2018 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 2018 Financial Review
Financial Highlights
Consolidated Statement of Income
10
16
18
19
28
33
37
38
43
46
47
52
54
55
Consolidated Statement of Financial Position 56
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
58
72
73
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82
86
STEVE STREIT
POLYGON
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TETR AGON FINANCIAL GROUP LIMITED 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.
References to “we” are to Tetragon Financial Management LP, Tetragon’s
investment manager.
YUKO THOMAS
INVESTOR RELATIONS
Delivering Results Since 2005(1)
NAV PER SHARE TOTAL RETURN(2)
10.3% 10.3% 13.2% 11.2% 247%
2018 FULL YEAR
FIVE YEARS ANNUALISED
TEN YEARS ANNUALISED
SINCE IPO ANNUALISED
SINCE IPO
INVESTMENT RETURNS/RETURN ON EQUITY(3)
12.1% 10-15% 12.4%
2018 ROE
ROE TARGET
ANNUAL AVER AGE
SINCE IPO
DIVIDENDS
$0.1825 $0.7200
6.2%
3.7x
5.0%
Q4 2018 DIVIDEND
2018 DIVIDENDS
DIVIDEND YIELD
DIVIDEND COVER(4)
DIVIDEND 5-YEAR CAGR
NET ASSET VALUE
OWNERSHIP(5)
$2.2 billion
31 DECEMBER 2018
26%
PRINCIPAL & EMPLOYEE OWNERSHIP
AT 31 DECEMBER 2018
(1) (2) (3) (4) (5) Please see important notes on page 8.
6 TETR AGON FINANCIAL GROUP LIMITED
NAV PER SHARE TOTAL RETURN(2)
10.3% 10.3% 13.2% 11.2% 247%
2018 FULL YEAR
FIVE YEARS ANNUALISED
TEN YEARS ANNUALISED
SINCE IPO ANNUALISED
SINCE IPO
INVESTMENT RETURNS/RETURN ON EQUITY(3)
12.1% 10-15% 12.4%
2018 ROE
ROE TARGET
ANNUAL AVER AGE
SINCE IPO
DIVIDENDS
$0.1825 $0.7200
6.2%
3.7x
5.0%
Q4 2018 DIVIDEND
2018 DIVIDENDS
DIVIDEND YIELD
DIVIDEND COVER(4)
DIVIDEND 5-YEAR CAGR
NET ASSET VALUE
OWNERSHIP(5)
$2.2 billion
31 DECEMBER 2018
26%
PRINCIPAL & EMPLOYEE OWNERSHIP
AT 31 DECEMBER 2018
250%
200%
150%
100%
50%
0%
(50%)
(100%)
2018 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 2018
31 December 2017
$2,189.4m
$1,994.5m
$22.48
$11.65
$0.7200
1.73%
$21.08
$13.55
$0.7000
1.74%
FIGURE 2
Tetragon's NAV Per Share Total Return and Share Price Since IPO to 31 December 2018
Change
$194.9m
$1.40
$(1.90)
$0.0200
12.1%
10.3%
(9.0%)
4.9%
(9.0%)
(9.5%)
247%
150%
67%
59%
57%
7
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TFG N AV per share (T R)
TFG S hare Price (TR)
MSCI ACWI ( TR)
TFG LIBOR-based performan ce hurdle
FTSE All-S hare Index (TR)
(1) (2) (3) (4) (5) (6) (7) Please see important notes on page 8.
2018 ANNUAL REPORT 7
Notes
Page 6:
Page 7:
(1) Tetragon commenced investing as an open-ended investment
(1) Based on TFG.NA.
company in 2005, before its inital public offering in April 2007.
(2) Annual calculation as at 31 December 2018. The ongoing charges figure
(2) NAV per share total return (NAV Total Return) to 31 December 2018, for
is calculated as defined by the AIC, and comprises all direct recurring
the last year, the last five years, the last ten years, and since Tetragon’s
expenses to Tetragon expressed as a percentage of average Net Assets,
initial public offering in April 2007. In previous reports, we reported
and includes the annual management fee of 1.5%.
annualised NAV Total Return figures for period-to-date, five years, three
years, and since IPO. On a go-forward basis, we will no longer report
(3) Please see Note 3 for Page 6.
annualised NAV Total Return figures for three years, and will report a 10
(4) Please see Note 2 for Page 6.
years annualised number given that 10 full calendar years have elapsed
since Tetragon’s IPO. At 31 December 2018, the three years annualised
NAV Total Return was 9.3%. NAV Total Return is determined in accordance
(5) 2018 total shareholder return, defined as share price appreciation
including dividends reinvested, as sourced from Bloomberg.
with the “NAV total return performance” calculation as set forth on the
(6) Cumulative return determined on a quarterly compounding basis
Association of Investment Companies (AIC) website. Tetragon’s NAV
using the actual Tetragon quarterly incentive fee LIBOR-based hurdle
Total Return is determined for any period by calculating, as a percentage
rate.
return on the Fully Diluted NAV per Share (NAV per share) at the start
of such period, (i) the change in NAV per share over such period, plus
(ii) the aggregate amount of any dividends per share paid during such
period, with any dividend deemed reinvested at the 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 54 for further details.
(7) Any indices and other financial benchmarks are provided for
illustrative purposes only. Comparisons to indices have limitations
because, for example, indices have volatility and other material
characteristics that may differ from the fund. Any index information
contained herein is included to show general trends in the markets in
the periods indicated, is not meant to imply that these indices are the
only relevant indices, and is not intended to imply that the portfolio or
investment was similar to any particular index either in composition
or element of risk. The indices shown here have not been selected
to represent an appropriate benchmark to compare an investor's
(3) Tetragon seeks to deliver 10-15% Return on Equity (RoE) per annum
performance, but rather is disclosed to allow for comparison of the
to shareholders. Tetragon’s returns will most likely fluctuate with LIBOR.
investor's performance to that of certain well-known and widely-
LIBOR directly flows through some of Tetragon’s investments and, as
recognised indices. The volatility of the indices may be materially
it can be seen as the risk-free short-term rate, it should affect all of
different from the individual performance attained by a specific investor.
Tetragon’s investments. In high-LIBOR environments, Tetragon should
In addition, the fund's holdings may differ significantly from the securities
achieve higher sustainable returns; in low-LIBOR environments, Tetragon
that comprise the indices. The MSCI ACWI captures large and mid-cap
should achieve lower sustainable returns.
(4) EPS divided by Dividends per Share at 31 December 2018.
representation across 23 developed markets and 24 emerging markets
countries. With over 2,700 constituents, the index covers approximately
85% of the global investable equity opportunity set. Further information
(5) Shareholdings at 31 December 2018 of the principals of Tetragon’s
relating to the index constituents and calculation methodology can
investment manager and employees of TFG Asset Management, including
be found at www.msci.com/acwi. The FTSE All-Share Index represents
all deferred compensation arrangements. Please refer to the 2018 Audited
98-99% of UK market capitalisation and is the aggregate of the FTSE 100,
Tetragon Financial Group Limited financial statements for more details of
FTSE 250 and FTSE Small Cap indices. Further information relating to the
these arrangements.
index constituents and calculation methodology can be found at www.
ftse.com/products/indices/uk.
8 TETR AGON FINANCIAL GROUP LIMITED
Strategic
Review
CHRIS D'AURIA
LCM
Letter to Our Shareholders
In 2018, Tetragon delivered an
investment return on equity (RoE)
of 12.1%, a NAV Per Share total
return of 10.3%, and a share price
total return of -9.0%. It also declared 72
cents of dividends per share for the year – a yield
of 6.2%. Whilst we are pleased with the company’s
performance against our stated target of a 10-15%
RoE, we were particularly pleased to have generated
attractive returns in a challenging market.
“We believe that Tetragon’s investment
manager has constructed a portfolio
that can generate positive returns in a
variety of economic environments and
across various credit, equity, interest
rate, inflation and real estate cycles.”
– Paddy Dear, Co-Founder of Tetragon’s investment manager
2018 was a difficult year for investors, with negative
performance in most markets and in most asset
classes. As the Wall Street Journal reported, by mid-
November, nearly 90% of investible assets (stocks,
bonds, commodities, etc.) had produced negative
returns for the year.(1) In equity markets in the United
States, the S&P 500 Index was down 4.2% for the year
and markets were particularly trying in the fourth
quarter. In fact, the U.S. equity market had its worst
December since 1931. Equity markets in Europe fell
between 7% and 26% and many emerging market
equities indices fell by double digits.
We believe that Tetragon’s investment manager has
constructed a portfolio that can generate positive
returns in a variety of economic environments and
across various credit, equity, interest rate, inflation
and real estate cycles. Tetragon’s ability to invest
10 TETR AGON FINANCIAL GROUP LIMITED
in a broad range of asset classes and strategies,
partner and invest with what we believe are superior
asset managers, make investments directly on its
balance sheet, adjust its cash holdings as appropriate
to market cycles and maintain a long-term view,
contributed to Tetragon’s performance in 2018 and we
believe will continue to do so over the long-term.
We also believe that Tetragon’s investing benefits
from a repeatable process – in particular around the
sourcing of compelling and differentiated investment
ideas. As Tetragon has grown and evolved, so
too has the breadth of its sourcing capabilities.
Key contributors to Tetragon’s ability to source
investments are the managers on the TFG Asset
Management platform as well as third-party managers
with whom it invests.
“We also believe that Tetragon’s
investing benefits from a repeatable
process – in particular around
the sourcing of compelling and
differentiated investment ideas. As
Tetragon has grown and evolved, so
too has the breadth of its sourcing
capabilities.”
– Reade Griffith, Co-Founder of Tetragon’s investment manager
2018 performance gains and losses
All of the portfolio’s asset classes and investment
strategies produced performance gains for the year,
with the main exception of Tetragon’s allocation to
hedge funds managed by Polygon(2), where Tetragon
saw performance gains from its allocations to
convertible bonds, absolute return European equities
and global equities strategies and losses from its
distressed and long-bias European equities strategies.
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70% (or approximately $231 million) of the portfolio’s
gains during the year were generated within TFG Asset
Management, driven primarily by GreenOak(3) and
Equitix(4). The remaining gains in the portfolio were
broad-based, coming from the company’s allocations
to bank loans (through CLOs), real estate (primarily
through private equity-style funds), private equity and
other equities and credit.
TFG Asset Management
Tetragon’s largest gain during the year was from TFG
Asset Management’s GreenOak joint venture. The
performance gains in GreenOak were the product
of eight years of partnership with the GreenOak
Founders, with the announcement in December
of the merger of GreenOak with Bentall Kennedy,
Sun Life Financial Inc.’s leading North American
real estate and property management firm, to form
Bentall GreenOak. Please see page 23 for further
details of this transaction, which is expected to close
in the first half of 2019. We are particularly proud
of the growth and performance of the GreenOak
business and are pleased to have found in Bentall
GreenOak a strong strategic platform to fuel the next
generation of business growth while also delivering an
attractive return to Tetragon’s shareholders. TFG Asset
Management will continue to hold its key investment in
Bentall GreenOak, will serve on its Board of Directors,
will participate in investment committees for funds in
which TFG Asset Management will hold carried interest
and expects to invest in new Bentall GreenOak funds.
The performance to date of the GreenOak joint
venture reflects Tetragon’s overall investment strategy.
Having identified real estate – post financial crisis –
as an attractive asset class and investment strategy,
Tetragon partnered with the GreenOak Founders on
the launch of GreenOak, providing working capital, co-
investment capital and operating infrastructure to the
joint venture. The GreenOak joint venture has yielded
attractive returns on two levels: first, on Tetragon’s
investments in GreenOak products and, second,
through TFG Asset Management’s ownership stake
in GreenOak. Since the inception of the GreenOak
joint venture, Tetragon has committed more than
$410 million to the GreenOak investment programs.
As an investor in these programs, Tetragon has seen
what we believe are compelling realised returns and
a relatively swift return of investment capital. At the
same time, the joint venture itself has performed at
a high level. The announced merger has seen the fair
value of TFG Asset Management’s stake in GreenOak
increase by just under $100 million to approximately
$210 million(5) – all from a business launched in 2011.
As part of an active pre-merger restructuring of its
non-dilutable 23% interest(6) in the joint venture,
TFG Asset Management will hold a 29% interest in
GreenOak going into the merger with Bentall Kennedy,
making it the largest pre-merger owner in the joint
venture.
Equitix generated the second-highest investment
gains ($66.1 million) in 2018 for Tetragon through TFG
Asset Management. Over the past four years, Equitix
has nearly tripled its assets under management
(AUM), and has established itself as one of the leading
infrastructure managers in Europe. One of the larger
contributors to Equitix’s increase in value in 2018
was its successful take-private of the John Laing
Infrastructure Fund (JLIF) with Dalmore Capital in
July 2018. We believe that taking JLIF private was
an attractive opportunity for Equitix and Tetragon,
both through TFG Asset Management and directly
through its balance sheet. JLIF’s depressed share
price was influenced by a slight strategy shift as well
as political and construction risks. However, Equitix
believed that most of the assets were highly attractive
and were trading (even at a take-over premium) at a
more attractive valuation than single asset secondary
deals. From Equitix’s perspective, acquiring JLIF is
enabling an earlier deployment of its investors’ capital,
providing co-investment opportunities for Equitix
investors, and offering the opportunity for attractive
returns through improved management of the JLIF
assets. From TFG Asset Management’s perspective,
acquiring the JLIF assets is accelerating Equitix’s
business plan, which has already resulted in a positive
impact on Equitix’s fair value. We believe that this
deal highlights some of the strengths of TFG Asset
2018 ANNUAL REPORT 11
Management’s structure coupled with Tetragon’s
– In the case of Equitix, Tetragon acquired it in early
balance sheet. Equitix’s management team knew the
2015 and added it to the TFG Asset Management
JLIF assets well, the financing of those assets, and
the disconnect between public and private market
values, but was also able to leverage the experience
of the TFG Asset Management investment team in
mergers and acquisitions in the United Kingdom
and specifically its strategic advice in take-private
transactions. Tetragon, through its balance sheet,
was able to provide Equitix balance sheet capital for
the JLIF assets that were non-core. This combination
helped to achieve positive 2018 performance.
“Tetragon’s largest gain during the year
was from TFG Asset Management’s
GreenOak joint venture. The
performance gains in GreenOak were
the product of eight years of partnership
with the GreenOak Founders, with
the announcement in December of
the merger of GreenOak with Bentall
Kennedy, Sun Life Financial Inc.’s North
American real estate and property
management firm, to form Bentall
GreenOak.”
– Stephen Prince, Head of TFG Asset Management
platform. Under the management, oversight and
supervision of TFG Asset Management, Equitix’s
fair value has increased from its acquisition cost of
$133.1 million in 2015 to approximately $230 million as
at 31 December 2018(8); in addition, net loan repayment
receipts during that period totaled in excess of
$60 million. Its AUM has grown from approximately
£1.3 billion in early 2015 to approximately £3.9 billion
as at 31 December 2018.
– In the case of LCM, it was acquired in 2010 for
approximately $1 million and a commitment
to provide operating infrastructure. LCM had
approximately $2.5 billion of AUM at the time. In the
interim, Tetragon, through TFG Asset Management,
has leveraged infrastructure and strategic guidance
and management and, through its balance sheet,
investment capital, into a $155 million(9) business.
LCM’s AUM now stands at $8.3 billion.
During the year, TFG Asset Management added to the
senior ranks of its structured credit team with the
expectation of offering additional investment products
in 2019. Its TCIP(10) business’s Tetragon Credit Income III
L.P. (TCI III) final 2018 close in December brought TCI III
AUM to $400 million, with Tetragon Credit Income
II L.P. (TCI II) having raised just under $350 million
through its final close in 2017.
The GreenOak and Equitix growth stories echo that of
LCM.(7)
Bank loans through CLOs
– As noted above, in the case of GreenOak,
Tetragon, through TFG Asset Management,
leveraged infrastructure, strategic guidance and
management and working capital loans and,
through its balance sheet, working capital loans and
co-investment capital, into a holding with a fair value
of approximately $210 million in under eight years.
Tetragon’s various investments in bank loans through
CLOs produced the third-largest performance
gains.(11) In some cases, these gains were driven by
CLO liquidation values being above the estimated fair
values of the portfolio’s holdings. In other cases, gains
were driven by the active management of certain CLOs
where the team refinanced various debt tranches,
GreenOak’s AUM now stands at $10.6 billion (from zero
taking advantage of the lower liability pricing in the
at inception).
market.
12 TETR AGON FINANCIAL GROUP LIMITED
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Real estate
Real estate as an asset class delivered the next largest
performance gains.(12) Real estate gains were driven
from all of the GreenOak investments – European, U.S.
and Asian fund allocations – as well as from Tetragon’s
investments in Paraguayan farmland.
Private equity and other equities and credit
Remaining performance gains were from private equity
(with one direct private equity investment driving the
bulk of these gains), and other equities and credit,
where the portfolio’s allocations to biotechnology
positions and one event-driven investment drove
the gains of $31.6 million. Tetragon began making
investments in other equities and credit following the
formation of TFG Asset Management. As we wrote
above with respect to sourcing of compelling and
differentiated investment ideas, we believe that the
sourcing of these investments has been facilitated by
the managers on the TFG Asset Management platform
as well as third-party managers with whom Tetragon
invests.
Event-driven equities, convertible bonds and
quantitative strategies through hedge funds
The investment manager views the hedge fund
sector, in general, as somewhat saturated, with many
strategies competing for increasingly diminishing
opportunities for intrinsic alpha. As such, it has
come to believe that capacity-constrained, niche
and targeted approaches – such as the event-driven
equities and convertible bond strategies managed
by Polygon – are more likely to be good investments.
During 2018, Tetragon’s performance losses from its
investments in hedge funds were approximately $17
million, of which $12 million was from the Polygon
Distressed Opportunities Fund, which closed in the
first quarter of 2018, as previously reported. During
2018, the Polygon Convertible Opportunity Fund’s net
return was 1.8%, and the Polygon European Equity
Opportunity Fund - Absolute Return was down less
than one percent(13), whereas the HFRX Global Hedge
Fund Index was down 6.7%. The portfolio’s investment
in an external quantitative manager generated positive
returns, compared to the negative returns generated
by the HFRI Equity Market Neutral Index.(14) Although
this approach to hedge fund investing did not generate
performance gains for the portfolio in 2018, we
believe that it had the effect of protecting capital, with
only modest losses from the company’s hedge fund
investments. Furthermore, Tetragon’s hedge fund
investments are generally more liquid than its private
equity and CLO investments.
Other 2018 Events
Tetragon’s share price fell by 14.0% during the year
despite Tetragon’s NAV per share increasing by
6.6%. The company’s shares ended the year at a
48% discount to its NAV per share, which compares
to a discount of 36% at the end of 2017. 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. At the end of
2018, principal and employee ownership was 26%
of the company’s shares, which continues to place
insider ownership amongst the highest of U.K.-listed
investment companies.
In the fourth quarter of 2018, the company announced
its intention to repurchase $50 million of its non-voting
shares. The share repurchase was completed after the
end of the year, with a repurchase of approximately
4.3 million shares at a purchase price of $11.50 per
share.
At the end of the year, net cash balances were
$271.3 million, or 12.4% of the company’s NAV.
Tetragon’s investment manager currently expects
the following investment commitments, including:
GreenOak - $97.0 million; TCI III - $77.6 million;
Hawke’s Point(15) - $54.9 million; and six private equity
commitments totaling $18.8 million. The investment
manager also maintains these cash levels to fund
new businesses and opportunistic investments
and acquisitions, and pay dividends and fees. The
company has a $150 million revolver, of which
$38.0 million has been drawn. Whilst a high cash
balance can mute investment returns, the investment
2018 ANNUAL REPORT 13
managers. TFG Asset Management will seek to grow
a number of its existing businesses in 2019. There are
a number of businesses, where over time, TFG Asset
Management will have the opportunity to expand
either geographically or with product offerings (and in
some cases, both). In addition, TFG Asset Management
is focused on building out new businesses over the
short to medium-term, in some cases with support
from Tetragon’s balance sheet.
There are many risks in the markets – market volatility
and returns in 2018 exemplified these risks. With
quantitative easing seemingly nearing an end (the
pace and timing of which is still to be determined),
global sovereign debt levels at historic highs and
heightened political risks, Tetragon’s investment
manager remains cautious. On the other hand,
achieving attractive absolute investment returns
over time requires not just an acknowledgement of
market risks, but a view on market pricing. Eventually,
these risks become priced-in (and in some cases
more than priced-in). As we wrote above, we believe
that Tetragon’s ability to invest in a broad range of
asset classes and strategies, partner and invest with
superior asset managers, make investments directly
on its balance sheet, adjust its cash holdings as
appropriate to market cycles and maintain a long-term
view, will contribute to Tetragon’s performance in 2019
and over the long term.
With Regards,
THE BOARD OF DIRECTORS
28 February 2019
manager believes that in the current environment, the
portfolio’s cash provides useful flexibility.
The fourth quarter dividend was announced at 18.25
cents per share, bringing the full-year 2018 dividend to
72.0 cents per share, which is a 2.9% increase on 2017.
Using the year-end share price of $11.65, this gives a
yield of 6.2%. Dividend coverage at the end of the year
was 3.7x.
At the end of the year, Tetragon announced three
new Independent Directors, whose biographies are
featured in this report. The Independent Directors
bring extensive private equity and asset management
expertise as well as considerable operational and
administrative experience. These backgrounds and
experiences, as well as the overall composition of the
Board of Directors, should be valuable as Tetragon
continues to diversify its alternative asset portfolio
and looks to continue to grow TFG Asset Management.
We look forward to continuing our engagement with
both long-term and new shareholders during 2019.
