Tetragon Financial Group Limited: Performance Report For Quarter Ended 31 March 2015

LONDON, April 30, 2015 /PRNewswire/ -- Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG."⁽¹⁾  In this report, we provide an update on TFG's results of operations for the period ending 31 March 2015.

EXECUTIVE SUMMARY

TFG had a strong Q1 2015 with an annualised Return on Equity ("RoE") of 16.8%, ahead of the company's over the cycle target of 10-15% per annum.⁽²⁾

Performance was positive for the quarter for both the balance sheet (asset returns) and TFG Asset Management or "TFG AM" (operating income) with net economic income before tax for the former of $73.7 million and EBITDA equivalent⁽³⁾ for the latter of $18.8 million.

The investment portfolio returns had a strong contribution for the quarter from investments held directly on the balance sheet.  This was particularly pleasing given the performance in Q4 2014 in this part of the business.  In addition, the Company had some notable profits and return of cash from GreenOak Real Estate's⁽⁴⁾ real estate investments in the quarter.

On the operating, TFG AM, side of the business, the EBITDA equivalent for TFG AM grew to $18.8 million in Q1 (against $6.3 million in Q1 last year), helped by the addition of Equitix Holdings Limited ("Equitix") (the acquisition completed on 2 February 2015), plus positive performance from the other businesses that make up TFG AM.  

There were good positive asset inflows across TFG AM during Q1 2015, with total Assets Under Management ("AUM") standing at approximately $13.8 billion at 31 March 2015.(5)  This is up from $11.1 billion at year end excluding Equitix.

The first quarter dividend was declared at 15.75 cents per share, giving 12 months' rolling dividend growth of 7.8%.

TFG is considering seeking admission for TFG's shares to trade on the Specialist Fund Market of the London Stock Exchange.  TFG believes that the principal benefit of having this additional trading platform should be improved liquidity through (1) access to a broader investor base and (2) expanded analyst coverage.  TFG would maintain its listing on Euronext in Amsterdam, a regulated market of Euronext Amsterdam N.V. ("Euronext Amsterdam").  As is the case for Euronext Amsterdam, the Specialist Fund Market is a regulated market for the purposes of the Markets in Financial Instruments Directive.  There can be no assurance that TFG will decide to go ahead and seek admission or that it will be approved.  Further details will be provided in due course.

TFG OVERVIEW

Tetragon Financial Group Limited ("TFG") is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG" that aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles.  TFG's investment objective is to generate distributable income and capital appreciation.

To achieve this objective, TFG'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 the Investment Manager⁽⁶⁾ to negotiate favourable terms for its investments.
• To seek to own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on its capital.

Through this investment strategy, TFG has become a diversified alternative asset management business that owns majority and minority stakes in asset managers and uses its balance sheet to invest in, build and grow those businesses.

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 TFG's capital; and seeks for TFG to own a share of the asset management company.  TFG aims to not only produce asset level returns, but also aims to enhance these returns with profits from owning asset management businesses that derive income from external investors.  Thus, TFG seeks to use its balance sheet to facilitate the growth of TFG Asset Management to help create value for TFG shareholders.

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 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.  The Investment Manager looks to mitigate potential correlated risks across TFG Asset Management's investment managers by diversifying its exposure across asset classes, investment vehicles, durations, and investor types, among other factors.

TFG's asset management businesses can operate autonomously, or on the TFG Asset Management platform.  In either case, the objective is for them to benefit from an established infrastructure, which can assist in critical business management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence.

TFG's permanent capital base should increase the likelihood of success for this strategy of investing in alternative asset managers and the assets they manage, as its capital is available both for supporting operations of the management businesses and for co-investing, seeding or anchoring new investment funds of the managers.  In this sense, TFG is not only an investor, but also a business builder.

At 31 March 2015, TFG's global alternative asset management businesses had approximately $13.8 billion of assets under management.⁽⁷⁾  These businesses consisted of LCM Asset Management ("LCM"), the GreenOak Real Estate ("GreenOak") joint venture, Polygon Global Partners ("Polygon"), Equitix Holdings ("Equitix") and Hawke's Point.

