetragon Financial Group
Consolidated Statement of Financial Position as at 31 December 2016 and 31 December 2017
2
0
1
7
F
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A
N
C
I
A
L
R
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V
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W
ASSETS
Investments
Cash and cash equivalents
Amounts due from brokers
Derivative financial assets
Other receivables
Total assets
LIABILITIES
Other payables and accrued expenses
Loans and borrowings
Derivative financial liabilities
Total Liabilities
NET ASSETS
2017
($millions)
2016
($millions)
1,583.4
395.5
57.2
17.4
2.1
1,487.4
425.2
51.0
22.2
0.6
2,055.6
1,986.4
(16.5)
(38.0)
(6.6)
(61.1)
1,994.5
(9.4)
(38.0)
(4.1)
(51.5)
1,934.9
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 $30.0 million (2016: $32.6 million) and decreasing
investments by $30.0 million (2016: $32.6 million). This treatment is consistent with how Tetragon has reported
these investments in prior periods. The net assets of $1,994.5 million are after accruing for an incentive fee of
$13.9 million.
2017 ANNUAL REPORT 55
Other
Information
MAUREEN WAINWRIGHT
RESEARCH
TFG Asset Management
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 2017, TFG Asset Management
comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke’s Point,
TCIP and TCICM. TFG Asset Management has approximately $23.0 billion of AUM(1)
and approximately 300 employees globally. Each of the asset managers on the
platform is privately held.
FIGURE 15 (1)
TM
LCM Asset Management – a CLO asset management company.
$6.5 billion
TM
The GreenOak Real Estate joint venture – a real estate-focused principal
investing, lending and advisory firm.
$7.6 billion
Polygon Global Partners – a manager of open-ended hedge fund and
private equity vehicles across a number of strategies.
$1.6 billion
TM
TM
Equitix – an integrated core infrastructure asset management and primary
project platform.
$3.6 billion
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.
$7.5 millon
TM
Tetragon Credit Income Partners (TCIP) – the holding company of the
general partner entities of two private equity vehicles focusing on CLO
investments, including majority stakes in CLO equity tranches.
$0.6 billion
TM
TCI Capital Management LLC (TCICM) – a CLO loan management business.(2)
$3.1 billion
$23B
ASSETS UNDER
MANAGEMENT(2)
31 December 2017
OFFICE LOCATIONS
London | New York
Plus GreenOak locations
300
APPROX HEADCOUNT
Including GreenOak
GLOBAL OPER ATING
PLATFORM
(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. AUM
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 Global Equities Master Fund, Polygon Distressed
Opportunities Master Fund, Equitix, TCI II, TCI III and TCICM as calculated by the applicable administrators for value date 31 December
2017. 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 assets under management of several investment advisers, including Tetragon Asset
Management
L.P., and GreenOak, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940. Figures for
GreenOak and TCIP 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.
(2) TCICM consists of TCI Capital Management II LLC and TCI Capital Management LLC, both of which are CLO managers.
2017 ANNUAL REPORT 57
TFG Asset Management Overview
Figure 16 shows the breakdown of the AUM by business and Figure 17 depicts the growth of that AUM over the last five years.
AUM for TFG Asset Management as of 31 December 2017 totalled approximately $23.0 billion.(i)
FIGURE 16 (i)
TFG Asset Management AUM by Business
at 31 December 2017 ($billions)
FIGURE 17(i)
TFG Asset Management AUM
at 31 December 2013-2017 ($billions)
$3.1
TCICM
$0.6
TCIP
$6.5
LCM
$23.0
$19.5
$17.1
$11.1
$9.2
$3.6
Equitix
$1.6
Polygon
(i) Please see Note 1 on page 57.
FIGURE 18
$7.6
GreenOak
2013
2014
2015
2016
2017
LCM
GreenOak
Polygon
Equitix
TCIP
TCICM
Tetragon Financial Group
TFG Asset Management Pro Forma Statement of Operations (excluding GreenOak)(i)
2017
($millions)
2016
($millions)
2015
($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"
74.8
45.8
12.4
4.1
137.1
(83.5)
(7.4)
46.2
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
(i) This table includes the income and expenses attributable to Tetragon’s majority owned businesses, Polygon, LCM, Equitix, Hawke’s Point and TCIP 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 is or 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 pays a mix of full and preferred fees on its investments in TFG Asset Management-managed investment vehicles.
Tetragon pays full management and performance fees on its investments in the open Polygon funds. 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.
58 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management Overview (continued)
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– Overview: Figure 18 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. The fee income
includes some amounts which were earned on capital invested in certain funds by Tetragon. During 2017, this
included $7.2 million of management fees and $4.7 million of performance and success fees.
– EBITDA: In 2017, TFG Asset Management’s EBITDA was $46.2 million, compared with $47.0 million for 2016, i.e.
fairly flat year on year. Underpinning the EBITDA was a continued improvement in the quality of income on both
an absolute and relative basis, with management fees now representing 55% of total income compared to 47%
in the prior year.
– Management fee income: Management fee income continued to grow, increasing by 15% year on year, with
all of the businesses contributing to this growth. Of note, Equitix management fee income increased by 20%
as AUM continued to grow, TCIP started earning fees as capital was put to work in TCI II, and Hawke’s Point
also started to earn management fees. The combined increase in fees across these three businesses was
responsible for approximately 80% of the uptick. Polygon management fees also increased as a result of a
number of factors, including an increase in AUM. As of 1 May 2017, Tetragon pays full fees on its investments in
the Polygon European Equity Opportunity Fund, Polygon Convertible Opportunity Fund and Polygon Distressed
Opportunities Fund.
– Performance and success fees: Unlike management fee income, performance and success fees can be quite
volatile in nature and subject to timing differences. Equitix primary fee income declined by $3.6 million, which
reflects partly timing and partly a reduction in the number of closed transactions. Polygon performance fees
were $2.8 million lower, reflecting lower performance in the two largest funds, whilst LCM performance fees
were also down $2.7 million. CLO performance fees are typically back-ended and subject to an IRR hurdle, so
this stream is particularly variable.
– 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
segment continued to decline as these transactions amortised down, accounting for the $1.5 million decline in
the “other fee income” category. “Other fee income” also includes certain cost recoveries from Tetragon relating
to seeded Polygon hedge funds. The cost recoveries decreased by $3.5 million during the year, largely due to
Tetragon migrating to paying full management fees (see the “management fee income” section above). Partially
offsetting these decreases, income generated by Equitix on certain management services contracts increased
period on period as this business continued to grow.
– Operating expenses: These were slightly lower than the reported number for 2016, although most expense
lines were broadly similar. In terms of compensation expense, however, there was a slight shift from bonus to
base, reflecting both headcount growth in the Equitix business as well a reduction in discretionary bonuses in
certain businesses.
2017 ANNUAL REPORT 59
TFG Asset Management Company Overviews
The following pages provide a summary of each asset management company
and a review of AUM growth and underlying strategies and investment vehicles.
All data is at 31 December 2017, unless otherwise stated.
Description of Business
TM
– LCM is a specialist in below-investment grade U.S. broadly-syndicated leveraged loans.
– The business was established in 2001 and has offices in New York and London.
– Tetragon owns 100% of LCM.
– Currently, LCM manages loan assets exclusively through CLOs, which are long-term, multi-
year investment vehicles. The typical duration of a CLO, and thus LCM’s management fee
stream, depends on, among other things, the term of its reinvestment period (currently
typically four to five years for a new issue CLO), the prepayment rate of the underlying loan
assets, as well as post-reinvestment period reinvestment flexibility and weighted average
life constraints.
– Further information on LCM is available at www.lcmam.com.
FIGURE 19
LCM AUM History(i) ($billions)
LCM's AUM was $6.5 billion at 31 December 2017.
$5.3
$4.2
$6.1
$6.6
$6.5
YE 2013
YE 2014
YE 2015
YE 2016
YE 2017
CLO 1.0
CLO 2.0
(i) Includes, where relevant, investments from the Tetragon Master Fund and TCI II.
Products
– LCM currently manages 16 CLOs.
60 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management Company Overviews (continued)
Description of Business
O
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TM
– GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks
to create long-term value for its investors and provide strategic advice to its clients.
– The business was established in 2010 as a joint venture with Tetragon and has a presence
in New York, London, Tokyo, Los Angeles, Madrid and Seoul.
– Tetragon owns 23% of the joint venture.
– GreenOak currently has funds with investments focused on the United States, Japan,
Spain and the United Kingdom.
– Further information on GreenOak is available at www.greenoakrealestate.com.
FIGURE 20
GreenOak AUM History(i) ($billions)
GreenOak's AUM was $7.6 billion at 31 December 2017.
$7.1
$7.6
$6.6
$4.4
$3.6
YE 2013
YE 2014
YE 2015
YE 2016
YE 2017
Europe
U.S.
Japan
(i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2017. Tetragon owns a 23% stake in GreenOak. AUM includes all third-party
interests and total projected capital investment costs.
Products
– Europe Fund I (Spain)
– Europe Fund II
– Europe Senior Debt Fund
– UK Active Income Fund
– UK Senior Debt Fund
– UK Senior Debt Fund II
– Japan Fund I
– Asia Fund II
– U.S. Fund I
– U.S. Fund II
– U.S. Fund III
– U.S. Core Plus Fund
– Global advisory
– Grafton Partners
– Co-investment vehicles
2017 ANNUAL REPORT 61
TFG Asset Management Company Overviews (continued)
Description of Business
– Polygon manages open-ended hedge fund and private equity vehicles across a number of
TM
strategies.
– Polygon was established in 2002 and has offices in New York and London.
– Tetragon owns 100% of the business.
– Further information on Polygon is available at www.polygoninv.com.
FIGURE 21
Polygon AUM History(i) ($billions)
Polygon's AUM was $1.6 billion for all funds and $1.5 billion for open strategies at 31 December 2017.
$1.4
$1.5
$1.2
$1.1
$0.9
YE 2013
YE 2014
YE 2015
YE 2016
YE 2017
Convertible Opportunity Fund
Distressed Opportunities Fund
European Equity Opportunity Fund
Global Equities Fund
Mining Opportunity Fund
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon
Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund
administrator at 31 December 2013, 2014, 2015, 2016, and 31 December 2017. Includes, where relevant, investments by the Tetragon Master Fund. The Polygon
Mining Opportunity Fund was closed in Q4 2017.
FIGURE 22
Polygon Funds Summary*
Fund
Convertible Opportunity Fund(2)
European Equity Opportunity Fund(3)
Distressed Opportunities Fund(4)
Global Equities Fund5)
Total AUM - Open Funds
Recovery Fund(6)
TOTAL AUM
*Please see the next page for important notes.
62 TETR AGON FINANCIAL GROUP LIMITED
AUM at
31 Dec 2017
($millions)(1)
2017
Net Performance
Annualised Net LTD
Performance
532.5
777.4
133.1
22.4
1,465.5
130.0
1,595.5
7.9%
5.4%
8.9%
6.8%
NA
15.4%
10.0%
7.6%
12.4%
Estimated approx.
LTD multiple
1.91x
TFG Asset Management Company Overviews (continued)
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(1) The AUM noted includes investments in the relevant strategies by
(6) The manager of the Polygon Recovery Fund L.P. (PRF) is a
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. For each of the funds
shown, the return and AUM figures are final values as calculated by
the applicable fund administrator. All performance numbers provided
herein reflects the actual net performance of each fund net of
management and performance fees, as well as any commissions and
direct expenses incurred by each 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.
(2) The Polygon Convertible Opportunity Fund began trading with Class
B shares, which carry no incentive fees, on 20 May 2009. Class D shares
of the Fund were first issued on 1 July 2017 and returns from inception
through June 2017 have been pro forma adjusted to match the Fund’s
Class D 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).
(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.
(4) 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).
(5) 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.
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 2019. 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. PRF’s P&L for
2017 was +$23.1 million (excluding FX); FX movements accounted for
+10.5 million, and net P&L was therefore +$33.7 million; P&L life-to-
date (from closing date March 2011 net asset value) was $162.6 million
(excluding FX); FX movements accounted for ($36.8) million, and net
P&L was therefore up $125.8 million. PRF is generally precluded from
hedging FX exposure. The fund has made life to date distributions of
approximately $710 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 1.79 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.
2017 ANNUAL REPORT 63
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 and street
lighting, offshore transmission and renewable and waste sectors.
– Further information on Equitix is available at www.equitix.co.uk.
FIGURE 23
Equitix AUM History (£billions)
Equitix's AUM was £2.7 billion ($3.6 billion) at 31 December 2017.(i)
£2.7
£1.9
£2.1
£1.3
£1.0
YE 2013
YE 2014
YE 2015
YE 2016
YE 2017
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 2017.
Products
– Fund I
– Fund II
– Fund III
– Fund IV
– Managed account
– Energy Saving Investments
– Energy Efficiency Fund
64 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management Company Overviews (continued)
Description of Business
– Hawke’s Point is an asset management company focused on mining finance that seeks to
TM
provide capital to companies in the mining and resource sectors.
– Hawke’s Point was established in 2014 and is based in London and New York.
– Tetragon owns 100% of the business.
– Hawke’s Point invested in its first mine financing project in an early stage gold miner in Q1
2017.
O
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Hawke's Point AUM
Hawke's Point's AUM was $7.5 million at 31 December 2017.
2017 ANNUAL REPORT 65
TFG Asset Management Company Overviews (continued)
Description of Business
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– TCIP is the holding company of the general partner entities of certain private equity
vehicles focusing on CLO investments, including majority stakes in CLO equity tranches.(i)
– The business was established at the end of 2015 and is managed out of New York and
London.
– Tetragon owns 100% of the business.
– TCIP currently owns two entities, which act as general partner of Tetragon Credit Income
II L.P. (TCI II) and Tetragon Credit Income III L.P. (TCI III) respectively. TCIP focuses on CLO
investments, including majority stakes in CLO equity tranches of transactions managed
by LCM or sub-advised by third-party CLO managers. The vehicles are structured with
a management fee and carried interest over a preferred return (and in the case of TCI II
solely on non-LCM investments) with multi-year investment period and a term of seven
years (subject to potential extensions and otherwise as required by applicable regulatory
requirements).
