Tetragon Financial Group Limited: Semi-Annual Performance Report For Period Ended 30 June 2015

LONDON, July 31, 2015 /PRNewswire/ --

Shareholder Return

The numbers below show annualised total shareholder return to 30 June 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 1

Source: Bloomberg TRA function.

 

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 30 June 2015.

EXECUTIVE SUMMARY

TFG had a good first half to 2015 with an annualised Return on Equity ("RoE") of 12%, in line with the Company's over-the cycle target of 10-15% per annum.⁽²⁾ Notable performance in the first half came from (1) equities, both direct investments and Polygon's⁽³⁾ event-driven European equity strategy; (2) U.S. CLO 1.0 and 2.0 deals; and (3) GreenOak-managed real estate⁽⁴⁾, particularly in Japan and the United States. In addition, TFG Asset Management ("TFG AM") continued to grow organically through both underlying fund performance and asset raising. TFG AM closed on its acquisition of Equitix⁽⁵⁾ in Q1 2015.

The second quarter dividend was declared at $16.25 cents per share, giving 12 months' rolling dividend growth of 6.3%.

Enhancing liquidity: As indicated in our Q1 2015 report, TFG has submitted an application seeking admission for TFG's shares to trade on the Specialist Fund Market ("SFM")⁽⁶⁾ 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. It is currently anticipated that the admission to the SFM will be completed in November 2015.⁽⁷⁾ 

Medium-term planning: The Company's investment strategy with respect to TFG AM has led it to become a diversified alternative asset management business that owns majority and minority stakes in asset managers. TFG uses its balance sheet to invest in, build and grow those businesses. Some of the growth has been organic – through active capital raising into existing businesses leveraging off the TFG AM platform and launching new businesses such as Hawke's Point. The Investment Manager⁽⁸⁾ has also sought to accelerate growth through joint ventures and partnerships with existing businesses and via acquisitions, as was the case with Equitix. The Investment Manager believes that considerable value has already been built within TFG AM. Given the significantly increased scale of TFG AM in light of this organic growth and, in particular, following the acquisition of Equitix – in terms of AUM (approximately $15 billion)⁽⁹⁾, people (approximately 200), infrastructure and profitability – the Investment Manager is reviewing how that value might be delivered to TFG's shareholders over the medium term.

One option under consideration is to seek to have an initial public offering and listing of shares of TFG AM in the next three to five years. Such an IPO would potentially create value for TFG Shareholders as well as provide an acquisition currency to accelerate the growth of TFG AM. As part of that consideration, the Investment Manager has engaged a strategic and capital markets specialist adviser to assess the feasibility for an IPO and review strategic options of further optimising value in TFG AM prior to an IPO. The Investment Manager expects to update shareholders on this aspect of its investment strategy in the Q3 2015 report.

Should such a strategic plan be settled upon, one result may be that all the businesses owned by TFG AM would be required under U.S. GAAP to move to a consistent basis of accounting – fair value – rather than being partly fair valued (as is the case with Equitix and GreenOak) and partly consolidated (as is the case with LCM Asset Management ("LCM") and Polygon). This would provide a certain consistency and thus clarity to the accounts. It would also result in a potentially material increase, net of fees, in the carrying value of businesses such as LCM and Polygon, which have historically been consolidated, and consequently, an increase in the Net Asset Value ("NAV") of TFG, all other things being equal.⁽¹⁰⁾ In such an event, the Investment Manager would propose to defer any performance fees otherwise resulting with respect to the initial fair valuing of LCM and Polygon for a number of years or, if earlier, an IPO of TFG AM, with a "clawback" mechanic in place should the fair value of these businesses decline in the interim period. Furthermore, the Investment Manager believes that any such fees should be converted into TFG Shares in order to further align the Investment Manager with TFG Shareholders.

Investor Day: TFG plans to host its annual Investor Day in London on 17 November 2015. The event will be webcast live. Further details regarding registration and the agenda will be published closer to the date of the event.

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 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.

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/or seeks for TFG (via TFG AM) 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 may use its balance sheet to facilitate the growth of TFG AM 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 AM's existing businesses. The Investment Manager looks to mitigate potential correlated risks across TFG AM'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 AM platform: an established global asset management platform, which comprises critical business management functions such as risk management, operations, financial control, compliance, legal, business development and technology.

Figure 2 shows the company's current net asset breakdown.

Figure 2^(i)(ii)

(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG's investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of "Other Net Assets and Liabilities."

(ii) Assets characterised as "Equities" consist of the fair value of investments in Polygon-managed equity funds as well as the fair value of, or capital committed to, equity assets (as applicable) held directly on TFG's balance sheet. Please see Figure 8 for further details on asset composition.