Figure 1⁽⁸⁾

[Figure 1]

Shareholder Return

The numbers below show annualised total shareholder return to 31 March 2015, defined as share price appreciation including dividends reinvested, for one year, three years, five years, and since the Company's initial public offering in April 2007.

Figure 2

Source: Bloomberg TRA function.

LCM

• LCM is a specialist in below-investment grade U.S. senior secured leveraged loans.
• The business was established in 2001 and has offices in New York and London.
• TFG acquired 75% of LCM in 2010 and the remainder in 2012.
• AUM was approximately $5.8 billion at 31 March 2015.
• 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 often four 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.
• CLO managers typically earn a management fee of up to 0.50% of total assets, and a performance fee of 20% over a CLO equity IRR hurdle.
• Further information on LCM is available at www.lcmam.com.

GREENOAK

• GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks to create long-term value for its investors and provide strategic advice to its clients.
• The business was established in 2010 as a joint venture with TFG and has a presence in New York, London, Tokyo, Los Angeles, Luxembourg, Madrid, Munich, and Seoul.
• TFG owns 23% of the business and carries it at fair value.
• AUM was approximately $4.6 billion at 31 March 2015.
• GreenOak currently has funds with investments focused on the United States, Japan, Spain, and the United Kingdom.
• Funds are typically structured with management fees of 2% and carried interest over a preferred return.  The funds generally have a multi-year investment period, with a fund term of seven years after the final close, with possible extensions subject to certain approvals.
• Further information can on GreenOak is available at www.greenoakrealestate.com.

POLYGON

• Polygon manages open-ended hedge fund and private equity vehicles across a number of strategies.
• Polygon was established in 2002 and has offices in New York and London.
• TFG acquired 100% of the business in 2012.
• AUM was approximately $1.5 billion at 31 March 2015.
• Polygon manages funds focusing on the following strategies: European event-driven equities, global convertible bonds, mining company equities, and distressed securities.  Polygon also manages a private equity vehicle comprised of certain illiquid investments.  Each fund manager has its own CIO and investment team.  Polygon's open-ended funds have capacity levels set which seek to optimize the investment opportunity.  The investor liquidity of these products is calibrated to match the duration of the underlying investments.
• Fees in these products include a management fee that is generally between 1.5% and 2.0% and the typical performance fee or carried interest is 20%.
• Further information on Polygon is available at www.polygoninv.com.

EQUITIX

• Equitix is an integrated core infrastructure asset management and primary project platform. 
• Equitix was established in 2007 and is based in London.
• TFG acquired 85% of the business in February 2015; over time, TFG's holding is expected to decline to approximately 74.8%.  Management own the balance.
• AUM was approximately $2.0 billion at 31 March 2015.
• Since inception of the business, Equitix has raised over £1.2 billion across four UK-focused funds and managed accounts, investing in sectors including healthcare, education, utility infrastructure, social housing, renewable energy, transport, waste, and accommodation.
• Fees in this product include a management fee, and a carry interest fee that is over a hurdle currently set at 7.5%.  The carried interest fee is typically 20% over the hurdle, and the management fee after the investment period is typically between 1.25% and 1.65%; during the investment period it has ranged between 0.95% and 2.0% on invested capital.  The core funds also have an additional fee on committed capital of approximately 0.30%.
• Further information on Equitix is available at www.equitix.co.uk.

HAWKE'S POINT

• Hawke's Point Resource Finance seeks to provide capital to companies in the mining and resource sectors.
• TFG established Hawke's Point in Q4 2014 and owns 100% of the business. 
• Hawke's Point is currently actively evaluating a range of mine financing opportunities.

Board of Directors

TFG's Board of Directors is comprised of six members, four of whom are non-executive independent directors who have significant experience in asset management and financial markets.  Biographies of the directors can be found in the appendix.