– TCI II and TCI III invest in CLOs managed by LCM and TCICM.
– Further information on TCIP is available at www.tetragoninv.com.
(i) For additional information on Tetragon’s CLO equity investments, including its buy and hold strategy, please refer to
http://www.tetragoninv.com/portfolio/bank-loans-via-clos.
FIGURE 24
TCIP Committed Capital History ($millions)
TCI II and TCI III’s total committed capital was $604.4 million in aggregate at 31 December 2017.
$604
$143
YE 2015
$253
YE 2016
TCI II
TCI III
YE 2017
Products
– Tetragon Credit Income II L.P.
– Tetragon Credit Income III L.P.
66 TETR AGON FINANCIAL GROUP LIMITED
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TFG Asset Management Company Overviews (continued)
Description of Business
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F
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– The TCICM business is a specialist in below-investment grade U.S. broadly-syndicated
leveraged loans. TCICM consists of TCI Capital Management II LLC, which was established
as a Delaware limited liability company in November 2015 and is a subsidiary of Tetragon
Credit Income II L.P and TCI Capital Management LLC, which was established as a
Delaware limited liability company in September 2017. The TCICM business acts as a CLO
collateral manager for certain CLO investments. It utilises, and has access to, the TFG
Asset Management platform, including personnel from Polygon and LCM.
– Tetragon owns 100% of the business.
– Currently, TCICM manages loan assets exclusively through CLOs (which includes
warehouse vehicles created in anticipation of future CLOs), which are long-term, multi-
year investment vehicles. At this time, TCICM utilises, and expects to continue to utilise,
the investment expertise of certain third-party sub-advisors to assist in the management
of its CLOs. Such sub-advisors will typically earn a substantial portion of the management
fees from the CLOs.
– Further information TCICM is available at www.tetragoninv.com.
FIGURE 25
TCICM AUM History(i) ($billions)
As of 31 December 2017, TCICM had AUM of approximately $3.1 billion.(i)
$3.1
$1.4
YE 2016
YE 2017
(i) Includes, where relevant, investments from TCI II and TCI III. 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.
Products
– TCICM currently manages six CLOs.
2017 ANNUAL REPORT 67
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 a major
contributor to Syncona Limited (“Syncona”, formerly
known as BACIT Limited) a UK-based charitable investment
vehicle.(1) Syncona is a leading FTSE 250 company
focused on investing in and building global leaders in life
science. The company states that their vision is “to deliver
transformational treatments to patients in truly innovative
areas of healthcare while generating attractive returns for
shareholders.” Their current investment portfolio consists
of seven investee companies in life science and a range of
fund investments, with the statement, “Our funds portfolio
seeks to generate superior returns by investing in long
only and alternative investment funds. This represents
a productively deployed evergreen funding base, which
enables us to take a long-term approach to investing in
life science as we target the best new opportunities and
support our existing portfolio investee companies to grow
and succeed.” Syncona is aligned with two of the premium
charitable funders in UK science, The Wellcome Trust,
original founder of Syncona, and Cancer Research UK, both
of which are significant shareholders in their business.
Syncona donates 0.3% of its Net Asset Value to a range of
charities each year. 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.
(1) As of Syncona’s Interim Results Report, 22 November 2017.
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 Standards Board for Alternative
Investments (SBAI)
TFG Asset Management’s Polygon business is a member of
the Alternative Investment Management Association and
is a signatory of the Standards of the Standards Board for
Alternative Investments (formerly known as 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 manages the Energy Efficiency 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. The
target of this fund is to reduce GHG emissions by at least
one tonne CO2e per £2,000 invested. 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.
68 TETR AGON FINANCIAL GROUP LIMITED
Share Repurchases & Distributions
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Tetragon Share Repurchase History
FIGURE 26
Tetragon Financial Group
Share Repurchase History
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
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
$66.4
$609.6
$2.2
$14.5
$21.2
$46.7
$81.9
$257.5
$273.6
$324.5
$385.4
$543.2
$609.6
0.3
2.6
2.4
5.7
5.1
18.7
1.4
4.9
6.0
14.9
4.9
66.9
0.3
2.9
5.3
11.0
16.1
34.8
36.2
41.1
47.1
62.0
66.9
Share Repurchases and Dividend Distributions
The below graph shows cumulative historical share repurchases and dividends distributed by Tetragon from inception to 31
December 2017 in millions of U.S. dollars.(1)
FIGURE 27
$694.7
$370.1
$324.5
Inception - 2014
$818.0
$432.6
$385.4
2015
$1,037.8
$494.6
$1,167.2
$557.6
$543.2
$609.6
2016
2017
Cumulative Share Repurchases ($MM)
Cumulative Dividends Paid ($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. Cumulative dividends paid includes the cash and stock dividends paid to shareholders, but excludes dividends
declared on shares held in escrow.
2017 ANNUAL REPORT 69
Share Reconciliation and Shareholdings
FIGURE 28 (1)
IFRS to Fully Diluted Shares Reconciliation
Legal Shares Issued and Outstanding
Less: Shares Held in Treasury
Less: Total Escrow Shares(1.i)
IFRS Shares Outstanding
Add: Dilution for Share Options(1.ii)
Add: Certain Escrow Shares(1.iii)
Add: Dilution for equity-based awards(1.iv)
Fully Diluted Shares Outstanding
2017 shares
(millions)
139.7
41.3
8.3
90.1
0.6
2.1
1.8
94.6
Shareholdings
Persons affiliated with Tetragon maintain significant interests in Tetragon shares. For example, as of 31 December 2017, the
following persons own (directly or indirectly) interests in shares in Tetragon in the amounts set forth below:
FIGURE 29
Individual
Mr. Reade Griffith
Mr. Paddy Dear
Mr. David Wishnow
Mr. Jeff Herlyn
Mr. Michael Rosenberg
Mr. Rupert Dorey(2)
Mr. Frederic Hervouet
Mr. William Rogers
Other Tetragon/Polygon Employees
Equity-based awards(3)
Shareholding at
31 December 2017
11,868,998
4,044,303
749,144
575,883
575,080
160,812
50,574
3,938
2,380,292
5,535,163
(1.i) The Total Escrow Shares of 8.3 million consists of 6.2 million shares held in a separate escrow account in relation to equity-based compensation; 2.1 million shares held in
a separate escrow account relating to deferred incentive fees payable to the manager.
(1.ii) 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 0.6 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) 977,058 (being a number
of shares subject to the options). This approach has been selected because this reflects the way in which the options have been exercised to date. Should the GreenOak
Founders all separately choose to exercise and settle the gross amount of shares, the dilution amount would be 1.0 million shares.
(1.iii) This comprises 2.1 million shares held in a separate escrow account relating to deferred incentive fees payable to the manager.
(1.iv) Dilution in relation to equity-based awards by TFG Asset Management for certain senior employees. At the reporting date, this was 1.8 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. 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. 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.
(2) Includes amounts held by children in a shared household.
(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.
70 TETR AGON FINANCIAL GROUP LIMITED
Additional CLO Portfolio Statistics
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FIGURE 30
Tetragon's CLO Portfolio Details at 31 December 2017
Deal
Transaction(i)
Type
Transaction 2 EUR CLO Wound Down
Transaction 5 EUR CLO Called
EUR CLO Subtotal:
Status(ii)
Primary or
Secondary
Investment(iii)
Primary
Primary
Original
Invest. Cost
($MM USD)(iv)
29.7
36.9
66.5
Original
Deal
Closing
End of Wtd Avg
Year of
Reinv
Date Maturity Period
2013
2023
2006
2014
2022
2007
Current Jr-
Spread Cost of Funds Cost of Funds Most O/C
(bps)(v)
Cushion(viii)
NA
NA
NA
NA
NA
NA
NA
NA
NA
52
60
56
(bps)(vii)
(bps)(vi)
Current
Transaction 13 U.S. CLO Wound Down
Transaction 14 U.S. CLO Wound Down
Transaction 15 U.S. CLO Called
Transaction 32 U.S. CLO Called
Transaction 47 U.S. CLO Outstanding
Transaction 61 U.S. CLO Outstanding
Transaction 68 U.S. CLO Outstanding
Transaction 69 U.S. CLO Outstanding
Transaction 78 U.S. CLO Outstanding
Transaction 81 U.S. CLO Outstanding
Transaction 82 U.S. CLO Called
Transaction 83 U.S. CLO Outstanding
Transaction 84 U.S. CLO Outstanding
Transaction 85 U.S. CLO Outstanding
Transaction 87 U.S. CLO Outstanding
Transaction 88 U.S. CLO Outstanding
Transaction 96 U.S. CLO Outstanding
Transaction 97 U.S. CLO Outstanding
Transaction 89 U.S. CLO Outstanding
Transaction 90 U.S. CLO Outstanding
Transaction 91 U.S. CLO Outstanding
Transaction 92 U.S. CLO Outstanding
Transaction 93 U.S. CLO Outstanding
Transaction 94 U.S. CLO Outstanding
Transaction 95 U.S. CLO Outstanding
Transaction 98 U.S. CLO Outstanding
Transaction 99 U.S. CLO Outstanding
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Primary
Secondary
Primary
Primary
Primary
Primary
Primary
Secondary
Secondary
Primary
Primary
Primary
U.S. CLO Subtotal:
Total CLO Portfolio:
Notes
2018
2021
2021
2021
2021
2021
2020
2019
2023
2024
2022
2029
2027
2025
2026
2030
2030
2030
2026
2026
2027
2027
2027
2026
2029
2030
2030
2012
2014
2014
2014
2013
2014
2013
2013
2015
2016
2016
2021
2021
2017
2018
2022
2022
2022
2018
2018
2019
2020
2019
2018
2022
2022
2022
2006
2007
2007
2007
2006
2007
2006
2007
2012
2012
2012
2013
2013
2013
2013
2014
2017
2017
2014
2014
2015
2015
2015
2014
2016
2017
2017
15.2
26.0
28.1
24.0
28.3
29.1
19.3
28.2
22.9
21.7
25.4
20.8
24.6
1.0
23.0
30.1
2.7
9.9
33.6
20.7
27.8
34.6
6.1
6.6
2.6
33.2
8.3
553.7
620.2
NA
NA
NA
NA
360
353
244
215
257
287
NA
341
322
316
338
320
320
320
315
326
321
320
321
315
336
327
356
313
313
47
49
52
59
47
45
48
44
217
216
206
193
183
170
199
199
199
178
195
203
215
199
215
215
194
178
164
145
135
NA
NA
NA
NA
148
271
123
365
228
217
NA
215
199
175
176
179
179
179
146
178
208
199
208
146
194
178
164
200
200
NA
NA
NA
NA
7.8%
24.5%
27.5%
NA
8.6%
6.5%
NA
4.2%
4.0%
5.5%
2.2%
3.9%
3.9%
3.9%
3.0%
3.7%
3.0%
3.6%
3.0%
3.0%
4.4%
4.6%
4.5%
7.0%
7.0%
Jr-Most O/C
Cushion at
Close(ix)
3.6%
5.7%
4.8%
4.8%
5.6%
4.2%
5.6%
4.3%
4.0%
4.4%
5.6%
4.0%
4.0%
4.0%
6.2%
4.0%
5.0%
4.0%
4.0%
3.0%
3.9%
4.0%
4.0%
4.0%
4.0%
3.6%
3.3%
4.4%
4.5%
4.5%
Annualized
(Loss) Gain
of Cushion(x)
NA
NA
NA
ITD Cash
Received as
IRR(xi) % of Cost(xii)
148.2%
199.6%
176.7%
9.8%
11.5%
10.7%
NA
NA
NA
NA
0.3%
1.9%
2.1%
NA
0.8%
0.5%
NA
(0.4%)
0.0%
0.1%
(0.5%)
(0.0%)
1.4%
(0.1%)
(0.3%)
(0.1%)
(0.4%)
(0.2%)
(0.2%)
(0.1%)
(0.1%)
0.1%
(0.0%)
23.0%
20.2%
32.1%
23.4%
23.8%
18.1%
30.1%
28.8%
15.4%
6.1%
10.9%
13.2%
19.4%
8.9%
4.4%
14.5%
10.8%
12.9%
14.6%
13.0%
11.5%
13.0%
11.4%
14.2%
11.7%
12.6%
11.8%
293.9%
261.7%
346.5%
249.9%
260.8%
204.9%
321.8%
290.5%
113.6%
72.7%
141.4%
87.0%
101.4%
87.9%
68.1%
74.6%
7.1%
8.2%
73.2%
61.3%
54.4%
49.4%
35.6%
35.5%
13.1%
12.6%
0.0%
4.4%
4.4%
0.2%
0.2%
17.0%
16.3%
142.1%
145.8%
(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.
(ii)
"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.
(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.
2017 ANNUAL REPORT 71
Additional CLO Portfolio Statistics (continued)
FIGURE 31
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
12
10
8
6
4
2
0
Reinvestment End Date of Outstanding Investments
Based on Original Investment Size ($ Millions)
$86.7
$34.6
$45.5
2020
2021
2022
CLO Deal Maturities of Outstanding Investments
Based on Original Investment Cost ($ Millions)
$93.1
$83.9
$84.1
$83.9
2018
$33.9
2019
$57.4
$28.2
$19.3
$22.9
$21.7
$23.4
$0.0
2018
2019
2020
2021
$0.0
2022
2023
2024
$1.0
2025
2026
2027
$0.0
2028
2029
2030
Current Junior-Most O/C Test Cushion Distribution of Outstanding Investments
(by Number of Transactions)
10
0
<= 0%
0
0% to 2%
2% to 4%
4% to 6%
Over 6%
4
5
72 TETR AGON FINANCIAL GROUP LIMITED
Certain Regulatory Information
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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.