 

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, and Dividends.  Drivers for each of the metrics are discussed in the following sections of the report.

EARNINGS - RETURN ON EQUITY ("RoE")

RoE for H1 2015 was an annualised 12.0%, within TFG's long-term target range of 10-15%⁽¹¹⁾, reflecting a good first half of the year across many of the business areas.

TFG generated Net Economic Income⁽¹²⁾ of $109.0 million in H1 2015, compared with $86.0 million in the equivalent period last year, representing an increase of 26.7%.

Figure 3⁽ⁱ⁾

(i) Average RoE is calculated from TFG's IPO in 2007.

 

EARNINGS PER SHARE ("EPS")

TFG generated an Adjusted EPS⁽¹³⁾ of $1.13 in H1 2015

The H1 Net Economic Income⁽¹⁴⁾ of $109.0 million resulted in an EPS of $1.13, the highest first half of the year adjusted EPS result for the Company since 2012.

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 $17.66 at the end of H1 2015, up 3.6% from the end of Q4 2014.

• Total NAV for TFG rose to $1,901.0 million at 30 June 2015, which equated to Pro Forma Fully Diluted NAV per Share⁽¹⁵⁾ of $17.66.
• The 3.6% growth in NAV per Share recorded in the first half of the year is after distributing dividends of $0.315 during that period. The NAV per Share growth adjusting for the dividend distribution was approximately 5%.

Figure 5⁽ⁱ⁾

(i) Source: NAV per share based on TFG's financial statements as of 30 June of each of the years shown. Please note that the Pro Forma Fully Diluted NAV per share reported at each date excludes any shares held in treasury or in a subsidiary as of that date, but includes shares held in escrow which are expected to be released and incorporated into the U.S. GAAP NAV per Share over a five-year period and the number of shares corresponding to the applicable intrinsic value of the options issued to the Investment Manager at the time of the Company's IPO. Please see Figure 18 on page 26 for more details.

DIVIDENDS PER SHARE ("DPS")

TFG increased its dividend to 16.25 cents per share.

• TFG declared a Q2 2015 DPS of $0.1625, an increase on the previous quarter. On a rolling 12-month basis, the dividend of $0.6325 cents per share represents a 6.3% increase over the prior 12-month period and equated to an annualised dividend yield of 6.3% on the 30 June 2015 share price of $10.07.
• This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q2 2015 DPS of $0.1625 brings the cumulative DPS declared since TFG's IPO to $3.7625.

Figure 6

 

H1 2015 IN REVIEW

PERFORMANCE BY ASSET TYPE

The figure below illustrates the composition of TFG's net assets as of the end of H1 2015 and year end 2014.

Figure 7^(i)(ii)

(i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG's investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of "Other Net Assets and Liabilities."

(ii) Assets characterised as "Equities" consist of the fair value of investments in Polygon-managed equity funds as well as the fair value of, or capital committed to, equity assets (as applicable) held directly on TFG's balance sheet. Please see Figure 8 for further details on asset composition.

 

NET ASSET BREAKDOWN AND INCOME FOR H1 2015

Figure 8

(i) "U.S. CLO 1.0" refers to U.S. CLOs issued before or during 2008. "U.S. CLO 2.0" refers to U.S. CLOs issued after 2008. The U.S. CLO 1.0 segment includes an investment in the BB tranche of a U.S. CLO 1.0 with fair value of $1.8 million.

(ii) Assets characterised as "Other Equities" consist of the fair value of, or capital committed to, investment assets held directly on the balance sheet.

(iii) TFG Asset Management income figure is "Net Economic Income Before Tax." This includes the consolidated results for Polygon and LCM in addition to any change in value, realised or unrealised, attributable to the investments in Equitix and GreenOak.

Figure 8 above shows net assets and net income by asset class for H1 2015.

