Fund profile: Global alternative assets income portfolio
Founded in August 2005, Tetragon Financial Group is a Guernsey-domiciled, closed-ended investment company with the objective of generating distributable income and capital appreciation, aiming to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. Tetragon’s investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds, private equity and infrastructure. Tetragon’s investment structure is such that its only direct investment is in shares of the Tetragon Master Fund, in which it holds 100% of the issued and outstanding non-voting shares (see Exhibit 3). Tetragon’s shares were admitted to trading on Euronext Amsterdam in April 2007 and have also been listed on the Specialist Fund Segment of the London Stock Exchange since November 2015.
Exhibit 3: Tetragon group structure
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Source: Tetragon Financial Group, Edison Investment Research
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Tetragon’s investment manager is Tetragon Financial Management (TFM), a company controlled by Reade Griffith and Paddy Dear, co-founders of Tetragon and Polygon (now part of TFG Asset Management), who also control Tetragon’s voting shares. Griffith and Dear are the voting members of TFM’s investment committee, which determines Tetragon’s investment strategy and approves each significant investment. The committee also comprises Jeffrey Herlyn (due to retire in September 2018), Michael Rosenberg, David Wishnow and Stephen Prince (head of TFG Asset Management), who all have extensive experience in alternative investments.
Tetragon’s investment strategy has four key elements:
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To identify attractive asset classes and investment strategies.
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To identify asset managers that demonstrate superior skill and experience.
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Using TFM’s market experience to negotiate favourable terms for investments.
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Where appropriate, to take significant stakes in the asset management companies with which it invests, to enhance the returns achieved on its capital.
In addition, TFM seeks to continue to grow Tetragon’s diversified alternative asset management business, TFG Asset Management, with a medium-term view to a possible initial public offering.
At inception, Tetragon focused on debt markets, in particular collateralised loan obligations (CLOs), but has substantially diversified its portfolio since 2010, currently deploying its capital across the following alternative asset categories (see Exhibit 4 for a description of the asset managers):
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Bank loans – third-party, TCICM and LCM-managed CLO equity investments primarily in US CLO transactions. At end-2017, the portfolio effectively comprised 22 direct CLO transactions and two investments in CLO investment vehicles through TCIP.
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Hedge funds – event-driven equity, convertible bond and distressed debt fund investments managed by Polygon and a quantitative strategies fund managed by Credit Suisse.
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Real estate – primarily investments in c 10 GreenOak-managed private equity-style funds and co-investment vehicles that concentrate on opportunistic investments targeting middle-market situations in the US, Europe and Asia.
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TFG Asset Management – private equity investments in a portfolio of asset managers, each specialising in a niche alternative investment strategy.
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Private equity – directly held private equity stakes and small allocations to various third-party managed private equity funds and a first investment in Hawke’s Point.
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Other equities & credit – directly held investments in single strategy ideas, either co-investments with underlying managers or idiosyncratic investments which may be unsuitable for inclusion in TFG Asset Management vehicles.
TFG Asset Management is Tetragon’s alternative asset management platform, which owns majority and minority private equity stakes in asset managers. Tetragon may invest in funds managed by a TFG Asset Management business and also provide financial support to any fund, where it will benefit from value creation through its stake in the business. TFG Asset Management seeks to generate income and value through its businesses’ managing and growing third-party investor capital. At end-2017, TFG Asset Management had aggregate client assets of US$23bn, with c 300 employees and main offices in New York and London.
Since its inception on Tetragon’s acquisition of LCM in 2010, the platform has grown to include seven distinct asset management brands: LCM, GreenOak, Polygon, Equitix, Hawke’s Point, TCIP and TCICM (see Exhibit 4). Majority stakes are held in all of the managers except the GreenOak joint venture and TCICM (a subsidiary of the TCI II fund managed by TCIP).