Tetragon’s shares are not intended for European retail
investors. Tetragon anticipates that its typical investors
will be institutional and professional investors who wish
to invest for the long term in a predominantly income-
producing investment and who have experience in investing
in financial markets and collective investment undertakings
and are capable themselves of evaluating the merits and
risks of Tetragon shares and who have sufficient resources
both to invest in potentially illiquid securities and to be
able to bear any losses (which may equal the whole amount
invested) that may result from the investment.
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
2017 ANNUAL REPORT 73
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 TFM).
Awards under the long-term incentive plan, along with
other equity-based awards, are typically spread over
multiple vesting dates up to 2024 which may vary for each
employee and are subject to forfeiture provisions. The
arrangements may also include additional periods, beyond
the vesting dates, during which employees gain exposure
to the performance of the 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
2017, approximately 1.8 million shares were included in the
fully diluted share count.
74 TETR AGON FINANCIAL GROUP LIMITED
Shareholder Information
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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)
Covington & Burling LLP
The New York times Building
620 Eighth Avenue
New York, NY 10018-1405
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
2017 ANNUAL REPORT 75
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.
76 TETR AGON FINANCIAL GROUP LIMITED
Audited Financial
Statements
ASEEM GARG
RISK MANAGEMENT
Independent auditor’s report to the members of Tetragon Financial Group Limited
Our opinion is unmodified
We have audited the financial statements (the “Financial Statements”) of Tetragon Financial Group Limited
(the “Company”), which comprise the Statement of Financial Position as at 31 December 2017, the Statement of
Comprehensive Income, the Statement of Changes in Equity and the Statement of Cash Flows for the year then
ended, and notes, comprising significant accounting policies and other explanatory information.
In our opinion, the accompanying financial statements:
• give a true and fair view of the financial position of the Company as at 31 December 2017, and of the Company’s
financial performance and the Company’s cash flows for the year then ended;
• are prepared in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”);
and
• comply with the Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are
independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards as
applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis
for our opinion.
Key Audit Matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit
of the Financial Statements and include the most significant assessed risks of material misstatement (whether
or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit
matter, was as follows:
(continued on next page)
78 TETR AGON FINANCIAL GROUP LIMITED
Independent auditor’s report to the members of Tetragon Financial Group Limited
The key audit matter
Our response
Valuation of Financial Asset at fair value through profit or loss classified as Level 3
$2,008.4 Million (2016: $1,942.0 Million) (Refer to Note 2 for accounting policy and Notes 3 & 4 for disclosures)
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Basis:
The Company’s investment in Tetragon Financial Group Master
Fund Limited (the “Master Fund”) forms 100% of its financial asset
at fair value through profit or loss and is classified as a Level 3
investment in the fair value hierarchy.
The carrying value of the Master Fund is calculated by assessing
the fair value of the Master Fund which reflects its net asset
value incorporating the fair value of the Master Fund’s underlying
portfolio of investments. 53.5% (2016: 57.1%) of the Master Fund’s
net asset value comprises of Level 3 financial assets at fair value
through profit or loss including CLO Equity Tranches, Unlisted
Stock, Investment funds & vehicles and TFG Asset Management
investments.
The fair value of these investments is based on:
•
•
for CLO Equity Tranches, a marked to model approach;
for Unlisted Stock, based on recent transactions;
•
marked model and market multiple approach; and
TFG Asset Management investments, a combination of
for the remaining level 3 investments, partner capital
•
or net asset value statements provided by independent
administrators.
In addition, independent third party valuation providers (the
“Valuation Agents”) have been engaged to assist in the valuation
process for Level 3 investments including Unlisted Stock and TFG
Asset Management investments.
Risk:
The Company’s investment in the Master Fund represents
the majority of its net assets and in view of the estimates and
judgements that may be involved in the determination of the fair
value of the underlying level 3 investments held by the Master
Fund, the valuation of the Company’s investment in the Master
Fund is a significant area of our audit.
Our audit procedures included:
Control Evaluation:
We have obtained and documented our understanding of the
valuation process, and assessed and tested the adequacy of
design and implementation of controls in place in relation to the
valuation process.
Challenging managements’ assumptions and inputs
including use of KPMG Specialists:
We agreed the Company’s investment in the Master Fund to the
net asset value per Master Fund’s financial statements for the year
ended 31 December 2017.
For CLO Equity Tranches held by the Master Fund, with the
support of our KPMG valuation specialists, we performed a peer
group benchmark analysis on model inputs. For a risk based
selection of CLO investments, with the support of our KPMG
valuation specialists, we independently tested reference prices
through the use of fundamental cash flow modelling sourcing key
inputs and assumptions used, such as default rates, prepayment
rates, discount rates and recovery rates, to observable market
data.
For investments valued using the assistance of the Valuation
Agents and with the assistance of our KPMG valuation specialists:
• we assessed the objectivity, capabilities and competence of
the Valuation Agents engaged to provide valuations services to
the Master Fund;
• we assessed the methodology applied by the Valuation Agents
in developing fair value of the Unlisted Stock, and TFG Asset
Management investments; and
• we critically assessed the valuations provided by the Valuation
Agents and we challenged the valuation inputs and techniques
based on market available information.
For Investment funds & vehicles, we obtained net asset value
per share confirmation or partner capital statements directly
from the administrators of the underlying funds and vehicles and
reconciled to the investment value recorded by the Master Fund.
We reviewed the latest available audited financial statements of
a selection of Investment funds & vehicles in order to consider
the nature of the investments held by those funds, the financial
reporting standards applied in the preparation of the financial
statements, any modification to the auditors’ reports and other
disclosures which may have been relevant to the valuation of the
Master Fund’s investments.
Assessing disclosures:
We considered the adequacy of the disclosures made in the
financial statements (see Notes 2, 3 & 4) in relation to the use of
estimates and judgements regarding the fair value of investments,
the valuation estimation techniques inherent therein and fair
value disclosures for compliance with IFRS.
2017 ANNUAL REPORT 79
(continued)
Our application of materiality and an overview of the scope of our audit
Materiality for the Financial Statements as a whole was set at $59.8 Million, determined with reference to a
benchmark of Net Assets of $1,994.5 Million, of which it represents 3% (2016: 3%).
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding $3 Million,
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level specified above, which has informed our
identification of significant risks of material misstatement and the associated audit procedures performed in
those areas as detailed above.
We have nothing to report on going concern
We are required to report to you if we have concluded that the use of the going concern basis of accounting is
inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that
basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing
to report in these respects.
We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the Financial
Statements. Our opinion on the Financial Statements does not cover the other information and we do not express
an audit opinion or any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our Financial
Statements audit work, the information therein is materially misstated or inconsistent with the financial
statements or our audit knowledge. Based solely on that work we have not identified material misstatements in
the other information.
We have nothing to report on other 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.
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on pages 43 and 44, the Directors are responsible for: the
preparation of the Financial Statements including being satisfied that they give a true and fair view; such
internal control as they determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis
of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
(continued on next page)
80 TETR AGON FINANCIAL GROUP LIMITED
(continued)
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report.
Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of the Financial Statements.
A fuller description of our responsibilities is provided on the FRC’s website at
www.frc.org.uk/auditorsresponsibilities.
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The purpose of this report and restrictions on its use by persons other than the Company’s members as
a body
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.
DEBORAH J SMITH
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors, Guernsey
26 February 2018
2017 ANNUAL REPORT 81
FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2017
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December 2017
Assets
Financial asset at fair value through profit or loss
Total assets
Liabilities
Accrued incentive fee
Total liabilities
Net assets
Equity
Share capital
Other equity
Capital reserve in respect of share options
Share-based employee compensation reserve
Retained earnings
Shares outstanding
Number of shares
Note
4
8
9
9
9
31 Dec 2017
US$ MM
31 Dec 2016
US$ MM
2,008.4
2,008.4
1,942.0
1,942.0
13.9
13.9
7.1
7.1
1,994.5
1,934.9
0.1
808.9
0.1
80.7
1,104.7
1,994.5
Millions
90.1
0.1
813.5
12.0
100.0
1,009.3
1,934.9
Millions
87.1
Net Asset Value per share
US$ 22.13
US$ 22.21
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey,
Director
Date: 26 February 2018
David Jeffreys,
Director
1
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2017
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
Note
Year ended
31 Dec 2017
US$ MM
Year ended
31 Dec 2016
US$ MM
4
8
12
12
12
12
200.0
200.0
(32.2)
(32.2)
167.8
US$ 1.86
US$ 1.70
Millions
90.0
98.9
138.5
138.5
(22.0)
(22.0)
116.5
US$ 1.26
US$ 1.09
Millions
92.1
106.8
The accompanying notes are an integral part of the financial statements.
2
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2017
Share
capital
US$ MM
0.1
Other
equity
US$ MM
921.8
Retained
earnings
US$ MM
962.7
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
-
-
16.0
0.1
(157.8)
0.3
(108.3)
-
-
(8.1)
-
(45.9)
(16.0)
-
-
-
(69.9)
-
-
-
-
-
-
-
-
-
(0.3)
(0.3)
12.0
-
116.5
25.1
(25.0)
-
9.4
-
-
-
-
-
9.5
25.1
-
-
9.4
(45.9)
-
0.1
(157.8)
-
(169.0)
100.0
1,934.9
As at 1 January 2016
Profit and total comprehensive
income for the year
Transactions with owners recognised
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
As at 31 December 2016
0.1
813.5
1,009.3
As at 1 January 2017
Profit and total comprehensive
income for the year
Transactions with owners recognised
directly in equity
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
Share
capital
US$ MM
0.1
Other
equity
US$ MM
813.5
Retained
earnings
US$ MM
1,009.3
Capital
reserve
US$ MM
12.0
Share-based
reserve
US$ MM
100.0
Total
US$ MM
1,934.9
-
-
167.8
-
-
167.8
-
-
-
-
-
-
-
-
22.8
9.4
-
15.8
0.1
(66.4)
13.7
(4.6)
-
(9.4)
-
(47.2)
(15.8)
-
-
-
(72.4)
-
-
(22.8)
-
-
-
-
-
-
-
-
3.5
-
-
-
-
3.5
(47.2)
-
0.1
(66.4)
(11.9)
(11.9)
-
(19.3)
1.8
(108.2)
As at 31 December 2017
0.1
808.9
1,104.7
0.1
80.7
1,994.5
The accompanying notes are an integral part of the financial statements.
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TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CASH FLOWS
For the year ended 31 December 2017
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 buyback of shares by Master Fund
Financing activities
Proceeds from issue of shares
Purchase of Master Fund shares
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 2017
US$ MM
Year ended
31 Dec 2016
US$ MM
47.2
25.4
(25.4)
47.2
66.4
66.4
1.9
(1.9)
(66.4)
(47.2)
(113.6)
-
-
-
45.9
22.6
(22.6)
45.9
157.8
157.8
-
-
(157.8)
(45.9)
(203.7)
-
-
-
The accompanying notes are an integral part of the financial statements.
* The gross dividend payable to shareholders was US$ 63.0 million (31 December 2016: US$ 61.9 million) with a value
equivalent to US$ 15.8 million (31 December 2016: US$ 16.0 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.
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TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2017
Note 1
Corporate Information
Tetragon Financial Group Limited (the “Company” or “Feeder”) was registered in Guernsey on 23 June 2005 as a
company limited by shares, with registered number 43321. All voting shares of the Company are held by Polygon Credit
Holdings II Limited (the “Voting Shareholder”). The Company continues to be registered and domiciled in Guernsey, and
the Company's non-voting shares 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 London Stock Exchange plc ("SFM") (ticker symbol:
TFG.LN). The Company acts as a feeder fund in a “master feeder structure” investing substantially all of its assets in
Tetragon Financial Group Master Fund Limited (the “Master Fund”). The registered office of the Company is 1st Floor
Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ.
The Company’s investment objective is to generate distributable income and capital appreciation. It aims to provide
stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Master Fund’s
investment portfolio comprises a broad range of assets, including bank loans, real estate, equities, credit, convertible
bonds, private equity, infrastructure and TFG Asset Management, a diversified alternative asset management business.
As at 31 December 2017, 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 Manager LP (“Hawke’s Point”), Tetragon Credit Income Partners Limited (“TCIP”) and
GreenOak Real Estate LP (“GreenOak”).
TFG Asset Management LP and Tetragon Financial Management LP, the Company’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 entities, Polygon Global Partners LLP and Equitix Investment
Management Limited, are authorised and regulated by the United Kingdom Financial Conduct Authority.
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 International Financial Reporting
Standards as adopted by the European Union (“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” or “US$”), which is the functional currency of the
Company, expressed in USD millions (unless otherwise stated). The share capital of the Company and its only investment
are denominated in USD. All of the expenses and fees paid by the Company are in USD. Hence, the Board of Directors
determined that USD as functional and presentational currency reflects the Company's primary economic environment.
5
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 2
Significant Accounting Policies (continued)
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. 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 2017, the Company had 100% (31
December 2016: 100%) economic ownership interest in the Master Fund.
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 recognised 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 (31 December 2016: GBP 1,200).
Dividend distributions
Dividend distributions from shares are recognised in the statement of changes in equity, when the shareholders’ right to
receive the payment is established.
6
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 2
Significant Accounting Policies (continued)
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 recognised 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. These options were fully exercised during 2017.
The fair value of options issued to certain founding partners of GreenOak are also recognised 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 other equity based on the
fair value of options at grant date.
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 recognises these compensation costs net of an estimated
forfeiture rate, and recognises 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. The Company
recognises these awards in the cost of the investment with an equivalent credit in share-based compensation reserve.
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 other equity. Any associated stock dividends
accrued on the original award are debited against retained earnings and credited to other equity using the value
determined by the stock reference price at the date of each applicable dividend.
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 certain of their own shares previously held by each as treasury shares to
TFG Holdings I. Where this occurred, the status of the shares was unchanged from an accounting perspective and they
were 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.
7
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 2
Significant Accounting Policies (continued)
Other equity
The share premium and treasury shares columns, previously shown separately in the Statement of Changes in Equity,
have been merged together in a more meaningful presentation under other equity.