Tetragon’s next annual investor day is scheduled to be
held in London during April 2020, where we hope to
see many of you.
Outlook
Despite increasing negativity in the leveraged loan
market, the investment manager continues to
be optimistic about its allocations to bank loans
through CLO equity. Covenant deterioration in the
leveraged loan market as well as increasing levels
of debt generally should be of concern to long
holders of corporate debt; however, CLO equity
remains an attractive investment due to a number of
factors, including that it may provide investors with
optionality on spread widening. With fixed liabilities
and floating-rate assets, CLO equity can benefit from
spread widening, provided that loan defaults are well
managed.
In addition, and as evidenced by 2018 performance,
the portfolio benefits from TFG Asset Management’s
management of its private equity investments in asset
14 TETR AGON FINANCIAL GROUP LIMITED
Notes:
(1) Otani, A and Wursthorn, M (2018), ‘No Refuge for Investors as 2018
Rout Sends Stocks, Bonds, Oil Lower’. The Wall Street Journal
(online), 25 November 2018.
(2) Polygon Global Partners LP and Polygon Global Partners LLP (and
certain of their affiliates), managers of open-ended hedge fund and
private equity vehicles across a number of strategies that are part
of TFG Asset Management, referred to in this report as “Polygon”.
Polygon Global Partners LLP is authorised and regulated by the
United Kingdom Financial Conduct Authority.
(3) GreenOak Real Estate, LP is referred to in this report as “GreenOak”.
TFG Asset Management owns a 23% interest in GreenOak.
(4) Equitix Holdings Limited, referred to in this report as “Equitix”. TFG
Asset Management owns 75% of the business.
(5) The fair value of GreenOak as at 31 December 2018 was $208.5
million. See Figure 10 in this report.
(6) TFG Asset Management’s interest is non-dilutable as to carried
interests in GreenOak-managed investment programs.
(7) LCM Asset Management LLC is referred to in this report as “LCM”. TFG
Asset Management owns a 100% interest in LCM.
(8) See Figure 10 in this report.
(9) The fair value of LCM as at 31 December 2018 was $154.9 million. See
Figure 10 in this report.
(10) 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. TFG Asset Management owns a
100% interest in TCIP.
(11) See Figure 10 in this report.
(12) See Figure 10 in this report.
(13) The Absolute Return Class A shares returned -0.94% net during 2018,
based on final values as calculated by the Fund’s administrator. The
Long-Bias L-A share class was launched on 1 October 2018; on a pro
forma basis, this class returned -7.72% net for 2018. Tetragon invested
in the L-A share class on 1 October 2018.
(14) The indices shown here have not been selected to represent
appropriate benchmarks to compare an investor's performance,
but rather are disclosed to allow for comparison of the investor's
performance to that of certain well-known and widely-recognised
indices. The volatility of the indices may be materially different
from the individual performance attained by a specific investor.
In addition, the Fund’s holdings may differ significantly from the
securities that comprise the indices. You cannot invest directly in
an index. The HFRX Global Hedge Fund Index (Bloomberg Code:
HFRXGL) and the HFRI Equity Market Neutral Index (Bloomberg
Code: HFRIEMNI) are compiled by HFR Hedge Fund Research Inc.
Further information relating to index constituents and calculation
methodology can be found at www.hedgefundresearch.com.
(15) Hawke’s Point Manager LP, an asset management company focused
on mining finance, referred to in this report as “Hawke’s Point”. TFG
Asset Management owns a 100% interest in Hawke’s Point.
INVESTMENT COMPANY
OF THE YEAR AWARDS 2018
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Tetragon was nominated for the 2018 and 2017 Investment Company of the
Year Award in the “Flexible” category. There were four other nominees for these
awards in 2018, and five other nominees in 2017. It was 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.
2018 ANNUAL REPORT 15
Investment Objective & Strategy
Tetragon is a closed-ended investment company that invests in a broad range
of assets, including bank loans, real estate, equities, credit, convertible bonds,
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.
16 TETR AGON FINANCIAL GROUP LIMITED
Investment Objective & Strategy (continued)
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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
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
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.
Following Tetragon’s acquisition of Polygon
Management L.P. in 2012, Tetragon’s Board of
Directors and its investment manager determined
that it was in the best interests of Tetragon and
its shareholders to have TFG Asset Management
manage, oversee and supervise Tetragon’s
private equity investments in asset management
companies. TFG Asset Management, as a
unified business, could enhance the value of
each individual investment and the entity as a
whole through a shared strategic direction and
operating infrastructure – encompassing critical
business management functions such as risk
management, investor relations, financial control,
technology, and compliance/legal matters –
while at the same time giving entrepreneurial
independence to the managers of the underlying
businesses. In light of the strategy to continue
to grow TFG Asset Management with a view to
a possible initial public offering and listing of its
shares, the combination of a number of relatively
uncorrelated businesses across different asset
classes and at different stages of development
under TFG Asset Management is also intended to
create a collectively more robust and diversified
business and income stream.
2018 ANNUAL REPORT 17
Key Performance Metrics
Tetragon focuses on the following key metrics when assessing how value is being created for, and delivered to,
Tetragon shareholders:
– NAV Per Share
– Investment Returns/Return on Equity
– Dividends
Fully Diluted NAV Per Share
FIGURE 3
NAV Per Share Total Return 2014-2018
Fully Diluted NAV per share (NAV per share) was $22.48 at 31
December 2018. NAV per share total return was 10.3% for
2018.
16.0%
8.1%
8.5%
9.0%
10.3%
2014
2015
2016
2017
2018
Investment Returns/Return on Equity*
RoE for 2018 was 12.1%. Earnings Per Share (EPS) for 2018
was $2.65.
FIGURE 4
Return on Equity 2014-2018
14.5%
Target RoE: 10-15%
Average RoE: 12.4%
12.1%
*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.
6.6%
6.3%
8.9%
2014
2015
2016
2017
2018
FIGURE 5
Dividend Per Share Comparison 2014-2018 (USD)
$0.6175
$0.6475
$0.6725
$0.7000
$0.7200
Dividends Per Share (DPS)
Tetragon declared a Q4 2018 dividend of $0.1825 per
share, for a full year dividend payout of $0.7200 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 $6.1775.
18 TETR AGON FINANCIAL GROUP LIMITED
2014
2015
2016
2017
2018
Investment Review
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NAV Per Share
Tetragon’s Fully Diluted NAV Per Share increased from $21.08 per share as at 31 December 2017 to $22.48 per share
as at 31 December 2018. Figure 6 below shows the contributions to that performance.
FIGURE 6
Year-on-Year NAV Per Share Progression (USD)(i)
25.00
24.50
24.00
23.50
23.00
22.50
22.00
21.50
21.00
20.50
21.08
(0.88)
(0.04)
(0.72)
3. 43
(0.39)
22.48
NAV at 31 December
2017
Investment income
and gains
Operating expenses,
management and
incentive fees
Interest expense
Dividends
Other share dilution NAV at 31 December
2018
(i)
Progression from 31 December 2017 to 31 December 2018 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. The impact
of the share repurchase in January 2019 is 52 cents of accretion.
2018 ANNUAL REPORT 19
Net Asset Breakdown Summary
Net Asset Breakdown Summary
The table shows a breakdown of the composition of Tetragon’s NAV at 31 December 2017 and 31 December 2018,
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
NAV at
31 Dec 2017
Additions(i) Disposals/
Receipts(i)
Gains/
Losses
NAV at
31 Dec 2018
Private equity in asset management companies
Event-driven equities, distressed opportunities, convertible
bonds and quantitative strategies
Bank loans
Real estate
Private equity
Other equities and credit(ii)
Net cash(iii)
Total
430.7
449.8
374.4
162.3
78.8
141.3
357.2
26.7
199.7
27.1
53.8
83.0
55.7
-
(26.2)
(202.6)
(115.3)
(40.4)
(32.6)
(71.4)
(93.7)
230.9
(16.8)
40.5
37.1
16.7
14.9
7.8
662.1
430.1
326.7
212.8
145.9
140.5
271.3
1,994.5
446.0
(582.2)
331.1
2,189.4
(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. Payments and receipts on the CFDs have
been netted off against each other.
(iii) Net cash consists of: (1) cash held directly by Tetragon, (2) excess margin held by brokers associated with assets held directly by Tetragon 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.”
20 TETR AGON FINANCIAL GROUP LIMITED
Net Asset Composition Summary
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As can be seen from Figure 8 below, Tetragon’s asset class allocation changed during the year, with a significant
increase in private equity in asset management companies, notable decreases in cash and bank loans, an
increase in private equity and marginal decreases in other asset classes. These changes are described in the
‘Detailed Investment Review’.
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
Net Asset Breakdown at 31 December 2017
Net Asset Breakdown at 31 December 2018
Net Cash
18%
22%
Private equity in asset
management companies
Other equities
and credit
Private equity
7%
4%
8%
Real estate
19%
Bank loans
22%
Event-driven equities,
convertible bonds,
quantitative strategies
Net cash
Other equities
and credit
12%
6%
7%
10%
Private equity
Real estate
Private equity in asset
management companies
30%
15%
20%
Bank loans
Event-driven equities,
convertible bonds,
quantitative strategies
CLOs
Hedge funds
Private equity-style funds
Private equity in asset management companies
Direct balance sheet investments
Private equity
Cash
Top 10 Holdings by Value as of 31 December 2018
FIGURE 9
Holding
Equitix
Asset Class
Private equity in asset management company
GreenOak Real Estate
Private equity in asset management company
Polygon European Equity Opportunity
Fund Absolute Return(i)
Event-driven equities
LCM
Private equity in asset management company
Polygon European Equity Opportunity
Fund Long Bias(i)
Event-driven equities
Polygon Convertible Opportunity Fund
Convertible bonds
Bank loans
Private equity
Private equity in asset management company
Quantitative strategies
1
2
3
4
5
6
7
8
9
TCI II
Private investment
Polygon
10 QT Fund Ltd
TOTAL
Value
($millions)
% of NAV
230.9
208.5
190.7
154.9
91.0
76.8
65.3
55.5
55.1
50.2
10.5%
9.5%
8.7%
7.1%
4.2%
3.5%
3.0%
2.5%
2.5%
2.3%
53.8%
(i) On 1 October 2018, Polygon introduced “Long Bias” share classes in the European Equity Opportunity Fund. The original share classes have been renamed “Absolute
Return”. As the share classes have different return profiles, the position previously called “Polygon European Equity Opportunity Fund” has been split into the two
different positions. Please refer to the section “event-driven equities” for further information. Tetragon invested in this share class on 1 October 2018.
2018 ANNUAL REPORT 21
Detailed Investment Review
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 2018; more detailed commentary for each asset class follows.
FIGURE 10
Asset Class
Private equity in asset management companies
Equitix
GreenOak
LCM
Polygon
TCIP
Hawke's Point
Event-driven equities
Polygon European Equity Opportunity Fund Absolute Return(ii)
Polygon European Equity Opportunity Fund Long Bias(ii)
Polygon Global Equities Fund
Convertible bonds
NAV at
31 Dec 2017
($ millions)
Additions(i)
Disposals/
Receipts(i)
Gains/
Losses
% of NAV
NAV at
31 Dec 2018
($ millions)
152.2
69.6
144.3
56.0
7.8
0.8
234.8
-
19.6
26.3
0.4
-
-
-
-
55.0
100.0
-
(13.7)
(10.9)
(1.6)
-
-
-
(100.0)
-
-
-
-
66.1
149.4
12.2
(0.9)
3.2
0.9
0.9
(9.0)
1.8
1.5
-
230.9
208.5
154.9
55.1
11.0
1.7
190.7
91.0
21.4
10.5%
9.5%
7.1%
2.5%
0.5%
0.1%
8.7%
4.2%
1.0%
76.8
3.5%
50.2
2.3%
Polygon Convertible Opportunity Fund
55.3
20.0
Quantitative strategies
QT Fund Ltd
Distressed opportunities
25.5
24.7
Polygon Distressed Opportunities Fund
114.6
-
(102.6)
(12.0)
-
0.0%
Bank Loans
U.S. CLOs (LCM)
TCI II
U.S. CLOs (non-LCM)
TCI III
European CLOs
Real estate
GreenOak Europe funds & co-investments
GreenOak U.S. funds & co-investments
GreenOak Asia funds & co-investments
GreenOak debt funds
Other real estate
Private equity
Direct
Funds & co-investments
Other equities & credit(iii)
Other equities
Other credit
Cash
Net cash(iv)
Total
191.9
68.1
107.1
-
7.3
47.7
55.1
23.9
6.2
29.4
43.6
35.2
107.3
34.0
23.3
-
-
3.8
-
29.0
6.7
15.0
2.6
0.5
40.0
43.0
52.8
2.9
(30.3)
(8.3)
(69.4)
-
(7.3)
(16.8)
(8.7)
(10.4)
(4.5)
-
(0.5)
(32.1)
(67.1)
(4.3)
18.0
5.5
16.3
0.4
0.3
8.0
4.4
12.6
0.3
11.8
14.0
2.7
23.7
(8.8)
202.9
65.3
54.0
4.2
0.3
67.9
57.5
41.1
4.6
41.7
97.1
48.8
116.7
23.8
9.3%
3.0%
2.5%
0.2%
0.0%
3.1%
2.6%
1.9%
0.2%
1.9%
4.4%
2.2%
5.3%
1.1%
357.2
-
(93.7)
7.8
271.3
12.4%
1,994.5
446.0
(582.2)
331.1
2,189.4
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) Please see note (i) on page 21.
(iii) 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.
(iv) Net cash consists of: (1) cash held directly by Tetragon, (2) excess margin held by brokers associated with assets held directly by Tetragon 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.”
22 TETR AGON FINANCIAL GROUP LIMITED
Detailed Investment Review (continued)
Private equity investments in asset management
companies
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. TFG Asset Management, as a
unified business, is intended to enhance the value of each
individual investment and the entity as a whole through
a shared strategic direction and operating infrastructure
– encompassing critical business management functions
such as risk management, investor relations, financial
control, technology, and compliance/legal matters – while
at the same time giving entrepreneurial independence
to the managers of the underlying businesses. In light of
the strategy to continue to grow TFG Asset Management
with a view to a possible initial public offering and listing
of its shares, the combination of a number of relatively
uncorrelated businesses across different asset classes
and at different stages of development under TFG Asset
Management is also intended to create a collectively more
robust and diversified business and income stream. As at
31 December 2018, TFG Asset Management investments
comprised Equitix, the GreenOak joint venture, LCM,
Polygon, TCIP, TCICM and Hawke’s Point. TFG Asset
Management recorded an investment gain of $230.9 million
during 2018, with positive contributions from all but one of
the businesses.
- Equitix: TFG Asset Management’s investment in Equitix
made a significant positive contribution of $66.1 million,
reflecting increased capital raised and the impact of
the acquisition of John Laing Infrastructure Fund (JLIF)
on its business model in the third quarter of 2018. From
Equitix’s perspective, acquiring JLIF is enabling an
earlier deployment of its investors’ capital, providing
co-investment opportunities for Equitix investors, and
offering the opportunity for attractive returns through
improved management of the JLIF assets. Fund V was
launched in January 2018 and is expected to reach its
£1 billion capital raising target in its final close in the
first quarter of 2019, with Fund VI to follow once Fund V
has been sufficiently invested. Equitix also continued its
structural evolution from variable primary fee income to
more stable asset management fee income.
- GreenOak: In December 2018, GreenOak announced a
merger with Bentall Kennedy, Sun Life Financial Inc.’s
North American real estate and property management
firm, to form Bentall GreenOak. The merger is expected
to close by the end of the first half of 2019, and TFG
Asset Management will continue to own nearly 13% of
the combined entity. There are a number of cashflow
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elements to the transaction, including TFG Asset
Management’s receipt of: approximately $42.3 million
upon closing of the transaction; and a series of fixed
quarterly payments and a portion of Bentall GreenOak’s
earnings over the next seven years. As part of the
transaction, Sun Life will have an option to acquire the
remaining interest in Bentall GreenOak approximately
seven years from the close of the transaction. The
transaction includes a put option that entitles TFG Asset
Management and the other minority owners of Bentall
GreenOak to sell their interest to Sun Life approximately
eight and a half years from the close of the transaction.
Alongside other GreenOak owners and team members,
TFG Asset Management will retain its current ownership
of carried interest in existing GreenOak funds and will
participate in carried interest in new Bentall GreenOak
funds.
A gain of $149.4 million in TFG Asset Management’s
investment in GreenOak was recorded for 2018. During
the first three quarters of the year, the receipt of carried
interest, the first non-carry distribution and meaningful
valuation gains flowed through, the latter due to strong
GreenOak performance as increased AUM (particularly in
U.S. Fund III and Europe Fund II) led to a much higher than
previously expected full year 2018 EBITDA and thus an
increase in the budgeted profitability for the year. During
the fourth quarter, GreenOak was valued based on the
cashflows arising out of Bentall GreenOak merger, leading
to a valuation gain of $98.4 million. Please see pages 62
and 63 for further information.
With respect to how AUM at the new Bentall GreenOak
entity will be calculated in the future, we expect to
assume a pro rata share of group AUM consistent
with the percentage of the group owned by TFG Asset
Management. Therefore, since TFG Asset Management will
continue to own nearly 13% of the combined entity, its
share of Bentall GreenOak’s $47 billion AUM would equate
to approximately $6.1 billion; this methodology will be
adopted once the transaction closes.
- LCM: A performance gain of $12.2 million was recorded
with respect to LCM, primarily attributable to the growth
in AUM from $6.5 billion to $8.3 billion. The business
continued to perform well, with zero outstanding loans
in payment default or bankruptcy at 31 December
2018, compared to 1.31% for the LSTA universe(1); whilst
applicable market multiples decreased in the fourth
quarter of 2018, there was an overall increase year-on-
year in the multiple of AUM from 2.10% to 2.35%.
(1) Sources: LCD Quarterly Review 4Q 2018, “Percent of Outstanding Loans in Default or
Bankruptcy”, and LCM.
2018 ANNUAL REPORT 23
Detailed Investment Review (continued)
- Polygon: Tetragon’s investment in Polygon recorded
a loss of $0.9 million, reflecting lower than budgeted
performance and capital raising.
- TCIP: TFG Asset Management’s investment in TCIP
recorded a gain of $3.2 million for the period, driven by
capital raising for TCI III, which had a close in December,
ending the year at $400.0 million.
- Hawke’s Point: The NAV of this business remains small.
Please see Note 5 in the 2018 Tetragon Financial Group
financial statements for further details on the basis for
determining the fair value of TFG Asset Management.
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.
Event-driven equities, convertible bonds and
quantitative strategies
Tetragon invests in event-driven equities, convertible
bonds and quantitative strategies through hedge funds. At
31 December 2018, these investments are primarily through
Polygon-managed hedge funds.
Event-driven equities
- Polygon European Equity Opportunity Fund: This fund
focuses on event-driven European equity strategies.
Tetragon’s investment in 2018 recorded a loss of
$8.1 million. Against a backdrop of poor performance
in European equity markets in 2018 (STOXX Europe 600
Index down -10.5%), and for hedge funds (HFRX Global
Hedge Fund Index down -6.7%), the performance of
the Absolute Return share class was down -0.94% net.
Corporate restructuring and dislocation trades were the
main detractors in the portfolio during 2018, offsetting
positive performance from the M&A book. In October,
Polygon introduced a new “Long Bias” share class in
the fund. Both share classes have the same portfolio of
35-40 positions and low portfolio leverage (maximum
1.5x), however, the Long Bias share class targets 75% net
exposure and has a hurdle of 75% to the STOXX Europe
600 Index, compared to net exposure of approximately
20% for the Absolute Return share class. In October,
Tetragon invested in the Long Bias share class which now
represents approximately one-third of its investment in
the fund, which remains Tetragon’s largest allocation.
- Polygon Global Equities Fund: Tetragon’s investment
generated a gain of $1.8 million in 2018. The fund was up
14.3% net. Tetragon’s allocation to this strategy remains
small in relation to its other hedge fund investments.
24 TETR AGON FINANCIAL GROUP LIMITED
Convertible bonds
- Polygon Convertible Opportunity Fund: This fund
invests in securities across the capital structure of issuers
primarily in Europe and North America, and seeks to
identify relative value opportunities leveraging Polygon’s
event-driven and convertible expertise in a concentrated
and heavily-researched portfolio. Tetragon’s investment
generated a gain of $1.5 million in 2018. Net performance
in the fund was +1.83% for its flagship share class,
compared to the HFR RV Fixed Income-Convertible
Arbitrage Index which was down -2.7%. The fund was
nominated for the eighth time for the 2018 Eurohedge
Award in the Convertibles and Volatility category; it has
won the award five times, including in 2017.(2) The fund,
which had been closed to new investment for several
years, temporarily reopened to accept new capital in early
2018; Tetragon increased its investment by $20 million
during this window.
Quantitative strategies
- QT Fund Ltd: Tetragon’s investment in this third party-
managed quantitative hedge fund was flat during 2018.
Tetragon added $24.7 million to its position during the
year. 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.
Bank loans
Tetragon continues to invest in bank loans through CLOs by
taking majority positions in the equity tranches. Tetragon’s
CLO portfolio performed well in 2018, despite significant
volatility in the U.S. credit markets towards the end of the
year. Tetragon exercised optional redemption and refinance
rights on certain CLO transactions during the year, and
made new U.S. CLO investments both directly and via the
TCIP platform. We continue to view CLOs as attractive
vehicles for obtaining long-term exposure to the leveraged
loan asset class. All segments in this category generated
gains in 2018.
(2) The Polygon Convertible Opportunity Fund was nominated for the 2018 EuroHedge
Award in the “Convertibles & Volatility” category. There were four other nominees for
this award. The EuroHedge Award is organised by EuroHedge magazine, a publica-
tion 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 method-
ology 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.