• Rupert Dorey (Independent Director)
• Frederic Hervouet (Independent Director)
• David Jeffreys (Independent Director)
• Byron Knief (Independent Director)
• Reade Griffith
• Paddy Dear

KEY METRICS

The Company focuses on four key metrics when assessing how value is being created for, and delivered to, TFG shareholders: Earnings, Net Asset Value ("NAV") per share, Dividends, and AUM.  Drivers for each of the metrics are discussed in the following sections of the report.

EARNINGS - RETURN ON EQUITY ("RoE")

RoE for the Q1 2015 was an annualised 16.8%, above TFG's long-term range of 10-15%^(9), reflecting a strong start to the year across many of the business areas

TFG generated Net Economic Income⁽¹⁰⁾ of $76.2 million in Q1 2015, compared with $47.2 million in the equivalent quarter last year, representing an increase of 61%.

Figure 3

TFG generated an Adjusted EPS of $0.79 in Q1 2015

The Q1 Net Economic Income⁽¹¹⁾ of $76.2 million resulted in an EPS of $0.79, the highest quarterly adjusted EPS result for the Company since Q4 2013.

Figure 4

Further detailed information on the drivers of the Company's performance is provided later in this report.

NAV PER SHARE

Pro Forma Fully Diluted NAV per Share was $17.57 at the end of Q1 2015, up 3.0% from the end of Q4 2014 and up 4.4% from the end of Q1 2014

• Total NAV for TFG rose to $1,882.0 million at 31 March 2015, which equated to Pro Forma Fully Diluted NAV per Share⁽¹²⁾ of $17.57, compared to $17.05 at the end of 2014.
• The 3% growth in NAV per Share recorded in the quarter is after distributing dividends of $0.1575 during that period.  The NAV per Share growth adjusting for the dividend distribution was 4%.

Figure 5

DIVIDENDS PER SHARE ("DPS")

TFG held its dividend steady quarter on quarter

• TFG declared a Q1 2015 DPS of $0.1575, the same as in Q4 2014.  On a rolling 12-month basis, the dividend of $0.625 per share represents a 7.8% increase over the prior 12-month period and equated to an annualised dividend yield of 6.3% on the quarter-end share price of $9.89.
  
  
• This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings.  The Q1 2015 DPS of $0.1575 brings the cumulative DPS declared since TFG's IPO to $3.60.

Figure 6

AUM GROWTH

TFG Asset Management grew its total AUM by 25% in Q1 2015 driven in large part by the acquisition of Equitix, although the non-Equitix businesses grew AUM by 7% and most business lines added fee-paying capital

AUM for TFG Asset Management was approximately $13.8 billion at end of Q1 2015, up from $11.1 billion at year-end 2014.

Figure 7⁽ⁱ⁾

[Figure 7]

Q1 2015 IN REVIEW

RETURNS BY ASSET TYPE AND TFG ASSET MANAGEMENT

Figure 8

Figure 8 above shows the returns by asset type for Q1 2015 and the returns for TFG Asset Management.

• CLOs continued to make a strong contribution to income generated by the investment portfolio.  In particular, the U.S. CLO 1.0 deals enjoyed a return significantly above the discount rate of 12%.
• Real Estate enjoyed a strong quarter, buoyed by a combination of realisations and the recognition of 2014 year-end revaluations of certain properties in some of the underlying investment vehicles.
• The Polygon Equity Fund investments also performed well in the quarter.  See page 20 for further details on the performance of the funds.
• Other Equities, Credit, Convertibles, & Distressed income was the single biggest sector contributing to the quarterly performance.  A few investments generated positive income, although the majority came from a single position, which was put on in 2014.
• TFG Asset Management also had a good start to 2015, with the acquisition of Equitix becoming effective from the beginning of February in terms of income generation.  There is further detail on TFG AM later in this section. 

Figure 9

Figure 9 shows the Q1 2015 statement of operations for TFG Asset Management, compared to the same quarter in 2014.  The asset managers are at different stages of evolution and therefore different stages of profitability.