• U.S. 1.0 CLOs: TFG's U.S. CLO 1.0 investments performed well during H1 2015, with all such CLOs passing their junior-most O/C tests as of the end of the period.⁽¹⁶⁾ In particular, stable underlying credit quality and a reduction in the pace of structural deleveraging during H1 2015 compared with 2014 supported continued stable equity performance for TFG's U.S. CLO 1.0 transactions and allowed us to complete a number of optional redemptions and opportunistic sales, which were generally accretive to returns. In aggregate, during H1 2015 U.S. 1.0 CLOs generated net income of $36.0 million.
• U.S. 2.0 CLOs: The performance of TFG's U.S. 2.0 CLOs remained stable during Q2 2015 making for a healthy H1 2015. As of the end of Q2 2015, all of TFG's U.S. 2.0 CLOs were in compliance with their junior-most O/C tests.⁽¹⁷⁾ During Q2 2015, we took advantage of favourable market conditions to refinance the liabilities of LCM XII, reducing the transaction's financing costs, which may increase the returns to the equity tranche held by the Company, all else being equal. During H1 2015, U.S. 2.0 CLOs generated net income of $26.1 million.
• European CLOs: All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of H1 2015.⁽¹⁸⁾ Nonetheless, income generation by this segment of the portfolio was weak during the first half of the year as a number of transactions suffered realised losses in their underlying loan portfolios, negatively impacting CLO equity valuations. During H1 2015, this portfolio segment generated net income of $1.6 million.
• Equity Funds: Polygon's equity hedge funds all performed well during H1 2015, particularly the European event-driven equity strategy. Please refer to pages 20 and 21 for further details on the performance of the individual funds.
• Other Equities: This category had a quiet second quarter after the very strong first quarter driven by the sale of an equity position established in 2014.
• Convertible Fund: Polygon's convertible fund was profitable in H1 2015. Please refer to pages 20 and 21 for further details.
• Distressed Fund: Polygon's distressed fund was a small positive contributor during H1 2015. Please refer to pages 20 and 21 for further details.
• Real Estate: GreenOak-managed real estate investments continued the strong performance seen in Q1 2015. Income generation was across a number of different investment vehicles, with realisations in the U.S. Fund I and the Japan Fund contributing close to 50% of income during the period.
• TFG AM: The first half incorporated Equitix for the first time. Equitix and other parts of TFG AM had a strong first half in terms of both performance of the underlying funds as well as new AUM growth. Further details are on page 22 of this report.

Figure 9

(i) Comprising the Polygon management contracts plus the aggregated net assets of Polygon, LCM and Hawke's Point.

 

H1 2015 Major New Investments

• U.S. 2.0 CLOs: In H1 2015, TFG acquired a majority equity position in one LCM-managed CLO for a total cost of approximately $27.8 million. Additionally, TFG agreed to acquire a majority equity position in a new issue LCM-managed CLO that priced during Q2 2015 for a cost of $34.6 million; this transaction closed in July 2015.
• Real Estate: During H1 2015, TFG invested $54.9 million into various real estate funds and vehicles which focus on a variety of geographical areas including the Americas, Europe and Asia.
• 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 an external £60 million bank facility. TFG's investment is structured through the holding of a mezzanine loan, a 12% loan note and an equity stake which in aggregate has a combined cost of $133.1 million. TFG holds 85% of the loan notes with management holding 15%. Over time its effective economic share through the equity holding is expected to decline to 74.8% with management owning the balance.
• Other Equities: During H1 2015 TFG invested $20.0 million in two U.S. pre-IPO companies.

H1 2015 Major Asset Sales and Optional Redemptions

• U.S. CLOs: During H1 2015, TFG exercised its optional call rights on two U.S. CLO 1.0 deals and sold one U.S. CLO 1.0 transaction, generating call proceeds of approximately $15.1 million and sale proceeds of $6.5 million. TFG has received substantially all of the expected proceeds from these redemptions, with some small final payments remaining, pending the sale or settlement of certain assets and the closing of the CLOs' issuer entities.
• European CLOs: TFG exercised its optional call rights on one European CLO in the first half of 2015, generating call proceeds of approximately €17.4 million. TFG has received substantially all of the expected proceeds from this redemption, with a small final payment to be received after the closing of the CLO's issuer.
• Real Estate: During H1 2015, TFG received $22.4 million, representing both capital and income on certain investments. The majority of these receipts were from investments focused on the United States and Japan.

TFG ASSET MANAGEMENT OVERVIEW

TFG AM OVERVIEW

One of TFG's significant investments is TFG AM, a diversified alternative asset management business that owns majority and minority stakes in asset managers. At 30 June 2015, TFG AM comprised LCM, the GreenOak joint venture, Polygon, Equitix and Hawke's Point (please see Figure 10 for the breakdown of AUM by business line). TFG AM has approximately $15 billion of assets under management⁽¹⁹⁾ and has approximately 200 employees globally. Figure 11 depicts the growth of that AUM over the last five years.

Figure 10⁽ⁱ⁾

 

Figure 11⁽ⁱⁱ⁾

(i) Includes funds and advisory assets of the GreenOak joint venture, LCM Asset Management LLC, Polygon Recovery Fund LP, 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, Polygon Distressed Opportunities Master Fund, and Equitix Holdings as calculated by the applicable administrator for value date 30 June 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG AM AUM as used in this report includes the assets under management of several investment advisers, including Tetragon Asset Management L.P., and GreenOak Real Estate, LP, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940.

(ii) Please see note (i) above.

 

BUSINESS OVERVIEWS

The following pages provide a summary of each asset management business and a H1 2015 review of AUM growth and underlying strategy / investment vehicle performance.