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Detailed Investment Review (continued)
- U.S. CLOs (LCM): LCM CLOs produced $18.0 million
of income in 2018 and the fair value of this segment
increased by 6%. All LCM CLO transactions were
compliant with their junior-most overcollateralization
O/C) tests as of the end of 2018.(3)
During 2018, Tetragon made add-on investments in
the equity tranches of three LCM-managed CLOs that
were “reset” (a restructuring of an existing CLO that
refinances its liabilities and increases the duration of the
reinvestment period, maximum weighted average life and
stated maturity), as well as a small minority investment in
one LCM-managed CLO.
Tetragon expects to make most of its new issue LCM
CLO equity investments via the TCIP platform, but
continues 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.
- TCI II(4) and TCI III(5): TCI II is the CLO investment vehicle
established by TCIP, a 100% owned subsidiary of TFG
Asset Management. As of 31 December 2018, Tetragon’s
commitment to TCI II was $70.0 million, which was fully
funded. During 2018, Tetragon’s investment in TCI II
generated $5.5 million in income.
During 2018, TCI II successfully refinanced certain debt
tranches in four CLOs, as CLO liability spreads tightened
during the first three quarters of the year relative to the
transactions’ pre-refinancing levels.
On 18 December 2018, TCIP’s other CLO investment
vehicle, TCI III, had a third close, bringing total capital
commitments to $400.0 million. Tetragon’s commitment
to TCI III is $81.4 million. Including a capital call notice
that was delivered in January 2019, Tetragon had funded
$7.4 million of its total commitment.
As of the end of 2018, TCI III had made four investments
and an additional commitment to purchase a majority of
the equity tranche of a CLO that closed in January 2019.
We will continue to provide updates as TCI III ramps its
portfolio over the remainder of its investment period.
(3) Based on the most recent trustee reports available as of 31 December 2018.
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) Tetragon Credit Income II L.P.
(5) Tetragon Credit Income III L.P.
- U.S. CLOs (non-LCM): Non-LCM-managed CLOs
generated $16.3 million of income in 2018, driven
primarily by the monetisation of loan price gains that
resulted in CLO liquidation values above our estimated
fair values. The fair value of this segment declined by 50%
from the prior year-end, as deals continued to naturally
amortise and we exercised optional redemption rights. As
of the end of 2018, all non-LCM CLOs were compliant with
their junior-most O/C tests.(6)
We continue to expect the fair value of this segment
to decline further in the near term. No new non-LCM
investments or “reset” transactions were made by
Tetragon directly in 2018, although we may selectively
choose to “reset” or refinance certain non-LCM
investments when appropriate. As with LCM CLOs, we
expect to make the majority of our new issue non-LCM
equity investments via the TCIP platform, rather than
directly by Tetragon.
- European CLOs: European CLOs had income of $0.3
million in 2018. At the end of the year, the total fair value
of this segment stood at $0.3 million, as substantially all
of our exposure to this segment has been monetised.
Real estate
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. All segments in this
category generated gains in 2018.
- 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. In 2018, these investments generated
gains of $8.0 million, primarily driven by the successful
refinancing of a Madrid-based commercial property,
along with upward revaluations of assets in the Europe II
fund as well as a standalone U.K. property investment.
(6) Based on the most recent trustee reports available as of 31 December 2018.
2018 ANNUAL REPORT 25
Detailed Investment Review (continued)
- 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 2018,
these investments generated net income of $4.4 million
for Tetragon, driven by realised and unrealised gains on
certain investment properties in U.S. Fund II.
- 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 gains of $12.6 million, Asia-
based investments were the most significant drivers of
Tetragon’s investment gains in GreenOak funds during
2018. Upward revaluations of Razorback and GreenOak
Asia II were the main contributors.
- 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; $0.3 million of gains were generated in 2018.
– 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 managed by Scimitar,
a specialist manager in South American farmland. During
2018, the farmlands were valued by an independent
valuation specialist, with a gain of $11.8 million reflecting
the first stage of the execution of the strategy to
transform cattle farms into crop farms with a higher value
per hectare.
Private equity
Tetragon’s private equity investments are split into sub-
categories of “direct”, comprising investments on the
balance sheet, and “fund investments” where Tetragon
invests in a fund as a limited partner or in a special purpose
vehicle as a co-investor.
- Direct: Investments in direct private equity stakes
generated net income of $14.0 million in 2018. This
category currently comprises several investments in
growth companies in North America, some of which have
had positive developments in progressing their business
26 TETR AGON FINANCIAL GROUP LIMITED
strategies during 2018. This segment now represents 4.4%
of NAV.
- Funds: At 31 December 2018, Tetragon had a 2.2%
allocation to investments in private equity funds and co-
investment vehicles in Europe and North America. This
category generated a gain of $2.7 million in 2018.
Other equities and credit
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 an investment via
TFG Asset Management vehicles. These investments tend
to be opportunistic and with a catalyst. We believe that
the sourcing of these investments has been facilitated by
the managers on the TFG Asset Management platform as
well as third-party managers with whom Tetragon invests.
We also believe this ability to invest flexibly is a benefit of
Tetragon’s structure.
- Other equities: This segment generated gains of $23.7
million; these investments comprised European and U.S.-
listed public equities. Biotechnology positions and one
event-driven investment drove the gains.
- Other credit: This generated a loss of $8.8 million during
2018, with one of the two investments in the segment
giving back all of the gains that it had made in 2017. This
position, a distressed credit trade, has been sold as of
February 2019.
Cash
Tetragon’s net cash balance, which is cash adjusted
for net liabilities, was $271.3 million at 31 December
2018. Approximately 44% 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 the period, the company used $446.0 million of cash
to make investments and $47.5 million to pay dividends.
Future cash commitments are approximately $252.8
million, comprising: hard and soft investment commitments
(GreenOak $97.0 million, TCI III $77.6 million, Hawke’s Point
$59.4 million, and private equity funds $18.8 million).
Tetragon currently has a $150.0 million revolving credit
facility in place, of which $38.0 million has been drawn.
Further Portfolio Metrics
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Exposures at 31 December 2018
FIGURE 11
B Y G E O G R A P H Y (1)
B Y E X P O S U R E (2)
Europe
46%
43%
North
America
9%
2%
Latin America
Asia Pacific
Cash
Hawke's Point(i)
1%
12%
TCIP(i)
4%
Equitix(iii)
11%
11%
Polygon(i)
20%
16%
LCM(i)
Direct balance sheet(ii)
8%
17%
External(ii)
GreenOak(i)
Cash
12%
Direct
11%
8%
LP external
39%
LP internal
B Y I N V E S T M E N T
GP
30%
Tetragon’s investments comprise:
GP – private equity in asset management
companies
LP internal – investments in funds/accounts on
the TFG Asset Management platform
LP external – investments in external
funds/accounts
Direct – direct balance sheet investments
Cash
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.
(1) Assumptions:
– Event-driven equities, 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, TCI II and TCI III are 100% North America
– European CLOs are 100% Europe.
– GreenOak (TFG Asset Management) is treated as 1/3 Europe, 1/3 North America., 1/3 Asia.
– Polygon (TFG Asset Management) is treated as 80% Europe, 20% North America.
– LCM (TFG Asset Management) is treated as 100% North America.
– Equitix (TFG Asset Management) is treated as 100% Europe.
– TCIP (TFG Asset Management) is treated as 100% North America.
(2)(i) Exposure represents the net asset value of (1) the private equity position in the relevant asset management company and (2) investments in funds/accounts managed
by that asset management company.
(ii) Exposure represents the net asset value of investments.
(iii) Exposure represents the net asset value of the private equity position in the asset management company. Source: Tetragon
2018 ANNUAL REPORT 27
Risk Factors
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.
– 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 investments in asset
management businesses. These include:
– The asset management business is intensely competitive.
– The performance of TFG Asset Management may be
negatively influenced by various factors, including the
performance of managed funds and vehicles and its
ability to raise capital from third-party clients.
– TFG Asset Management is highly dependent on its
investment professionals for the management of its
investment funds and vehicles and on other employees
for management, oversight and supervision of its asset
management businesses. If and when such persons
cease to participate in the management of TFG Asset
Management or its investment funds and vehicles, the
consequence could be material and adverse.
– Certain of TFG Asset Management’s businesses have a
limited or no operating history.
– The asset management business is subject to extensive
regulation.
– A further issuance of shares or repurchase of shares by
– Misconduct of TFG Asset Management employees or
Tetragon.
at the companies in which TFG Asset Management has
28 TETR AGON FINANCIAL GROUP LIMITED
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.
Risks Relating to Other Tetragon Portfolio Investments
Tetragon otherwise currently invests or expects to invest its
capital, directly and indirectly, in:
1. bank loans, generally through subordinated, residual
tranches of CLOs;
2. real estate, generally through 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. private equity, through fund investments and direct
investments.
6. infrastructure projects through Equitix Holdings Limited;
7. mining-industry related equity securities and
instruments, including through Hawke’s Point.
These portfolio investments are subject to various risks,
many of which are beyond Tetragon’s control, including:
– These securities are susceptible to losses of up to 100% of
the initial investments.
– The performance of these investments may significantly
depend upon the performance of the asset manager of
funds or products in which Tetragon invests.
– Tetragon may be exposed to counterparty risk.
– The fair value of investments, including illiquid
investments, may prove to be inaccurate and require
adjustment.
– Adverse changes in international, national or local
economic and other conditions could negatively affect
investments.
– Tetragon is subject to concentration and geographic risk
in its investment portfolio.
– Tetragon’s investments are subject to interest rate risk,
which could cause its cash flow, the fair value of its
investments and its operating results to decrease.
– Tetragon’s investments are subject to currency risks,
which could cause the value of its investments in U.S.
dollars to decrease regardless of the inherent value of the
underlying investments.
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– 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.
– Leverage and financing risk and the use of options,
futures, short sales, swaps, forwards and other derivative
instruments potentially magnify losses in equity
investments.
– Market illiquidity could negatively affect these
investments.
– 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 owned by
Reade Griffith and Paddy Dear, who also majority own the
investment manager. Pursuant to an agreement between
Reade Griffith and Paddy Dear, Reade Griffith is the
controller of Tetragon’s voting shares and 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 both 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
and to remove a Director from office for any reason. As a
result of these provisions, the Independent Directors are
limited in their ability to exercise influence over Tetragon’s
business and affairs.
2018 ANNUAL REPORT 29
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.
Tetragon's ability to pay its expenses and dividends will
depend on its earnings, financial condition, fair value of its
assets and such other factors that may be relevant from
time to time, including limitations under the Companies
(Guernsey) Law, 2008, as amended.
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 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.
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.
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.
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.
30 TETR AGON FINANCIAL GROUP LIMITED
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.
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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2018 ANNUAL REPORT 31
Governance
CHRISTOPHER M. GRAY
LEGAL, REGULATORY &
COMPLIANCE
Tetragon's Board of Directors
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The Board of Directors currently comprises five directors, of which three are Independent Directors.
Deron Haley, also known as D.J., is a founding Partner and Chief Operating Officer at
Durational Capital Management, LP, a New York-based private equity firm that specialises
in consumer buy-outs. Prior to Durational Capital Management, Mr. Haley was the Chief
Operating Officer of Hound Partners, LLC, a New York-based global equity fund. Prior
thereto, he was a senior executive of Ziff Brothers Investments, LLC, a global, single-family
office that invested directly in private and public equities, fixed income, global-macro,
and commodities, and led firm-wide operational and management initiatives. Mr. Haley
began his finance career as an equity research analyst, and later a registered trader before
taking on senior managerial roles. Prior to finance, Mr. Haley served five years active duty
in the United States Navy. He is a founding Director of the Navy SEAL Foundation and is a
member of the Governance and Investment Committees. Mr. Haley is a Director of Ibis Tek,
Inc, a small-business defense contractor, and also sits on the Investment Committee of The
Heinz Endowments. Mr. Haley recently served as an independent director on the Boards of
Directors of several funds managed by TFG Asset Management. He holds a B.S. degree in
Mechanical Engineering from Carnegie Mellon University in Pittsburgh and a M.B.A. degree
from Harvard Business School.
Steven Hart serves as president of Hart Capital LLC, which he founded in 1998 as a family
office to invest in a diversified portfolio of assets with a strong education industry focus.
He also co-founded Florian Education Investors LLC in May 2013, which now includes
an ACCSC accredited postsecondary vocational education company offering on ground
and online diploma and degree programs to the allied health community. Mr. Hart was
the co-owner (1999-2010) and member of the Board of Directors (1999-2007) of Lincoln
Educational Services Corporation. From 1983 to 1997, he was co-founder of a family-owned
conglomerate where he acquired and managed manufacturing and distribution companies
involved in automotive, printing, apparel and industrial textiles, electronics, synthetic foam,
and home furnishing industries. Mr. Hart served as chairman of the State of Connecticut
Investment Advisory Council from 1995 to 2003, which oversees the State of Connecticut
Retirement Plans and Trust Funds, and, as a trustee (1996-2003), and chairman (2003) of
the Stanford University Graduate School of Business Endowment Trust. He also served as
a member of Golden Seeds, an angel stage investment firm focused on empowerment of
women entrepreneurs. Since 2011, Mr. Hart has been a member of the Boards of Directors of
several funds connected with Blue Harbour Group, L.P., a hedge fund based in Greenwich,
Connecticut. He earned an M.B.A. degree from Stanford University Graduate School of
Business and a B.A. degree in mathematics and economics from Wesleyan University.
David O'Leary retired from State Street Corporation in Boston, Massachusetts in 2012,
where he was Executive Vice President - Chief Administrative Officer (2010-2012) and
Executive Vice President - Global Head of Human Resources (2005-2010). At State Street,
he managed a global team of 325 staff across 15 countries, was a member of its 10-person
Operating Group and Management Committee, reporting directly to its Chief Executive
Officer. From 1985 to 2004, Mr. O’Leary was at Credit Suisse First Boston, serving as
Managing Director, Global Head of Human Resources from 1988 to 2003, where he managed
a global team of 250 staff in 13 countries responsible for all aspects of Human Resources in
the Americas, Europe, and Asia. Mr. O’Leary began his career in financial services at Merrill
Lynch & Company in New York, where he was Vice President - Executive Compensation from
1981 to 1985. He earned a M.B.A. degree from the University of Massachusetts, where he
graduated first in his class, a M.S. degree from the State University of New York and a B.S.
degree from Union College.
2018 ANNUAL REPORT 33
DERON J. HALEY
Independent Director
STEVEN W. HART
Independent Director
DAVID C. O'LEARY
Independent Director
The Board of Directors (continued)
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, the Chief Investment Officer of TFG
Asset Management and the Chief Investment Officer 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.
READE GRIFFITH
PADDY DEAR
34 TETR AGON FINANCIAL GROUP LIMITED
The Board of Directors (continued)
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Size, Independence and Composition of the Board of
Directors of Tetragon
The structure, practices and committees of the Board of
Directors of Tetragon, including matters relating to the size,
independence and composition of the Board of Directors,
the election and removal of Directors, requirements
relating to board action and the powers delegated to board
committees, are governed by Tetragon’s Memorandum and
Articles of Incorporation.
Tetragon has five 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
Each member of Tetragon’s Board 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
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
The Board of Directors of Tetragon 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 both of the Directors affiliated with the holder of
Tetragon’s voting shares.
The Directors are responsible for the management of
Tetragon. 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 in which
Tetragon 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 in which
Tetragon is otherwise interested; and (c) shall not be
accountable to Tetragon for any benefit derived from any
such transaction or arrangement or from any interest
in any such body corporate, and no such transaction or
arrangement shall be void or voidable on the ground of
any such interest or benefit or because such Director is
present at or participates in the meeting of the Directors
that approves such transaction or arrangement, provided
that (i) the material facts as to the interest of such Director
in such transaction or arrangement have been disclosed
or are known to the Directors and the Directors in good
faith authorise the transaction or arrangement and (ii) the
approval of such transaction or arrangement includes the
votes of a majority of the Directors that are not interested in
such transaction or such transaction is otherwise found by
the Directors (before or after the fact) to be fair to Tetragon
as of the time it is authorised. Under the Investment
2018 ANNUAL REPORT 35
The Board of Directors (continued)
Management Agreement, the Directors have authorised the
investment manager 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 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 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 $125,000, in compensation for
service on the Board of Directors of Tetragon. 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. None of the Directors has a contract with
Tetragon providing for benefits upon termination of
employment.
Certain Corporate Governance Rules
Tetragon is required to comply with all provisions of the
Companies (Guernsey) Law, 2008, as amended, 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”. Tetragon reports against the
AIC Corporate Governance Guide for Investment Companies
and, as such, is deemed to meet the provisions of the Code
of Corporate Governance issued by the Guernsey Financial
Services Commission. No formal corporate governance
code applies to Tetragon under Dutch law.
Indemnity
Each present and former Director or officer of Tetragon
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. In addition, the Directors
may authorise the purchase or maintenance by Tetragon
for any Director or officer or former Director or officer of
Tetragon of any insurance, in respect of any liability which
would otherwise attach to the Director or officer or former
Director or officer.
36 TETR AGON FINANCIAL GROUP LIMITED
The Audit Committee
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The Audit Committee of Tetragon
currently comprises the three
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
independent auditor, the audit and non-
audit fees charged by the independent
auditor and the adequacy of Tetragon's
internal accounting controls.
2018 ANNUAL REPORT 37
The Investment Manager
Tetragon Financial Management LP has been appointed the
investment manager of Tetragon 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 its portfolio and currently
consists of Reade Griffith, Paddy Dear, Michael Rosenberg,
David Wishnow and Stephen Prince. The Investment
Committee determines the investment strategy of Tetragon
and approves each significant investment by it.
The investment manager’s Risk Committee is responsible
for the risk management of Tetragon and its 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, 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 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 giving notice to the
investment manager or the investment manager giving
notice to Tetragon in relation to such entity in the event
of (a) the party in respect of which notice has been given
38 TETR AGON FINANCIAL GROUP LIMITED
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 Tetragon or any investor in 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, in the absence of
fraud or wilful misconduct on the part of an indemnified
party, and Tetragon has 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 are not materially impaired thereby, and need not
disclose to Tetragon anything that comes to its attention
in the course of its business in any other capacity than as
investment manager. The investment manager is not liable
to account for any profit earned or benefit derived from
advice given by the investment manager to other persons.
The investment manager will not be liable to Tetragon
for any loss suffered in connection with the investment
The investment manager (continued)
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manager’s decision to offer investments to any other
person, or failure to offer investments to Tetragon.
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 of aggregate investment, the investment
manager obtains either (i) the approval of a majority of
the Directors 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 from a
financial point of view.
Management and Incentive Fees; Expenses
All fees and expenses of Tetragon, except for the incentive
fees for the investment manager (as described below), will
be paid by Tetragon, 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
Tetragon.
Tetragon will also pay to the investment manager an
incentive fee for each Calculation Period (as defined below)
equal to 25% of the increase in the NAV of Tetragon during
the Calculation Period (before deduction of any dividend
paid or the amount of any redemptions or repurchases
of shares (or other relevant capital adjustments) during
such Calculation Period) above (i) the Reference NAV (as
defined below) plus (ii) the Hurdle (as defined below)
for the Calculation Period. If the Hurdle is not met in
any Calculation Period (and no incentive fee is paid),
the shortfall will not carry forward to any subsequent
Calculation Period.
A “Calculation Period” is a period of three months ending
on March 31, June 30, September 30 and December 31
of each year, or as otherwise determined by the Board of
Directors of Tetragon.
The “Reference NAV” is the greater of (i) NAV at the end of
the Calculation Period immediately preceding the current
Calculation Period and (ii) the NAV as of the end of the
Calculation Period ending three months earlier than the
Calculation Period referred to in clause (i). For the purposes
of determining Reference NAV at the end of a Calculation
Period, NAV shall be adjusted by the amount of accrued
dividends and amounts of any redemptions or repurchases
of shares (or other relevant capital adjustments) and
incentive fees to be paid with respect to that Calculation
Period.
The “Hurdle” for any Calculation Period will equal (i) the
Reference NAV multiplied by (ii) the Hurdle Rate (defined
below).
The “Hurdle Rate” for any Calculation Period equals
3-month U.S. Dollar LIBOR determined as of 11:00 a.m.
London time on the first London business day of the
then-current Calculation Period plus the hurdle spread of
2.647858%, in each case multiplied by (x) the actual number
of days in the Calculation Period divided by (y) 365. (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 Tetragon.
An incentive fee of $17.5 million was accrued in the fourth
quarter of 2018 in accordance with Tetragon’s investment
management agreement. The hurdle rate for the first
quarter of 2019 incentive fee has been reset at 5.441738%
(Q4 2018: 5.045988%) as per the process outlined above
and in accordance with Tetragon’s investment management
agreement.
The NAV determined in accordance with IFRS includes
carrying investments in TFG Asset Management businesses
at fair value rather than being consolidated, which was how
they were previously treated under U.S. GAAP. The result of
the foregoing was an increase in NAV and an incentive fee
payable of $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
2018 ANNUAL REPORT 39
The investment manager (continued)
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 certain of the 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 generally bears all costs and expenses directly
related to its investments or prospective investments, such
as brokerage commissions, interest on debit balances or
borrowings, custodial fees and legal and consultant fees.
Tetragon also generally bears 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 include, inter alia:
– investing and reinvesting the assets of Tetragon in
securities, derivatives and other financial instruments
and other investments of whatever nature and
committing the assets of Tetragon 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, 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;
– 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.
