Building 1

Comfortable liquidity situation

Tetragon Financial Group 23 November 2022 Update
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Tetragon Financial Group

Comfortable liquidity situation

Investment companies

Alternative assets

23 November 2022

Price*

US$9.66

Price (TFGS)*

815p

Market cap*

US$912m

NAV**

US$2,664m

NAV per share**

US$28.20

Discount to NAV*

65.7%

Yield*

4.6%

Fully diluted shares in issue

94.4m

Code/ISIN

TFG/GG00B1RMC548

Primary exchange

Euronext Amsterdam

Secondary exchange

LSE Specialist Fund Segment

AIC sector

Flexible Investment

52-week high/low*

US$10.90

US$8.02

NAV high/low

US$29.86

US$26.75

*Based on Refinitiv data. **As at end-September 2022.

Gearing

Net gearing at 30 September 2022

0.3%

Fund objective

Tetragon Financial Group’s objective is to generate distributable income and capital appreciation, aiming 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 public and private equities and credit, real estate, venture capital, infrastructure, bank loans and a diversified alternative asset management business.

Bull points

Diverse portfolio with a proven track record.

Recurring income from asset management business (TFG Asset Management).

Shares available at wide discount to NAV.

Bear points

Above-average ongoing charge and performance fees.

Limited disclosure on some underlying investments means lower visibility of prospective returns.

Only non-voting shares available for investors.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

Tetragon Financial Group is a research client of Edison Investment Research Limited

Tetragon Financial Group’s (Tetragon’s) NAV declined 1.0% in Q322 and 4.5% in 9M22 in total return terms (compared to declines of 6.5% and 26.4% in the MSCI ACWI, respectively). The best performing asset classes in Q322 were TFG Asset Management (driven by BentallGreenOak’s revaluation) and private equity (especially funds managed by Hawke’s Point). Meanwhile, the other equities and credit asset class (consisting predominantly of listed equity) remains a negative contributor. Tetragon continues its distributions to shareholders, with US$30m ytd in quarterly dividends (declared Q422 DPS stable quarter-on-quarter, implying a 4.6% yield) and US$42m in share repurchases (with a further tender offer of up to US$25m to be conducted in Q422).

NAV per share (NAV/share) development in the first nine months of 2022

Source: Tetragon Financial Group

Why consider Tetragon now?

Tetragon invests in alternative assets with diverse exposure, providing returns with low correlation to traditional asset classes. This may be compelling to investors seeking to expand their portfolios beyond traditional bond and equity exposures, for instance into assets benefiting from rising interest rates (eg equity tranches of collateralised loan obligations (CLOs)) or offering a certain degree of inflation protection (eg real estate). We also note that Tetragon-owned asset managers generate recurring fee income, which supports Tetragon’s ongoing costs and distributions to shareholders.

The analyst’s view

While Tetragon was fully invested as at end-September 2022, it still has sufficient resources to continue investments given the US$325m undrawn part of its US$400 credit line. This compares to US$96.5m of outstanding future investment commitments as at end-June 2022. On top of that, Tetragon holds cash-generating assets (eg CLOs and TFG Asset Management), with disposals and receipts in the first nine months of 2022 (9M22) from CLOs at US$69m and a dividend from Equitix at US$17m in Q322. Overall disposals and receipts from the portfolio, net of investments, were US$93.5m in 9M22.

Slight portfolio rebound in Q322

Q322 saw a minor 0.4% increase in Tetragon’s portfolio. Taking into account Tetragon’s ongoing costs, the NAV declined by 1.0% in total return terms, bringing the 9M22 NAV decline to a moderate 4.5%. The main driver behind 9M22 performance remains Tetragon’s other equities and credit asset class, which consists mostly of listed equity (supplemented by listed debt). The assets deepened their losses to 62% in 9M22 from the 54% accounted for in H122. As Tetragon’s public equities portfolio is highly concentrated, its performance is predominantly driven by company-specific developments, and the majority of the H122 losses stemmed from its biotechnology exposure.

Exhibit 1: 9M22 performance by asset class (%)

Exhibit 2: 9M22 NAV attribution by asset class (pp)

Source: Tetragon Financial Group, Edison Investment Research. Note: Share of Tetragon’s NAV at end-September 2022 stated on x-axis labels.

Source: Tetragon Financial Group, Edison Investment Research Note: Share of Tetragon’s NAV at end- September 2022 stated on x-axis labels.