Revenues:

Fee income in the quarter increased significantly compared with the comparative period in 2014, boosted primarily by the addition of Equitix at the beginning of February.  The timing of the Equitix acquisition closing resulted in only two months' performance being recognised through the TFGAM statement of operations.  Equitix contributed both investment management income and primary income, which is derived when Equitix is successful in delivering primary investment opportunities for inclusion in Equitix managed funds.  Primary income typically arises at the end of a two to five year bidding and development phase, and consequently is likely to have a less predictable income profile than the secondary asset management fee income.

Unrealised Polygon Performance Fees reflect performance fees that have been earned year-to-date, but not accrued under U.S. GAAP (net of any accrued compensation to the investment teams).⁽¹³⁾

Interest income earned by TFG AM has fallen to immaterial levels following the full repayment in Q1 2015 of the remaining working capital loan by GreenOak.

Costs:

As expected, costs have increased as the Equitix business has been consolidated onto the TFG AM platform.  Given the Equitix team is over 60 strong, and that TFG AM added investment, compliance and marketing headcount during 2014, employee costs have been a significant contributor to the cost increase year on year.

On an EBITDA basis, however, income growth has far outstripped the increase in expenses, leading EBITDA to almost triple to $18.8 million.  "Below the line" expenses have increased as amortisation of the Equitix intangible assets is factored in, and there is also now interest expense on the external loan of £60 million which was used to partially fund the acquisition.

Finally, as with previous quarters, in the Company's segmental reporting TFG AM is allocated its share of the performance fees payable to the Investment Manager ("TFM").  Starting from this quarter, TFG AM has also been allocated a share of the base management fee which is paid to TFM, whereas previously this had been 100% allocated to the investment portfolio segment.  This reflects the growing net assets attributable to the asset management segment following the acquisition of Equitix ($242.0 million as per Figure 10) and an allocation of $0.7 million is included in the "performance and management fee allocation" included in the table in Figure 9.

Figure 10

EXPOSURE TO ASSET MANAGERS

Given that external managers now only manage 31% of Company assets, the table below has been created to show TFG's exposure to each of TFG Asset Management's underlying asset managers, both in terms of the NAV of TFG monies invested in that asset manager's various funds, and the NAV of the carrying value of TFG's ownership of the asset manager itself.  This illustrates a significant accounting difference between GreenOak, where TFG owns 23% and thus holds it on its balance sheet as an investment, and the other asset managers, where TFG owns a majority stake and thus consolidates the earnings and holds the asset at purchase price less amortisation.  This is important, as it is the combined exposure that is relevant from a risk perspective.  In some cases, the NAV of the asset manager may not completely reflect the intrinsic value of the business: for example, under U.S. GAAP, the fair value of the LCM management contracts has amortised to zero since the business was purchased in 2010, whilst its AUM has more than doubled.

Figure 11

BUSINESS OVERVIEWS

The following pages outline the progress of each business during Q1 2015 in turn.
All data is at 31 March 2015, unless otherwise stated.

LCM

 

GREENOAK

 

POLYGON

 

EQUITIX

 

HAWKE'S POINT RESOURCE FINANCE

 

EXTERNAL MANAGERS

 

DIRECT BALANCE SHEET / CO-INVESTMENT OPPORTUNITIES

• Whilst TFG's Investment Manager does not make investment decisions at the various TFG Asset Management affiliated managers, it does sit on the various investment committees, and, in addition to investing in various funds, it also gets opportunities to make co-investments or additional investments.  TFG may invest in opportunities directly from its balance sheet rather than through, for example, investments in other funds or collective investment schemes, when the Investment Manager sees an opportunity that fits its investment criteria, particularly where the structuring ability and the Company's long duration capital may give it a potential investment advantage.  In some cases, TFG may also have exposure to the investment indirectly through fund investments. 
  
  
• The adjusted net assets of this part of the portfolio at the end of Q1 2015 were $127.6 million.⁽¹⁸⁾ The majority of this is invested in publicly quoted equities.
  
  
• This segment of the portfolio experienced gains in the first quarter, primarily from European equity-related investments.