40 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management is an investment of Tetragon,
and, as such, the investment manager is responsible for
exercising any of Tetragon’s voting or similar rights with
respect to TFG Asset Management as an investment
and is responsible for the management, oversight and/
or supervision of such investment. As with any other
category of investments, the investment manager is also
responsible for decisions with respect to acquisitions of
asset management businesses to be added to TFG Asset
Management using Tetragon’s cash (which may include
minority interests in asset management businesses, joint
ventures or other similar arrangements) – as investment
decisions with respect to Tetragon’s cash or other assets.
Following the acquisition of an asset management
business, that business then becomes a part of TFG Asset
Management and TFG Asset Management is responsible
for the management, oversight and/or supervision of such
business, including amendments to or modifications of the
terms or arrangements of its ownership of such business
(except, where relevant, to the extent of decisions with
respect to Tetragon’s cash), and any decision to sell or
otherwise dispose of all or any portion of such business.
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 management, oversight and/or
supervision of its various asset management businesses
as they form and grow the funds and vehicles that they
manage, and is responsible for its own costs.
Tetragon 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 and is also
responsible for decisions regarding financial support for
TFG Asset Management.
In connection with the management, oversight and/or
supervision of asset management businesses within TFG
Asset Management, TFG Asset Management (rather than
the investment manager) is responsible for, inter alia,
business development, marketing, legal and compliance,
risk management and governance, as well as guidance
on business issues faced by a new fund or vehicle and
The investment manager (continued)
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the strategic direction of such businesses. As such, TFG
Asset Management is responsible for any restructuring or
reorganisation of these asset management businesses from
time to time (to the extent that such arrangements do not
involve the acquisition of asset management businesses
using Tetragon’s cash), any disputes or litigation with
respect to the ownership arrangements of such businesses
and any decision to sell or otherwise dispose of all or any
portion of such businesses.
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(1) for a broad range of services to
support its activities.(2)
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.(3)
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 2018 the total amount
recharged to the investment manager was $17.6 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.(4)
each TFG Asset Management employee(5), directly or via
their team head, provides a breakdown of the approximate
percentage of time spent supporting the various businesses
for the previous month (this excludes certain functions
such as office management and technology that are
charged to business users on a standard basis (e.g., space
used or global headcount) which removes any need on
the part of those teams to allocate their FTEs to business
lines). TFG Asset Management employees should not
be incentivised to either over- or under-allocate to any
business, as their time allocation is not a consideration
in the determination of their overall compensation. Once
allocated percentages are determined and agreed, an FTE
is derived, subject to adjustments for items determined
by contractual arrangements. 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.
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,
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
2018 ANNUAL REPORT 41
The investment manager (continued)
recovered from) the investment manager have been
properly calculated in accordance with the approved cost-
allocation methodology. Tetragon’s Board of Directors has
adopted procedures for related-party transactions that
require approval of a majority of disinterested Directors.
Accordingly, Tetragon’s Independent Directors 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. 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.
Notes:
(1) These Polygon entities also provide infrastructure services to LCM,
infrastructure and investment management services to Hawke’s Point
and the TCI General Partner, and oversight services with respect to
Equitix.
(2) 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.
(3) This cost allocation methodology also applies to the other TFG
Asset Management businesses to which the Polygon entities provide
services.
(4) Employee compensation will also include TFG Asset Management’s
long-term incentive plan and its other equity-based awards.
(5) Amounts paid by TFG Asset Management to Messrs. Griffith and
Dear in connection with services provided by them to TFG Asset
Management are not allocated to the investment manager.
42 TETR AGON FINANCIAL GROUP LIMITED
TETRAGON FINANCIAL GROUP LIMITED
DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2018
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The Directors present to the shareholders their report together with the audited financial statements for the year ended
31 December 2018.
TETRAGON 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 symbols: TFG.LN and TFGS.LN). Tetragon has historically invested all its capital through
Tetragon Financial Group Master Fund Limited. Effective 31 December 2018, Tetragon and the Tetragon Master Fund were
amalgamated, with the amalgamated company continuing as Tetragon Financial Group 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. 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 at 31 December 2018, TFG Asset Management’s 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, TCI Capital Management LLC 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 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.
RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS
The results of operations are set out on page 3 of the Tetragon 2018 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 of Tetragon.
DIRECTORS
The Directors who held office during the year were:
Paddy Dear
Rupert Dorey*
Reade Griffith
Frederic Hervouet* (until 5 July 2018)
David Jeffreys*
William Rogers Jr.*
Effective upon the amalgamation, the following individuals were appointed members of the Tetragon Board of Directors:
Paddy Dear
Reade Griffith
Deron J. Haley*
Steven Hart*
David O’Leary*
* Independent Directors
2018 ANNUAL REPORT 43
The remuneration for Directors is determined by resolution of the holder of Tetragon’s voting shares. Each Director’s annual
fee is US$ 125,000 (2017: US$ 100,000) as compensation for service on the Board of Directors of both Tetragon and the
Tetragon Master Fund and was paid in quarterly instalments by the Tetragon Master 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 Tetragon instead of their quarterly director’s fee. During the
year, Frederic Hervouet and William Rogers received 1,912 and 5,179 shares respectively (2017: 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 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 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, 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 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 Board of Directors declared the following dividends during the year:
Dividend period
Quarter ended 31 December 2017
Quarter ended 31 March 2018
Quarter ended 30 June 2018
Quarter ended 30 September 2018
Dividend per share
$0.1775
$0.1775
$0.1800
$0.1800
On 26 February 2019, the Board of Directors declared a dividend amounting to US$ 0.1825 per share for the Quarter Ended
31 December 2018. The total dividend declared for the year ended 31 December 2018 amounted to US$ 0.7200 per share (31
December 2017: US$ 0.7000 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, as amended, 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 of the profit or
loss of Tetragon 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 Tetragon’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
44 TETR AGON FINANCIAL GROUP LIMITED
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• 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.
The Directors are responsible for the keeping of proper accounting records which disclose with reasonable accuracy at any
time Tetragon’s financial position and to enable them to ensure that the financial statements comply with the Companies
(Guernsey) Law, 2008, as amended. 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 Tetragon’s assets 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”. Tetragon reports against the Association of Investment Companies 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 gives 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 respectively require, inter alia, (i) an
indication of important events that have occurred since the end of the financial year and the likely future development of the
Fund and (ii) 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 is the appointed independent auditor of Tetragon and it has 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:
David O'Leary, Director
Steven Hart, Director
Date: 26 February 2019
2018 ANNUAL REPORT 45
Directors' Statements
The Directors of Tetragon confirm that (i) this Annual Report constitutes the Tetragon
management review for the year ended 31 December 2018 and contains a fair review
of that period and (ii) the 2018 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.
46 TETR AGON FINANCIAL GROUP LIMITED
The AIC Code of Corporate Governance
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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 400 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 2016 AIC Code is also set out on Tetragon’s website at www.
tetragoninv.com/site-services/aic/aic-code. Note that the AIC has published the 2019 AIC Code that will apply to accounting
periods beginning on or after 1 January 2019, which Tetragon will report against for its 2019 annual report.
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 more than a majority of the Board of Directors (three out
of five) 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 three 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.
2018 ANNUAL REPORT 47
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
5. There should be full disclosure of
information about the board.
Tetragon will continue to comply with this recommendation and include biographies of the
Directors in the Tetragon Annual Report. Biographies are also included on Tetragon’s website.
The Board of Directors has established an Audit Committee comprising the three Independent
Directors. 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 46 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”. As Tetragon reports against the AIC Code it is deemed to meet the
provisions of the Code of Corporate Governance issued by the Guernsey Financial Services
Commission. No formal corporate governance code applies to Tetragon under Dutch law.
6. The board should aim to have
a balance of skills, experience,
length of service and knowledge of
the company.
The Board of Directors has an appropriate balance of skills, experience, length of service
and knowledge of the company. 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.
7. The board should undertake
a formal and rigorous annual
evaluation of its own performance
and that of its committees and
individual directors.
The Board of Directors evaluates its own performance and effectiveness, including that of
individual Directors and committees, by open discussion in Board meetings.
8. Director remuneration should
No remuneration committee has been appointed by the Company.
reflect their duties, responsibilities
and the value of their time spent.
The remuneration for Directors is determined by resolution of the holder of Tetragon’s voting
shares. Currently, the Directors’ annual fee is $125,000, in compensation for service on the
Board of Directors. 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
36 of this report and under the headings Governance: Board of Directors: Compensation/
Indemnity on Tetragon’s website.
48 TETR AGON FINANCIAL GROUP LIMITED
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
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9. The independent directors should
take the lead in the appointment
of new directors and the process
should be disclosed in the annual
report.
Deron J. Haley, Steven Hart and David O’Leary were appointed to the Board of Directors on 31
December 2018. 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 35 of this report.
The Board of Directors has determined that each of the three Independent Directors satisfies
the standards for independence contained in The U.K. Corporate Governance Code in all
material respects.
10. Directors should be offered
relevant training and induction.
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 its 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,
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
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 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 38 and 39 of this report.
2018 ANNUAL REPORT 49
The AIC Code (continued)
Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
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 17 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)..
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.
50 TETR AGON FINANCIAL GROUP LIMITED
The AIC Code (continued)
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Corporate Governance Report (continued)
AIC Code Principle
Compliance Statement
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 independent auditor.
19. The board should regularly
monitor the shareholder profile
of the company and put in
place a system for canvassing
shareholder views and for
communicating the board’s views
to shareholders.
20. The board should normally take
responsibility for, and have a
direct involvement in, the content
of communications regarding
major corporate issues even if
the manager is asked to act as
spokesman.
21. The board should ensure that
shareholders are provided
with sufficient information for
them to understand the risk/
reward balance to which they are
exposed by holding the shares.
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.
2018 ANNUAL REPORT 51
Additional Information
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 has the authority to declare
dividend payments, based upon the recommendation of
the investment manager, subject to the approval of the
voting shares of Tetragon and adherence to applicable law,
including the satisfaction of a solvency test as 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.
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.
52 TETR AGON FINANCIAL GROUP LIMITED
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 Tetragon’s investments;
a general statement of the composition of Tetragon’s
investments; and the number of its legal issued and
outstanding shares.
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 U.K. 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.
2018
Financial
Review
KAREN HEROLD
RESEARCH
2018 Financial Review
This section shows consolidated financial data for Tetragon and the Tetragon Master Fund.
FIGURE 12
Financial Highlights
Tetragon Financial Group
Financial Highlights Through 2016 - 2018
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
2018
2017
2016
$241.5
$241.5
$2.65
$2.65
12.1%
$167.8
$171.3
$1.86
$1.90
8.9%
$116.8
$125.9
$1.26
$1.37
6.3%
$2,189.4
$1,994.5
$1,934.9
92.4
$23.70
97.4
$22.48
10.3%
90.1
$22.13
94.6
$21.08
9.0%
87.1
$22.21
96.7
$20.01
8.5%
$0.7200
$0.7000
$0.6725
Tetragon uses the following metrics, among others, to understand the progress and performance of the business:
– Net Income ($241.5 million): Please see Figure 13 for more details and a breakdown of the net income.
– Return on Equity (12.1%): Net Income ($241.5 million) divided by Net Assets at the start of the year ($1,994.5
million).
– Fully Diluted Shares Outstanding (97.4 million): Adjusts the IFRS shares outstanding (92.4 million) for
various dilutive factors (5.0 million shares). Please see Figure 30 for more details.
– EPS ($2.65): Calculated as Net Income ($241.5 million) divided by the time-weighted average IFRS or GAAP
shares during the period (91.1 million).
– Fully Diluted NAV Per Share ($22.48): Calculated as Net Assets ($2,189.4 million) divided by Fully Diluted
Shares Outstanding (97.4 million).
54 TETR AGON FINANCIAL GROUP LIMITED
2
0
1
8
F
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A
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V
I
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W
Consolidated Statement of Comprehensive Income
FIGURE 13
Tetragon Financial Group
Consolidated Statement of Comprehensive Income Total Year 2017 - Total Year 2018
Net gain on financial assets at fair value through profit or loss
Net (loss) / gain on derivative financial assets and liabilities
Other income
Investment income
Management and incentive fees
Other operating and administrative expenses
Interest expense
Total operating expenses
Net income
2018
($millions)
2017
($millions)
292.6
30.7
7.8
331.1
(78.3)
(7.8)
(3.5)
(89.6)
241.5
247.9
(11.0)
5.7
242.6
(61.8)
(6.4)
(3.1)
(71.3)
171.3
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.
During the period, an incentive fee of $47.6 million was expensed, of which $17.5 million remains outstanding at 31
December 2018.
2018 ANNUAL REPORT 55
Consolidated Statement of Financial Position
FIGURE 14
Tetragon Financial Group
Consolidated Statement of Financial Position as at 31 December 2017 and 31 December 2018
2018
($millions)
2017
($millions)
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
1,905.6
301.3
35.3
3.5
8.0
1,583.4
395.5
57.2
17.4
2.1
2,253.7
2,055.6
(19.5)
(38.0)
(6.8)
(64.3)
2,189.4
(16.5)
(38.0)
(6.6)
(61.1)
1,994.5
This table shows Tetragon at the end of 2018 and the consolidated view of Tetragon and the Tetragon Master Fund
at the end of 2017. Although the consolidated net assets are identical to the IFRS net assets reported by Tetragon,
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 $31.5 million (2017: $30.0 million) and decreasing
investments by $31.5 million (2017: $30.0 million). This treatment is consistent with how Tetragon has reported
these investments in prior periods. The net assets of $2,189.4 million are after accruing for an incentive fee of $17.5
million.
56 TETR AGON FINANCIAL GROUP LIMITED
Other
Information
MIKE HOCKING
POLYGON
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. TFG Asset Management, as a unified business, is intended to enhance
the value of each individual investment and the entity as a whole through a shared strategic direction and operating infrastructure –
encompassing critical business management functions such as risk management, investor relations, financial control, technology, and
compliance/legal matters – while at the same time giving entrepreneurial independence to the managers of the underlying businesses.
In light of the strategy to continue to grow TFG Asset Management with a view to a possible initial public offering and listing of its shares,
the combination of a number of relatively uncorrelated businesses across different asset classes and at different stages of development
under TFG Asset Management is also intended to create a collectively more robust and diversified business and income stream. As at 31
December 2018, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke’s Point, TCIP and TCICM.
TFG Asset Management has approximately $28.1 billion of AUM(1) and approximately 370 employees globally. Each of the asset managers
on the platform is privately held.
FIGURE 15
TFG Asset Management at a glance
Established
Joined Tetragon
2001
2009
2010
2010
2002
2012
2007
2015
Asset class
A CLO asset management
company.
A joint venture with a real
estate-focused principal
investing, lending and
advisory firm.
A manager of open-ended
hedge fund and private
equity vehicles across a
number of strategies.
An integrated core
infrastructure asset
management and primary
project platform.
AUM at 31 Dec 2018 ($Bn)
Percentage Tetragon
Ownership
Valuation at
31 Dec 2018 ($m)
Valuation at
31 Dec 2017 ($m)
Year-on-year change
$8.3
100%
$154.9
$144.3
7.3%
Products
16 CLOs
$10.6
23% (4)
$ 208.5
$69.6
199.6%
$1.4
100%
$55.1
$56.0
-1.6%
$5.0
75%
$230.9
$152.2
51.7%
12 funds focused across
the United States, Europe,
and Asia, in addition to co-
investment vehicles.
Four hedge funds
Eight funds and managed
accounts
Average fund duration
10-12 year s(2)
7-10 years
Quarterly liquidity
25 years
Valuation Methodology(3)
DCF and market multiples
DCF (sum-of-parts)
DCF, discount for illiquidity
DCF, debt at par + accrued
interest, discount for
illiquidity
Significant
unobservable inputs
Discount rate 11.5%, P/AUM
multiple 2.3%, DLOL 15%
(31 Dec 17: Discount rate
11.0%, P/AUM multiple 2.1%,
DLOL 15%)
Discount rate ranges from
5% to 25% for different cash
flows with a base discount
rate of 11%
(31 Dec 2017: Blended EBITDA
multiple 11.1x)
Discount rate 12.5%, DLOL
20%
(31 Dec 2017: Discount rate
12.5%, EBITDA multiple 7.0x,
DLOL 20%)
Discount rate 9.75%, DLOL
15%
(31 Dec 2017: Discount rate
8.75%, EBITDA multiple 6.75x,
DLOL 15%)
(1) 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, Equitix, TCI II, TCI III and TCICM as calculated by the applicable administrators for value date 31 December 2018. Includes, where relevant,
investments by Tetragon and TCI II (in the case of LCM and TCICM). TFG Asset Management AUM as used in this report includes the AUM of several investment advisers, including TFG 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) 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.
(3) Please see Note 5 of the 2018 Audited Financial Statements for more information.
(4) The GreenOak Real Estate joint venture has agreed to merge with Bentall Kennedy, Sun Life Financial Inc.’s leading North American real estate and property management firm. The combined Bentall
Kennedy and GreenOak entity will be named Bentall GreenOak and will be part of Sun Life Investment Management. Bentall GreenOak will remain a key strategic investment of TFG Asset Management.
58 TETR AGON FINANCIAL GROUP LIMITED
370
APPROX HEADCOUNT
Including GreenOak
GLOBAL OPER ATING
PL ATFORM
OFFICE LOCATIONS
London | New York
Plus GreenOak locations
FIGURE 15 (CONTINUED)
TFG Asset Management at a glance
Established
Joined Tetragon
Asset class
2014
2014
2015
2015
2015
2015
An asset management
company focused on mining
finance that seeks to provide
capital to companies in the
mining and resource sectors.
The holding company of the
general partner entities of
two private equity vehicles
focusing on CLO investments,
including majority stakes in
CLO equity tranches.
A CLO loan management
business.(5)
AUM at 31 Dec 2018 ($Bn)
Percentage Tetragon
Ownership
Valuation at
31 Dec 2018 ($m)
Valuation at
31 Dec 2017 ($m)
$0.02
100%
$1.7
$0.8
Year-on-year change
112.5%
$0.7
100%
$11.0
$7.8
41.0%
$2.1
100%
not applicable
not applicable
Products
Two investments in early
stage gold miners
Two private equity vehicles
Six CLOs
Average fund duration
Not applicable
10 years
CLOs are long-term, multi-
year investment vehicles
Valuation Methodology
Replacement cost
DCF
Not applicable
Significant
unobservable inputs
Discount rate 11.5%, DLOL
15%
(31 Dec 2017: Discount rate
11.0%)
(4) TCICM consists of TCI Capital Management II LLC and TCI Capital Management LLC, both of which are CLO managers.
$28.1B
TOTAL ASSETS UNDER
MANAGEMENT(1)
31 December 2018
$662.1M
TOTAL VALUATION
31 December 2018
53.7%
YEAR-ON-YEAR CHANGE
31 December 2018
2018 ANNUAL REPORT 59
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 2018 totalled approximately $28.1 billion.(i)
FIGURE 16 (i)
TFG Asset Management AUM by Business
at 31 December 2018 ($billions)
FIGURE 17(i)
TFG Asset Management AUM
at 31 December 2014-2018 ($billions)
$2.1
TCICM
$0.7
TCIP
$28.1
$23.0
$8.3
LCM
$19.5
$17.1
$11.1
$10.6
GreenOak
2014
2015
2016
2017
2018
LCM
GreenOak
Polygon
Equitix
TCIP
TCICM
$5.0
Equitix
$1.4
Polygon
FIGURE 18
Tetragon Financial Group
TFG Asset Management Pro Forma Statement of Operations (excluding GreenOak)(ii)
2018
($millions)
2017
($millions)
2016
($millions)
Management fee income
Performance and success fees(iii)
Other fee income
Distributions from GreenOak
Interest income
Total income
Operating, employee and administrative expenses
Minority interest
Net income - "EBITDA equivalent"
(i) Please see Note 1 on page 58.
85.7
24.0
13.0
13.2
3.6
139.5
(93.9)
(6.3)
39.3
74.8
45.8
12.4
8.4
4.1
145.5
(83.5)
(7.4)
54.6
64.9
55.1
16.3
3.8
2.7
142.8
(83.3)
(8.7)
50.8
(ii) This table includes the income and expenses attributable to TFG Asset Management’s majority owned businesses, Polygon, LCM, Equitix, Hawke’s Point and TCIP during
that period. Although TFG Asset Management currently has an 85% effective economic share of its business, 100% of Equitix’s income and expenses are reflected above;
15% of Equitix’s income and expenses are reversed out through the minority interest line, being the proportion not attributable to Tetragon. GreenOak EBITDA is not
included, but distributions relating to ordinary income and carried interest are 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.
(iii) 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.
60 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. The reported fee income includes
some amounts which were earned on capital invested in certain funds by Tetragon. During 2018, this included
$7.3 million of management fees and $1.0 million of performance and success fees. For the first time, GreenOak’s
contribution has been captured by including the distributions that it has made to Tetragon and, for comparative
purposes, prior periods have been updated accordingly.
– EBITDA: In 2018, TFG Asset Management’s EBITDA was $39.3 million, which was down on the previous two
years. Whilst management fee income continued to grow, a significant reduction in performance and success
fees were the primary reason for the overall EBITDA reduction.
– Management fee income: Management fee income continued to grow, increasing by $10.9 million or 15%
year-on-year. Of note, Equitix management fee income increased by $8.2 million, or 28.6%, as AUM continued
to grow. TCIP added $1.9 million in management fees as TCI II became fully invested and TCI III started putting
capital to work, thus triggering management fees. LCM also added $2.3 million as AUM was increased. Polygon
was broadly unchanged, as was Hawke’s Point.
– Performance and success fees: Unlike management fee income, performance and success fees can be quite
volatile in nature and subject to timing differences. Overall, this category was down $21.8 million on the prior
year and was a significant driver of the overall EBITDA reduction year-on-year. Equitix primary fee income
declined by $12.5 million to $14.0 million, which reflects partly timing and partly a reduction in the number of
closed transactions. Performance fee income was down $9.4 million, as the Polygon funds, like the rest of the
hedge fund industry, had a tough 2018. This was slightly cushioned by an increase in Equitix performance fees/
carried interest.