All data is at 30 June 2015, unless otherwise stated.

LCM

 

GREENOAK

POLYGON

 

EQUITIX

 

HAWKE'S POINT

 

TFG AM PRO-FORMA EBITDA (Ex-GreenOak)

Figure 17

(i)   In H1 2015 this table includes the income and expenses attributable to TFG's majority owned businesses, Polygon, LCM and Equitix during that period. In the case of Equitix this only covers the period from February 2, 2015, the date of the closing of TFG's acquisition of Equitix. Although TFG currently has an 85% effective economic share of its business, 100% of Equitix's income and expenses are reflected with the 15% not attributable to TFG backed out through the minority interest line. The GreenOak joint venture is not included. The EBITDA equivalent is a non-GAAP measure and is designed to show the performance of the TFG AM businesses rather than what is reflected in TFG's U.S. GAAP financial statements.

(ii)   The performance and success fees include some 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 quarter end, less certain assumed costs. Similar amounts, if any, from LCM and the GreenOak joint venture 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 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million. It also includes any unrealised performance fees to potentially be paid on investments made by TFG in Polygon hedge funds or other investment vehicles. TFG is able to invest at a preferred level of fees.

 

• Overview: Figure 17 shows a pro forma statement of operations which reflects the operating performance of the majority-owned asset management companies within TFG AM. Thus, even though Equitix is fair valued for U.S. GAAP reporting purposes, this pro forma table includes Equitix as if it had been consolidated in order to be on the same basis as Polygon, LCM and Hawke's Point. GreenOak, in which TFG holds a minority interest, is not included in the pro forma EBITDA currently.
• EBITDA: EBITDA Equivalent for the majority-owned TFG AM businesses rose by 57% in H1 2015 compared with H1 2014, accelerated in large part by the inclusion of Equitix from the start of February 2015.
• Management fee income: Management fee income continued to increase with the growth of the TFG AM businesses. Fee paying capital increased significantly year on year, both through organic growth of the Polygon and LCM businesses and, notably, from the acquisition of Equitix which added approximately $2.0 billion of fee paying AUM from early February onwards.
• Performance and success fees: Polygon hedge fund performance fees⁽³⁰⁾ (realised and unrealised) were lower in H1 2015 than in H1 2014 despite the good start to the year, particularly by the European event-driven equity strategy, and the additional capital under management. This was because the Polygon funds had a particularly strong start to 2014. LCM also contributed realised performance fees in H1 2015, although also at a lower level than in H1 2014. Other performance and success fees were boosted strongly by the acquisition of Equitix, which has had an excellent first few months on the TFG AM platform. The profile of such fees may be more volatile than management fees, but have the potential to continue to make a significant contribution to the bottom line of TFG AM over time.
• Other fee income: This category includes third party CLO management fee income, all of which relates to CLO 1.0s, which continued to decline in line with expectations as such CLO 1.0s amortised down. In addition, it includes certain cost recoveries from TFG relating to seeded Polygon hedge funds which are described in more detail in the TFG AM Overview section of this report. Such cost recoveries increased year on year as the teams supporting the seeded funds grew.
• Operating expenses: Operating expenses rose by approximately 62% in H1 2015 compared to H1 2014, largely driven by the addition of the Equitix business in early 2015 plus additions to the teams supporting the growing Polygon hedge fund and Hawke's Point businesses.

H1 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.⁽³¹⁾

FINANCIAL HIGHLIGHTS

Figure 18

 

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

• Net Economic Income ($109.0 million): Adds back to the U.S. GAAP net income ($95.7 million) the imputed H1 2015 share based employee compensation ($11.5 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction, and also includes net unrealised Polygon performance fees ($1.7 million).⁽³²⁾
• Return on Equity (6.0%): Net Economic Income ($109.0 million) divided by Net Assets at the start of the year ($1,818.5 million).
• Pro Forma Fully Diluted Shares (107.6 million): Adjusts the U.S. GAAP shares outstanding (96.8 million) for the impact of escrow shares used as consideration in the Polygon transaction and associated stock dividends (together, 10.7 million) and for the potential impact of options issued to TFG's investment manager at the time of TFG's IPO (0.1 million). See also figure 32.
• Adjusted EPS ($1.13): Calculated as Net Economic Income ($109.0 million) divided by weighted-average U.S. GAAP shares⁽ⁱ⁾ during the period (96.3 million).
• Pro Forma Fully Diluted NAV per Share ($17.66): Calculated as Net Assets ($1,901.0 million) divided by Pro Forma Fully Diluted shares (107.6 million).⁽³³⁾

(i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.