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 potentially relevant to the
Company are disclosed below. The Company intends to adopt these standards, if applicable, when they become
effective.
IFRS 9 Financial instruments
IFRS 9, ‘Financial instruments’, (effective for annual periods beginning on or after 1 January 2018), specifies how an entity
should classify and measure financial assets and liabilities, including some hybrid contracts. The standard improves and
simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39.
Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward
unchanged.
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 its only
financial asset currently held at fair value as required by IFRS 10.
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 recognised 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 Company’s accounting policies, management has made the following judgments, which
have the most significant effect on the amounts recognised in the financial statements:
8
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 3
Significant accounting judgments, estimates and assumptions (continued)
Judgments (continued)
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 2017 is included in Note 4.
Note 4
Fair value measurement
Fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised 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.
The Company’s investment in the Master Fund is classified as Level 3 (31 December 2016: Level 3) due to the fact that the
NAV of the Master Fund was not observable on the market.
9
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 4
Fair value measurement (continued)
Fair value hierarchy (continued)
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 2017 and 31 December 2016.
Balance at start of year
Additions
Proceeds
Gain on investment in the Master Fund
Balance at end of year
Gain for the period included in profit or loss for assets held at the end of
the reporting period
31 Dec 2017
US$ MM
1,942.0
21.2
(66.4)
111.6
2,008.4
31 Dec 2016
US$ MM
2,020.2
25.5
(157.8)
54.1
1,942.0
111.6
54.1
Dividend income from the Master Fund amounted to US$ 88.4 million (31 December 2016: US$ 84.5 million). Total net
gain on the Master Fund investment, including dividend income, amounted to US$ 200.0 million (31 December 2016: US$
138.5 million).
Valuation technique
The level in the fair value hierarchy within which the fair value measurement is categorised 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
judgment, considering factors specific to the asset or liability.
The determination of what constitutes observable requires significant judgment 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 the Master Fund does not have any redemption restriction.
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. Please refer to Note 4 of the Master Fund's financial
statements for more information on valuation techniques and assumptions used to value the investments held by the
Master Fund.
10
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 4
Fair value measurement (continued)
Valuation technique (continued)
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$ 20.1 million (2016: 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 5
Financial Risk Review
All of the Company’s financial assets are invested in the shares of Master Fund. The Master Fund can buyback its shares
from the Company 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:
Credit Risk
“Credit risk” is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment
that it has entered into with the Company, resulting in a financial loss to the Company. The Company is exposed to credit
risk through investments made by the Master Fund.
Management of credit risk in the Master Fund is detailed in Note 7 of the Master Fund's financial statements.
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 7 of the Master Fund’s financial statements.
(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 financial assets denominated in Euro, Sterling, Norwegian Krone and
Japanese Yen in addition to US Dollars. The Master Fund’s exposure to currency risk rate risk is detailed in Note 7 of the
Master Fund’s financial statements.
11
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 5
Financial Risk Review (continued)
(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 2017 was US$ 2,008.4 million (31 December 2016: US$ 1,942.0 million).
As at 31 December 2017, 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$ 20.1 million for (31 December 2016: US$ 19.4 million).
A weakening of price by 1% will have an equal but opposite effect.
Other price risk in the Master Fund is detailed in Note 7 of the Master Fund’s financial statements.
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 the Master Fund is detailed in Note 7 of the Master Fund’s financial statements.
Note 6
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 was held in escrow (along with accrued stock dividends), by the escrow agent
pursuant to the terms of the escrow agreement. The tranches were released in 2013 to 2016 with the final tranche released
in 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 Payment (“IFRS 2”). The Master Fund
recognises 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 recognises this as an equity settled
transaction through the share-based employee compensation reserve with a corresponding entry in its investment in
Master Fund. The charge for the year ended 31 December 2017 amounted to US$ 3.5 million (31 December 2016: US$ 9.4
million). Please refer to Note 9 for the movements during the year.
In the fourth quarter of 2015, the Company bought back approximately 5.6 million of its non-voting shares in a tender offer
for US$ 57.4 million (including fees and expenses) 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
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 Tetragon Optional Stock Dividend Plan (See Note 9).
12
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 6
Share-Based Payments (continued)
As the Company has contributed these shares, under IFRS 2, TFG Asset Management is considered to be the settling entity
and as a result the Company recorded the imputed value of the shares contributed to escrow as credit to share-based
compensation reserve in the year in which the shares were acquired for this purpose, with a corresponding debit to the cost
of investment in Master Fund
The Company also holds 2.1 million shares in an escrow account related to deferred incentive scheme. Please refer to Note
8 for details of this arrangement.
Note 7
Share Options
On 21 April 2017, the Investment Manager exercised the 12,545,330 options it received from the Company in recognition of
the work it performed in successfully arranging its 2007 global offering and the associated raising of new capital.
The exercise price per share for the options was set at the Company’s IPO offer price of US$ 10.00. These options were
settled by the Company on a cashless basis, and the Investment Manager received 2,382,395 non-voting shares – the net
shares resulting from the exercise of the options based on the then-current price of US$ 12.3442 per non-voting share.
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% during 2017, 25% are exercisable from
1 January 2018, expiring a year later.
During the year ended 31 December 2017, US$ 0.7 million (31 December 2016: US$ 0.8 million) shares with fair value at grant
date of US$ 0.2 million (31 December 2016: US$ 0.3 million), were issued as a result of options being exercised. The
weighted average price of the Company's shares was US$ 12.72 per share during 2017 (31 December 2016: US$ 12.34).
Note 8
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.
13
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 8
Incentive Fee (continued)
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 Hurdle for Q1 2018 is 4.344788%.
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 incentive fee for the year ended 31 December 2017 was US$ 32.2 million (31 December 2016: US$ 22.0 million). As at
31 December 2017, US$ 13.9 million was outstanding (31 December 2016: US$ 7.1 million).
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
prior to transitioning to IFRS on 1 January 2015. The result of the foregoing was an increase in NAV and an incentive fee
payable of US$ 25.1 million, previously recognised.
The Investment Manager agreed to accept payment of this portion of the incentive fee in the form of shares, which is 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 businesses, and subject to a “clawback” mechanism should the NAV of the TFG Asset
Management businesses decline at the end of the escrow period or the investment management agreement is
terminated. The expense has been recognised in full in the year in which the NAV event occurred through equity and the
share-based compensation reserve. As at 31 December 2017, 2.1 million shares (31 December 2016: nil) are held in
escrow in relation to deferred incentive fees.
Note 9
Share Capital
Authorised
The Company has an authorised 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.
14
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 9 Share Capital (continued)
Voting shares
The 10 voting shares in issue were issued at par and are owned by the Voting Shareholder, which is a non-U.S. affiliate of
the Investment Manager. The voting shares are the only shares of the Company entitled to vote for the election of
Directors and on all other matters put to a vote of shareholders, subject to the limited rights of the shares described
below. The voting shares are not entitled to receive dividends.
Shares
The shares are not entitled to vote on any matter other than limited voting rights in respect of variation of their class
rights. The shares carry a right to any dividends or other distributions declared by the Company. The shares are subject
to certain transfer restrictions as set out in the Company’s Memorandum and Articles of Incorporation.
The Directors, upon the recommendation of the Investment Manager and with prior approval of a resolution of voting
shares, may allot, issue or otherwise dispose of shares to such persons, at such times, for such consideration and on such
terms and conditions as they deem necessary or desirable. There are no pre-emption rights attaching to any shares.
The Directors, upon the recommendation of the Investment Manager, may grant options over the shares. The Company
may repurchase shares and hold such repurchased shares as treasury shares.
Share Transactions
Shares in issue at 1 January 2016
Stock dividend
Issued through release of tranche of escrow
shares
Issue through exercise of GreenOak options
Shares purchased during the year
Shares transferred to Treasury
Shares in issue at 31 December 2016
Stock dividend
Issued through release of tranche of escrow shares
Issue through exercise of TFM options
Issue through exercise of GreenOak options
Shares transferred to escrow for deferred incentive fee
Shares purchased during the year
Shares in issue at 31 December 2017
* TFG Holdings I was closed during 2016.
Voting Non-Voting Treasury Shares held in Shares held in
Escrow
Shares
No. MM
No.
12.3
10
0.8
-
Shares TFG Holdings I*
No. MM
17.0
-
Shares
No. MM No. MM
12.8
(0.7)
95.9
1.6
-
-
-
-
10
-
-
-
-
-
-
10
3.2
0.7
(14.3)
-
87.1
1.4
3.4
2.4
0.7
-
(4.9)
90.1
0.6
(0.7)
4.3
27.0
43.3
(1.8)
-
(2.4)
(0.7)
(2.0)
4.9
41.3
-
-
10.0
(27.0)
-
-
-
-
-
-
-
-
(3.8)
-
-
-
9.3
0.4
(3.4)
-
-
2.0
-
8.3
15
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 9
Share Capital (continued)
Optional Stock Dividend
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$ 63.0 million (31 December 2016: US$ 61.9 million) was declared, of which US$ 47.2
million was paid out as a cash dividend (31 December 2016: US$ 45.9 million), and the remaining US$ 15.8 million (31
December 2016: US$ 16.0 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 2017, there was no share repurchase program in
place.
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 2017, the Company and the Master Fund announced that under the terms of a “modified Dutch auction”, the
Company had accepted for purchase approximately 4.8 million (31 December 2016: 14.3 million) Company non-voting
shares at an aggregate cost of US$ 65.4 million (31 December 2016: US$ 151.1 million), including applicable fees and
expenses of US$ 0.4 million (31 December 2016: US$ 1.1 million). Additionally during 2017, the Master Fund agreed to
purchase 0.1 million shares for US$ 1.0 million from TFG Asset Management LP. The Company purchased the shares from
the Master Fund.
During 2016, the Company 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.
Escrow shares
As part of the acquisition of TFG Asset Management, the Aggregate Consideration of 11.7 million Feeder shares were
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 3.3 million shares (31 December 2016: 3.8 million shares) were issued to the Company as a
result of an equivalent number of shares being released from escrow.
16
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 9
Share Capital (continued)
Escrow shares (continued)
Of these approximately 2.5 million (31 December 2016: 3.0 million) shares were deemed to be in relation to the original
Company escrow shares, and a value of US$ 21.1 million (31 December 2016: US$ 25.0 million) was debited against
share-based compensation reserves, using the transaction share price of US$ 8.43.
In addition, approximately 0.8 million shares (31 December 2016: 0.4 million shares) were deemed to be related to the
stock dividends awarded on the original shares released and an amount of US$ 9.0 million (31 December 2016: US$ 8.1
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 forms 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 (2016: 0.3 million) shares were allocated to this account. During 2017, 0.2 million shares were
released from escrow. As a result, US$ 0.4 million (31 December 2016: nil) was released from Retained Earnings relating
to the dividend shares released during the year using the stock reference price at each applicable dividend date. US$ 1.7
million (31 December 2016: nil) was transferred from share-based compensation reserve to other equity, using the
original transaction price of US$ 10.00.
During 2017, 2.0 million shares related to deferred incentive fees were transferred to an escrow account. These shares are
eligible for stock dividends and 0.1 million shares were allocated as dividends.
Capital Reserve
The capital reserve is in relation to the GreenOak and Investment Manager options. Please see Note 7 for details
regarding these share options.
Share-Based Compensation Reserve
The balance in share-based compensation reserve is related to the following transactions.
Share-based employee compensation - TFG Asset Management acquisition
Share-based employee compensation - equity based awards
Deferred incentive fee
Note 10
Related-Party Transactions
31 Dec 2017
US$ MM
-
55.6
25.1
80.7
31 Dec 2016
US$ MM
17.5
57.4
25.1
100.0
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 8.
17
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 10
Related-Party Transactions (continued)
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 options were
exercised during the period, please refer to Note 7 for details.
The Company invests substantially all of its assets in the Master Fund, a Guernsey-based closed-ended investment
company which has the same Investment Manager as the Company.
The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’
annual fee is US$ 100,000 as compensation for service on the Boards of Directors of both the Company and the Master
Fund. The Directors have the option to elect to receive shares in the Company instead of the quarterly fee.
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 2017, Frederic Hervouet has elected to receive shares in lieu of his full
compensation as director. William Rogers has elected to receive shares in lieu of half of his compensation from Q1 2017.
During the year, Frederic Hervouet and William Rogers received 7,879 and 2,938 shares respectively (31 December 2016:
10,157 and nil shares respectively). The number of shares to be issued instead of the fee for the fourth quarter will be
determined as part of the fourth quarter 2017 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.
During 2017, the Master Fund purchased 0.1 million (31 December 2016: nil) shares from TFG Asset Management LP for
US$ 1.0 million using the then-current share price of US$ 13.12. The Company purchased an identical number of shares
from Master Fund in exchange of shares held in the Master Fund. During 2016, the Company purchased 0.6 million shares
from Michael Humphries, a manager of certain Polygon funds. Please see Note 9 for details.
Reade Griffith, Paddy Dear, 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 2017, with
interests of 11,868,998, 4,044,303, 160,812, 50,574 and 3,938 shares respectively (31 December 2016: 8,411,075, 2,756,801,
144,410, 30,419 and 1,000 shares respectively).
As described in Note 6, TFG Asset Management, including Polygon’s asset management businesses and infrastructure
platform, and interests in LCM and GreenOak, were acquired on 28 October 2012. The shares issued in consideration
were held in escrow for release over the period 2013 to 2017.
Reade Griffith and Paddy Dear were initially allocated 5,539,954 and 1,955,291 shares, respectively. During 2017, Reade
Griffith and Paddy Dear received 2,474,887 and 873,487 share respectively in relation to this transaction as the final
tranche was released.
18
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (continued)
For the year ended 31 December 2017
Note 10
Related-Party Transactions (continued)
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 their employment with the 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 2017 total compensation paid to them each in aggregate was US$ 100,000 (31 December 2016: US$ 100,000).