– Other fee income: This category includes three different buckets of fees: (i) income generated by Equitix on
management services contracts which is known as the EMS business (ii) third-party CLO management fee
income relating to certain U.S. CLO 1.0 transactions and (iii) certain cost recoveries from Tetragon relating to
seeded Polygon hedge funds. EMS fee income continued to grow, increasing from $7.4 million to $9.9 million
year-on-year. This was partially offset by a reduction in cost recoveries on the Polygon funds with the Global
Equities fund now the only fund which operates with the cost recovery arrangement in place.
– Distributions from GreenOak: Distributions from GreenOak reflect (i) distributions from ongoing operations
and (ii) distributions from carried interest. To date, carried interest has made up nearly 80% of these
distributions with the first distribution from ongoing operations of $5.2 million being made in 2018. Carried
interest from Asia II and U.S. Fund II contributed most of the rest of 2018’s distributions. Going forward, post
the Bentall GreenOak merger, we would expect to see carried interest distributions being supplemented by the
fixed and variable payments agreed as part of that deal.
– Operating expenses: Operating expenses increased by $10.4 million year-on-year, with over 90% of this
coming from Equitix as this business added headcount and continued to scale up. TCIP also saw an increase in
costs reflecting an increased allocation of resource to this business line with the launch and successful raise of
TCI III as well as to support new business lines. We view the increase in expenses as an investment to support
greater AUM in the future.
2018 ANNUAL REPORT 61
TFG Asset Management Overview (continued)
Overview of the Bentall GreenOak merger
In December 2018, GreenOak announced a merger with Bentall Kennedy, Sun Life Financial Inc.’s North American
real estate and property management firm, to form Bentall GreenOak. The merger is expected to close by the end
of the first half of 2019. Sun Life will own 56% of Bentall GreenOak, with the GreenOak owners holding 44%. As
part of a pre-merger restructuring of its non-dilutable 23% interest in the joint venture, TFG Asset Management
will hold a 29% interest in GreenOak going into the merger with Bentall Kennedy.
As part of the proposed business combination, TFG Asset Management will receive the following cash flows:
– an initial upfront cash payment of $42.3 million;
– a series of fixed quarterly payments, commencing from deal close up to the fourth quarter of 2026;
– a series of variable distributions based on the performance of Bentall GreenOak during 2019 to 2026;
– carried interest based on the performance of existing GreenOak funds;
– carried interest based on the performance of Bentall GreenOak’s new funds; and
– a final cash payment in the form of a call option payout to be exercised by Sun Life in 2026 (or a put option
payout to be exercised by TFG Asset Management in 2027). The exercise price will be determined based on the
average EBITDA of Bentall GreenOak during the two years prior to exercising the option.
The Q3 2018 GreenOak valuation versus its value going into the merger
In the third quarter of 2018, TFG Asset Management’s 23% interest in GreenOak was valued at $110.1 million. The
valuation was based on the following:
– maintainable EBITDA for the business of $32.0 million;
– expected carried interest of $11.3 million; and
– a market multiple of 11.1x.
GreenOak’s value going into the merger is $560 million on a standalone basis. This excludes the carried interest
from existing funds, and is based on a multiple of 13.2x on a projected 2018 EBITDA of $42.4 million. This implies a
valuation of $157.7 million, including carried interest, for Tetragon’s 23% original share in the business, and a 43%
increase in value compared to the third quarter of valuation. As noted above, as part of a pre-merger restructuring
of its non-dilutable 23% interest in the joint venture, TFG Asset Management will hold a 29% interest in GreenOak
going into the merger with Bentall Kennedy.
We set out the impact of each of the components in the chart below:
Quarterly NAV progression:
FIGURE 19
All figures below are in millions of U.S. dollars.
240.0
200.0
160.0
120.0
80.0
40.0
110.1
54.5
( 36.8)
33.6
31.7
15.4
245.3
208.5
Q3 2018 valuation
Multiple uplift
EBITDA uplift
Increase in ownership
to 29%
Deal premium
Pre-DLOL valuation
Discount for lack of
liquidity
Q4 2018 valuation
62 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management Overview (continued)
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Sum of the parts valuation:
FIGURE 20
All figures below are in millions of U.S. dollars.
240.0
200.0
160.0
120.0
80.0
40.0
0.0
74.8
32.8
74.1
( 36.8)
13.1
28.7
21.8
245.3
208.5
Upfront cash
payment
Fixed quarterly
distributions
Variable
distributions
Carried interest from
existing funds
Carried interest from
future funds
Option payout
Pre-DLOL valuation Discount for lack of
Q4 2018 valuation
liquidity
Upfront cash payment:
Sun Life will pay an initial upfront cash payment of $146 million to the GreenOak owners in order for Sun Life to
have a majority equity interest of 56% in Bentall GreenOak.
Tetragon’s share of the upfront payment, net of tax, is estimated to be $32.8 million.
Fixed Quarterly Distributions:
Sun Life will acquire from GreenOak's owners their respective rights to 75% of the distributions of operating
income from Bentall GreenOak (based on the business plan of the combined entity prepared by Sun Life and
GreenOak). In return, Sun Life will make a series of equal quarterly fixed payments to the GreenOak Founders
and Tetragon for the next seven years, commencing the first quarter post the closing of the transaction. These
payments will be obligations of Sun Life and have been discounted at 5% on a post-tax basis.
Variable Distributions:
Tetragon will be entitled to its share of 25% of Bentall GreenOak’s cumulative distributable earnings on a quarterly
basis (whilst the remaining 75% would be exchanged for fixed payments as described above). These post-tax
distributions are based on the Bentall GreenOak business plan and have been discounted at 11%.
Carried interest from existing funds:
Tetragon’s share of carried interest in existing funds has been valued at $28.7 million.
Carried interest from future funds:
This covers Tetragon’s projected share of estimated carried interest payments accruing on funds launched by the
new merged entity. A discount rate of 25% has been applied to post-tax cash flows.
Option Pay-out:
Sun Life will have the option to buy out the GreenOak Founders’ and Tetragon’s equity interests in Bentall
GreenOak after the finalisation of the financial statements of Bentall GreenOak for the calendar year December
2025. If Sun Life does not exercise the call in 2026, the GreenOak Founders and Tetragon will have the option to
sell their equity interest in Bentall GreenOak to Sun Life during the following financial year.
For the purpose of the valuation exercise, the post-tax receipts have been discounted at 11%.
Discount for lack of liquidity:
A discount for the lack of liquidity of 15% has been applied to reflect the fact that the interests in Bentall
GreenOak are not as easily tradeable as those in a publicly-listed company.
2018 ANNUAL REPORT 63
TFG Asset Management Company Overviews
The following pages provide a summary of each of TFG Asset Management’s asset management
companies and a review of AUM growth and underlying strategies and investment vehicles.
All data is at 31 December 2018, unless otherwise stated. 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.
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.
– TFG Asset Management 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 21
LCM AUM History(i) ($billions)
LCM's AUM was $8.3 billion at 31 December 2018.
$6.1
$6.6
$6.5
$5.3
$8.3
YE 2014
YE 2015
YE 2016
YE 2017
YE 2018
CLO 1.0
CLO 2.0
(i) Includes, where relevant, investments from Tetragon and TCI II.
Products
– LCM currently manages 16 CLOs.
64 TETR AGON FINANCIAL GROUP LIMITED
TFG Asset Management Company Overviews (continued)
Description of Business
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TM
– GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks to create
long-term value for its investors and provide strategic advice to its clients.
– The business was established in 2010 as a joint venture with Tetragon and has a presence in New
York, London, Tokyo, Los Angeles, Madrid, Luxembourg, Milan, Paris, Seoul and Mumbai.
– TFG Asset Management owns 23% of the joint venture. In December 2018, GreenOak announced
a merger with Bentall Kennedy, Sun Life Financial Inc.’s North American real estate and property
management firm; the merged entity will be named Bentall GreenOak. The merger is expected to
close by the end of the first half of 2019, and TFG Asset Management will continue to own nearly
13% of the combined entity.
– GreenOak currently has funds with investments focused on the United States, Japan, Spain and the
United Kingdom.
– Further information on GreenOak is available at www.greenoakrealestate.com.
FIGURE 22
GreenOak AUM History(i) ($billions)
GreenOak's AUM was $10.6 billion at 31 December 2018.
$10.6
$7.1
$7.6
$6.6
$4.4
YE 2014
YE 2015
YE 2016
YE 2017
YE 2018
Europe
U.S.
Japan
(i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2018. Tetragon owns a 23% stake in GreenOak. AUM includes all third-party
interests and total projected capital investment costs.
Products
– Europe Fund I (Spain)
– Europe Fund II
– Europe Senior Debt Fund
– UK Active Income Fund
– UK Senior Debt Fund
– UK Senior Debt Fund II
– Japan Fund I
– Asia Fund II
– U.S. Fund I
– U.S. Fund II
– U.S. Fund III
– U.S. Core Plus Fund
– Global advisory
– Grafton Partners
– Co-investment vehicles
2018 ANNUAL REPORT 65
TFG Asset Management Company Overviews (continued)
Description of Business
– Polygon manages open-ended hedge fund and private equity vehicles across a number of
TM
strategies.
– Polygon was established in 2002 and has offices in New York and London.
– TFG Asset Management owns 100% of the business.
– Further information on Polygon is available at www.polygoninv.com.
FIGURE 23
Polygon AUM History(i) ($billions)
Polygon's AUM was $1.4 billion for all funds and $1.3 billion for open strategies at 31 December 2018.
$1.2
$1.1
$1.4
$1.5
$1.3
YE 2014
YE 2015
YE 2016
YE 2017
YE 2018
Convertible Opportunity Fund
Distressed Opportunities Fund
European Equity Opportunity Fund
Global Equities Fund
Mining Opportunity Fund
(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon
Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund
administrator at 31 December 2014, 2015, 2016, 2017 and 2018. Includes, where relevant, investments by Tetragon. The Polygon Mining Opportunity Fund was
closed in the fourth quarter of 2017 and the Polygon Distressed Opportunities Fund was closed in the third quarter of 2018.
FIGURE 24
Polygon Funds Summary*
Fund
Convertible Opportunity Fund(2)
European Equity Opportunity Fund - Absolute Return(3)
European Equity Opportunity Fund - Long Bias(4)
Distressed Opportunities Fund(5)
Global Equities Fund(6)
Total AUM - Open Funds
Recovery Fund(7)
TOTAL AUM
*Please see the next page for important notes.
66 TETR AGON FINANCIAL GROUP LIMITED
AUM at
31 Dec 2018
($millions)(1)
2018
Net Performance
Annualised Net
LTD Performance
642.8
298.8
312.2
-
25.0
1,278.7
84.1
1,362.8
1.8%
(0.9%)
(7.7%)
(26.3%)
14.3%
13.9%
8.8%
11.4%
0.2%
12.7%
Estimated
approx. LTD
multiple
NA
1.83x
TFG Asset Management Company Overviews (continued)
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Notes - Figure 24
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.
(1) The AUM noted includes investments in the relevant strategies by
Tetragon, other than in respect of the Polygon Recovery Fund, where
there is no such investment. The Polygon Recovery Fund, at the time
of the Polygon transaction and currently, remains a closed investment
strategy.
(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 2018 and returns from inception
through June 2018 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 - Absolute Return
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 European Equity Opportunity Fund - Long Bias began
trading on 1 October 2018. Returns for the managed account following
the Strategy are calculated by the manager and are pro forma
adjusted based on performance data provided by the independent
administrator of a managed account advised by Polygon which is
managed according to the European Long Bias Strategy, adjusted to
reflect a management fee of 1.5% and a performance fee of 20% above
a hurdle rate equal to 75% of the total return of the STOXX Europe 600
Index, which is the hurdle rate benchmark for the managed account
following the Strategy.
(5) The Polygon Distressed Opportunities Fund began trading on 2
September 2013. Returns shown are for offshore Class A shares,
reflecting the terms set forth in the Offering Memorandum (2.0%
management fee, 20% incentive fee and other items, in each case).
This fund was closed in the third quarter of 2018.
(6) The Polygon Global Equities Fund began trading with Class B/B1
shares, which carry no incentive fees, on 12 September 2011. Returns
shown from inception through August 2013 have been pro forma
adjusted to account for a 2.0% management fee and a 20% incentive
fee, in each case, as 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.
(7) The manager of the Polygon Recovery Fund L.P. is a subsidiary of
Tetragon. The management fees earned in respect of the Polygon
Recovery Fund are included in the TFG Asset Management business
segment described herein. The Polygon Recovery Fund is a limited-
life vehicle seeking to dispose of its portfolio securities prior to the
expiration of its term. In February 2019, the Polygon Recovery Fund’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. The
Polygon Recovery Fund’s P&L for 2018 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. The Polygon Recovery Fund 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.
2018 ANNUAL REPORT 67
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.
– TFG Asset Management owns 75% of the business.
– 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 25
Equitix AUM History (£billions)
Equitix’s AUM was £3.9 billion ($5.0 billion) at 31 December 2018.(i)
£3.9
£2.7
£1.9
£2.1
£1.3
YE 2014
YE 2015
YE 2016
YE 2017
YE 2018
Equitix Fund I
Equitix Fund IV
Managed Account
Equitix Fund II
Equitix Fund V
Equitix Fund III
Energy Efficiency Funds
(i) USD-GBP exchange rate at 31 December 2018.
Products
– Fund I
– Fund II
– Fund III
– Fund IV
– Energy Efficiency Funds
– Fund V
– Euro Fund I
– Managed accounts
– Energy Saving Investments
68 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.
– TFG Asset Management owns 100% of the business.
– To date, Hawke’s Point has two investments in early stage gold miners.
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Hawke's Point AUM
Hawke's Point's AUM was $17.9 million at 31 December 2018.
2018 ANNUAL REPORT 69
TFG Asset Management Company Overviews (continued)
Description of Business
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– TCIP is the holding company of the general partner entities of certain private equity
vehicles focusing on CLO investments, including majority stakes in CLO equity tranches.(i)
– The business was established at the end of 2015 and is managed out of New York and
London.
– TFG Asset Management owns 100% of the business.
– TCIP currently owns two entities, which act as general partner of Tetragon Credit Income
II L.P. (TCI II) and Tetragon Credit Income III L.P. (TCI III) respectively. TCIP focuses on CLO
investments, including majority stakes in CLO equity tranches of transactions managed
by LCM or sub-advised by third-party CLO managers. The vehicles are structured with
a management fee and carried interest over a preferred return (and in the case of TCI II,
solely on non-LCM investments) with a multi-year investment period and a term of seven
years (subject to potential extensions and otherwise as required by applicable regulatory
requirements).
– TCI II and TCI III invest in CLOs managed by LCM and TCICM.
– Further information on TCIP is available at www.tetragoninv.com.
(i) For additional information on Tetragon’s CLO equity investments, including its buy and hold strategy, please refer to
www.tetragoninv.com/portfolio/bank-loans-via-clos.
FIGURE 26
TCIP Committed Capital History ($millions)
TCI II and TCI III’s total committed capital was $724.0 million in aggregate at 31 December 2018.
$724
$604
YE 2017
TCI II
TCI III
YE 2018
$253
YE 2016
Products
– Tetragon Credit Income II L.P.
– Tetragon Credit Income III L.P.
70 TETR AGON FINANCIAL GROUP LIMITED
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TFG Asset Management Company Overviews (continued)
Description of Business
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– The TCICM business is a specialist in below-investment grade U.S. broadly-syndicated
leveraged loans. TCICM consists of TCI Capital Management II LLC, which was established
as a Delaware limited liability company in November 2015 and is a subsidiary of Tetragon
Credit Income II L.P and TCI Capital Management LLC, which was established as a
Delaware limited liability company in September 2017. The TCICM business acts as a CLO
collateral manager for certain CLO investments. It utilises, and has access to, the TFG
Asset Management platform, including personnel from Polygon and LCM.
– TFG Asset Management owns 100% of the business.
– Currently, TCICM manages loan assets exclusively through CLOs (which includes
warehouse vehicles created in anticipation of future CLOs), which are long-term, multi-
year investment vehicles. At this time, TCICM utilises, and expects to continue to utilise,
the investment expertise of certain third-party sub-advisors to assist in the management
of its CLOs. Such sub-advisors will typically earn a substantial portion of the management
fees from the CLOs.
– Further information TCICM is available at www.tetragoninv.com.
FIGURE 27
TCICM AUM History(i) ($billions)
As of 31 December 2018, TCICM had AUM of approximately $2.1 billion.(i) During 2018, the management contract for a
CLO was assigned from TCICM to PGIM, Inc., accounting for the reduction in AUM.
$3.1
$2.1
$1.4
YE 2016
YE 2017
YE 2018
(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.
2018 ANNUAL REPORT 71
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:
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 SBAI, formerly known as
the HFSB or 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.
Syncona Limited
TFG Asset Management continues to be a contributor
to Syncona Limited, a U.K.-based charitable investment
vehicle, by charging no fees on Syncona investments into
TFG Asset Management products.(1) Syncona is a leading
FTSE 250 healthcare 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 nine investee
companies in life science and a range of fund investments,
with the statement, “We have a range of actively managed
fund investments in leading long-only and alternative
funds, across a variety of strategies and geographies. This
represents a productively deployed pool of capital to draw
down to invest in life sciences over the long term.” Syncona
is aligned with two of the premium charitable funders
in U.K. 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.
Royal Court Theatre
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.
(1) As of Syncona’s Interim Results Report, 21 November 2018.
72 TETR AGON FINANCIAL GROUP LIMITED
Share Repurchases & Distributions
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Tetragon Share Repurchase History
FIGURE 28
Tetragon Financial Group
Share Repurchase and Dividend History ($millions)
Year
Amount repurchased
Cumulative amount
Dividends paid
Cumulative dividends
paid
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
TOTAL
$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
$609.6
$56.5
$60.4
$18.8
$37.5
$46.4
$51.5
$55.5
$58.7
$63.3
$61.0
$64.0
$65.1
$638.7
$56.5
$117.0
$135.7
$173.3
$219.6
$271.1
$326.6
$385.3
$448.6
$509.6
$573.6
$638.7
Share Repurchases and Dividend Distributions(1)
The below graph shows cumulative historical share repurchases and dividends distributed by Tetragon from inception to
31 December 2018 in millions of U.S. dollars. In addition, Tetragon repurchased $50 million of its shares in January 2019.
FIGURE 29
$834.0
$448.6
$385.4
$1,052.8
$509.6
$543.2
$1,183.2
$573.6
$1,248.3
$638.7
$609.6
$609.6
Inception - 2015
2016
2017
2018
Cumulative Share Repurchases ($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.
2018 ANNUAL REPORT 73
Share Reconciliation and Shareholdings
FIGURE 30 (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: Certain Escrow Shares(1.ii)
Add: Dilution for equity-based awards(1.iii)
Fully Diluted Shares Outstanding
Shares at
31 December 2018
(millions)
139.7
38.7
8.6
92.4
2.3
2.7
97.4
Shareholdings
Persons affiliated with Tetragon maintain significant interests in Tetragon shares. For example, as of 31 December 2018, the
following persons own (directly or indirectly) interests in shares in Tetragon in the amounts set forth below:
FIGURE 31
Individual
Mr. Reade Griffith
Mr. Paddy Dear
Mr. David Wishnow
Mr. Michael Rosenberg
Other Tetragon/Polygon Employees
Equity-based awards(2)
Shareholding at
31 December 2018
12,553,797
4,210,182
749,144
575,080
2,803,004
5,107,040
(1) (i) The Total Escrow Shares of 8.6 million consists of 6.3 million shares held in a separate escrow account in relation to equity-based compensation and 2.3 million shares
held in a separate escrow account relating to deferred incentive fees payable to the manager.
(ii) This comprises 2.3 million shares held in a separate escrow account relating to deferred incentive fees payable to the manager.
(iii) Dilution in relation to equity-based awards by TFG Asset Management for certain senior employees. At the reporting date, this was 2.7 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 78 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) 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 78 for further details.