 

EPS ANALYSIS H1 2013-H1 2015

Figure 19

 

STATEMENT OF OPERATIONS

Figure 20

 

Performance Fee
A performance fee of $5.7 million was accrued in Q2 2015 in accordance with TFG's investment management agreement. The hurdle rate for the Q3 2015 incentive fee has been reset at 2.931458% (Q2 2015: 2.918608%) 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.

BALANCE SHEET

Figure 21

 

STATEMENT OF CASH FLOWS

Figure 22

(i) The H1 2015 figure reconciles to the U.S. GAAP Statement of Cash flows, "net cash provided by operating activities" figure of $45.7 million, adjusted for "dividends paid to Feeder in lieu of incentive fee liability" ($24.5 million).

 

NET ECONOMIC INCOME TO U.S. GAAP RECONCILIATION

Figure 23

 

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 $11.5 million and performance fee earned but not accrued of $1.7 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 unaudited financial statements for the period ended 30 June 2015.

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, the GreenOak joint venture 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 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million as shown above.

APPENDICES

APPENDIX I

Certain Regulatory Information

This Performance Report constitutes TFG's semi-annual financial report as required pursuant to Section 5:25e of the Dutch Financial Markets Supervision Act ("FMSA"). Pursuant to Section 5:25d 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 Financiële 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.

Directors' Statements

The Directors of TFG confirm that (i) this Performance Report constitutes the TFG management review for the six month period ended 30 June 2015 and contains a fair review of that period and (ii) the financial statements in the accompanying unaudited interim report for the six month period ended 30 June 2015 for TFG have been prepared in accordance with applicable laws and in conformity with accounting principles generally accepted in the United States of America.

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.

Figure 24

U.S. CLOs modelling assumption

 

Figure 25

European CLOs modelling assumption

 

Figure 26

Discount Rates

 

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 27 cannot be reproduced]

[Figure 28 cannot be reproduced]

CLO PORTFOLIO CREDIT QUALITY

Figure 29

 

CLO EQUITY PORTFOLIO DETAILS
AS OF 30 JUNE 2015

Figure 30

 

Figure 30 (continued)

 

Notes

(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. TFG may continue to hold such transactions as of the date of this report.

(ii)      The USD investment cost reflects a USD-EUR exchange rate fixed at a single historical rate to avoid the impact of skewed weightings and FX volatility over time. As such, the investment costs of European CLOs as shown in this table may not be comparable to the investments costs as shown in TFG's financial statements.

(iii)     Par weighted-average spread over LIBOR or EURIBOR (as appropriate) of the underlying loan assets in each CLO's portfolio.

(iv)    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.

(v)     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.

(vi)    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. Calculations are ignored and stated as "N/A" In certain cases where debt has been substantially, but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful.

(vii)    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. Please note that two of TFG'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.

(viii)   Calculated by annualising the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion.

(ix)    Calculated from TFG's investment date. Includes both historical cash flows received to-date and prospective cash flows expected to be received, based on TFG's base case modeling assumptions.

(x)     Inception to report date cash flow received on each transaction as a percentage of its original cost.

 

CLO EQUITY PORTFOLIO DETAILS (CONTINUED)
AS OF 30 JUNE 2015

[Figure 31 cannot be reproduced]

APPENDIX IV

SHARE RECONCILIATION AND SHAREHOLDINGS

Figure 32⁽³⁴⁾

Shareholdings
Persons affiliated with TFG maintain significant interests in TFG shares.  For example, as of 30 June 2015, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:

 

*The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares. In addition to the foregoing, as of 30 June 2015, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.5 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees.

As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the "Vested Shares")) that were issued pursuant to TFG's acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the "Polygon Transaction") have vested with certain persons (other than Messrs. Griffith and Dear) (such persons, the "Sellers"), all of whom are employees or partners ("Employees") of TFG-owned or affiliated entities, pursuant to the Polygon Transaction.

Certain of these Employees may from time to time enter into sales trading plans (each a, "Fixed Trading Plan") providing for the sale of Vested Shares in the market or may otherwise sell their Vested Shares subject to applicable compliance policies. Applicable brokerage firms may be authorised to sell such TFG 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 TFG in accordance with its applicable compliance policies.

For additional information regarding the Polygon Transaction and the future vesting schedule for shares issued thereunder, see Note 22 to the 2014 Tetragon Financial Group Master Fund Limited audited financial statements, included in the TFG 2014 Annual Report.

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, nonpublic information.