CASH

• As of the end of Q1 2015, TFG continued to have no long-term debt.  Investible Cash⁽¹⁹⁾ fell during the quarter from approximately $352.9 million to $275.8 million, primarily due to the  Company funding the acquisition of Equitix.  There is also now $87.6 million of loans and borrowings as a result of obtaining third party debt to partly fund the aforementioned acquisition.
  
  
• Cash flows from operations remained strong, with cash flows from operations reaching $106.3 million in Q1 2015.

BALANCE SHEET COMPOSITION OVERVIEW

The Investment Manager seeks to invest TFG's capital in a manner consistent with the Company's goal of providing stable returns to its investors across various credit, equity, interest rate, inflation and real estate cycles.  Given the long duration of many of the Company's assets, TFG's asset allocation methodology is not a fully dynamic, continuous process of risk adjustment, but is rather an evolution and diversification of income streams.  The Investment Manager seeks to balance not just the risks and rewards of various asset classes, but also the risks and rewards of each asset manager that it owns.

Q1 2015 Net Asset Composition Review

Figures 17 and 18 illustrate the composition of TFG's net assets as of the end of Q1 2015 and Q4 2014. 

Figure 17

Figure 18

[Figure 18]

Q1 2015 Major New Investments

• U.S. 2.0 CLOs: In Q1 2015, TFG acquired a majority equity position in one LCM-managed CLOs for a total cost of $27.8 million.
  
  
• Real estate: During Q1 2015, TFG invested $21.3 million into various real estate funds and vehicles focused on investments in the United States, Europe, and Asia.
  
  
• Polygon credit, convertible and distressed funds: During Q1 2015, TFG invested $5.0 million into Polygon-managed credit, convertible and distressed funds.
  
  
• Equitix: On 2 February 2015, TFG completed the acquisition of Equitix for a total enterprise value of £159.5 million, which was partially financed by a £60 million bank facility made to Equitix. Part of the acquisition included investments in Equitix-managed infrastructure funds, which is segregated from the carrying value of the asset manager for purposes of the Balance Sheet Composition Overview.

Q1 2015 Major Asset Sales and Optional Redemptions

• U.S. CLOs: Shortly after the end of Q1 2015, TFG exercised its optional call rights on two U.S. CLO 1.0 deals.
  
  
• European CLOs: TFG exercised its optional call rights on one European CLO in the first quarter of 2015. TFG received a significant portion of the expected optional redemption proceeds shortly after the end of the quarter.
  
  
• Real estate: During Q1 2015, TFG received $12.1 million back representing both capital and income on certain investments. The majority of these receipts were from investments focused on the United States.

Q1 2015 FINANCIAL REVIEW

This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), and provides comparative data where applicable.⁽²⁰⁾

FINANCIAL HIGHLIGHTS

Figure 19

TFG uses, among others, the following metrics to understand the progress and performance of the business:

• Net Economic Income ($76.2 million): adds back to the U.S. GAAP net income ($69.7 million) the imputed 2014 share based employee compensation ($5.8 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction, and also includes net unrealised Polygon performance fees ($0.8 million).⁽²¹⁾
  
  
• Return on Equity (4.2%): Net Economic Income ($76.2 million) divided by Net Assets at the start of the year ($1,818.5 million).
  
  
• Pro Forma Fully Diluted Shares (107.1 million): adjusts the U.S. GAAP shares outstanding (96.6 million) for the impact of escrow shares used as consideration in the Polygon transaction and associated stock dividends (10.6 million).
  
  
• Adjusted EPS ($0.79): calculated as Net Economic Income ($76.2 million) divided by weighted-average U.S. GAAP shares⁽ⁱ⁾ during the period (96.0 million).
  