74 TETR AGON FINANCIAL GROUP LIMITED
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ITD Cash
Received as
% of Cost(xii)
273.0%
230.6%
338.7%
319.5%
123.3%
156.2%
Additional CLO Portfolio Statistics
FIGURE 32
Tetragon's CLO Portfolio Details at 31 December 2018
Transaction(i)
Deal Type
Status(ii)
Secondary
Investment(iii)
Invest. Cost
($MM USD)(iv)
Closing
Year of
Reinv
Date Maturity Period
Spread
(bps)(v)
Cost of Funds Cost of Funds Most O/C
Cushion(viii)
(bps)(vii)
(bps)(vi)
Cushion at
Close(ix)
(Loss) Gain
of Cushion(x)
IRR(xi)
Primary or
Original
Deal
End of
Wtd Avg
Original
Current
Current Jr-
Jr-Most O/C Annualized
Transaction 47
U.S. CLO
Called
Transaction 61
U.S. CLO
Called
Primary
Primary
28.3
2006
2021
2013
29.1
2007
2021
2014
Transaction 68
U.S. CLO Wound Down
Primary
19.3
2006
2020
2013
Transaction 69
U.S. CLO Wound Down
Primary
28.2
2007
2019
2013
Transaction 78
U.S. CLO
Called
Transaction 81
U.S. CLO
Called
Primary
Primary
22.9
2012
2023
2015
21.7
2012
2024
2016
Transaction 83
U.S. CLO
Outstanding
Primary
20.8
2013
2029
2021
Transaction 84
U.S. CLO
Outstanding
Primary
24.6
2013
2027
2021
Transaction 85
U.S. CLO
Outstanding
Primary
1.0
2013
2031
2023
Transaction 87
U.S. CLO
Outstanding
Primary
23.0
2013
2026
2018
Transaction 88
U.S. CLO
Outstanding
Primary
30.1
2014
2030
2022
Transaction 89
U.S. CLO
Outstanding
Primary
33.6
2014
2031
2023
Transaction 90
U.S. CLO
Outstanding
Primary
20.7
2014
2031
2023
Transaction 91
U.S. CLO
Outstanding
Primary
27.8
2015
2031
2023
Transaction 92
U.S. CLO
Outstanding
Primary
34.6
2015
2027
2020
Transaction 93
U.S. CLO
Outstanding
Secondary
Transaction 94
U.S. CLO
Outstanding
Secondary
Transaction 95
U.S. CLO
Outstanding
Primary
Transaction 96
U.S. CLO
Outstanding
Secondary
Transaction 97
U.S. CLO
Outstanding
Primary
6.1
6.6
2.6
2.7
9.9
2016
2031
2023
2016
2031
2023
2016
2029
2022
2017
2030
2022
2017
2030
2022
Transaction 98
U.S. CLO
Outstanding
Primary
33.2
2017
2030
2022
Transaction 99
U.S. CLO
Outstanding
Primary
Transaction 100 U.S. CLO
Outstanding
Primary
Transaction 101 U.S. CLO
Outstanding
Primary
Transaction 102 U.S. CLO
Outstanding
Primary
Transaction 103 U.S. CLO
Outstanding
Primary
Transaction 104 U.S. CLO
Outstanding
Primary
Total CLO Portfolio:
Notes
2017
2030
2022
2018
2031
2023
2018
2031
2023
2018
2031
2023
2018
2031
2023
2018
2031
2023
8.3
2.6
0.2
5.0
5.6
9.8
458.4
NA
NA
NA
NA
NA
NA
334
314
320
324
307
311
328
309
308
309
311
321
307
307
310
330
331
320
309
328
311
315
47
45
48
44
217
216
193
183
170
199
199
195
203
215
199
215
195
194
199
178
178
164
111
163
148
159
166
161
NA
NA
NA
NA
NA
NA
215
199
162
202
178
166
158
148
199
148
166
194
178
178
178
164
111
162
148
158
166
NA
NA
NA
NA
NA
NA
4.8%
3.4%
4.9%
4.2%
3.1%
4.6%
4.4%
4.5%
2.8%
4.5%
4.6%
3.7%
3.1%
3.1%
4.1%
4.4%
7.9%
4.9%
4.5%
4.4%
4.6%
4.3%
4.0%
4.4%
5.6%
4.0%
4.0%
6.2%
4.0%
5.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
3.6%
3.3%
4.4%
3.0%
3.9%
4.5%
4.5%
7.8%
4.9%
4.5%
4.5%
4.5%
NA
NA
NA
NA
NA
NA
23.7%
16.5%
30.4%
28.7%
17.2%
12.1%
(0.2%)
12.3%
94.6%
(0.1%)
18.2%
113.1%
(0.0%)
9.9%
0.0%
(0.8%)
(0.2%)
13.1%
0.1%
14.0%
0.1%
12.9%
0.1%
12.2%
(0.3%)
10.3%
0.3%
16.2%
0.5%
16.4%
(0.4%)
9.0%
0.1%
7.2%
(0.5%)
9.8%
(0.2%)
10.3%
(0.1%)
9.4%
0.2%
26.9%
(0.1%)
10.9%
0.0%
18.5%
(0.5%)
18.0%
1.2%
15.6%
95.9%
77.5%
83.4%
90.5%
73.7%
66.2%
60.7%
49.3%
54.3%
23.3%
18.6%
19.0%
26.0%
13.5%
15.9%
10.0%
9.2%
0.0%
0.0%
178
4.0%
4.3%
(0.0%)
15.1%
122.0%
(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 any European CLOs that may be 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 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.
2018 ANNUAL REPORT 75
Additional CLO Portfolio Statistics (continued)
FIGURE 33
$140
$120
$100
$80
$60
$40
$20
$0
$140
$120
$100
$80
$60
$40
$20
$0
16
14
12
10
8
6
4
2
0
Reinvestment End Date of Outstanding Investments
Based on Original Investment Size ($ Millions)
$45.5
$86.7
$119.0
2021
2022
2023
CLO Deal Maturities of Outstanding Investments
Based on Original Investment Cost ($ Millions)
$0.0
2019
$34.6
2020
$119.0
$84.1
$59.2
$23.0
$23.4
$0.0
2019
$0.0
2020
$0.0
2021
$0.0
2022
$0.0
2023
$0.0
2024
$0.0
2025
2026
2027
Current Junior-Most O/C Test Cushion Distribution of Outstanding Investments
(by Number of Transactions)
$0.0
2028
14
2029
2030
2031
0
<= 0%
0
0% to 2%
2% to 4%
4% to 6%
1
Over 6%
6
76 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
2018 ANNUAL REPORT 77
Equity-Based Compensation Plans
In the fourth quarter of 2015, Tetragon bought back
approximately 5.65 million of its non-voting shares in a
tender offer to hedge against (or otherwise offset the future
impact of) grants of shares under an equity-based long-
term incentive plan and other equity awards by TFG Asset
Management for certain senior employees (excluding the
principals of the investment manager).
Awards under the long-term incentive plan, along with
other equity-based awards, are typically spread over
multiple vesting dates up to 2024 which may vary for each
employee and are subject to forfeiture provisions. The
arrangements may also include additional periods, beyond
the vesting dates, during which employees gain exposure
to the performance of the Tetragon shares, but the shares
are not issued to the employees. Such periods may range
from one to five years beyond the vesting dates. The shares
underlying these equity-based incentive programs typically
will be held in escrow until they vest and will be eligible to
receive shares under the Tetragon Optional Stock Dividend
Plan (DRIP Shares).
As Tetragon has contributed these shares, under IFRS TFG
Asset Management is considered to be the settling entity
and as a result in Tetragon's 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
2018, approximately 2.7 million shares were included in the
fully diluted share count.
78 TETR AGON FINANCIAL GROUP LIMITED
Shareholder Information
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Registered Office of Tetragon
Tetragon Financial Group 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 (Guernsey) LLP
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
2018 ANNUAL REPORT 79
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.
80 TETR AGON FINANCIAL GROUP LIMITED
Audited Financial
Statements
QUENTIN NASON
TETRAGON
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 2018, 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 2018, 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)
82 TETR AGON FINANCIAL GROUP LIMITED
(continued)
The key audit matter
Our response
Valuation of Non-derivative financial assets at fair value through profit or loss classified as Level 3
$1,377.2 Million (2017: $1,074.2 Million) (Refer to Note 3 for accounting policy and Notes 4 & 5 for disclosures)
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Basis:
As at 31 December 2018, the Company held level 3 financial assets
at fair value through profit or loss representing 62.9% of the
Company’s net asset value. These financial assets include 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, recently available data points;
– TFG Asset Management investments, a combination of marked
to model and market multiple approach; and
– 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 comprising Unlisted Stock and
TFG Asset Management investments.
Risk:
The valuation of the Company’s level 3 investments is considered
a significant area of our audit in view of the significance of
the estimates and judgements that may be involved in the
determination of their fair value and given that it represents the
majority of the net assets of the Company.
Our audit procedures included:
Control Evaluation:
We have obtained an understanding of the valuation process and
tested the design and implementation of the valuation process
controls.
Challenging managements’ assumptions and inputs
including use of KPMG Specialists:
For CLO Equity Tranches held by the Company, with the support
of a KPMG valuation specialist, we performed a peer group
benchmark analysis on model inputs. For a risk based selection
of CLO investments, with the support of a KPMG valuation
specialist, 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, with the support of a KPMG valuation specialist we:
– assessed the objectivity, capabilities and competence of the
Valuation Agents engaged to provide valuation services to the
Company;
– assessed the methodology applied by the Valuation Agents
in developing fair value of the Unlisted Stock, and TFG Asset
Management investments; and
– critically assessed the valuations provided by the Valuation
Agents and challenged the valuation inputs and techniques
based on market available information.
For Investment funds & vehicles, we obtained net asset value
per share confirmations or partner capital statements directly
from the administrators of the underlying funds and vehicles and
reconciled these confirmations/statements to the investment
value recorded by the Company. For a statistical sample, we
reviewed the latest audited financial statements 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 Company’s investments.
Assessing disclosures:
We considered the adequacy of the disclosures made in the
Financial Statements (see Notes 3, 4 & 5) 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.
2018 ANNUAL REPORT 83
(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 $63.6 Million, determined with reference to a
benchmark of Net Assets of $2,189.4 Million, of which it represents approximately 3% (2017: 3%).
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding $3.2
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 44 and 45, 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)
84 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
February 2019
2018 ANNUAL REPORT 85
FINANCIAL STATEMENTS
TETRAGON FINANCIAL GROUP LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2018
TETRAGON FINANCIAL GROUP LIMITED
FINANCIAL STATEMENTS
For the year ended 31 December 2018
CONTENTS
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
2
3
4
5
6
50
1
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December 2018
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
Net assets
Equity
Share capital
Other equity
Capital reserve in respect of share options
Share-based compensation reserve
Retained earnings
Shares outstanding
Number of shares
Net Asset Value per share
Note
31 Dec 2018
US$ MM
31 Dec 2017
US$ MM
5
5
8
7
9
11
5
10
13
13
1,937.1
3.5
8.0
35.3
269.8
2,253.7
38.0
6.8
19.5
64.3
2,008.4
-
-
-
-
2,008.4
-
-
13.9
13.9
2,189.4
1,994.5
0.1
829.7
-
79.0
1,280.6
2,189.4
0.1
808.9
0.1
80.7
1,104.7
1,994.5
Millions
Millions
13
92.4
90.1
US$ 23.70
US$ 22.13
The accompanying notes are an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
David O’Leary
Director
Date: 26 February 2019
Steven Hart
Director
2
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018
Net gain on non-derivative financial assets at fair value through profit or loss
Total income
Incentive fee
Operating expenses
Profit and total comprehensive income for the year
Earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
The accompanying notes are an integral part of the financial statements.
Note
Year ended
31 Dec 2018
US$ MM
Year ended
31 Dec 2017
US$ MM
3
12
18
18
18
18
289.1
289.1
(47.6)
(47.6)
241.5
US$ 2.65
US$ 2.42
Millions
91.1
99.7
200.0
200.0
(32.2)
(32.2)
167.8
US$ 1.86
US$ 1.70
Millions
90.0
98.9
3
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2018
Share
capital
US$ MM
Other
equity
US$ MM
Retained
earnings
US$ MM
Capital
reserve
US$ MM
Share-based
compensation
reserve
US$ MM
Total
US$ MM
0.1
813.5
1,009.3
12.0
100.0
1,934.9
-
-
167.8
-
-
167.8
-
22.8
-
-
(22.8)
-
-
-
-
-
-
9.4
-
15.8
0.1
(66.4)
(9.4)
-
- -
-
-
-
-
(47.2)
(15.8)
-
-
-
3.5
-
-
-
-
-
3.5
(47.2)
-
0.1
(66.4)
-
13.7
-
(11.9)
-
1.8
0.1
808.9
1,104.7
0.1
80.7
1,994.5
-
-
-
-
-
-
-
-
-
241.5
-
(0.5)
(47.5)
(17.6)
-
-
1.7
0.5
-
17.6
0.1
(1.0)
1.9
-
-
-
-
-
-
-
-
241.5
(1.7)
-
-
-
-
-
-
-
-
(47.5)
-
0.1
(1.0)
1.8
-
(0.1)
As at 1 January 2017
Profit and total comprehensive income
for the year
Transactions with owners recognised
d i rectly 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
As at 31 December 2017
Profit and total comprehensive income
for the year
Transactions with owners recognised
d i rectly in equity
Shares released from escrow
Dividends on shares released from
escrow
Cash dividends
Stock dividends
Issue of shares
Purchase of treasury shares
Capital reserve in respect of share
options
As at 31 December 2018
0.1
829.7
1,280.6
-
79.0
2,189.4
The accompanying notes are an integral part of the financial statements.
4
TETRAGON FINANCIAL GROUP LIMITED
STATEMENT OF CASH FLOWS
For the year ended 31 December 2018
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
Inv esting activities
Cash from the Master Fund on amalgamation**
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 2018
US$ MM
Year ended
31 Dec 2017
US$ MM
47.5
43.9
(43.9)
47.5
269.8
1.0
270.8
1.9
(1.9)
(1.0)
(47.5)
(48.5)
269.8
-
269.8
47.2
25.4
(25.4)
47.2
-
66.4
66.4
1.9
(1.9)
(66.4)
(47.2)
(113.6)
-
-
-
The accompanying notes are an integral part of the financial statements.
* The gross dividend payable to shareholders was US$ 65.1 million (31 December 2017: US$ 63.0 million) with a value
equivalent to US$ 17.6 million (31 December 2017: US$ 15.8 million) elected to be taken by the dividend recipient in
shares rather than cash.
** Up to 31 December 2018, the Fund did not maintain any bank accounts or cash balances. All cash transactions took
place within the Master Fund. Please refer to Note 2 for the details of amalgamation and cash flow statement for the
Master Fund.
5
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
As at 31 December 2018
Note 1
Corporate Information
Tetragon Financial Group Limited (“Tetragon” or the “Fund”) was registered in Guernsey on 23 June 2005 as a company
limited by shares, with registered number 43321. All voting shares of the Fund are held by Polygon Credit Holdings II
Limited (the “Voting Shareholder”). The Fund continues to be registered and domiciled in Guernsey, and the Fund's non-
voting shares (the “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 symbo ls: TFG.LN and
TFGS.LN). The registered office of the Fund is 1st Floor Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel
Islands, GY1 6HJ.
Since its inception to 31 December 2018, the Fund acted 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”). With effect from 31
December 2018, the Master Fund was amalgamated under Part VI of the Companies (Guernsey) Law, 2008 (as amended)
with its parent company, the Fund. There was no change in beneficial ownership as a result of amalgamation.
Note 2
Legal Amalgamation of the Master Fund with the Fund
During Q3 2018, the Board of Directors approved the amalgamation of the Master Fund with its parent company, the
Fund, under Part VI of the Companies (Guernsey) Law, 2008 (as amended) with effect from 31 December 2018.
Prior to the amalgamation on 31 December 2018, the Fund fair valued its investment in the Master Fund and recognized
the gain in the Statement of Comprehensive Income. The Master Fund also fair valued its assets and liabilities. Post
amalgamation, the investment in Master Fund was replaced by the assets and liabilities of the Master Fund on a no-
profit-or-loss basis.
The Master Fund’s statement of financial position, statement of comprehensive income and the statement of cash flows
for the year ended 31 December 2018 are presented below. These pro-forma statements are prepared in accordance
with International Financial Reporting Standards as adopted by the European Union. The accounting policies and
judgments applicable to the Fund also apply to these statements.
6
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 2
Legal Amalgamation of the Master Fund with the Fund (continued)
Pro-forma statement of financial position of the Master Fund:
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
Net assets
Equity
Share capital
Other equity
Retained earnings
Shares outstanding
Number of shares
Net Asset Value per share
31 Dec 2018
US$ MM
31 Dec 2017
US$ MM
1,613.6
17.4
1.9
57.2
365.5
2,055.6
38.0
6.6
2.6
47.2
2,008.4
0.1
754.2
1,254.1
2,008.4
Millions
90.1
US$ 22.28
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 2
Legal Amalgamation of the Master Fund with the Fund (continued)
Pro-forma statement of comprehensive income of the Master Fund:
Net gain on non-derivative financial assets at fair value through profit or loss
Net gain / (loss) 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
Year ended
31 Dec 2018
US$ MM
Year ended
31 Dec 2017
US$ MM
292.6
30.7
7.8
-
331.1
(30.7)
-
(4.6)
(0.4)
(2.8)
(38.5)
292.6
(3.5)
289.1
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
8
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 2
Legal Amalgamation of the Master Fund with the Fund (continued)
Pro-forma statement of cash flows of the Master Fund:
Year ended
31 Dec 2018
US$ MM
Year ended
31 Dec 2017
US$ MM
289.1
200.0
(249.5)
72.8
-
112.4
(5.1)
(0.7)
21.8
128.4
283.6
26.4
(443.6)
(133.6)
1.9
(1.0)
(47.5)
(43.9)
(90.5)
(95.7)
(269.8)
365.5
-
(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
Operating activities
Profit for the period
Adjustments for:
Gains on investments and derivatives
Amortisation of CLOs
Share-based employee compensation
Operating cash flows before movements in working capital
Decrease / (Increase) in receivables
(Decrease) / Increase in payables
Decrease / (Increase) in amounts due from brokers
Cash generated from operating activities
Inv esting 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 issue of shares
Repurchase of shares
Dividends paid to shareholders
Dividends paid to the Fund to settle incentive fee liability
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash to the Fund on legal amalgamation
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
9
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies
B asis of Preparation
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.
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 Consolidated Financial Statements, 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.
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.
New standards and am endm ents to existing standards
The Fund has adopted all standards and amendments effective in 2018. IFRS 9 Financial Instruments (“IFRS 9”) and IFRS
15 Revenue from Contracts with Customers (“IFRS 15”) became effective for the periods beginning on or after 1 January
2018. IFRS 9 largely retains the existing requirements in IAS 39 Financial Instruments: Recognition and Measurement ("IAS
39") for the classification and measurement of the financial liabilities. However, it eliminates the previous IAS 39
categories for financial assets of held to maturity, loans and receivables and available for sale.
The adoption of IFRS 9 has not had a significant effect on the Fund’s accounting policies related to financial assets,
liabilities and derivative financial instruments. Under IFRS 9, on initial recognition, a financial asset is classified as
measured at: amortised cost; fair value through other comprehensive income (“FVOCI”) or FVTPL. The classification of
financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its
contractual cash flow characteristics. Since the Investment Manager manages and evaluates the performance of all of
the Fund’s financial instruments on a fair value basis, it must classify its financial assets and financial liabilities as FVTPL.
Therefore, there is no change to classifications when compared to prior years.
IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' model . The new impairment model
applies to financial assets measured at amortised cost and debt investments at FVOCI, but not to investments in equity
instruments. Due to the nature of assets that the Fund holds at amortised cost as at 1 January 2018, the change in
impairment model has no impact on the net assets or profits.
The Fund’s income and assets are outside the scope of IFRS 15.
10
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies ( continued)
New standards and am endm ents to existing standards ( continued)
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. IFRS 16 Leases and IFRS 17 Insurance Contracts will be applicable to the
financial year ending 31 December 2019 and 31 December 2021 respectively. These standards are not relevant to the
Fund’s activities.
Foreign Currency Translation
Transactions in foreign currencies are translated to the Fund’s functional currency at the foreign currency exchange rate
ruling at the date of the transaction. All assets and liabilities denominated in foreign currencies are translated to USD at
the foreign currency closing exchange rate ruling at the reporting date.
Foreign currency exchange differences arising on translation and 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 Instrum ents
(i) Classification
The Fund classifies its financial assets and financial liabilities at initial recognition into the following categories, in
accordance with IFRS 9.
Financial assets at amortised cost
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at
FVTPL:
- it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
- its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest
outstanding.
The Fund includes in this category cash and cash equivalents, amounts due from brokers, receivable for securities sold
and other sundry receivables. These assets are held with an intention to collect the principal and interest payments.
Financial assets and liabilities at FVTPL
All financial assets not classified as measured at amortised cost are measured at FVTPL. Financial liabilities attached to
derivatives are also measured at FVTPL.
Investments in derivatives, CLOs, loans and corporate bonds, listed and unlisted stock, investment funds and vehicles
and private equity in asset management companies are included in this category.
11
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies ( continued)
Financial Instrum ents ( 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 m easurem ent
Financial assets and financial liabilities at FVTPL are initially recognised 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 m easurem ent
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.
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.
12
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies ( continued)
Financial Instrum ents ( continued)
(v) Derecognition ( continued)
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.
The Fund derecognises a financial liability when the obligation under the liability is discharged, cancelled or expired.
(vi) Im pairm ent
The Fund recognises loss allowances for expected credit losses ("ECL") on financial assets at amortised cost.
When determining whether the credit risk of a financial asset has increased significantly since initial recognition and
when estimating ECLs, the Fund considers reasonable and supportable information that is relevant and available
without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the
Fund’s historical experience and informed credit assessment and including forward-looking information.
Offsetting of financial instrum ents
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 v alue m easurem ent
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.
13
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies ( continued)
Fair v alue m easurem ent ( continued)
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.
Am ounts 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 financial instruments for
recognition and measurement.
Cash and cash equiv alents
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 Incom e
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 2017: GBP 1,200).
14
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 3
Significant Accounting Policies ( continued)
Div idend distribution
Dividend distributions are recognised in the Statement of Changes in Equity, when the shareholders’ right to receive the
payment is established.
Share-based pay m ent 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.
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 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.
Share Options
The fair value of options issued to certain founding partners of GreenOak are recognised through the capital reserve in
respect of share options.
If and when the share options are exercised there is a transfer from the capital reserve to other equity based on the fair
value of options at grant date.
Other equity
Other equity contains the share premium and treasury shares balances.
Am algam ation of entities under com m on control
As a result of amalgamation, assets and liabilities are transferred to the surviving entity at fair value on the effective date
of amalgamation.
Operating Segm ents
An operating segment is a component of the Fund that engages in business activities from which it may earn revenues
and incur expenses, whose operating results are regularly reviewed by the Fund's chief operating decision makers and
for which discrete financial information is available. The chief operating decision makers for the Fund are the Investment
Manager and the Directors. The Fund has considered the information reviewed by the Fund's chief operating decision
makers and determined that there is only one operating segment in existence.