The Company has entered into share-based employee reward schemes with TFG Asset Management LP, a subsidiary of the
Master Fund. See Note 6 and Note 9 for details. For related party transactions at the Master Fund level, please refer to Note
17 of the Master Fund financial statements.
Note 11
Dividends
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
Quarter ended 31 December 2016 of US$ 0.1725 per share
Quarter ended 31 March 2017 of US$ 0.1725 per share
Quarter ended 30 June 2017 of US$ 0.1750 per share
Quarter ended 30 September 2017 of US$ 0.1750 per share
31 Dec 2017
US$
MM
-
-
-
-
15.1
15.6
15.8
16.5
63.0
31 Dec 2016
US$
MM
15.9
16.1
14.6
15.3
-
-
61.9
The fourth quarter dividend of US$ 0.1775 per share was approved by the Directors on 26 February 2018.
Note 12
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
19
Year ended
31 Dec 2017
US$ MM
Year ended
31 Dec 2016
US$ MM
167.8
116.5
90.0
92.1
-
6.2
0.6
2.1
98.9
3.2
6.0
3.5
2.0
106.8
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
For the year ended 31 December 2017
Note 12
Earnings per share (continued)
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 – equity based awards and deferred incentive fee shares, it is
assumed that all of the shares currently held in escrow will be released, thereby increasing the weighted average number
of shares.
In respect of share options, the intrinsic value of the options 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.
Note 13
Segment information
IFRS 8 Operating Segments 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 organised 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 US Dollars. The Company's only investment is in the 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 2017
49.6%
42.8%
5.9%
1.8%
31 Dec 2016
51.6%
40.8%
5.0%
2.6%
The Directors have evaluated the period up to 26 February 2018, 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
Approvals of Financial Statements
The Directors approved and authorised for issue the financial statements on 26 February 2018.
20
FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2017
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
FINANCIAL STATEMENTS
For the year ended 31 December 2017
CONTENTS
DIRECTORS’ REPORT
INDEPENDENT AUDITOR’S REPORT
FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF CASH FLOWS
NOTES TO THE FINANCIAL STATEMENTS
OTHER INFORMATION
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS
PAGE
1
5
7
8
9
10
11
51
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT
For the year ended 31 December 2017
The Directors present to the shareholders their report together with the audited financial statements for the year ended
31 December 2017.
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”). All non-voting shares are held by Tetragon Financial Group Limited (the “Feeder”).
The Fund continues to be registered and domiciled in Guernsey.The registered office of the Fund is 1st Floor Dorey Court,
Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ.
The Fund’s investment objective is to generate distributable income and capital appreciation. It aims to provide stable
returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Fund is a closed-
ended investment company that invests in a broad range of assets, including bank loans, real estate, equities, credit,
convertible bonds, private equity, infrastructure and TFG Asset Management, a diversified alternative asset management
business. Where appropriate, 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.
As at 31 December 2017, 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 Manager LP (“Hawke’s Point”), Tetragon Credit Income Partners Limited (“TCIP”) and
GreenOak Real Estate LP (“GreenOak”).
TFG Asset Management LP and Tetragon Financial Management LP., 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
Investment
Asset Management’s
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 8. 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.
1
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2017
DIRECTORS
The Directors who held office during the year were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet*
David Jeffreys*
William Rogers Jr.*
* 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 2017, Frederic Hervouet has elected to receive shares in lieu of his full
compensation as director. William Rogers has elected to receive shares in lieu of half of his compensation from Q1 2017.
During the year, Frederic Hervouet and William Rogers received 7,879 and 2,938 shares respectively (31 December 2016:
10,157 and nil shares respectively). 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$ 0.1725 per share for the Quarter Ended 31 December 2016, US$ 0.1725 per share for the Quarter Ended 31 March
2017, US$ 0.1750 per share for the Quarter Ended 30 June 2017 and US$ 0.1750 per share for the Quarter Ended 30
September 2017. On 26 February 2018, the Directors have declared a dividend amounting to US$ 0.1775 per share for the
Quarter Ended 31 December 2017. The total dividend declared for the year ended 31 December 2017 amounted to US$
US$ 0.7000 per share (31 December 2016: US$ 0.6725 per share).
The Fund also paid a dividend of US$ 25.4 million (31 December 2016: US$ 22.6 million) to the Feeder to fund the
Feeder’s incentive fees liability.
2
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2017
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.
Accordingly, the Directors have elected to prepare the financial statements in conformity with International Financial
Reporting Standards as adopted by the EU 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;
assess the Fund’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern; and
use the going concern basis of accounting unless they either intend to liquidate the Fund or to cease operations,
or have no realistic alternative but to do so.
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 are responsible for such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and
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 Directors are responsible for the maintenance and integrity of the corporate and financial information included on
the Fund’s website, and for the preparation and dissemination of the financial statements. Legislation in Guernsey
governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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. The Feeder reports against the
Association of Investment Companies (“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.
The Directors confirm that they have complied with the above requirements.
DISCLOSURE OF INFORMATION TO THE 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.
3
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
DIRECTORS’ REPORT (continued)
For the year ended 31 December 2017
STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued)
AUDITOR
KPMG Channel Islands Limited are the appointed independent auditor 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 auditor of the
Fund is to be proposed at the forthcoming Annual General Meeting.
Signed on behalf of the Board of Directors by:
Rupert Dorey,
Director
Date: 26 February 2018
David Jeffreys,
Director
4
Independent auditor’s report to the members of Tetragon Financial Group Master Fund Limited
Our opinion is unmodified
We have audited the financial statements (the “Financial Statements”) of Tetragon Financial Group Master Fund Limited
(the “Fund”), which comprise the statement of financial position as at 31 December 2017, the statements of
comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant
accounting policies and other explanatory information.
In our opinion, the accompanying financial statements:
give a true and fair view of the financial position of the Fund as at 31 December 2017, and of the Fund’s financial
performance and the Fund’s cash flows for the year then ended;
are prepared in accordance with International Financial Reporting Standards as adopted by the EU; and
comply with The Companies (Guernsey) Law, 2008
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the
Fund in accordance with, UK ethical requirements including FRC Ethical Standards. We believe that the audit evidence
we have obtained is a sufficient and appropriate basis for our opinion.
We have nothing to report on going concern
We are required to report to you if we have concluded that the use of the going concern basis of accounting is
inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis
for a period of at least twelve months from the date of approval of the Financial Statements. We have nothing to report
in these respects.
We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the Financial
Statements. Our opinion on the Financial Statements does not cover the other information and we do not express an
audit opinion or any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements
audit work, the information therein is materially misstated or inconsistent with the Financial Statements or our audit
knowledge. Based solely on that work we have not identified material misstatements in the other information.
We have nothing to report on other 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.
5
Independent auditor’s report to the members of Tetragon Financial Group Master Fund Limited
(continued)
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on pages 3 and 4, the Directors are responsible for: the preparation of
the Financial Statements including being satisfied that they give a true and fair view; such internal control as they
determine is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error; assessing the Fund’s ability to continue as a going concern, disclosing, as applicable,
matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate
the Fund or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of the Financial Statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
The purpose of this report and restrictions on its use by persons other than the Fund’s members as a
body
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.
KPMG Channel Islands Limited
Chartered Accountants, Guernsey
26 February 2018
6
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December 2017
Note
31 Dec 2017 31 Dec 2016
US$ MM
US$ MM
Assets
Non-derivative 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
4
7
8
9
10
12
7
11
1,613.6
17.4
1.9
57.2
365.5
2,055.6
38.0
6.6
2.6
47.2
1,520.0
22.2
0.6
51.0
392.6
1,986.4
38.0
4.1
2.3
44.4
2,008.4
1,942.0
0.1
754.2
1,254.1
-
2,008.4
0.1
772.5
1,151.9
17.5
1,942.0
Millions
Millions
13
90.1
87.1
US$ 22.28
US$ 22.29
Net assets
Equity
Share capital
Other equity
Retained earnings
Capital contribution
Shares outstanding
Number of shares
Net Asset Value per share
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Rupert Dorey,
Director
Date: 26 February 2018
David Jeffreys,
Director
7
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2017
Net gain on non-derivative financial assets at fair value through profit or loss
Net (loss)/gain on derivative financial assets and liabilities
Interest income
Net foreign exchange loss
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
The accompanying notes are an integral part of the financial statements.
Note
Year ended
31 Dec 2017
US$ MM
Year ended
31 Dec 2016
US$ MM
2
2
17
15
17
12
247.9
(11.0)
5.8
(0.1)
242.6
(29.5)
(3.5)
(3.3)
(0.4)
(2.8)
(39.5)
203.1
(3.1)
200.0
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
138.5
8
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2017
As at 1 January 2016
Profit and total comprehensive
income for the year
Transactions with owners
recognised 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
Other
equity
US$ MM
Retained
earnings
US$ MM
Capital
contribution
US$ MM
Total
US$ MM
0.1
881.1
1,105.9
33.1
2,020.2
-
-
-
-
-
-
-
-
-
-
-
138.5
-
138.5
16.0
25.0
8.1
-
-
-
0.1
(157.8)
(108.6)
(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
772.5
1,151.9
17.5
1,942.0
As at 1 January 2017
Profit and total comprehensive
income for the year
Transactions with owners
recognised directly in equity
Stock dividends
Shares released from escrow
Dividends on shares released from escrow
Shares issued to settle share options
Share-based compensation
Dividends paid to shareholder
Dividends paid to Feeder to settle
incentive fee liability
Issue of shares
Purchase of treasury shares
Total
Share capital
US$ MM
Other
equity
US$ MM
Retained
earnings
US$ MM
Capital
contribution
US$ MM
Total
US$ MM
0.1
772.5
1,151.9
17.5
1,942.0
-
-
200.0
-
200.0
-
-
-
-
-
-
-
-
-
15.8
21.0
9.4
1.8
-
-
-
0.1
(66.4)
(18.3)
(15.8)
-
(9.4)
-
-
(47.2)
(25.4)
-
-
(97.8)
-
(21.0)
-
-
3.5
-
-
-
-
(17.5)
-
-
-
1.8
3.5
(47.2)
(25.4)
0.1
(66.4)
(133.6)
As at 31 December 2017
0.1
754.2
1,254.1
-
2,008.4
The accompanying notes are an integral part of the financial statements.
9
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
STATEMENT OF CASH FLOWS
For the year ended 31 December 2017
Operating activities
Profit for the year
Adjustments for:
Gains on investments and derivatives
Amortisation of CLOs
Share-based employee compensation
Operating cash flows before movements in working capital
(Increase) / decrease in receivables
Increase / (decrease) in payables
(Increase) / decrease 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 to fund the Feeder’s 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
Cash interest received
Cash interest paid
Year ended
31 Dec 2017
US$ MM
Year ended
31 Dec 2016
US$ MM
200.0
138.5
(194.8)
191.2
3.5
199.9
0.1
0.3
(6.2)
194.1
217.2
10.4
(311.7)
(84.1)
-
1.9
(66.4)
(47.2)
(25.4)
(137.1)
(27.1)
392.6
365.5
5.8
(3.1)
(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
1.7
(1.5)
The accompanying notes are an integral part of the financial statements.
* The gross dividend payable to shareholders was US$ 63.0 million (31 December 2016: US$ 61.9 million) with a value
equivalent to US$ 15.8 million (31 December 2016: US$ 16.0 million) elected to be taken by the dividend recipient in
shares rather than cash.
10
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
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 17, Related-Party Disclosures.
Note 2
Significant Accounting Policies
Statement of Compliance
The financial statements of the Fund have been prepared in accordance with International Financial Reporting
Standards as adopted by the European Union (“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” or “US$”), 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 accordance with IFRS 10, the Fund is an investment entity and, as such, does not consolidate the entities it controls
where they are deemed to be subsidiaries. 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.
After making enquiries and given the nature of the Fund and its investments, 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 Fund is able to continue for the foreseeable future and at least twelve
months from the date of this report.
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.
11
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
Foreign Currency Translation (continued)
Foreign currency exchange differences arising on translation and realised gains and losses on disposals or settlements of
monetary assets and liabilities are recognised 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 recognised as
components of net gain or loss on financial assets and liabilities at FVTPL.
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 also
includes derivatives. 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, corporate bonds 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
in associates using the equity
method. Instead, the Fund has determined that it qualifies to elect to measure its investments in associates
at FVTPL.
investments
its
Financial assets at amortised 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.
12
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
Other financial liabilities at amortised 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 recognises 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 recognised on the trade date (i.e.
the date that the Fund commits to purchase or sell the asset).
(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 recognised 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 amortised 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 amortised 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
derecognised 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 recognised to the extent of the Fund’s continuing involvement in the asset.
In that case, the Fund also recognises 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.
13
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
The Fund derecognises 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 recognised amounts and there is an intention to settle
on a net basis, or to realise the asset and settle the liability simultaneously.
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
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 ongoing basis.
For all other financial instruments not traded in an active market, the fair value is determined by using observable inputs
where available and 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 categorisation (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, credit default swaps and contracts for difference. Refer to the accounting policy for loans and receivables for
recognition and measurement.
14
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
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 related interest, dividends 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.
Finance Costs
Interest and fees charged on borrowings are recognised through profit or loss in the Statement of Comprehensive
Income using the effective interest method.
Expenses
Expenses and fees, including Directors’ fees, are recognised through profit or loss in the Statement of Comprehensive
Income on an accruals basis.
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 (31 December 2016: GBP 1,200).
Dividend distribution
Dividend distributions are recognised 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 recognises these compensation costs net of an estimated forfeiture rate, and
recognises 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 recognises share-based payments expense in the Statement of Comprehensive
Income and corresponding capital contribution in equity.
15
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
Joint arrangements
The Fund entered into an arrangement with the Feeder through the establishment of TFG Holdings I. The Fund and the
Feeder transferred certain of their own shares previously held by each of them as treasury shares to TFG Holdings I.
Where this occurred, the status of the shares was unchanged from an accounting perspective and they were 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.