APPENDIX V

TFG AM Reconciliation Between U.S. GAAP Net Economic Income and Pro Forma EBITDA

Figure 33

 

• Overview: TFG and TFG Master Fund are both Investment Companies for U.S. GAAP purposes and the default accounting for Investment Companies under U.S. GAAP (ASC 946) is to fair value all assets and liabilities. See TFG Master Fund's Financial Statements, Note 2 Basis of Presentation, for further details.
• Companies which meet certain criteria including primarily providing services, such as asset management services, to the Investment Company, can be subject to a service provider exemption under ASC 946, which results in them being consolidated rather than fair valued. Historically and as at 30 June 2015, the LCM, Polygon and Hawke's Point businesses are being accounted for under this exemption because they manage significant levels of TFG investment capital and historically there has been no specific articulated exit strategy. See TFG Master Fund's Financial Statements, Note 2 Principles of Consolidation, for further details.
• Should the medium-term strategic plan described in the Executive Summary be settled upon, one result may be that all the businesses owned by TFG AM would be required under U.S. GAAP to move to a consistent basis of accounting – fair value. Although the determination of fair value will be based on a calculation made by an independent valuation specialist (based in part on certain information such as forecasts provided by the Investment Manager) and subject to the approval of the Audit Committee of TFG, the Investment Manager would expect that the valuation range from which an appropriate valuation would be taken would be derived from a variety of industry-standard valuation techniques, depending on the stage of development of the business being valued. Please see Note 10 for further information.
• Following additional analysis of the application of Investment Company accounting to TFG AM post the acquisition of Equitix, it has been concluded that Equitix's relationships with TFG and TFGMF do not have the same service provider characteristics as LCM, Polygon and Hawke's Point and thus as at H1 2015 Equitix has been accounted for using the default Investment Company methodology – at fair value. Equitix had initially been consolidated at Q1 2015 in order to be consistent with the other majority-owned management entities but this has now been amended and applied consistently from the period since acquisition.
• Figure 17 provides a pro forma EBITDA calculation for the TFG AM businesses to assist in understanding its underlying operating performance. Figure 33 above takes the U.S. GAAP Net Income before tax for TFG AM and adds to it certain pro forma operating adjustments for the Fair Valued businesses (excluding the GreenOak joint venture) in order to give a combined set of operating metrics.

APPENDIX VI

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.

ENDNOTES

TFG is not responsible for the contents of any third-party website noted in this report.

(1) TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the issued non-voting shares. In this report, unless otherwise stated, we report on the consolidated business incorporating TFG and TFGMF. References to "we" are to Tetragon Financial Management LP, TFG's investment manager (the "Investment Manager").

Executive Summary

(2) LIBOR directly flows through some of TFG's investments and, as it can be seen as the risk-free short-term rate, it should affect all of TFG's investments. In high-LIBOR environments, TFG should achieve higher sustainable returns; in low-LIBOR environments, TFG should achieve lower sustainable returns.

(3) Polygon Global Partners LP and Polygon Global Partners LLP and certain of their affiliates, hereinafter referred to in this report as "Polygon."

(4) GreenOak Real Estate, LP; hereinafter referred to in this report as "GreenOak." GreenOak is separately registered as an investment adviser under the U.S. Investment Advisers Act of 1940. TFG owns a 23% interest in GreenOak.

(5) Equitix Holdings Limited, hereinafter referred to in this report as "Equitix."

(6) Euronext in Amsterdam is 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.

(7) There is no assurance that the application will receive approval and further details to be provided in due course.

(8) Please see note 1.

(9) Includes funds and advisory assets of the GreenOak joint venture, LCM Asset Management LLC, Polygon Recovery Fund LP, 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, Polygon Distressed Opportunities Master Fund, and Equitix Holdings as calculated by the applicable administrator for value date 30 June 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG AM AUM as used in this report includes the assets under management of several investment advisers, including Tetragon Asset Management L.P., and GreenOak Real Estate, LP, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940.

(10) Although the determination of fair value will be based on a calculation made by an independent valuation specialist (based in part on certain information such as forecasts provided by the Investment Manager) and subject to the approval of the Audit Committee of TFG, the Investment Manager would expect that the valuation range from which an appropriate valuation would be taken would be derived from a variety of industry-standard valuation techniques, depending on the stage of development of the business being valued. Valuation techniques include, among other things, discounted cash flows, multiples of a measure of expected income (often EBITDA) and value expressed as a percentage of AUM. Values from recent transactions, such as the acquisition of Equitix, can also play a significant role in such a valuation exercise. In addition, the existence of several early-stage, seeded businesses alongside more mature, well-established businesses can make the valuation process more complex.