15
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 4
Significant Accounting Judgm ents, E stim ates and Assum ptions
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.
Judgm ents
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:
Inv estm ent entity status
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. The Fund has a documented exit strategy for all of its investments.
The Fund meets the definition of an investment entity as per IFRS 10. 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.
Estim ates and assum ptions
Measurem ent of fair v alues
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 and
circumstances arising beyond the control of the Fund. Such changes are reflected in the assumptions when they occur.
For detailed information on the estimates and assumptions used to determine the fair value of financial instruments,
please refer to Note 5.
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss
Fair v alue 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 -
Level 2 -
Level 3 -
Quoted in active markets for identical instruments.
Prices determined using other significant observable inputs. These may include quoted prices for similar
securities, interest rates, prepayments spreads, credit risk and others.
Unobservable inputs. Unobservable inputs reflect assumptions market participants would be expected to use
in pricing the asset or liability.
16
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Recurring fair v alue m easurem ent of assets and liabilities
The following table shows financial instruments measured at fair value by the level in fair value hierarchy as of 31
December 2018:
Non-derivative financial assets at FVTPL
CLO equity tranches
Loans and corporate bonds
Listed stock
Unlisted stock
Investment funds and vehicles
TFG Asset Management
Total non-derivative financial assets at FVTPL
Derivative financial assets
Contracts for difference (asset)
Forward foreign exchange contracts (asset)
Total derivative financial assets
Derivative financial liabilities
Contracts for difference (liability)
Forward foreign exchange contracts (liability)
Total derivative financial liabilities
Lev el 1
US$ MM
-
-
106.0
-
-
-
106.0
-
-
-
-
-
-
Lev el 2
US$ MM
-
23.8
-
-
430.1
-
453.9
0.8
2.7
3.5
-
(1.3)
(1.3)
Lev el 3
US$ MM
257.1
-
-
96.1
361.9
662.1
1,377.2
-
-
-
(5.5)
-
(5.5)
Total
Fair Value
US$ MM
257.1
23.8
106.0
96.1
792.0
662.1
1,937.1
0.8
2.7
3.5
(5.5)
(1.3)
(6.8)
17
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Recurring fair v alue m easurem ent of assets and liabilities ( continued)
As at 31 December 2017, the only asset of the Fund was its investment in the Master Fund, US$ 2,008.4 million, which was
held at Level 3. The following table shows financial instruments measured at fair value by the level in fair value hierarchy
as of 31 December 2017 for the Master Fund:
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
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
Transfers between lev els
Lev el 1
US$ MM
-
-
-
54.9
-
-
-
Lev el 2
US$ MM
-
0.7
34.0
-
-
449.8
-
Lev el 3
US$ MM
305.9
-
-
-
42.2
295.4
430.7
Total
Fair Value
US$ MM
305.9
0.7
34.0
54.9
42.2
745.2
430.7
54.9
484.5
1,074.2
1,613.6
-
-
-
-
-
-
-
-
14.2
0.1
3.1
17.4
(0.1)
(5.1)
(1.4)
(6.6)
-
-
-
-
-
-
-
-
14.2
0.1
3.1
17.4
(0.1)
(5.1)
(1.4)
(6.6)
During the year ended 31 December 2017, an unlisted stock held at level 2 of US$ 18.3 million in the Master Fund at 31
December 2016 was transferred to level 1 following its listing, and then remained quoted on an active market. There were
no transfers between levels in 2018.
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, loans and borrowings, and other payables.
18
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Lev el 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 2018.
CLO Equity
Tranches
US$ MM
-
-
-
-
Unlisted
Stock
US$ MM
-
-
-
-
Inv estment
Funds and
Vehicles
US$ MM
-
-
-
-
TFG Asset
Management Master Fund
US$ MM
2,008.4
19.5
(1.0)
179.9
US$ MM
-
-
-
-
257.1
257.1
96.1
96.1
361.9
361.9
662.1
662.1
(2,206.8)
-
Total
US$ MM
2,008.4
19.5
(1.0)
179.9
(829.6)
1,377.2
Balance at start of year
Additions
Proceeds
Gain on investments
Transfer from the Master Fund
on amalgamation
Balance at end of year
On 31 December 2017, the Fund’s only asset was its investment in the Master Fund. The following is a reconciliation of
that asset as at 31 December 2017.
Balance at start of year
Additions
Proceeds
Gain on investment in the Master Fund
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
Master Fund
US$ MM
1,942.0
21.2
(66.4)
111.6
2,008.4
111.6
Dividend income from the Master Fund amounted to US$ 109.1 million (31 December 2017: US$ 88.4 million). Total net
gain on the Master Fund investment, including dividend income, amounted to US$ 289.1 million (31 December 2017: US$
200.0 million).
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 Co mmittee of
independent directors from time to time.
For certain investments, such as TFG Asset Management, a third party valuation agent is also used. However, the Board of
Directors is responsible for the valuations and may, at its discretion, permit any other method of valuation to be used if it
considers that such method of valuation better reflects value and is in accordance with IFRS.
19
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques
All comparatives, in the note below, relate to the Master Fund’s investments.
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 2018, key modelling assumptions used are disclosed below. The modelling assumptions disclosed
below are a weighted average (by USD amount) of the individual deal assumptions. Each individual deal’s assumptions may
differ from this average and vary across the portfolio.
Constant Annual Default
Rate (“CADR”)
Approximately 2.35% (31 December 2017: 2.2%), which is 1.0x of the original Weighted
Average Rating Factor (“WARF”) derived base-case default rate for the life of the transaction.
Recovery Rate
Prepayment Rate
Reinvestment Price and
Spread
74% (31 December 2017: 73%), 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 2017: 20%), the original base-case prepayment rate with a 0%
prepayment rate on bonds throughout the life of the transaction.
Assumed reinvestment price is par for the life of the transaction, with an effective spread
over LIBOR of approximately 348 bps (31 December 2017: 310 bps) on broadly U.S.
syndicated loan deals which are still in their reinvestment periods.
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 ri sk
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 2018, a discount rate of 10% for U.S. 1.0 deals and European deals (31 December 2017: 10%)
has been utilised. At 31 December 2018, for U.S. 2.0 deals the discount rate applied is 11% (31 December 2017: 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 10.1% (31 December 2017: 12.4%).
20
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques ( continued)
CLO equity tranches ( continued)
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
Priv ate equity in asset m anagem ent com panies
31 Dec 2018
US$ MM
31 Dec 2017
US$ MM
7.4
(6.9)
7.6
(7.2)
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. LCM is valued using combination of DCF Approach and quoted market multiples (“Market
Multiple Approach”) based on comparable companies to determine an appropriate valuation range. Equitix, Polygon and
TCIP are valued using DCF Approach.
During 2018, the Fund announced the merger of GreenOak with Bentall Kennedy, Sun Life Financial Inc.'s real estate and
property management firm. The Fund will receive US$ 42.5 million upon the closing of the merger. TFG Asset Management
will continue to hold approximately 13% interest in the combined entity and will receive a series of fixed and variable profit
distributions. Sun Life will have an option to acquire the remaining interest in the merged entity approximately seven years
from the closing. TFG Asset Management and other minority owners are entitled to sell their interest to Sun Life
approximately eight and a half years from the close of the transaction. The Fund's investment in GreenOak, as at 31
December 2018, is valued using DCF Approach on expected cash flows from the merged entity.
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 Fund (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 bu siness. 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.
21
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques ( continued)
Priv ate equity in asset m anagem ent com panies ( continued)
The following table shows the unobservable inputs used by third party valuation specialist in valuing various investments
within TFG Asset Management.
31 Decem ber 2018
Inv estment
Fair Value
US$ MM
Valuation
m ethodology
Equitix
230.9
DCF, Debt at par +
accrued interest
GreenOak
208.5
DCF (sum-of-the-parts)
LCM
154.9
DCF and Market
Multiples
Significant unobservable inputs
Discount rate 9.75%, DLOL 15%
Discount rate ranges from 5% to 25% for different types
of cash flows with a base discount rate of 11.0%, DLOL
15%
Discount rate 11.5%, P/AUM multiple 2.3%, DLOL 15%
Polygon
TCIP
55.1
11.0
DCF
DCF
Discount rate 12.5%, DLOL 20%
Discount rate 11.5%, DLOL 15%
Hawke's Point
1.7
Replacement cost
31 Decem ber 2017
Inv estment
Fair Value
US$ MM
Valuation
m ethodology
Equitix
152.2
DCF and Market
Multiples Debt at par +
accrued interest
Significant unobservable inputs
Discount rate 8.75%, EBITDA multiple 6.75x, DLOL 15%
GreenOak
69.6
Market Multiples
Blended EBITDA multiple 11.1x
LCM
144.3
Polygon
56.0
DCF and Market
Multiples
DCF and Market
Multiples
Discount rate 11.0%, P/AUM multiple 2.1%, DLOL 15%
Discount rate 12.5%, EBITDA multiple 7.0x, DLOL 20%
TCIP
7.8
DCF
Discount rate 11.0%, DLOL 15%
Hawke's Point
0.8
Replacement cost
22
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques ( continued)
Priv ate equity in asset m anagem ent com panies ( continued)
Sensitivity Analysis:
For the investments listed above, changing one or more of the assumptions to a reasonably possible alternative would have
the following effects on the net assets and profits:
31 Decem ber 2018
Inv estment
Fav orable
Unfavorable
Equitix
GreenOak
LCM
Polygon
TCIP
US$ 31.7 MM
Discount rate 8.75%
US$ 5.0 MM
Discount rate 10.0%
(US$ 24.8 MM)
Discount rate 10.75%
(US$ 4.6 MM)
Discount rate 12.0%
US$ 19.3 MM
Discount rate 10.5%, P/AUM multiple 2.75%
(US$ 19.3 MM)
Discount rate 12.5%, P/AUM multiple 2.0%
US$ 5.6 MM
Discount rate 11.5%
US$ 0.6 MM
Discount factor 10.5%
(US$ 5.6 MM)
Discount rate 13.5%
(US$ 0.6 MM)
Discount factor 12.5%
31 Decem ber 2017
Inv estment
Fav orable
Unfavorable
Equitix
GreenOak
LCM
Polygon
TCIP
US$ 14.6 MM
EBITDA multiple 7.25x, Discount rate 8.25%
(US$ 15.9 MM)
EBITDA multiple 6.25x, Discount rate 9.25%
US$ 4.0 MM
EBITDA multiple 11.7x
(US$ 3.4 MM)
EBITDA multiple 10.5x
US$ 18.4 MM
P/AUM multiple 2.4%, Discount rate 10.0%
(US$ 18.4 MM)
P/AUM multiple 1.8%, Discount rate 12.0%
US$ 4.0 MM
EBITDA multiple 7.4x , Discount rate 11.5%
(US$ 4.3 MM)
EBITDA multiple 6.6x , Discount rate 13.5%
US$ 2.0 MM
Discount factor 10.0%
(US$ 2.0 MM)
Discount factor 12.0%
23
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques ( continued)
Inv estm ent funds and v ehicles
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. Management’s
assessment is that 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.
The Fund has an investment in an externally managed investment vehicle that holds farmlands in Paraguay. In 2018,
these farmlands were valued by an independent third party valuation agent.
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$ 3.6
million (31 December 2017: US$ 3.0 million). A decrease in net asset value of the funds will have an equal and opposite
effect.
Unlisted stock
The unlisted stock investment includes three 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 latest funding
round adjusted for expected IPO in near future. For the second investment, this includes fair value of an earn-out option
based on forecast revenues. For the third investment, cost is judged to be equal to fair value as it is the latest data point.
Sensitivity analysis:
A 1% increase in the value of unlisted stock included in level 3 will increase net assets and profits of the Fund by US$ 1.0
million (31 December 2017: US$ 0.4 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.
24
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 5
Financial Assets and Liabilities at Fair Value through Profit or Loss ( continued)
Valuation techniques ( continued)
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.
Contracts for difference
The Fund enters into contracts for difference (“CFD”) 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 is generally on equity
positions.
Fair values are based on quoted market prices of the underlying security, contract price, and valuation techniques including
expected value models, as appropriate.
Note 6
Interest in Other Entities
Inv estm ent 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.
The Fund holds various investments in CLOs and investment funds. The fair value of the CLOs and investment funds is
recorded in the “Non-derivative 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 and, if applicable,
unfunded commitments. 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.
25
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 6
Interest in Other Entities (continued)
Inv estm ent in unconsolidated structured entities ( continued)
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.
As at 31 December 2018:
CLO Equity
U.S. CLOs1
Inv estment Funds
No. of
inv est-
m ents
Range of
nom inal
US$ MM
Av erage
nom inal
US$ MM
Carrying
v alue
US$ MM
Percentage
of NAV
10
245.6 - 748.9
535.6
202.9
9.3 %
Equities
Polygon European Equity Opportunity Fund2
Polygon Global Equities Fund2
Credit
Polygon Convertible Opportunity Fund2
Tetragon Credit Income II3
Tetragon Credit Income III3
Real Estate
Other Real Estate4
Other
Hawke's Point Holdings LP3
1
1
1
1
1
4
1
Total GAV
US$ MM
399.0
25.0
642.8
324.0
17.3
41.7
17.9
n/a
n/a
n/a
n/a
n/a
n/a
281.7
21.4
76.8
65.3
4.2
41.7
17.9
12.9%
1.0%
3.5%
3.0%
0.2%
1.9%
0.8%
1 This includes all U.S. CLOs deemed to be controlled by the Fund. U.S. CLOs are domiciled in the 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, Tetragon Credit Income II (“TCI II”) and Tetragon Credit Income III ("TCI III") are domiciled
in the Cayman Islands. These are private-equity style investment funds. Please refer to Note 16 for details of unfunded
capital commitments.
4 The Fund has investments in commercial farmland in Paraguay, via individual managed accounts managed by Scimitar,
a specialist manager in South American farmland. The Fund's investment can only be redeemed when the underlying
real estate assets are sold.
26
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 6
Interest in Other Entities (continued)
Inv estm ent in unconsolidated structured entities ( continued)
As at 31 December 2017:
CLO Equity
U.S. CLOs1
Inv estment Funds
No. of
inv est-
m ents
Range of
nom inal
US$ MM
Av erage
nom inal
US$ MM
Carrying
v alue
US$ MM
Percentage
of NAV
11
39.5 - 721.1
454.5
192.2
9.6 %
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
1
1
1
1
1
1
4
Total GAV
US$ MM
525.3
22.4
133.1
532.5
340.0
7.5
29.4
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%
1 This includes all U.S. CLOs deemed to be controlled by the Fund. U.S. CLOs are domiciled in the 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, Tetragon Credit Income II (“TCI II”) and Tetragon Credit Income III ("TCI III") are domiciled
in the Cayman Islands. These are private-equity style investment funds. Please refer to Note 16 for details of unfunded
capital commitments.
27
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 6
Interest in Other Entities (continued)
Inv estm ent in unconsolidated structured entities ( continued)
Below is a summary of the Fund’s holding in non-subsidiary unconsolidated structured entities:
As at 31 December 2018:
CLO Equity
U.S. CLOs1
European CLOs1
Real Estate
GreenOak – U.S.2
GreenOak – Europe2
GreenOak – Asia2
Other
QT Fund
Private Equity Funds3
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
No. of
inv est-
m ents
Range of
nom inal
US$ MM
Av erage
nom inal
US$ MM
Carrying
v alue
US$ MM
Percentage
of NAV
12
1
6
12
3
1
10
31.0 - 1,550.1
24.0
257.2
24.0
Total AUM
US$ MM
5,551.3
3,881.7
1,191.1
Total NAV
US$ MM
629.0
277.9
n/a
n/a
n/a
n/a
n/a
54.2
0.3
89.1
71.7
41.1
50.2
30.9
2.5%
0.0%
4.1%
3.3%
1.9%
2.3%
2.2%
No. of
inv est-
m ents
Range of
nom inal
US$ MM
Av erage
nom inal
US$ MM
Carrying
v alue
US$ MM
Percentage
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
84.9
53.9
23.9
25.5
27.8
5.4%
0.4%
4.2%
2.7%
1.2%
1.3%
1.4%
1 Includes all externally managed CLOs that are outside the Fund’s control. U.S. CLOs are domiciled in the Cayman
Islands. The European CLO is domiciled in Ireland.
2 GreenOak funds hold real estate investments in the United States, 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 the Cayman Islands, Luxembourg and the United States.
28
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 6
Interest in Other Entities (continued)
TFG Asset Management
The Fund owns 100% holdings and voting rights in TFG Asset Management LP. As at 31 December 2018, TFG Asset
Management's investments were comprised of the following:
Inv estment
Principal place of business
Equitix
GreenOak
LCM
Polygon
TCIP
Hawke's Point
London
Global1
New York and London
New York and London
New York and London
New York and London
Ownership
interest
75%
23%
100%
100%
100%
100%
Carrying
v alue
US$ MM
230.9
208.5
154.9
55.1
11.0
1.7
Percentage
of NAV
10.5%
9.5%
7.1%
2.5%
0.5%
0.1%
1 GreenOak has a presence in New York, London, Tokyo, Los Angeles, Madrid, Luxembourg, Milan, Paris, Seoul and
Mumbai.
Please refer to Note 16 for details of unfunded capital commitments.
Note 7
Financial Risks Review
Financial Risk Review:
The Fund has exposure to the following risks from financial instruments:
Credit risk;
Liquidity risk; and
-
-
- Market risks
This note presents information about the Fund’s objectives, policies and processes for measuring and managing risk. All
comparatives relates to the Master Fund as, prior to the amalgamation, the Fund was exposed to these risks through the
Master Fund.
Risk Managem ent Fram ework:
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, private equity and
infrastructure. The Fund’s investment strategy is to seek to identify asset classes that offer excess returns relative to their
investment risk, or ‘intrinsic alpha’.
The Investment Manager analyses the risk/reward, correlation, duration and liquidity characteristics of each potential
capital use to gauge its attractiveness and increment impact on the Fund. As part of the Fund’s investment strategy, the
Investment Manager may employ hedging strategies and leverage in seeking to provide attractive returns while
managing risk.
The Investment Manager’s risk committee is responsible for risk management of the Fund and performs active and
regular oversight and risk monitoring.
29
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
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 with 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 and unfunded commitments 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 and note
16, represents the Fund’s maximum credit exposure, hence, no separate disclosure is provided.
i. Analysis of Credit Quality
Cash and cash equiv alents
The cash and cash equivalents, including reverse sale and repurchase agreements, are held with six (31 December 2017:
five) financial institutions with credit ratings between AA- and A- (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.
Am ounts due from brokers
Balances due from brokers represent margin accounts, cash collateral for borrowed securities and sales transactions
awaiting settlement.
Credit risk relating to unsettled transactions is considered small due to the short settlement period involved and th e high
quality of the brokers used. As at the reporting date, the balance was concentrated among three brokers (31 December
2017: three) with S&P’s credit ratings between A+ and A- (31 December 2017: A and A-). The following table details the
amounts held by brokers.
UBS AG
BNP Paribas
Bank of America Merrill Lynch
31 Dec 2018
US$ MM
19.1
15.6
0.6
35.3
31 Dec 2017
US$ MM
27.7
3.5
26.0
57.2
30
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
A) Credit risk ( continued)
i. Analysis of Credit Quality (continued)
Equitix
The Fund is exposed to Equitix through a combination of loan notes and equity investment that it hold s 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 5.
Loans and bonds portfolio
The Fund has investments in debt securities of US$ 23.7 million (31 December 2017: US$ 25.8 million) with Moody’s credit
rating of Caa2 (31 December 2017: B2 and Caa2). Corporate bonds of US$ 0.1 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 5. 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 & III)
Europe
Manager
LCM
TCIP
Other managers
31 Dec 2018
US$ MM
326.3
0.3
326.6
31 Dec 2018
US$ MM
202.9
69.5
54.2
326.6
31 Dec 2017
US$ MM
367.1
7.3
374.4
31 Dec 2017
US$ MM
191.9
68.1
114.4
374.4
31
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
A) Credit risk ( continued)
i. Analysis of Credit Quality (continued)
Derivatives
The table below shows an analysis of derivative financial assets and liabilities outstanding at 31 December 2018.
31 December 2018
31 December 2017
ii. Concentration of credit risk
Deriv ativ e assets
Fair Value
US$ MM
3.5
17.4
Notional
115.9
389.7
Deriv ativ e liabilities
Fair Value
US$ MM
(6.8)
(6.6)
Notional
522.1
583.6
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 2018
31 Dec 2017
43%
36%
12%
3%
5%
1%
100%
41%
40%
7%
4%
6%
2%
100%
None of the Fund’s financial assets were considered to be past due or impaired on 31 December 2018 and 31 December
2017.
iii. Collateral and other credit enhancements, and their financial effects
The Fund mitigates the credit risk of derivatives and reverse sale and repurchase agreements through collateral
management including master netting agreements.
Derivative transactions are either transacted on an exchange, or entered into under International Derivative Swaps and
Dealers Association
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. Under
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.
32
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
A) Credit risk ( continued)
iii. Collateral and other credit enhancements, and their financial effects (continued)
The table below shows the amount of reverse sale and repurchase agreements.
Receivables from reverse sale and repurchase agreements
31 Dec 2018
US$ MM
133.0
31 Dec 2017
US$ MM
246.5
No individual trades are under-collaterised. The fair value of collateral as at 31 December 2018 was US$ 139.5 million (31
December 2017: US$ 256.0 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.