Other equity
The share premium and treasury shares columns, previously shown separately in the Statement of Changes in Equity,
have been merged together in a more meaningful presentation under other equity.
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 recognised as interest income in the Statement of Comprehensive Income.
New standards issued but not yet effective
The Fund has considered all the standards and interpretations that are issued, but not yet effective, up to the date of
issuance of the Fund’s financial statements. Standards and interpretations that are relevant to the Fund are disclosed
below. The Fund 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 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.
16
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 2
Significant Accounting Policies (continued)
IFRS 9 Financial instruments (continued)
(a) Classification and measurement
Based on the Fund’s initial assessment, this standard is not expected to have a material impact on the classification of
financial assets and financial liabilities of the Fund. This is because:
- the financial instruments classified as held-for-trading under IAS 39 (derivatives) will continue to be classified as such
under IFRS 9;
- other financial instruments currently measured at FVTPL under IAS 39 are designated into this category because they
are managed on a fair value basis in accordance with a documented business model. Accordingly, these financial
instruments will be mandatorily measured at FVTPL under IFRS 9; and
- financial instruments currently measured at amortised cost are: cash balances and receivables. These instruments
meet the solely principal and interest criterion and are held in a held-to-collect business model. Accordingly, they will
continue to be measured at amortised cost under IFRS 9.
- Payables and borrowings are held at amortised cost and will continue to be held on this basis under IFRS 9.
(b) Impairment
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model also
applies to certain loan commitments and financial guarantee contracts but not to equity investments. Under IFRS 9,
credit losses are recognised earlier than under IAS 39.
Based on the Fund’s initial assessment, changes to the impairment model are not expected to have a material impact on
the financial assets of the Fund. This is because:
- the majority of the financial assets are measured at FVTPL and the impairment requirements do not apply to such
instruments; and
- the financial assets at amortised cost are short-term (i.e. no longer than 12 months), of high credit quality and/or highly
collateralised. Accordingly, the expected credit losses on such assets are expected to be small.
(c) Hedge accounting
The Fund has not applied hedge accounting under IAS 39 and will not apply hedge accounting under IFRS 9 either.
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 recognised 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.
17
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 3
Significant Accounting Judgments, Estimates and Assumptions (continued)
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 recognised in the financial statements:
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 the 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.
18
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 3
Significant Accounting Judgments, Estimates and Assumptions (continued)
Assessment of investment funds and CLOs as structured entities (continued)
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.
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 levelling please refer to
Note 4.
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss
Fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised 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.
19
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
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 2017:
Recurring fair value measurement of assets and liabilities
Level 1
US$ MM
Level 2
US$ MM
Level 3
US$ MM
Non-derivative financial assets designated at
FVTPL
CLO Equity Tranches
CLO Mezzanine
Loans and Corporate Bonds
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management (Note 6)
Total non-derivative financial assets
designated at FVTPL
Derivative financial assets held for trading
Contracts for difference (asset)
Foreign exchange option (asset)
Forward foreign exchange contracts (asset)
Total derivative financial assets held for trading
Derivative financial liabilities held for trading
Foreign exchange option (liability)
Forward foreign exchange contracts (liability)
Credit default swaps (liability)
Total derivative financial liabilities held for
trading
Total
Fair Value
US$ MM
305.9
0.7
34.0
54.9
42.2
745.2
430.7
305.9
-
-
-
42.2
295.4
430.7
1,074.2
1,613.6
-
-
-
-
-
-
-
-
14.2
0.1
3.1
17.4
(0.1)
(5.1)
(1.4)
(6.6)
-
0.7
34.0
-
-
449.8
-
484.5
14.2
0.1
3.1
17.4
(0.1)
(5.1)
(1.4)
(6.6)
-
-
-
54.9
-
-
-
54.9
-
-
-
-
-
-
-
-
20
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
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
Non-derivative financial assets designated at
FVTPL
CLO Equity Tranches
CLO Mezzanine
Loans
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management (Note 6)
Total non-derivative financial assets
designated at FVTPL
Derivative financial assets held for trading
Forward foreign exchange contracts (asset)
Contracts for difference (asset)
Total derivative financial assets held for trading
Derivative financial liabilities held for trading
Forward foreign exchange contracts (liability)
Credit default swaps
Total derivative financial liabilities held for
trading
Transfers between levels
Level 1
US$ MM
-
-
-
12.7
-
-
-
12.7
-
-
-
-
-
-
Level 2
US$ MM
Level 3
US$ MM
Total
Fair Value
US$ MM
443.7
1.8
6.6
12.7
43.3
604.1
407.8
443.7
-
-
-
25.0
234.2
407.8
1,110.7
1,520.0
-
-
-
-
-
-
11.1
11.1
22.2
(3.2)
(0.9)
(4.1)
-
1.8
6.6
-
18.3
369.9
-
396.6
11.1
11.1
22.2
(3.2)
(0.9)
(4.1)
During the year ended 31 December 2017, an unlisted stock held at level 2 of US$ 18.3 million at 31 December 2016 was
transferred to level 1 following its listing, and then remaining quoted on an active market. There were no transfers between
levels in 2016.
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 the Fund’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.
21
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Valuation process (framework) (continued)
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.
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 2017.
Balance at start of year
Purchases of investments
Proceeds from sale of investments
Realised (loss) / gain and change in
unrealised (depreciation) /
appreciation
Amortisation*
Balance at end of year
Unrealised 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
443.7
54.0
-
(0.6)
(191.2)
305.9
Unlisted
Stock
US$ MM
25.0
15.2
(13.2)
15.2
-
42.2
Investment
Funds and
Vehicles
US$ MM
234.2
149.2
(103.5)
TFG Asset
Management
US$ MM
407.8
-
(87.4)
15.5
-
295.4
110.3
-
430.7
Total
US$ MM
1,110.7
218.4
(204.1)
140.4
(191.2)
1,074.2
51.7
10.9
(0.1)
101.4
163.9
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
Realised (loss) / gain and change in
unrealised (depreciation) /
appreciation
Amortisation*
Balance at end of year
Unrealised 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
* Amortisation for CLOs is the deemed repayment of principal
22
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Level 3 reconciliation (continued)
Unrealised gains / losses arising on level 3 assets are included in net gains on financial assets at fair value through profit or
loss.
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
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, 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 utilise, 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 2017, key modelling assumptions used are disclosed below. The modelling 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 2.2% (31 December 2016: 2.3%), 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% (31 December 2016: 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. (31 December 2016: 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 310 bps (31 December 2016: 365 bps) on broadly U.S.
syndicated loan deals which are still in their reinvestment periods. Middle Market loan
deals are all through their reinvestment period.
23
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Valuation techniques (continued)
CLO equity tranches (continued)
European CLO equity tranche investments –
Constant Annual Default
Rate (“CADR”)
Approximately 2.1% (31 December 2016: 2.1%), which is 1.0x the original WARF-derived
base-case default rate for the life of the transaction.
Recovery Rate
Prepayment Rate
69% (31 December 2016: 68%), which is 1.0x of the original base-case assumed weighted-
average recovery rate, for the life of the transaction.
20% p.a. (31 December 2016: 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.
When determining the fair value of the equity tranches, a discount rate is applied to the expected future cash flows derived
from the third party valuation model. The discount rate applied to those future cash flows reflects the perceived level of risk
that would be used by another market participant in determining fair value. In determining the discount rates to use an
analysis of the observable risk premium data as well as the individual deal’s structural strength and credit quality is
undertaken. At 31 December 2017, a discount rate of 10% for U.S. 1.0 deals and European deals (31 December 2016: 11%)
has been utilised. At 31 December 2017, for U.S. 2.0 deals the discount rate applied is 11% (31 December 2016: 11%) unless
the deal is within its non-refinancing period, in which case the deal IRR is utilised as the discount rate. For deals in this
category the weighted average IRR or discount rate is 12.4% (31 December 2016: 13.4%).
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 change the discount rate by 1%. Changing the discount rate and keeping all other variables constant
would have the following effects on net assets and profits:
-1% discount rate
+1% discount rate
31 Dec 2017
US$ MM
31 Dec 2016
US$ MM
7.6
(7.2)
12.2
(14.3)
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. TCIP is valued using
DCF approach.
24
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Valuation techniques (continued)
TFG Asset Management (private equity in asset management companies) (continued)
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%.
The Market Multiple Approach applies a multiple considered to be 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 6 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 8.75%, EBITDA multiple 6.75x, DLOL 15%
(31 December 2016: 9.5%, 6.0x, 15%)
Discount rate 11.0%, P/AUM multiple 2.1%, DLOL 15%
(31 December 2016: 11.5%, 1.6%, 15%)
Discount rate 12.5%, EBITDA multiple 7.0x, DLOL 20 %
(31 December 2016: 12.5%, 7.0x, 20%)
GreenOak
Market Multiples
Blended EBITDA multiple 11.1x (31 December 2016: 11.7x)
TCIP
DCF
Discount rate 11.0% (31 December 2016: 12.5%)
25
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or 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:
31 December 2017
Investment
Favorable
Unfavorable
Equitix
LCM
Polygon
GreenOak
TCIP
31 December 2016
US$ 14.6m
EBITDA multiple 7.25x, Discount rate 8.25%
(US$ 15.9m)
EBITDA multiple 6.25x, Discount rate 9.25%
US$ 18.4m
P/AUM multiple 2.4%, Discount rate 10.0%
(US$ 18.4m)
P/AUM multiple 1.8%, Discount rate 12.0%
US$ 4.0m
EBITDA multiple 7.4x , Discount rate 11.5%
(US$ 4.3m)
EBITDA multiple 6.6x , Discount rate 13.5%
US$ 4.0m
EBITDA multiple 11.7x
US$ 2.0m
Discount factor 10.0%
(US$ 3.4m)
EBITDA multiple 10.5x
(US$ 2.0m)
Discount factor 12.0%
Investment
Favorable
Unfavorable
Equitix
LCM
Polygon
GreenOak
US$ 17.5m
EBITDA multiple 6.5x , 40% primary
unsecured revenues, 75% fund management
unsecured revenues
(US$ 17.5m)
EBITDA multiple 5.5x , 30% primary unsecured
revenues, 50% fund management unsecured
revenues
US$ 15.8m
P/AUM multiple 1.9%, Discount rate 10.5%
(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%
26
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Valuation techniques (continued)
Investment funds and vehicles
Investments in unlisted investment funds, classified as level 2 and level 3 in the fair value hierarchy, are valued utilising
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. 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$ 3.0
million (31 December 2016: 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 fair value of an earn-out option based on forecast revenues.
A 1% increase in the value of unlisted stock included in level 3 will increase net assets and profits of the Fund by US$ 0.4
million (31 December 2016: US$ 0.2 million).
Listed stock
For listed stock in an active market, the closing exchange price is utilised as the fair value price.
Loans and corporate bonds
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.
The corporate bonds held by the Fund are valued using the broker quotes obtained at the valuation date.
Forward currency contracts and currency options
Forward currency contracts and currency options are recognised 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. The currency options
are recognised initially at the amount of premium paid or received.
27
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 4
Financial Assets and Liabilities at Fair Value through Profit or Loss (continued)
Valuation techniques (continued)
Contracts for difference
The Fund enters into contracts for difference (“CFDs”) arrangements with financial institutions. 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 market prices 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. Unrealised
gains are reported as an asset and unrealised losses are reported as a liability in the Statement of Financial Position.
Note 5
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 3, 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. The gross asset value
(“GAV”) is the net asset value of the fund before deducting performance fees.
28
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 5
Interest in Other Entities (continued)
Investment in unconsolidated structured entities (continued)
As at 31 December 2017:
CLO Equity
U.S. CLOs1
Investment Funds
Equities
Polygon European Equity Opportunity Fund2
Polygon Global Equities Fund2
Credit
Polygon Distressed Opportunities Fund2
Polygon Convertible Opportunity Fund2
Tetragon Credit Income II3
Other
Hawke's Point Holdings LP3
Other Real Estate
As at 31 December 2016:
CLO Equity
U.S. CLOs1
Investment Funds
No. of
invest-
ments
Range of
nominal
US$ MM
Average
nominal
US$ MM
Carrying
value
US$ MM
% average
of NAV
11
39.5 - 721.1
454.5
192.2
9.6 %
Total GAV
US$ MM
525.3
22.4
133.1
532.5
340.0
7.5
29.4
1
1
1
1
1
1
4
n/a
n/a
n/a
n/a
n/a
n/a
n/a
234.8
19.6
114.6
55.3
68.1
7.4
29.4
11.8%
1.0%
5.7%
2.8%
3.4%
0.4%
1.5%
No. of
invest-
ments
Range of
nominal
US$ MM
Average
nominal
US$ MM
Carrying
value
US$ MM
% average
of NAV
15
33.0 - 721.1
457.6
202.0
10.4%
Equities
Polygon European Equity Opportunity Fund2
Polygon Mining Opportunity Fund2
Polygon Global Equities Fund2
Credit
Polygon Distressed Opportunities Fund2
Polygon Convertible Opportunity Fund2
Tetragon Credit Income II3
Other
Other Real Estate
1
1
1
1
1
1
4
Total GAV
US$ MM
455.3
69.6
22.3
119.6
487.5
66.0
27.7
n/a
n/a
n/a
n/a
n/a
n/a
n/a
192.9
36.6
19.5
106.5
50.9
16.1
27.7
9.9%
1.9%
1.0%
5.5%
2.6%
0.8%
1.4%
1 This includes all U.S. CLOs deemed to be controlled by the Fund. U.S. CLOs are domiciled in Cayman Islands.
2 Polygon Hedge Funds 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.
3 Hawke's Point Holdings LP and Tetragon Credit Income II (“TCI II”) are domiciled in Cayman Islands. These are private-
equity style investment funds. Please refer to Note 16 for details of unfunded capital commitments.