Exhibit 4: TFG Asset Management businesses as at 31 December 2017
Manager |
Tetragon stake |
Description |
Asset class |
Funds managed |
AUM (US$bn) |
Tetragon investment in funds (US$m) |
LCM Asset Management |
100% |
CLO asset manager |
Bank loans |
16 CLOs |
6.5 |
191.9 |
GreenOak joint venture |
23% |
Real estate-focused principal investing, lending and advisory firm |
Real estate |
15 funds and investment vehicles |
7.6 |
132.9 |
Polygon Global Partners |
100% |
Manager of open-ended hedge fund and private equity vehicles across a number of strategies |
Hedge funds Private equity |
4** unlimited life funds 1 fixed life fund |
1.6 |
424.3 |
Equitix |
85% |
Integrated core infrastructure asset management and primary project platform |
Infrastructure |
7 funds and investment vehicles |
3.6 |
No direct fund exposure |
Hawke's Point |
100% |
Asset manager that seeks to provide capital to companies in the mining and resource sectors |
Mining finance |
Hawke's Point Holdings |
US$7.5m |
7.4 |
Tetragon Credit Income Partners (TCIP) |
100% |
General partner of two private equity vehicles that invest in TCICM and LCM-managed CLOs |
CLO equity |
Tetragon Credit Income II & III (TCI II & TCI III) |
0.6 |
68.1 |
TCI Capital Management (TCICM)* |
N/A |
CLO asset manager |
Bank loans |
6 CLOs |
3.1 |
No direct fund exposure |
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23.0 |
824.6 |
Source: Tetragon, Edison Investment Research. Note: *TCICM is a subsidiary of TCI II. **Will reduce to three unlimited life funds on closure of the Polygon Distressed Opportunities Fund.
Tetragon’s investment manager, TFM, is responsible for acquisitions and disposals of asset management businesses. However, on acquisition these businesses become part of TFG Asset Management, which has its own management team responsible for the business as a whole, including oversight of the managers as they form and grow funds under management, and managing the cost base. From an operational perspective, each individual asset management business may be run autonomously or utilising the wider resources of TFG Asset Management’s platform. In either case, the aim is for the business to benefit from an established infrastructure, which can assist in essential management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence. The platform currently provides infrastructure services to LCM and the GreenOak joint venture, infrastructure and investment management services to Hawke’s Point and the TCI general partner, and oversight services with respect to Equitix.
Exhibit 5: Polygon fund assets and performance as at 31 December 2017
Fund |
Description |
AUM (US$m) |
Tetragon investment (US$m) |
Fund 2017 net return |
Fund inception |
Fund annualised net performance since inception |
Convertible Opportunity |
Primarily investing in North American and European convertible securities |
532.5 |
55.3 |
7.9% |
20 May 2009 |
15.4% |
European Equity Opportunity |
Primarily investing in major European equity markets with an event-driven focus |
777.4 |
234.8 |
5.4% |
8 July 2009 |
10.0% |
Distressed Opportunities |
Focused on opportunities in companies undergoing, or about to undergo, balance sheet restructuring |
133.1 |
114.6 |
8.9% |
2 Sept 2013 |
7.6% |
Global Equities |
Event-driven fund focused on global equity markets |
22.4 |
19.6 |
6.8% |
12 Sept 2011 |
12.4% |
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1,465.4 |
424.3 |
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Source: Tetragon, Edison Investment Research. Note: Excludes Polygon’s private equity Recovery fund (AUM: US$130.0m).
TFM’s approach to growing TFG Asset Management takes into account the risk and reward of the opportunity. Within TFG Asset Management, maintaining the discipline to close businesses that do not deliver adequate returns is considered as important as identifying new businesses to add to the platform. This is reflected in the decision in late 2017 to close the Polygon Distressed Opportunities Fund. The fund’s returns since inception were positive and attractive relative to its peers but, in light of other opportunities, it was determined that expected returns did not support Tetragon maintaining its investment in the fund and the portfolio manager, within the TFG Asset Management platform.
Exhibit 6: Valuation of TFG Asset Management businesses at 31 December 2017
Asset manager |
Tetragon holding |
Fair value (US$m) |
Value % of Tetragon NAV |
Valuation approach |
Discount rate |
Earnings multiple |
Valuation % of AUM |
Equitix |
85% |
152.2 |
7.6 |
Discounted cash flow analysis and cross-check to quoted market multiples. Debt at par + accrued interest |
8.75% 15% DLOL |
6.75x EBITDA |
N/A |
LCM |
100% |
144.3 |
7.2 |
Discounted cash flow analysis, cross-checked to market multiples |
11.0% 15% DLOL |
N/A |
2.10% |
GreenOak |
23% |
69.6 |
3.5 |
Quoted market multiples and cross-check using blended EBITDA and quoted market multiples |
N/A |
11.1x Blended EBITDA |
N/A |
Polygon |
100% |
56.0 |
2.8 |
Discounted cash flow analysis and cross-check to quoted market multiples |
12.5% 20% DLOL |
7.0x EBITDA |
N/A |
TCIP |
100% |
7.8 |
0.4 |
Discounted cash flow analysis |
11.00% |
N/A |
N/A |
Hawke’s Point |
100% |
0.8 |
0.0 |
Replacement cost approach |
N/A |
N/A |
N/A |
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430.7 |
21.6 |
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Source: Tetragon, Edison Investment Research. Note: DLOL = discount for lack of liquidity.