Tetragon Financial has released its annual report for the year ended 31 December 2018. During the year, a NAV Per Share total return of 10.3%, and a share price total return of -9.0%. It also It also declared 72 cents of dividends per share for the year, which it says is a yield of 6.2%. The company has a stated target return on equity (ROE) of 10% to 15% per annum and at 12.1% for 2018, it is comfortably in the middle of the range. The company says that it is particularly pleased to have achieved this given challenging market conditions.
2018 performance gains and losses
“All of the portfolio’s asset classes and investment strategies produced performance gains for the year, with the main exception of Tetragon’s allocation to hedge funds managed by Polygon. Here, Tetragon saw performance gains from its allocations to convertible bonds, absolute return European equities and global equities strategies and losses from its distressed and long-bias European equities strategies. 70% (or approximately $231 million) of the portfolio’s gains during the year were generated within TFG Asset Management (see below), driven primarily by GreenOak and Equitix. The remaining gains in the portfolio were broad-based, coming from the company’s allocations to bank loans (through CLOs), real estate (primarily through private equity-style funds), private equity and other equities and credit.”
TFG Asset Management
Tetragon’s largest gain during the year was from TFG Asset Management’s GreenOak joint venture. TFG say that the performance gains in GreenOak were the product of eight years of partnership with the GreenOak Founders. December saw the announcement of the merger of GreenOak with Bentall Kennedy, Sun Life Financial Inc.’s leading North American real estate and property management firm, to form Bentall GreenOak, in a transaction that is expected to close in the first half of 2019. TFG Asset Management will continue to hold its key investment in Bentall GreenOak, will serve on its Board of Directors, will participate in investment committees for funds in which TFG Asset Management will hold carried interest and expects to invest in new Bentall GreenOak funds.
The GreenOak joint venture
TFG Asset Management says that it identified real estate – post financial crisis – as an attractive asset class and investment strategy. Tetragon therefore partnered with the GreenOak Founders on the launch of GreenOak, providing working capital, coinvestment capital and operating infrastructure to the joint venture. TFG says that the GreenOak joint venture has yielded attractive returns on two levels: first, on Tetragon’s investments in GreenOak products and, second, through TFG Asset Management’s ownership stake in GreenOak. Since the inception of the GreenOak joint venture, Tetragon has committed more than $410 million to the GreenOak investment programs. As an investor in these programs, Tetragon has seen what it considers to be compelling realised returns and a relatively swift return of investment capital. The announced merger has seen the fair value of TFG Asset Management’s stake in GreenOak increase by just under $100 million to approximately $210 million(–from a business launched in 2011. As part of an active pre-merger restructuring of its non-dilutable 23% interest in the joint venture, TFG Asset Management will hold a 29% interest in GreenOak going into the merger with Bentall Kennedy, making it the largest pre-merger owner in the joint venture.
Equitix and John Laing Infrastructure Fund
Equitix generated the second-highest investment gains ($66.1 million) in 2018 for Tetragon through TFG Asset Management. TFG says that, over the past four years, Equitix has nearly tripled its assets under management (AUM), and has established itself as one of the leading infrastructure managers in Europe. One of the larger contributors to Equitix’s increase in value in 2018 was its successful take-private of the John Laing Infrastructure Fund (JLIF) with Dalmore Capital in July 2018. TFG says that it believed that taking JLIF private was an attractive opportunity for Equitix and Tetragon, both through TFG Asset Management and directly through its balance sheet.
JLIF’s depressed share price was influenced by a slight strategy shift as well as political and construction risks. However, Equitix believed that most of the assets were highly attractive and were trading (even at a take-over premium) at a more attractive valuation than single asset secondary deals. From Equitix’s perspective, acquiring JLIF is enabling an earlier deployment of its investors’ capital, providing co-investment opportunities for Equitix investors, and offering the opportunity for attractive returns through improved management of the JLIF assets.
From TFG Asset Management’s perspective, acquiring the JLIF assets is accelerating Equitix’s business plan, which has already resulted in a positive impact on Equitix’s fair value. TFG says that Equitix’s management team knew the JLIF assets well, the financing of those assets, and the disconnect between public and private market values, but was also able to leverage the experience of the TFG Asset Management investment team in mergers and acquisitions in the United Kingdom and specifically its strategic advice in take-private transactions. Tetragon, through its balance sheet, was able to provide Equitix balance sheet capital for the JLIF assets that were non-core. This combination helped to achieve positive 2018 performance.
About Tetragon Financial
Tetragon Financial Group Limited is a closed-ended investment company that invests in a broad range of assets, including bank loans, real estate, equities, credit, convertible bonds, private equity, infrastructure and TFG Asset Management, a diversified alternative asset management business. Tetragon’s investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. Where appropriate, Tetragon seeks 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 company is traded on Euronext in Amsterdam N.V. and on the Specialist Fund Segment of the main market of the London Stock Exchange.