Incentive fee crystallised to be paid in shares, restricted for five years
Tetragon Financial Group (TFG) has announced that it is adopting IFRS reporting for accounting periods ending on and after 31 December 2016. IFRS NAV is expected to be substantially the same as fair value NAV, which TFG has been reporting since September 2015. However, moving from US GAAP to IFRS increases the reported NAV of certain TFG Asset Management businesses, principally LCM and Polygon, to reflect their fair value, and will crystallise an incentive fee payable to TFG’s investment manager, Tetragon Financial Management (TFM). This incentive fee will be paid in shares, held in escrow until 31 December 2021, and subject to a clawback mechanism. Based on fair value NAV at 30 September 2016, the incentive fee would have been US$27.1m, as stated in TFG’s third quarter report.
While TFG’s IFRS NAV is expected to be substantially the same as fair value NAV, which already includes a provision for the incentive fee payable, the payment of the fee in shares will result in an adjustment to both NAV and NAV per share. Based on values at 30 September 2016 and a TFG share price of US$12.00, there will be a US$27.1m or 1.4% increase in NAV due to the release of the incentive fee provision, with a c 2.2m increase in the diluted shares in issue, resulting in a net 0.9% dilution in NAV per share.
The dilutive effect is due to TFG’s share price discount to NAV and, as no new shares are being issued, the share payment can be considered together with the purchase of the equivalent number of shares under the December 2016 US$50m tender offer. Taking these transactions together, there is a negligible net effect on NAV per share.
Read Edison’s most recent research report on TFG here.
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