Historically, an income-multiple technique has been used as a relevant methodology for purposes of valuing TFG's interest in GreenOak, which is carried at fair value. Under that methodology, TFG applies a range of multiples (7x-11x) to GreenOak's projected EBITDA. Solely for the purposes of providing a very simple example of one potential approach to the valuation of the currently consolidated businesses (Polygon, LCM and Hawke's Point), applying this same multiple range to the annualised EBITDA of such businesses as at June 30, 2015 would result in a valuation range between US$140 million and US$220 million for Polygon, LCM and Hawke's Point, compared with the current accounting value of US$48.1 million (see Figure 9). The resultant impact on NAV would therefore be a range of US$69 million and US$129 million net of incentive fees. This range is for illustrative purposes only and should not be relied on for any other purpose and should not be construed as the Investment Manager's or TFG's definitive estimate of the valuations of such businesses. There can be no assurance, of course, that the independent valuation specialist or the Audit Committee would use the income multiple technique for purposes of valuing these business, or, if such technique were used, that such range of multiples would be applied or that any other factors (including the factors described above) would not materially affect the resulting valuations; any of these determinations could result in valuations that are materially outside of such range. Additionally, there can be no assurance that the valuation of these businesses as part of a future IPO of TFG AM or other strategic transaction would be within this range.

Key Metrics

(11) Please see note 2.

(12) Please refer to Financial Highlights on page 26 of this report for the definition of Net Economic Income.

(13) Please refer to Financial Highlights on page 26 of this report for the definition of Adjusted EPS.

(14) Please see note 12.

(15) Please refer to Financial Highlights on page 26 of this report for the definition of Pro Forma Fully Diluted Shares and Pro Forma Fully Diluted NAV per Share.

H1 2015 In Review

(16) Based on the most recent trustee reports available as of 30 June 2015.

(17) Based on the most recent trustee reports available as of 30 June 2015.

(18) Based on the most recent trustee reports available as of 30 June 2015.

TFG Asset Management Overview

(19) Please see note 9.

(20) Default statistics include data only from LCM Cash Flow CLOs as of 30 June 2015.

(21) LCD Quarterly Review Q2 2015: "Percent of Outstanding Leveraged Loans in Default or Bankruptcy" as of 30 June 2015.

(22) 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 Funds' 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) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com.

(23) (i) The fund began trading with Class B shares, which carry no incentive fees, on 20 May 2009. Class A shares of the fund were first issued on 1 April 2010 and returns from inception through March 2010 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 over a hurdle and other items, in each case, as set forth in the Offering Memorandum). AUM figure and net performance is for the Polygon Convertible Opportunity Master Fund as calculated by the applicable fund administrator.

(ii) The fund began trading 8 July 2009 with Class B shares which carry no incentive fee. Class A shares commenced trading on 1 December 2009. Returns from inception through November 2009 for Class A shares have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee and other items, in each case, as set forth in the offering Memorandum). From December 2009 to February 2011, the table 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. AUM figure and net performance is for the Polygon European Equity Opportunity Master Fund and associated managed account as calculated by the applicable fund administrators. (iii) The fund began trading with Class B1 shares, which carry no incentive fees, on 1 June 2012. Returns through October 2013 have been pro forma adjusted to account for a 2.0% management fee, a 20% incentive fee, and non-trading expenses capped at 1%, in each case, as set forth in the Offering Memorandum. Class A1 shares of the Fund were first issued on 1 November 2013. From November 2013, forward, performance reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. AUM figure and net performance is for the Polygon Mining Opportunity Master Fund as calculated by the applicable fund administrator.

(iv) The fund began trading on 2 September 2013. Class A shares of the fund were first issued in September 2013 and returns from inception through September 2014 have been 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). AUM figure and net performance is for the Polygon Distressed Opportunities Master Fund as calculated by the applicable fund administrator.

(v) The fund began trading with Class B/B1 shares, which carry no incentive fees, on 12 September 2011. Returns shown from inception through August 2013 have been pro forma adjusted to account for a 2.0% management fee and a 20% incentive fee, in each case, as to be set forth in further definitive documents. The fund began trading Class A shares, which are not new issue eligible, on 23 September 2011. Class A1 shares of the Fund, which are new issue eligible, were first issued on 1 November 2013, and returns from inception through October 2013 have been pro forma adjusted to match the Fund's Class A1 performance. AUM figure and net performance is for the Polygon Global Equities Master Fund as calculated by the applicable fund administrator.

(vi) The Private Equity Vehicle noted is the Polygon Recovery Fund L.P. ("PRF"). The manager of the PRF is a subsidiary of TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term, recently extended to March 2016, and subject to a further one-year extension based on investor approval. 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 AUM figure for PRF is as calculated by the applicable fund administrator.

(24) The Polygon Convertible Opportunity Fund began trading with Class B shares, which carry no incentive fees, on 20 May 2009. Class A shares of the fund were first issued on 1 April 2010 and returns from inception through March 2010 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 over a hurdle and other items, in each case, as set forth in the Offering Memorandum). From April 2010, forward, the reported returns reflect actual Class A share performance on the terms set forth in the Offering Memorandum. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. 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. 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 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 RV: FI-Convertible Arbitrage Index (Bloomberg Code: HFRXCA) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com.