29
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 5
Interest in Other Entities (continued)
Investment in unconsolidated structured entities (continued)
Below is a summary of the Fund’s holding in non-subsidiary unconsolidated structured entities:
As at 31 December 2017:
CLO Equity
U.S. CLOs1
European CLOs1
Real Estate
GreenOak – U.S.2
GreenOak – Europe 2
GreenOak – Asia2
Other
QT Fund
Private Equity Funds3
As at 31 December 2016:
CLO Equity
U.S. CLOs1
European CLOs1
Real Estate
GreenOak – U.S.2
GreenOak – Europe 2
GreenOak – Asia2
No. of
invest-
ments
Range of
nominal
US$ MM
Average
nominal US$
MM
Carrying
value
US$ MM
% average of
NAV
19
2
5
13
4
1
4
31.0 – 512.3
38.0 – 52.2
148.7
45.1
107.1
7.3
Total AUM
US$ MM
4,445.6
2,157.9
1,001.8
Total NAV
US$ MM
612.0
551.0
n/a
n/a
n/a
n/a
n/a
55.1
53.9
23.9
25.5
27.8
5.4%
0.4%
2.8%
2.7%
1.2%
1.3%
1.4%
No. of
invest-
ments
Range of
nominal
US$ MM
Average
nominal US$
MM
Carrying
value
US$ MM
% average of
NAV
27
6
5
9
4
22.2 - 417.2
36.4 - 213.0
Total AUM
US$ MM
4,037.0
2,062.6
1,029.2
153.8
103.8
208.5
31.6
10.7%
1.6%
n/a
n/a
n/a
52.3
35.8
28.8
2.7%
1.8%
1.5%
1 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.
2 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 (“AUM”) 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.
3 Private equity funds are domiciled in Cayman Islands and United States.
Please refer to Note 16 for details of unfunded capital commitments.
30
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 6
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% (31 December 2016: 100%) holdings and voting rights
in TFG Asset Management. As at 31 December 2017, TFG Asset Management investments were comprised of LCM, Polygon,
Equitix, Hawke’s Point, TCIP and a minority stake in GreenOak.
Equitix
LCM
GreenOak
Polygon
TCIP
Hawke’s Point
Investments in TFG Asset Management
Equitix
31 Dec 2017
US$ MM
152.2
144.3
69.6
56.0
7.8
0.8
430.7
31 Dec 2016
US$ MM
172.5
106.2
67.0
59.7
1.6
0.8
407.8
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, Equitix was acquired 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 was structured through the holding of a mezzanine loan, 12% ‘A’ loan notes and an equity stake.
Although the Fund currently effectively receives 85% (31 December 2016: 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.
Equitix completed the refinancing of its existing debt facilities in 2017, resulting in US$ 87.4 million of proceeds to the
Fund.
LCM
LCM is a specialist in below-investment grade U.S. broadly-syndicated leveraged loans. The business was established in
2001 and has offices in New York and London. 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 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% (31 December 2016: 100%) of LCM through its investment in TFG Asset Management.
31
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 6
TFG Asset Management (continued)
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 (31 December 2016: 23%) in GreenOak.
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% (31 December 2016: 100%) of the Polygon business through its investment in TFG Asset Management.
TCIP
Tetragon Credit Income Partners II Limited (“TCIP II”) and Tetragon Credit Income Partners III Limited (“TCIP III”) act as
general partners of TCI II and TCI III respectively. These are private equity vehicles that, among other things, make
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. TCIP is the holding company containing TCIP II and TCIP III.
The Fund owns 100% (31 December 2016: 100%) of TCIP through its investment in TFG Asset Management.
Hawke’s Point
Hawke’s Point is a mining finance business 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% (31
December 2016: 100%) of Hawke’s Point through its investment in TFG Asset Management.
Note 7
Financial Risks Review
Financial Risk Review:
The Fund has exposure to the following risks from financial instruments:
- Credit risk;
-
- Market risks
Liquidity risk; and
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’.
32
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
Risk Management Framework (continued):
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.
A) Credit risk
‘Credit risk’ is the risk that 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 CLO portfolio held,
and also from derivative financial assets, cash and cash equivalents and balances due from brokers.
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 five (31 December 2016:
five) 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.
33
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
A) Credit risk (continued)
i. Analysis of Credit Quality (continued)
Amounts due from brokers (continued)
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 (31 December
2016: three) with S&P’s credit ratings between A and A- (31 December 2016: A and BBB+). Please refer to Note 9 for a
breakdown of balances held with each broker.
Equitix
The Fund is exposed to Equitix through a combination of 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 6.
Loans and bonds portfolio
The Fund has investments in debt securities of US$ 25.8 million (31 December 2016: US$ 6.6 million) with Moody’s credit
ratings between B2 and Caa2 (31 December 2016: B2 and Caa1). Corporate bonds of US$ 8.2 million are high yield bonds
and are not rated.
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 realised losses on the collateral in each CLO investment.
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. The maximum loss that the Fund can incur on CLOs is limited to the fair value of these CLOs as disclosed in
Note 4. The underlying loans are made up of a variety of credit ratings including investment grade, non-investment grade
and junk status.
The following tables show the concentration of CLOs by region and by manager.
Region
United States (including TCI II)
Europe
31 Dec 2017
US$ MM
367.1
7.3
374.4
31 Dec 2016
US$ MM
428.4
31.6
460.0
34
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
A) Credit risk (continued)
i. Analysis of Credit Quality (continued)
CLOs (continued)
Manager
LCM
TCIP II
Other managers
Derivatives
31 Dec 2017
US$ MM
191.9
68.1
114.4
374.4
31 Dec 2016
US$ MM
202.0
16.1
241.9
460.0
The table below shows an analysis of derivative financial assets and liabilities outstanding at 31 December 2017.
31 December 2017
31 December 2016
ii. Concentration of credit risk
Derivative assets
Fair Value
US$ MM
17.4
22.2
Notional
389.7
411.5
Derivative liabilities
Fair Value
US$ MM
(6.6)
(4.1)
Notional
583.6
363.5
The Fund’s credit risk is concentrated in CLOs, 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
Loans and bonds
Amount due from brokers
Other loans and derivatives
Total
31 Dec 2017
31 Dec 2016
41%
40%
7%
4%
6%
2%
100%
43%
37%
12%
1%
5%
2%
100%
None of the Fund’s financial assets were considered to be past due or impaired in 31 December 2017 and 31 December
2016.
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.
35
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
A) Credit risk (continued)
iii. Collateral and other credit enhancements, and their financial effects (continued)
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 7(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.
The table below shows the amount of reverse sale and repurchase agreements.
Receivables from reverse sale and repurchase agreements
31 Dec 2017
US$ MM
246.5
31 Dec 2016
US$ MM
201.0
No individual trades are under-collaterised. The fair value of collateral as at 31 December 2017 was US$ 256.0 million (31
December 2016: US$ 209.6 million).
Collateral accepted includes investment-grade securities that the Fund is permitted to sell or repledge. The Fund has
not recognised 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.
As at 31 December 2017
Gross Amount
of Recognised
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
Cash
collateral
held by
brokers
Description
US$ MM
US$ MM
US$ MM
US$ MM
US$ MM
Assets
UBS AG
BNP Paribas
Bank of America
Merrill Lynch
Total
3.1
0.1
14.2
17.4
3.1
0.1
14.2
17.4
(3.1)
(0.1)
(0.9)
(4.1)
-
-
-
-
-
-
-
-
36
Net
Amount
US$ MM
-
-
13.3
13.3
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
A) Credit risk (continued)
iv. Offsetting financial assets and liabilities (continued)
Gross Amount
of Recognised
Assets /
Liabilities
US$ MM
Gross Amounts
Offset in the
Statement of
Financial Position
US$ MM
Net Amounts
Presented in the
Statement of
Financial Position
US$ MM
Financial
instruments
eligible for
netting
US$ MM
Cash
collateral
held by
brokers
US$ MM
Net
Amount
US$ MM
5.1
0.6
0.9
6.6
-
-
-
-
5.1
0.6
0.9
6.6
(3.1)
(0.1)
(0.9)
(4.1)
(2.0)
(0.5)
-
(2.5)
-
-
-
-
Description
Liabilities
UBS AG
BNP Paribas
Bank of America
Merrill Lynch
Total
31 December 2016
Gross Amount
of Recognised
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
Cash
collateral
held by
brokers
Description
US$ MM
US$ MM
US$ MM
US$ MM
US$ MM
Assets
UBS AG
BNP Paribas
Bank of America
Merrill Lynch
Total
Liabilities
UBS AG
BNP Paribas
Bank of America
Merrill Lynch
Total
B) Liquidity risk
11.3
0.3
10.6
22.2
3.2
0.5
0.4
4.1
-
-
-
-
-
-
-
-
11.3
0.3
10.6
22.2
3.2
0.5
0.4
4.1
(3.2)
(0.3)
(0.4)
(3.9)
(3.2)
(0.3)
(0.4)
(3.9)
-
-
-
-
-
(0.3)
-
(0.3)
Net
Amount
US$ MM
8.1
-
10.2
18.3
-
-
-
-
‘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.
37
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
B) Liquidity risk (continued)
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.
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 (31 December 2016: US$
150.0 million). Details of the facility and the undrawn and drawn balance are disclosed in Note 12.
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 non-derivative financial liabilities at the reporting date. The amounts
are gross and undiscounted.
31 December 2017
Finance costs on borrowings
Loans and borrowings
Expenses payable
31 December 2016
Finance costs on borrowings
Loans and borrowings
Expenses payable
Within 1
month
US$ MM
0.3
-
2.6
2.9
Within 1
month
US$ MM
0.3
-
2.3
2.6
1 – 3
months
US$ MM
0.6
-
-
0.6
3 months –
1 year
US$ MM
2.4
-
-
2.4
1 – 5 years
US$ MM
12.4
38.0
-
50.4
1 – 3
months
US$ MM
0.6
-
-
0.6
3 months –
1 year
US$ MM
2.4
-
-
2.4
1 – 5 years
US$ MM
12.4
38.0
-
50.4
Greater
than 5
years
US$ MM
-
-
-
-
Greater
than 5
years
US$ MM
-
-
-
-
Total
US$ MM
15.7
38.0
2.6
56.3
Total
US$ MM
15.7
38.0
2.3
56.0
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
12.3
92.6
Inflows
1 – 3
months
US$ MM
211.8
87.0
3 months
– 1 year
US$ MM US$ MM
1 – 5
years
356.5
236.2
38
-
-
Outflows
Within 1
month
US$ MM
(12.4)
(90.7)
1 – 3
months
US$ MM
(212.8)
(84.7)
3 months –
1 year
US$ MM
(357.4)
(232.5)
1 – 5
years
US$ MM
-
-
31 Dec 2017
31 Dec 2016
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
B) Liquidity risk (continued)
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 (US$ MM)
Percentage of NAV
C) Market Risk
31 Dec 2017
365.5
18.20%
31 Dec 2016
392.6
20.22%
‘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 Fund’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.
39
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
C) Market Risk (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.
31 December 2017
U.S. CLOs 1.0
U.S. CLOs 2.0
European CLOs
PCOF
PDOF
TCI II
31 December 2016
U.S. CLOs 1.0
U.S. CLOs 2.0
European CLOs
PCOF
PDOF
TCI II
ii. Currency Risk
Fair Value as at 31
Dec 2017
US$ MM
57.5
241.7
7.3
55.3
114.6
68.1
Effects of +100bps
Change in Interest rate
on net assets
US$ MM
0.2
15.0
-
3.7
(1.5)
1.4
Effects of -100bps Change
in Interest rate on net
assets
US$ MM
(1.3)
(6.8)
-
(2.7)
1.5
(1.5)
544.5
18.8
(10.8)
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
12.8
Effects of -100bps Change
in Interest rate on net
assets
US$ MM
2.4
18.2
(0.2)
0.9
2.7
0.7
24.7
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.
40
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
C) Market Risk (continued)
ii. Currency Risk (continued)
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.
31 December 2017
EUR
GBP
NOK
JPY
31 December 2016
EUR
GBP
NOK
JPY
Net Monetary and
Non-Monetary
Assets and
Liabilities
US$ MM
79.8
215.6
25.0
16.0
336.4
Forward foreign
currency exchange
hedging
US$ MM
(79.5)
(208.4)
(25.0)
(16.2)
(329.1)
Effect of +/- 5%
on exchange
rate
US$ MM
-
0.3
-
-
0.3
Net exposure
US$ MM
0.3
7.2*
-
(0.2)
7.3
Net Monetary and
Non-Monetary
Assets and
Liabilities
US$ MM
61.9
263.0
18.3
16.0
359.2
Forward foreign
currency exchange
hedging
US$ MM
(61.9)
(242.3)
(19.9)
(16.3)
(340.4)
Effect of +/- 5%
on exchange
rate
US$ MM
-
(1.0)
0.1
-
0.9
Net exposure
US$ MM
-
20.7*
(1.6)
(0.3)
18.8
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 delay 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.
41
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 7
Financial Risks Review (continued)
C) Market Risk (continued)
iii. Other Price Risk (continued)
The following table sets out the concentration of the investment assets and liabilities, including derivatives held by the
Fund as at the reporting date.
Asset Class
CLO Equity Tranches
CLO Mezzanine
Contracts for difference
Credit default swaps
Foreign exchange forwards and options
Loans and Corporate Bonds
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management
% of net assets as at
31 Dec 2017
15.2%
0.0%
0.7%
(0.1)%
(0.1)%
1.7%
2.7%
2.1%
37.1%
21.4%
% of net assets as at
31 Dec 2016
22.8%
0.1%
0.6%
0.0%
0.4%
0.3%
0.7%
2.2%
31.1%
21.0%
The Investment Manager reviews the above percentages on a monthly basis against the limits which are set and
reviewed periodically. The table below shows the impact of a positive 1% movement in the price of these investments on
the NAV and profits of the Fund. A negative 1% movement will have an equal and opposite effect.