31 December 2018
Description
Assets
UBS AG
BNP Paribas
Total
Liabilities
UBS AG
BNP Paribas
Total
Gross
Am ount 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
Am ount
US$ MM
2.7
0.8
3.5
1.3
5.5
6.8
-
-
-
-
-
-
2.7
0.8
3.5
1.3
5.5
6.8
(1.3)
(0.8)
(2.1)
(1.3)
(0.8)
(2.1)
-
-
-
(4.7)
(4.7)
1.4
-
1.4
-
-
-
33
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
A) Credit risk ( continued)
iv . Offsetting financial assets and liabilities (continued)
31 December 2017
Gross
Am ount 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
Am ount
US$ MM
3.1
0.1
14.2
17.4
5.1
0.6
0.9
6.6
-
-
-
-
-
-
-
-
3.1
0.1
14.2
17.4
5.1
0.6
0.9
6.6
(3.1)
(0.1)
(0.9)
(4.1)
(3.1)
(0.1)
(0.9)
(4.1)
-
-
-
-
(2.0)
(0.5)
-
(2.5)
-
-
13.3
13.3
-
-
-
-
Description
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
‘Liquidity risk’ is the risk that the Fund will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or other financial assets.
The Fund’s policy and the Investment Manager’s approach to managing liquidity is to ensure, as far as possible, that it
will always have sufficient liquidity to meet its liabilities when due.
The Fund’s financial assets include some investments which are considered illiquid. These investments include TFG
Asset Management, CLO Equity tranches, real estate funds and vehicles and unlisted equities. The Fund also holds
investments in hedge funds and private equity funds, which are subject to redemption restrictions such as notice periods
and, in certain circumstances, redemption gates. As a result, the Fund may not be able to liquidate these investments
readily.
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 2017: US$
150.0 million). Details of the facility and the undrawn and drawn balance are disclosed in Note 11.
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.
34
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
B ) Liquidity risk (continued)
The following were the contractual maturities of non-derivative financial liabilities at the reporting date. The amounts
are gross and undiscounted.
31 Dec em ber 2018
Finance costs on borrowings
Loans and borrowings
Expenses payable
31 Dec em ber 2017
Finance costs on borrowings
Loans and borrowings
Expenses payable
Within 1
m onth
US$ MM
0.3
-
2.0
2.3
1 – 3
m onths
US$ MM
0.6
-
17.5
18.1
3 months –
1 y ear 1 – 5 years
US$ MM
12.4
38.0
-
50.4
US$ MM
2.4
-
-
2.4
Within 1
m onth
US$ MM
0.3
-
2.6
2.9
1 – 3
m onths
US$ MM
0.6
-
13.9
14.5
3 months –
1 y ear 1 – 5 years
US$ MM
12.4
38.0
-
50.4
US$ MM
2.4
-
-
2.4
Greater
than 5
y ears
US$ MM
-
-
-
-
Greater
than 5
y ears
US$ MM
-
-
-
-
Total
US$ MM
15.7
38.0
19.5
73.2
Total
US$ MM
15.7
38.0
16.5
70.2
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
m onth
US$ MM
-
12.3
Inflows
1 – 3
m onths
US$ MM
426.1
211.8
3 m onths
– 1 y ear
US$ MM
-
356.5
31 Dec 2018
31 Dec 2017
1 – 5
y ears
Within 1
m onth
US$ MM US$ MM
-
(12.4)
-
-
Outflows
3 m onths
1 – 3
– 1 y ear
m onths
US$ MM US$ MM
-
(357.4)
(424.7)
(212.8)
1 – 5
y ears
US$ MM
-
-
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
31 Dec 2018
269.8
12.32%
31 Dec 2017
365.5
18.20%
35
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
C) 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 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 of the Fund’s investments may be significantly affected by changes in interest rates. The Fund’s
investments in leveraged loans through CLOs 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”). 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.
36
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
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 2018
U.S. CLOs 1.0
U.S. CLOs 2.0
European CLOs
TCI II
TCI III
PCOF
31 December 2017
U.S. CLOs 1.0
U.S. CLOs 2.0
European CLOs
TCI II
PCOF
PDOF
ii. Currency Risk
Fair Value as at
31 Dec 2018
US$ MM
19.7
237.2
0.3
65.3
4.2
76.8
403.5
Fair Value as at
31 Dec 2017
US$ MM
57.5
241.7
7.3
68.1
55.3
114.6
544.5
Effects of +100bps
Change in Interest rate
on net assets
US$ MM
-
6.6
-
3.5
0.3
(1.3)
Effects of -100bps Change
in Interest rate on net
assets
US$ MM
(0.1)
(14.2)
-
(3.5)
(0.3)
1.4
9.1
(16.7)
Effects of +100bps
Change in Interest rate
on net assets
US$ MM
0.2
15.0
-
1.4
3.7
(1.5)
Effects of -100bps Change
in Interest rate on net
assets
US$ MM
(1.3)
(6.8)
-
(1.5)
(2.7)
1.5
18.8
(10.8)
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.
37
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
C) Market Risk (continued)
ii. Currency Risk (continued)
Exposure:
At the reporting date, the carrying amount of the Fund’s net financial assets and financial liabilities held in individual
foreign currencies, expressed in USD and as a percentage of its net assets, were as follows.
The sensitivity analysis sets out the effect on the net assets and profit for the year of reasonably possible weakening of
USD against EUR, GBP, NOK and JPY by 5%. The analysis assumes that all other variables, in particular interest rates,
remain constant.
31 Decem ber 2018
EUR
GBP
NOK
JPY
31 Decem ber 2017
EUR
GBP
NOK
JPY
Net Monetary and
Non-Monetary
Assets and
Liabilities
US$ MM
78.5
310.9
19.2
23.4
432.0
Forward foreign
currency exchange
hedging
US$ MM
(80.3)
(282.6)
(19.7)
(23.6)
(406.2)
Effect of +/- 5%
on exchange
rate
US$ MM
(0.1)
1.3
-
-
1.2
Net exposure
US$ MM
(1.8)
28.3*
(0.5)
(0.2)
25.8
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
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.
38
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 7
Financial Risks Review (continued)
C) Market Risk (continued)
iii. Other Price Risk (continued)
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.
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
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 2018
11.7%
0.0%
(0.2)%
0.1%
1.1%
4.8%
4.4%
36.2%
30.2%
% of net assets
as at
31 Dec 2017
15.2%
0.7%
(0.1)%
(0.1)%
1.7%
2.7%
2.1%
37.1%
21.4%
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
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 Receiv ables and Prepay m ents
Prepayments
Interest receivables
Other receivables
31 Dec 2018
US$ MM
2.5
-
-
-
0.2
1.1
1.0
7.9
6.6
31 Dec 2017
US$ MM
3.1
1.2
-
-
0.3
0.5
0.4
7.5
4.3
31 Dec 2018
US$ MM
0.7
1.0
6.3
8.0
31 Dec 2017
US$ MM
-
-
-
-
Other receivables and interest receivables are expected to be settled within 12 months.
39
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 9
Cash and Cash Equivalents
Cash and cash equivalents
31 Dec 2018
US$ MM
269.8
269.8
31 Dec 2017
US$ MM
-
-
All cash and cash equivalents were held by the Master Fund before the legal amalgamation. The cash and cash
equivalents balance as at 31 December 2017 in the Master Fund was US $365.5 million.
Certain controlled subsidiaries, related to real estate investments owned by the Fund, contain cash and cash equivalents
balance of US$ 31.5 million as at 31 December 2018 (Master Fund, 31 December 2017: US$ 30.0 million). This cash balance
is included in the fair value of these subsidiaries.
Note 10 Other Payables and Accrued Expenses
Accrued expenses
All other payables and accrued expenses are due within one year.
Note 11
Credit Facility
31 Dec 2018
US$ MM
19.5
19.5
31 Dec 2017
US$ MM
13.9
13.9
The Fund has an unsecured US$ 150.0 million revolving credit facility (the “Revolving Credit Facility”) with a stated
maturity date of 1 October 2021. 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 2018, the drawn balance of the credit facility was US$ 38.0 million (Master Fund, 31 December 2017:
US$ 38.0 million) while US$ 112.0 million of the facility remained undrawn (Master Fund, 31 December 2017: US$ 112.0
million).
Note 12
Incentiv e Fee
The Fund 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 Fund during the Calculation Period (before deduction of any dividend paid or the
amount of any redemptions or repurchases of the shares (or other relevant capital adjustments) during such Calculation
Period) above the Reference NAV (as defined below) plus the Hurdle (as defined below) for the Calculation Period.
If the Hurdle is not met in any Calculation Period (and no incentive fee is paid), the shortfall will not carry forward to an y
subsequent Calculation Period.
40
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 12
Incentiv e Fee ( continued)
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 2019 is 5.441738%.
The ‘‘Reference NAV’’ is the greater of (i) the 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, the 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 2018 was US$ 47.6 million (31 December 2017: US$ 32.2 million). As at
31 December 2018, US$ 17.5 million was outstanding (31 December 2017: US$ 13.9 million).
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.
Div idend 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.
41
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 13
Share Capital ( continued)
Share Transactions
Shares in issue at 1 January 2017
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
Stock dividends
Issued through release of tranche of escrow shares
Issue through exercise of GreenOak options
Shares purchased during the year
Shares in issue at 31 December 2018
Voting
Shares
No.
Non-Voting
Shares*
No. MM
Treasury
Shares
No. MM
Shares held
in Escrow
No. MM
10.0
-
-
-
-
-
-
10.0
-
-
-
-
10.0
87.1
1.4
3.4
2.4
0.7
-
(4.9)
90.1
1.5
0.2
0.7
(0.1)
92.4
43.3
(1.8)
-
(2.4)
(0.7)
(2.0)
4.9
41.3
(2.0)
-
(0.7)
0.1
38.7
9.3
0.4
(3.4)
-
-
2.0
-
8.3
0.5
(0.2)
-
-
8.6
* Non-voting shares do not include the treasury shares or the shares held in escrow.
Optional Stock Div idend
The Fund 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$ 65.1 million (31 December 2017: US$ 63.0 million) was declared, of which US$ 47.5
million was paid out as a cash dividend (31 December 2017: US$ 47.2 million), and the remaining US$ 17.6 million (31
December 2017: US$ 15.8 million) was reinvested under the Optional Stock Dividend Plan.
Treasury Shares and Share Repurchases
Treasury shares consist of shares that have been bought-back by the Fund from its investors through various tender
offers and plans. 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 Fund purchased 4.8 million non-voting shares at an aggregate cost of US$ 65.4 million, including fees
and expenses of US$ 0.4 million.
In December 2018, the Fund announced, under the terms of a "modified Dutch auction”, the commencement of a tender
offer to purchase non-voting shares for a maximum aggregate payment of US$ 50.0 million in cash. This tender offer is
not recorded in these financial statements as the tender offer closed and settled in January 2019.
During 2018, the Fund purchased 0.1 million shares (31 December 2017: 0.1 million) for US$ 1.0 million (31 December
2017: US$ 1.0 million) from TFG Asset Management LP using the then-current share price of US$ 12.10 (31 December
2017: US$ 13.12).
42
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 13
Share Capital ( continued)
Escrow Shares
Acquisition of TFG Asset Management
As part of the acquisition of TFG Asset Management, the aggregate consideration of 11.7 million shares was moved to an
escrow account, where they were to be held before being released in conjunction with the agreed vesting schedule,
subject to certain forfeiture conditions. During 2017, the last tranche of 3.3 million shares was released from the escrow.
Of these approximately 2.5 million shares were deemed to be in relation to the original Feeder escrow shares, and a
value of US$ 21.1 million was debited against Capital Contribution, using the transaction share price of US$ 8.43. In
addition, approximately 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 was released against Retained Earnings, based on the stock reference
price at each applicable dividend date. This escrow was closed in 2017.
Equity-based awards
In the fourth quarter of 2015, the Fund 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
Fund’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.
As the Fund has contributed these shares, under IFRS 2, TFG Asset Management is considered to be the settling entity and
as a result the Fund 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 TFG Asset Management.
6.3 million (31 December 2017: 6.2 million) shares related to TFG Asset Management’s employee reward schemes are
held in escrow. During the year, 0.2 million shares (31 December 2017: 0.2 million) 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$ 0.5
million (31 December 2017: US$ 0.4 million) 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, 0.4 million (31
December 2017: 0.3 million) shares were allocated to this account.
43
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 13
Share Capital ( continued)
Escrow Shares ( continued)
Deferred Incentive fees
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 are
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 2018, the Fund holds 2.3 million (31 December 2017: 2.1 million)
shares in an escrow account related to deferred incentive fees.
Capital Reserv e
The capital reserve is in relation to the GreenOak options. Please see Note 14 for details regarding these share options.
Share-B ased Com pensation Reserv e
The balance in share-based compensation reserve is related to the following transactions.
Share-based employee compensation - equity based awards
Deferred incentive fee
Capital Managem ent
31 Dec 2018
US$ MM
53.9
25.1
79.0
31 Dec 2017
US$ MM
55.6
25.1
80.7
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. 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
Share Options
On 21 April 2017, the Investment Manager exercised the 12,545,330 options it received from the Fund 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 Fund’s IPO offer price of US$ 10.00. During 2017, these options
were settled by the Fund 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.
44
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 14
Share Options ( continued)
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 Fund granted to the GreenOak founding partners options to purchase 3.9 million
shares (vesting after five 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 and the remaining 25%
during 2018.
During the year ended 31 December 2018, 0.7 million (31 December 2017: 0.7 million) shares with fair value at grant date of
US$ 0.1 million (31 December 2017: US$ 0.2 million), were issued as a result of options being exercised. The weighted
average price of the Fund’s shares was US$ 12.75 per share during 2018 (31 December 2017: US$ 12.72).
Note 15
Div idends
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
Quarter ended 31 December 2017 of US$ 0.1775 per share
Quarter ended 31 March 2018 of US$ 0.1775 per share
Quarter ended 30 June 2018 of US$ 0.1800 per share
Quarter ended 30 September 2018 of US$ 0.1800 per share
31 Dec 2018
US$ MM
-
-
-
-
16.1
16.1
16.4
16.5
65.1
31 Dec 2017
US$ MM
15.1
15.6
15.8
16.5
-
-
-
-
63.0
The fourth quarter dividend of US$ 0.1825 per share was approved by the Directors on 26 February 2019 and has not
been included as a liability in these financial statements.
Note 16
Contingencies and Com m itm ents
The Fund has the following unfunded commitments:
GreenOak investment vehicles
TCI III
Private equity funds
45
Fund
31 Dec 2018
US$ MM
97.0
77.6
18.8
193.4
Fund
31 Dec 2017
US$ MM
126.0
65.0
8.6
199.6
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 17
Related-Party Transactions
The Investment Manager is entitled to receive management fees equal to 1.5% per annum of the Net Asset Value of the
Fund payable monthly in advance prior to the deduction of any accrued incentive fee. Up to 31 December 2018, all fees
and expenses of the Fund including the management and administration fees, but excluding incentive fees from the
Investment Manager, were paid by the Master Fund and allocated fully to the Fund. An incentive fee may be paid to the
Investment Manager as disclosed in Note 12.
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 Fund, in 2007 the Fund granted to the Investment Manager options (the
“Investment Management Options”) to purchase approximately 12.5 million of the Fund’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 2017. Please refer to Note 14 for details.
The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’
annual fee is US$ 125,000 (31 December 2017: US$ 100,000) as compensation for service on the Boards of Directors of the
Fund. The Directors have the option to elect to receive shares in the Fund instead of the quarterly fee.
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 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 providing for benefits upon termination of
employment.
With respect to the year ended 31 December 2018, Frederic Hervouet elected to receive shares in lieu of his full
compensation as director. William Rogers elected to receive shares in lieu of half of his compensation. During the year,
Frederic Hervouet and William Rogers received 1,912 and 5,179 shares respectively (31 December 2017: 7,879 and 2,938
shares respectively).
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 Fund’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.
Reade Griffith and Paddy Dear maintained (directly or indirectly) interests in shares of the Fund as at 31 December 2018,
with interests of 12,553,797 and 4,210,182 shares respectively (31 December 2017: 11,868,998 and 4,044,303).
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.
46
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 17
Related-Party Transactions ( continued)
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 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 their employment with the Fund and its subsidiaries 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
2018 total compensation paid to them each in aggregate was US$ 100,000 (31 December 2017: US$ 100,000).
The Fund has entered into share-based employee reward schemes with its subsidiary, TFG Asset Management LP. See Note
13 for details.
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 and administrative services to Polygon Private Investment Partners LP, an affiliate of the
Voting Shareholder, pursuant to applicable separate services agreements. Infrastructure services were provided to
GreenOak up to March 2018 by the Service Providers.
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$ 17.6 million (31 December 2017: US$ 17.3 million), GreenOak US$
0.1 million (31 December 2017: US$ 0.5 million) and Polygon Private Investment Partners LP US$ 0.1 million (31 December
2017: US$ 0.2 million). During 2018, the Fund purchased 0.1 million shares (31 December 2017: 0.1 million) from TFG Asset
Management for US$ 1.0 million (31 December 2017: US$ 1.0 million) using then-current share price of US$ 12.10 (31
December 2017: 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 2018, it held CLO
equity tranche investments in 10 CLOs managed by LCM with a fair value of US$ 202.9 million (Master Fund, 31 December
2017: US$ 191.9 million).
At 31 December 2018, 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
2018, the fair value of these investments was US$ 379.9 million (Master Fund, 31 December 2017: US$ 424.3 million).
47
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 17
Related-Party Transactions ( continued)
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 2018, these investments referenced real estate in the United States,
Japan and Europe with a combined net asset value of US$ 170.3 million (Master Fund, 31 December 2017: US$ 132.9
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 2018, the Fund's investments in TCI II and TCI III are fair valued at US$ 69.5 million and US$ 4.2 million
respectively (Master Fund, 31 December 2017: US$ 68.1 million and nil respectively). 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 2018, the Fund's investment in Hawke's Point Holdings
LP is fair valued at US$ 17.9 million (Master Fund, 31 December 2017: US$ 7.4 million).
Note 18
Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
Year ended
31 Dec 2018
US$ MM
Year ended
31 Dec 2017
US$ MM
Earnings for the purposes of basic earnings per share being net profit
attributable to shareholders for the year
241.5
167.8
Weighted average number of shares for the purposes of basic earnings per
share
Effect of dilutive potential shares:
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
91.1
6.3
-
2.3
99.7
90.0
6.2
0.6
2.1
98.9
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 Fund’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.
48
TETRAGON FINANCIAL GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS – (continued)
As at 31 December 2018
Note 19
Segm ent inform ation
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 Fund 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 Fund’s investment activities are all determined
by the Investment Manager in accordance with the Fund’s investment objective.
All of the Fund’s activities are interrelated, and each activity is dependent on the others.
Accordingly, all significant operating decisions are based upon analysis of the Fund as one segment. The financial results
from this segment are equivalent to the financial statements of the Fund as a whole.
The shares in issue are in US Dollars. The Fund's investment geographical exposure is as follows (31 December 2017, the
Fund’s investment was in the Master Fund whose geographical exposure is detailed below for comparative purposes) :
Region
North America
Europe
Asia
Latin America
Note 20
Subsequent Ev ents
31 Dec 2018
43.4%
45.8%
8.6%
2.2%
31 Dec 2017
49.5%
42.8%
5.9%
1.8%
The Directors have evaluated the period up to 26 February 2019, which is the date that the financial statements were
approved. Apart from the tender offer described in note 13, the Directors have concluded that there are no material events
that require disclosure or adjustment to the financial statement.
Note 21
Approv al of Financial Statem ents
The Directors approved and authorised for issue the financial statements on 26 February 2019.
49
TETRAGON FINANCIAL GROUP LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS
As at 31 December 2018
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
Listed Stock
United Kingdom - Equity Investments
United States - Equity Investments
Norway - 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
Global – Hedge Funds – Credit and Convertible Bonds
Nom inal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
730.7
36.1
766.8
20.0
20.0
620.1
31.5
651.6
24.0
24.0
33.9
34.5
10.8
79.2
65.0
65.0
15.2
0.3
15.5
56.8
34.2
32.7
68.9
73.8
16.1
12.7
64.7
40.6
237.0
55.0
692.5
256.7
0.1
256.8
0.3
0.3
48.0
39.1
18.9
106.0
96.1
96.1
23.7
0.1
23.8
89.1
41.1
41.7
71.7
69.5
17.7
13.2
71.6
17.9
281.7
76.8
792.0
11.72%
0.01%
11.73%
0.01%
0.01%
2.20%
1.78%
0.86%
4.84%
4.39%
4.39%
1.08%
0.01%
1.09%
4.07%
1.88%
1.90%
3.27%
3.17%
0.81%
0.60%
3.27%
0.82%
12.88%
3.51%
36.18%
50
TETRAGON FINANCIAL GROUP LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS – (continued)
As at 31 December 2018
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
Equity Total Return Swaps
Total Financial Derivative Instruments
Cash and Cash Equivalents
Other Assets and Liabilities
Net Assets
Nom inal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
99.9
10.7
49.0
44.0
-
203.6
230.9
208.5
55.1
154.9
12.7
662.1
10.55%
9.52%
2.52%
7.07%
0.58%
30.24%
1,731.4
1,937.1
88.48%
1.4
(4.7)
(3.3)
0.06%
(0.21)%
(0.15)%
269.8
(14.2)
2,189.4
12.32%
(0.65)%
100.00%
51
TETRAGON FINANCIAL GROUP MASTER FUND LIMITED
UNAUDITED CONDENSED SCHEDULE OF INVESTMENTS – (continued)
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
52
Nom inal
MM
Cost
US$ MM
Fair Value % of Net
Assets
US$ MM
861.0
133.2
994.2
35.0
35.0
24.0
24.0
0.7
0.7
1.9
1.9
766.5
123.9
890.4
297.0
1.5
298.5
14.79%
0.07%
14.86%
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
182.0
97.7
35.0
624.8
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
Nom inal
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
7.59%
3.46%
2.79%
7.19%
0.43%
21.46%
1,848.1
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%
53