Exhibit 1: 9M22 performance by asset class (%)

Source: Tetragon Financial Group, Edison Investment Research. Note: Share of Tetragon’s NAV at end-September 2022 stated on x-axis labels.

Exhibit 2: 9M22 NAV attribution by asset class (pp)

Source: Tetragon Financial Group, Edison Investment Research Note: Share of Tetragon’s NAV at end- September 2022 stated on x-axis labels.

TFG Asset Management’s valuation was assisted by BentallGreenOak in Q322

The carrying value of TFG Asset Management, a wholly owned entity comprising Tetragon’s holdings in other asset managers, made up 45% of Tetragon’s NAV as at end-September 2022. In Q322, TFG Asset Management’s valuation increased by US$22m, mostly on the back of BentallGreenOak’s revaluation (up 4.3%) as the business continued to deliver against its business plan, according to Tetragon. Nevertheless, over the 9M22 period, the valuation of TFG Asset Management decreased by US$9m, due to a US$80m downward revaluation of Equitix (as described in our previous note) on the back of the sterling depreciation and public peer multiples contraction. Having said that, this followed a US$349m positive revaluation in 2021, and Equitix’s value increased fourfold from end-2017 to end-September 2022. During the quarter, disposals and receipts from TFG Asset Management to Tetragon amounted to US$45m, of which c US$17m was a dividend from Equitix.

Private equity investments managed by own managers appreciated

The second-largest positive driver of portfolio development in Q322 was Tetragon’s private equity exposure, increasing by US$12m (or 32% q-o-q). The main contributors were funds managed by Hawke’s Point (as the quoted market price of one of its investments recovered after the H122 decrease) and by Banyan Square Partners (driven particularly by one disposal at an attractive price). The 9M22 revaluation was a positive US$16m, mostly on the back of funds managed by Banyan Square Partners.

Public assets continue to weigh on the performance

Tetragon invests in public stocks both directly (5% of the portfolio) and through hedge funds (16%), with the majority of the latter managed by the fully owned Polygon. Both portfolios are concentrated and consist of a limited number of high-conviction positions, whose returns exhibit limited correlation with broader public market movements. Tetragon also holds exposure to listed convertible bonds (through hedge funds managed by minority owned Acasta Partners, 4% of the portfolio) and listed credit (on own balance sheet, 0.6% of the portfolio). In Q322, Tetragon’s public stocks decreased in value by US$18m (down 10% q-o-q, with a 0.7pp negative impact on Tetragon’s NAV). The decrease in hedge funds was less pronounced (down 3%) and reduced Tetragon’s NAV by 0.4pp. During Q322, Tetragon redeemed 5% of its hedge funds exposure (US$25m) and also received US$36m from ‘other equities’.

CLO equity tranches benefit from widening spreads

Tetragon’s investments in bank loans consist predominantly of equity tranches of CLO structures, which benefit from the current environment of increasing interest rates (loan collateral is floating rate while CLO debt tranches are normally fixed rate), as default rates remain low. Bank loans currently represent 11% of Tetragon’s portfolio after posting a 16% gain in 9M22 (US$46m, 1.6pp impact on NAV). On top of value appreciation, CLOs generated US$69m of cash inflow in 9M22 (up 28% y-o-y), which included predominantly contractual payments, but may have also included some undisclosed disposals.

We note that at this stage the outlook for the CLO market remains somewhat uncertain. Fitch Ratings expects the US leveraged loan default rate to increase from the current historically low levels to 2–3% by end-2023 and 3–4% by end-2024, though still not far away from the 15-year average of 2.5%. Moreover, 30% of US CLO collateral is made up of loans with a B- rating. Given that currently ratings downgrades outnumber upgrades 2.5 to 1.0 (according to Leveraged Commentary & Data (LCD)), this poses a risk of breaching the pre-set CLO limits in terms of exposure to loans rated CCC+ or below (usually no more than 7.5%). This would require managers to divert cash flows to holders of equity tranches to pay down the most senior CLO tranches. In this context, we highlight that most of the B-loans were issued by private equity-backed companies, according to LCD. We believe that these issuers may be less prone to defaults compared to ‘non-sponsored’ issuers.


General disclaimer and copyright

This report has been commissioned by Tetragon Financial Group and prepared and issued by Edison, in consideration of a fee payable by Tetragon Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Tetragon Financial Group and prepared and issued by Edison, in consideration of a fee payable by Tetragon Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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