Asset Class
CLO Equity Tranches
CLO Mezzanine
Contracts for difference
Credit default swaps
Foreign exchange forwards and options
Loans and Corporate Bonds
Listed Stock
Unlisted Stock
Investment funds and vehicles
TFG Asset Management
Note 8
Other Receivables and Prepayments
Prepayments
Interest receivables
Other receivables
31 Dec 2017
US$ MM
3.1
-
1.2
-
-
0.3
0.5
0.4
7.5
4.3
31 Dec 2016
US$ MM
4.4
-
1.2
-
-
0.1
0.1
0.4
6.0
4.1
31 Dec 2017
US$ MM
0.3
0.2
1.4
1.9
31 Dec 2016
US$ MM
0.1
0.1
0.4
0.6
Other receivables and interest receivables are expected to be settled within 12 months.
42
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 9
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
Bank of America Merrill Lynch
Note 10
Cash and Cash Equivalents
Cash and cash equivalents
31 Dec 2017
US$ MM
27.7
3.5
26.0
57.2
31 Dec 2016
US$ MM
11.2
8.8
31.0
51.0
31 Dec 2017
US$ MM
365.5
365.5
31 Dec 2016
US$MM
392.6
392.6
Of this cash balance, US$ 246.5 million relates to amounts loaned to counterparties and secured against collateral
through tri-party agreements (31 December 2016: US$ 201.0 million). 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$ 30.0 million as at 31 December 2017 (31 December 2016: US$ 32.6 million). This cash balance is included in
the fair value of these subsidiaries.
Note 11 Other Payables and Accrued Expenses
Accrued expenses
All other payables and accrued expenses are due within one year.
Note 12
Credit Facility
31 Dec 2017
US$ MM
2.6
2.6
31 Dec 2016
US$ MM
2.3
2.3
During 2016, the Fund obtained an unsecured US$ 150.0 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.
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 U.S.
LIBOR plus a spread of 4%.
As at 31 December 2017, the drawn balance of the credit facility was US$ 38.0 million (31 December 2016: US$ 38.0
million) while US$ 112.0 million of the facility remained undrawn (31 December 2016: US$ 112.0 million).
43
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 13
Share Capital
Authorised
The Fund has an authorised 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
Voting
Shares
No.
Treasury
Non-Voting
Shares*
Shares
No. MM No. MM
Shares held in
TFG Holdings I**
No. MM
Shares held
in Escrow
No. MM
Shares in issue at 1 January 2016
Stock dividend
Issued through release of tranche of escrow shares
Issue through exercise of GreenOak options
Shares purchased during the year
Shares transferred to Treasury
Shares in issue at 31 December 2016
Stock dividends
Issued through release of tranche of escrow shares
Issue through exercise of TFM options
Issue through exercise of GreenOak options
Shares transferred to escrow for deferred incentive fee
Shares purchased during the year
Shares in issue at 31 December 2017
10.0
-
-
-
-
-
10.0
-
-
-
-
-
-
10.0
95.9
1.6
3.2
0.7
(14.3)
-
87.1
1.4
3.4
2.4
0.7
-
(4.9)
90.1
12.8
(0.7)
0.6
(0.7)
4.3
27.0
43.3
(1.8)
-
(2.4)
(0.7)
(2.0)
4.9
41.3
* Non-voting shares do not include the treasury shares or the shares held in escrow.
** TFG Holdings I was closed during 2016.
44
17.0
-
-
-
10.0
(27.0)
-
-
-
-
-
-
-
-
12.3
0.8
(3.8)
-
-
-
9.3
0.4
(3.4)
-
-
2.0
-
8.3
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 13
Share Capital (continued)
Treasury Shares
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 2017, there was no share repurchase program in
place.
When the program was in operation, the Fund undertook to repurchase an identical number of its own shares from the
Feeder as and when 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 2017, the Feeder and the Fund announced that under the terms of a “modified Dutch auction” tender offer, the
Fund had accepted for purchase approximately 4.8 million (31 December 2016: 14.3 million) Feeder non-voting shares at
an aggregate cost of US$ 65.4 million (31 December 2016: US$ 151.1 million), including applicable fees and expenses of
US$ 0.4 million (31 December 2016: US$ 1.1 million). Additionally during 2017, the Master Fund agreed to purchase 0.1
million shares for US$ 1.0 million from TFG Asset Management LP using the then-current share price of US$ 13.12.
During 2016, 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 15) 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 3.3 million shares (31 December 2016: 3.8
million shares) were issued to the Feeder as a result of an equivalent number of Feeder shares being released from
escrow.
Of these approximately 2.5 million shares (31 December 2016: 3.0 million shares) were deemed to be in relation to the
original Feeder escrow shares, and a value of US$ 21.1 million (31 December 2016: US$ 25.0 million) was debited against
Capital Contribution, using the transaction share price of US$ 8.43. In addition, approximately 0.8 million shares (31
December 2016: 0.8 million shares) were deemed to be related to the stock dividends awarded on the original shares
released and an amount of US$ 9.0 million (31 December 2016: US$ 8.1 million) was released against Retained Earnings,
based on the stock reference price at each applicable dividend date. All shares related to this transaction were released
from escrow before 31 December 2017.
6.2 million (31 December 2016: 6.0 million) shares related to TFG Asset Management’s employee reward schemes are
held in escrow.
45
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 13
Share Capital (continued)
Escrow Shares (continued)
During the year, 0.2 million shares (31 December 2016: nil) were released from escrow including shares that were deemed
to be related to the stock dividends awarded on the original shares. An amount of US$ 0.4 million (31 December 2016: nil)
was released against Retained Earnings, based on the stock reference price at each applicable dividend date. These
shares are eligible for stock dividends and during the year, 0.3 million (31 December 2016: 0.3 million) shares were
allocated to this account.
The Fund also holds 2.1 million (31 December 2016: nil) in escrow in relation to deferred incentive fees of the Feeder.
These shares are deemed to be within treasury shares for the purposes of Statement of Changes in Equity.
Capital Management
The Fund’s capital is represented by the ordinary share capital, other equity, 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 14
Dividends
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
Quarter ended 31 December 2016 of US$ 0.1725 per share
Quarter ended 31 March 2017 of US$ 0.1725 per share
Quarter ended 30 June 2017 of US$ 0.1750 per share
Quarter ended 30 September 2017 of US$ 0.1750 per share
31 Dec 2017
US$ MM
-
-
-
-
15.1
15.6
15.8
16.5
63.0
31 Dec 2016
US$ MM
15.9
16.1
14.6
15.2
-
-
-
-
61.9
The fourth quarter dividend of US$ 0.1775 per share was approved by the Directors on 26 February 2018 and has not
been included as a liability in these 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 2017, US$ 25.4 million (31 December 2016: US$ 22.6 million) was paid.
Note 15
Share-based Payment Plan
On 28 October 2012, TFG Asset Management LP 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”).
46
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 15
Share-based Payment Plan (continued)
The Aggregate Consideration was held in escrow (along with accrued stock dividends), by the escrow agent pursuant to the
terms of the escrow agreement. The tranches were released in 2013 to 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 Sharebased Payments. The Fund, as receiver of benefits, recognises 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 2017 amounted to US$ 3.5 million (31
December 2016: US$ 9.4 million).
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 2017
New awards
Vested during the period
Stock dividends
Balance at 31 December 2017
31 Dec 2017
Shares MM
31 Dec 2016
Shares MM
3.2
-
(3.3)
0.1
-
6.6
-
(3.8)
0.4
3.2
All shares related to this transaction have been released from escrow.
The Fund also pays two of its directors in the form of shares in the Feeder. Please refer to Note 17 for details of this
payment.
47
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 16
Contingencies and Commitments
The fund has the following unfunded commitments:
GreenOak investment vehicles
TCI II
TCI III
Private equity funds
Note 17
Related-Party Transactions
31 Dec 2017
US$ MM
126.0
-
65.0
8.6
199.6
31 Dec 2016
US$ MM
90.9
46.1
-
-
137.0
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
non-voting 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 2017, US$ 32.2
million (31 December 2016: US$ 22.0 million) was paid as incentive fees.
The Investment Manager is considered key personnel and is entitled to receive management fees calculated as 1.5% of the
Fund’s NAV. During the year ended 31 December 2017, US$ 29.5 million (31 December 2016: US$ 27.8 million) was paid as
management fees to the Investment Manager.
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 2017, Frederic Hervouet has elected to receive shares in lieu of his full
compensation as director. William Rogers has elected to receive shares in lieu of half of his compensation from Q1 2017.
During the year, Frederic Hervouet and William Rogers received 7,879 and 2,938 shares respectively (31 December 2016:
10,157 and nil shares respectively). The number of shares issued instead of the fee for the fourth quarter will be determined
as part of the fourth quarter 2017 dividend process.
The Voting Shareholder acting as agent, holds all of the voting shares of the Fund. It 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.
48
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 17
Related-Party Transactions (continued)
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 vested between
2015 and 2017. During the year ended 31 December 2017, Reade Griffith and Paddy Dear received 2,474,887 and 873,487
shares respectively in relation to this transaction as the final tranche was released.
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 2017 total compensation
paid to them each in aggregate was US$ 100,000 (31 December 2016: 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.
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 authorised 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.
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$ 17.3 million (31 December 2016: US$ 14.0 million), GreenOak US$
0.5 million (31 December 2016: US$ 0.6 million) and Polygon Private Investment Partners LP US$ 0.2 million (31 December
2016: US$ 0.2 million). During 2017, the Fund purchased 0.1 million shares from TFG Asset Management for US$ 1.0 million
using then-current share price of US$ 13.12.
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 2017, it held CLO
equity tranche investments in 11 CLOs managed by LCM with a fair value of US$ 191.9 million (31 December 2016: US$ 202.0
million).
49
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2017
Note 17
Related-Party Transactions (continued)
At 31 December 2017, 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
2017, the fair value of these investments was US$ 424.3 million (31 December 2016: US$ 406.4 million).
The Fund owns a 23% equity interest in GreenOak. The Fund has made investments across several real estate investment
vehicles managed by GreenOak. As at 31 December 2017, these investments referenced real estate in the United States,
Japan and Europe with a combined net asset value of US$ 132.9 million (31 December 2016: US$ 116.7 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.
TCIP II and TCIP III are general partners of TCI II and TCI III respectively. The Fund owns 100% of TCIP II and TCIP III. As at 31
December 2017, the Fund's investment in TCI II is fair valued at US$ 68.1 million (31 December 2016: US$ 16.1 million). TCI III
has not called any capital as at 31 December 2017 (31 December 2016: nil). Please refer to Note 16 for details of unfunded
commitments related to GreenOak, TCI II and TCI III funds.
Hawke's Point Manager LP is the manager of Hawke's Point Holdings LP. The Fund owns 100% of Hawke's Point Manager LP
through its ownership of TFG Asset Management. As at 31 December 2017, the Fund's investment in Hawke's Point Holdings
LP is fair valued at US$ 7.4 million (31 December 2016: nil).
Note 18
Subsequent Events
The Directors have evaluated the period up to 26 February 2018, 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 19
Approval of Financial Statements
The Directors approved and authorised for issue the financial statements on 26 February 2018.
50
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS
As at 31 December 2017
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
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
Norway – Equity Investments
United Kingdom – Equity Investments
Unlisted Stock
United States – Private Equity
Corporate Bonds
Portugal – Corporate Bond
United States – Corporate Bond
Investment Funds and Vehicles
United States – Real Estate
Japan – Real Estate
Latin America – Real Estate
Europe - Real Estate
Cayman Islands – CLO Equity Fund
United Kingdom – Private Equity
United States – Private Equity
Global – Hedge Funds – Equities
Global - Mining Finance Fund
Polygon European Equity Opportunity Fund
Polygon Distressed Opportunities Fund
Global – Hedge Funds – Credit and Convertible Bonds
51
Nominal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
861.0
133.2
994.2
766.5
123.9
890.4
297.0
1.5
298.5
14.79%
0.07%
14.86%
35.0
35.0
24.0
24.0
0.7
0.7
1.9
1.9
40.9
40.9
31.8
31.8
0.4
0.4
1.4
1.4
6.8
20.5
27.3
35.0
35.0
15.2
3.0
18.2
52.0
22.6
32.2
52.9
70.0
11.2
16.4
40.0
12.8
222.0
97.6
46.0
675.7
6.9
6.9
0.5
0.5
0.7
0.7
1.6
1.6
24.9
30.0
54.9
42.2
42.2
24.2
8.2
32.4
84.9
24.1
29.4
53.9
68.1
11.5
16.2
45.2
7.4
234.7
114.5
55.3
745.2
0.34%
0.34%
0.02%
0.02%
0.03%
0.03%
0.08%
0.08%
1.24%
1.49%
2.73%
2.10%
2.10%
1.21%
0.40%
1.61%
4.23%
1.20%
1.46%
2.68%
3.39%
0.57%
0.81%
2.25%
0.37%
11.69%
5.70%
2.76%
37.11%
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS – (continued)
As at 31 December 2017
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
Financial Derivative Instruments
Forward Foreign Currency Exchange Contracts
Credit Default Swaps
Contract for Difference
Total Financial Derivative Instruments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Nominal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
73.3
10.7
49.9
44.0
-
177.9
152.2
69.6
56.0
144.3
8.6
430.7
7.58%
3.46%
2.79%
7.19%
0.43%
21.46%
1,899.1
1,613.6
80.34%
(2.0)
(1.4)
14.2
10.8
(0.10)%
(0.07)%
0.71%
0.54%
365.5
18.5
2,008.4
18.20%
0.92%
100.00%
52
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS – (continued)
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
53
Nominal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
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
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
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%
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS – (continued)
As at 31 December 2016
Global Hedge Fund Manager
United States CLO Manager
Other
Total Investments
Financial Derivative Instruments
Forward Foreign Currency Exchange Contracts
Credit Default Swaps
Contract for Difference
Total Financial Derivative Instruments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Nominal
MM
Cost
US$ MM
49.9
44.0
-
237.5
2,044.1
Fair Value % of Net
Assets
3.07%
5.47%
0.12%
21.00%
78.27%
US$ MM
59.7
106.2
2.4
407.8
1,520.0
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%
54