Building 1

Performance remains subdued year to date

Tetragon Financial Group 15 December 2021 Review
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Tetragon Financial Group

Performance remains subdued year to date

Investment trusts

15 December 2021

Price

US$8.52

Price (TFGS)

652.5p

Market cap

US$813.7m

NAV*

US$2,566m

NAV per share*

US$26.85

Discount to NAV

68.3%

*At end-October 2021.

Yield

4.7%

Fully diluted shares in issue

95.5m

Code/ISIN

TFG/GG00B1RMC548

Primary exchange

Euronext Amsterdam

Secondary exchange

LSE Specialist Fund Segment

AIC sector

Flexible Investment

52-week high/low

US$10.60

US$8.52

US$26.85

US$24.22

Gearing

Net gearing at 31 October 2021

7.4%

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

Diversified portfolio with a proven track record.

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

The wide discount provides investors with some downside protection.

Bear points

Above-average ongoing charge and performance fees.

Only non-voting shares available for investors.

Limited disclosure on underlying assets developments limiting investors’ understanding.

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 (Tetragon) reported a 2.6% NAV total return (TR) year to date (ytd) to end-October 2021 in US$ terms. All asset classes except for quoted assets showed positive gross returns, with TFG Asset Management (TFG AM, 37% of portfolio) and bank loans delivering 15.1% and 15.5% returns, respectively. However, this performance was largely offset by ongoing charges and fees (including incentive fees) and share dilution, mostly from share-based compensation. Tetragon is fully invested and had US$150m drawn out of its US$250m revolving credit facility at end-September 2021, with a net gearing ratio at end-October of 7.4%.

NAV return attribution by asset class (ppts, ytd to end-October 2021)

Source: Tetragon Financial Group, Edison Investment Research. Note: Share in Tetragon’s total NAV indicated in the data labels.

Why consider Tetragon Financial Group now?

Tetragon is a one-stop shop for alternative assets with a diversified exposure providing returns that are not correlated with major traditional asset classes. While Tetragon’s recent performance was subdued, its long-term returns remain within its target range and visibly outperform the AIC Flexible Investment sector and public equity markets over the last 10 years. Historically, it has traded at a wide discount (10-year average at 45%), with the potential reasons described in our June 2020 note. The discount stands at c 68% to NAV, which provides investors with a degree of downside protection.

The analyst’s view

Tetragon’s listed equity portfolio is concentrated (10 positions) and focused on (bio)technology and financials, with value driven by company-specific developments. Polygon funds (making up 97% of Tetragon’s hedge funds exposure) have concentrated portfolios focused on special situations. Meanwhile, the privately valued TFG Asset Management remains the main value driver of NAV returns. While Tetragon’s historical long-term performance remains intact, the high concentration in some asset buckets, coupled with Tetragon’s limited disclosure on individual underlying investments, translates into lower visibility of prospective returns. Tetragon’s recent performance is significantly behind the bull market in public and private equity, although we note it aims to deliver returns that are not correlated with broader equity markets.

TFG Asset Management remains the main driver

Exhibit 1: YTD performance by asset class (%, to end-October 2021)

Source: Tetragon Financial Group, Edison Investment Research; Note: Share in Tetragon’s total NAV indicated in the data labels.

In Q321 Tetragon reported US$88m in net valuation uplift across its portfolio, of which US$57m was related to TFG Asset Management. The revaluation was made on the back of operating performance, as its aggregate AUM increased to US$34.9bn at end-September 2021 from US$30.1bn at the beginning of the year (up 16% ytd), as well as market multiples expansion. Within TFG Asset Management businesses, the largest uplifts in Q321 alone were recognised on BentallGreenOak (US$32m) and LCM (US$18m). BentallGreenOak, in which Tetragon holds 13% stake, is valued using present value of cash flow elements of the GreenOak/Bentall Kennedy merger deal (fixed quarterly contractual payments, variable payments and carried interest) and the put/call option in place. The valuation uplift was due to strong performance in terms of AUM and projected EBITDA growth, as illustrated by the 13% y-o-y increase in the payments received by Tetragon in the first nine months of 2021. LCM has successfully launched two new CLOs, LCM 33 (US$509.2m) and LCM 34 (US$509.8m), and significantly increased its AUM. TFG Asset Management’s value is determined by a third-party valuation specialist using predominantly DCF models based on expected fee income. At end-October 2021 the business remains Tetragon’s largest portfolio holding (37% of the portfolio) and the main value driver (5.1pp out of 7.9% gross return in 2021 YTD, and 7.5pp out of 12.8% in 2020). The underlying performance drivers of other asset classes within Tetragon’s portfolio remained broadly unchanged between end-June 2021 and end-October 2021 compared to H121 (we discussed these in detail in our previous note).

Still outperforming its peers over a 10-year period

We compare Tetragon to other members of the AIC Flexible Investment sector (Exhibit 2) and despite the short-term returns falling behind the broad markets, it still significantly outperforms its peers over a 10-year perspective. Tetragon stands out from the group, with one of the highest dividend yields and ongoing charges, and the widest discount. Its discount has been wider than peers in the long term (10-year average at 45%), and we explored potential underlying factors in our June 2020 note. The recent somewhat underwhelming performance may have contributed to the widening compared to the long-term average.

Exhibit 2: Selected AIC Flexible Investment sector peer group in sterling terms at 14 December 2021*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Premium/ (discount)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Tetragon Financial Group

575.1

8.0

24.4

39.2

253.1

(68.3)

1.7

Yes

107

4.7

Aberdeen Diversified Income & Growth

308.6

7.7

10.7

20.7

55.9

(18.5)

0.6

Yes

102

5.5

Caledonia Investments

2,041.6

32.1

35.7

64.6

194.2

(23.3)

1.0

Yes

100

1.7

Capital Gearing

963.5

14.7

27.4

38.6

87.0

1.9

0.6

Yes

100

0.9

Hansa Trust 'A'

172.0

28.6

27.5

46.4

70.3

(35.6)

1.1

Yes

100

1.5

Personal Assets

1,765.1

12.9

28.6

32.2

73.4

1.0

0.7

Yes

100

1.1

RIT Capital Partners

4,230.2

36.9

54.7

71.5

180.8

(0.6)

0.7

Yes

108

1.3

Ruffer Investment Company

680.2

19.9

32.6

31.4

70.3

3.7

1.1

Yes

100

0.6

UIL

195.7

32.4

34.3

32.4

129.3

(35.7)

2.2

Yes

168

3.4

Average

1,451.6

21.8

31.0

43.6

104.6

(10.2)

0.8

101

1.8

Rank in peer group

6

8

8

4

1

9

2

3

2

Source: Morningstar, Edison Investment Research. Note: *Performance data to 31 October 2021. TR in sterling terms. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

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 2021 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 2021 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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