  
• Pro Forma Fully Diluted NAV per Share ($17.57): calculated as Net Assets ($1,882.0 million) divided by Pro Forma Fully Diluted shares (107.1 million).⁽²²⁾

 

EPS ANALYSIS Q1 2013-Q1 2015

Figure 20

STATEMENT OF OPERATIONS

Figure 21

Performance Fee
A performance fee of $20.5 million was accrued in Q1 2015 in accordance with TFG's investment management agreement.  The hurdle rate for the Q2 2015 incentive fee has been reset at 2.918608% (Q1 2015: 2.903458%) as per the process outlined in TFG's 2014 audited financial statements and in accordance with TFG's investment management agreement.  Please see TFG's website, www.tetragoninv.com, and the 2014 TFG audited financial statements for more details on the calculation of this fee.

STATEMENT OF OPERATIONS BY BUSINESS SEGMENT

Figure 22

 

BALANCE SHEET

Figure 23

STATEMENT OF CASH FLOWS

Figure 24

NET ECONOMIC INCOME TO U.S. GAAP RECONCILIATION

Figure 25

TFG is primarily reporting earnings through a non-GAAP measurement called Net Economic Income.

The reconciliation on the table above shows the adjustment required to get from this measure of earnings to U.S. GAAP net income.  There are currently two adjusting items.  Share based employee compensation of $5.8 million and performance fee earned but not accrued of $0.8 million.  In relation to the share based compensation, under ASC 805 TFG is recognizing the value of the shares given in consideration for the Polygon transaction as employee compensation over the period in which they are vesting.  

This mechanic and future vesting schedule are described in more detail in the Master Fund audited financial statements for the year ended 31 December 2014.

Unrealised Polygon performance fees represent the fees calculated by the applicable administrator of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining net asset value at quarter end, less certain assumed costs.  Similar amounts, if any, from Equitix, LCM, GreenOak and Hawke's Point are excluded from this line item.  Such fees would typically not be realised or recognised under U.S. GAAP until calendar year end, and are therefore subject to change based on fund performance during the remainder of the year.  There can be no assurance that the company will realise all or any portion of such amounts.

Through 31 March 2015, this amount equalled $1.4 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $0.8 million as shown in Figure 9 and further represented in Figures 21 and 22 of this report.

APPENDICES

APPENDIX I

CERTAIN REGULATORY INFORMATION

This Performance Report constitutes TFG's interim management statement as required pursuant to Section 5:25e of the Dutch Financial Markets Supervision Act ("FMSA").  Pursuant to Section 5:25e and 5:25m of the FMSA, this report is made public by means of a press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiele Markten) and also made available to the public by way of publication on the TFG website (www.tetragoninv.com). 

An investment in TFG 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 TFG.

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 TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act"), 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.  TFG 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, TFG 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.  TFG 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.  This release constitutes regulated information ("gereglementeerde informatie") within the meaning of Section 1:1 of the FMSA.

TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. trading market is less liquid than other major exchanges, which could affect the price of the Shares.

There are additional restrictions on the resale of 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 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.

APPENDIX II

FAIR VALUE DETERMINATION OF CLO EQUITY INVESTMENTS

In accordance with the valuation policies set forth on TFG's website, the values of TFG's CLO equity  investments  are  determined  using  a  third-party  cash  flow  modelling  tool.  The  model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined through, for example, forward- looking observable data) might potentially impact the performance of TFG's CLO equity investments.  Since this involves modelling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter's historical data.

Subject to the foregoing, when determining the U.S. GAAP-compliant fair value of TFG's portfolio, the Company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark the model inputs and resulting outputs to observable market data when available and appropriate.

The below modelling assumptions are unchanged from last quarter.  The Company will provide analytical information on these assumptions as needed going forward, rather than each quarter.

 

 

APPENDIX III

ADDITIONAL CLO PORTFOLIO STATISTICS

Each individual deal's metrics used in the calculation of the figures below will differ from the overall averages and vary across the portfolio.

Figure 29

[Figure 29]

Figure 30

[Figure 30]

(i) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a "Selective Default" rating by one or more of the applicable rating agencies.  Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes approximately 15.6% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate.

(ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date.