(25) The Polygon European Equity Opportunity Fund began trading 8 July 2009 with Class B shares, which carry no incentive fee. Class A shares commenced trading on 1 December 2009. Returns from inception through November 2009 for Class A shares have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee and other items, in each case, as set forth in the offering Memorandum). From December 2009 to February 2011, reported performance reflects actual Class A share performance on the terms set forth in the Offering Memorandum. From March 2011, forward, the table reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. Class A1 share performance is equivalent to Class A share performance for prior periods. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. 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. 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 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 ED: Event Driven Index (Bloomberg Code: HFRXED) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com.

(26) The Polygon Mining Opportunity Fund began trading with Class B1 shares, which carry no incentive fees, on 1 June 2012. Returns shown here through October 2013 have been pro forma adjusted to account for a 2.0% management fee, a 20% incentive fee, and non trading expenses capped at 1%, in each case, as set forth in the Offering Memorandum. Class A1 shares of the Fund were first issued on 1 November 2013. From November 2013, forward, reported performance reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. 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. 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 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 Market Vectors Junior Gold Miners Index (Bloomberg Code: GDXJ) is compiled by Market Vectors Index Solutions, a subsidiary of Van Eck. Further information relating to index constituents and calculation methodology can be found at www.marketvectorsindices.com.

(27) 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 documents (2.0% management fee, 20% incentive fee and other items, in each case, as set forth in the offering documents) as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. 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. 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 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 DS: Distressed Restructuring Index (Bloomberg Code: HFRXDS) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com.

(28) The Polygon Global Equities Fund began trading with Class B/B1 shares, which carry no incentive fees, on 12 September 2011. Returns shown from inception through August 2013 have been pro forma adjusted to account for a 2.0% management fee and a 20% incentive fee, in each case, as to be set forth in further definitive documents. The fund began trading Class A shares, which are not new issue eligible, on 23 September 2011. Class A1 shares of the Fund, which are new issue eligible, were first issued on 1 November 2013, and returns from inception through October 2013 have been pro forma adjusted to match the Fund's Class A1 performance. AUM figure and net performance is as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. 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.

(29) The Private Equity Vehicle noted is the Polygon Recovery Fund L.P. ("PRF"). The manager of the PRF is a subsidiary of TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term, recently extended to March 2016, and subject to a further one-year extension based on investor approval. 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. AUM figure and net performance is for PRF as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index.

(30) 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 NAV at quarter end, less certain assumed costs. Similar amounts, if any, from LCM and the GreenOak joint venture 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 30 June 2015, this amount equalled $3.3 million before (1) an assumed imputed tax charge and (2) estimated TFM performance fees reduced the net contribution to $1.7 million. It also includes any unrealised performance fees to potentially be paid on investments made by TFG in Polygon hedge funds or other investment vehicles. TFG is able to invest at a preferred level of fees.

H1 2015 Financial Review

(31) On occasion, figures may not total due to rounding.

(32) Please see note 30.

(33) Pro Forma Fully Diluted NAV per Share seeks to reflect certain potential changes to the total non-voting shares over the next few years, which may be utilised in the calculation of NAV per Share. Specifically, the number of shares used to calculate U.S. GAAP NAV per Share has been adjusted to incorporate:

(i) The Escrow Shares, which have been used as consideration for the acquisition of Polygon and applicable stock dividends relating thereto, and which are held in escrow and are expected to be released and incorporated into the U.S. GAAP NAV per Share over the next three years.

(ii) The number of shares corresponding to the applicable intrinsic value of the options issued to the Investment Manager at the time of the company's IPO with a strike price of $10.00, to the extent such options are in the money at period end. The intrinsic value of the manager (IPO) share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant period over (y) $10.00 (being the exercise price per share) times (z) 12,545,330 (being a number of shares subject to the options before the application of potential anti-dilution). The terms of exercise under the options allow for exercise using cash, as well as, with the consent of the board of the company, certain forms of cashless exercise. Each of these prescribed methods of exercise may give rise to the issuance of a different number of shares than the approach described herein. If the options were to be surrendered for their intrinsic value with the board's consent, rather than exercised, the number of shares issued would equal the intrinsic value divided by the closing price of the shares as of the final trading day in the relevant period. This approach has been selected because we currently believe it is more reasonably illustrative of a likely outcome if the options are exercised. The options are exercisable until 26 April 2017.

Appendix IV

(34) Please see Note 33.

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.

About Tetragon:

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.  The company's investment portfolio comprises a broad range of assets, including an asset-management business (TFG Asset Management), and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure. 

 

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SOURCE Tetragon Financial Group Limited