 

 

 

CLO EQUITY PORTFOLIO DETAILS (CONTINUED)
AS OF 31 MARCH 2015

Figure 33

[Figure 33]

 

 

APPENDIX V

BOARD OF DIRECTORS

Rupert Dorey has over 30 years of experience in financial markets.  Mr Dorey was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt.  He held a number of positions at CSFB, including establishing CSFB's high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales.  Since 2005, he has been acting in a Non-Executive Directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles.  He is former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors.

Frederic Hervouet has over 17 years of experience in financial markets and hedge funds, including in multi-asset class investment and risk management, structured products and structured finance.  Until September 2013, Mr. Hervouet was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales.  Previously, Mr. Hervouet was a Director and Global Head of Sales at Diapason Commodities Management SA, a partner at Systeia Capital Management, which is now part of Amundi Asset Management, and a Director and Head of European Market Distribution at BAREP Asset Management, the hedge fund management subsidiary of Société Générale.  Mr. Hervouet has a MSc in Applied Mathematics and International Finance and a Masters Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the Université Paris Dauphine.  He is a member of the Institute of Directors (IoD) and of the Guernsey Chamber of Commerce.  Mr. Hervouet who is based in Guernsey, is a Non-Executive, Independent Director.

David Jeffreys provides directorship services to a small number of fund groups. From 1993 until June 2004, Mr. Jeffreys was managing director of Abacus Fund Managers (Guernsey) Limited, where he was involved with private client trust arrangements, corporate administration, pension schemes and fund administration.  He was a board member of Abacus' principal administration operating companies and served on the boards of various administrated client companies.  Previously, Mr. Jeffreys worked as an auditor and accountant for 12 years with Coopers & Lybrand (and its predecessor firms).  He has an undergraduate degree in Economics and Accounting from the University of Bristol and is a fellow of the Institute of Chartered Accountants in England and Wales.  Mr. Jeffreys who is based in Guernsey, is a Non-Executive, Independent Director.

Byron Knief is Managing Director of Court Square Capital Advisor, LLC.  Since 1989, he has raised and invested over $3 billion of capital through a series of mezzanine and leveraged debt funds.  Prior to 1989, he ran a variety of businesses for Citigroup in the United States, Europe, Canada and Latin America.  Mr. Knief received an undergraduate degree from Northwestern University and an MBA from Columbia University.  He has served as a director on the boards of several public and private companies.  Current corporate board memberships include DavCo Restaurants, Inc., JAC Products, Inc. and Olameter, Inc.  He was also formerly a director of Polygon Global Opportunities Fund and certain of its affiliates.  Mr. Knief's charitable board memberships include The Milbank Memorial Fund and The Mountain Top Arboretum.  Mr. Knief who is based in the United States of America, is a Non-Executive, Independent Director.

Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005.  He was previously the founder and chief executive officer of the European office of Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998.  He was a partner and senior managing director responsible for running the Global Event Driven arbitrage team of 25 people in Tokyo, London and Chicago for the firm.  He was previously with Baker, Nye, where he was an analyst working on an arbitrage and special situations portfolio.  Mr. Griffith holds a JD from Harvard Law School and an undergraduate degree in Economics from Harvard College.  He also served as an officer in the United States Marine Corps and left as a Captain following the 1991 Gulf War.  He is a Principal of Tetragon Financial Group Management LP.  Mr. Griffith, who is based in the United Kingdom, is an Internal Director.

Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005.  He was previously managing director and the global head of Hedge Fund Coverage for UBS Warburg Equities.  As global head of Hedge Fund Coverage and Chairman of the Global Hedge Fund Committee, he was responsible for the delivery of all of the bank's products and services to hedge fund clients globally.  He was on the board of UBS Netherlands, and was a member of both the European Equity Business Committee and the Extended Global Equity Business Committee.  Prior to this, Mr. Dear 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 UBS.  Prior to moving into investment banking, Mr. Dear was a petroleum engineer with Marathon Oil Co.  He received a Bachelor of Science in Petroleum Engineering from Imperial College in London.  He is a Principal of Tetragon Financial Group Management LP.  Mr. Dear, who is based in the United Kingdom, is an Internal Director.

 

 

 

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SOURCE Tetragon Financial Group Limited