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Tetragon Financial Group
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== Performance<ref name=":2" /> == Tetragon posted a 14.1% NAV per share total return (TR) in dollar terms (15.2% in sterling terms) in FY21, which is slightly below the results of broad equity markets (19% by MSCI AC World Index) and slightly above the peer group average (see Exhibit 9). Having said that, Edison Investment Research notes that Tetragon targets returns with a low correlation to broader markets and the FY21 return is in line with its long-term NAV performance (10-year average annual return of 12.3%). Moreover, Tetragon reported a 17.3% return on equity (RoE) in FY21, which is ahead of its 10ā15% target. The largest single contributor to Tetragonās return in FY21 was the revaluation of Equitix, adding US$348.8m to Tetragonās NAV (14.1pp NAV attribution out of 17.9pp from TFG Asset Management). Excluding TFG Asset Management, the remaining assets contributed 6.8pp to the NAV increase (a US$167m uplift). Tetragonās reported ongoing charge ratio was 1.70% (flat year-on-year) and included the 1.50% annual management fee. In FY21 Tetragon expensed US$162.1m in management and incentive fees to TFM, which translates to 6.6% of the opening NAV and compares to US$107.1m expensed in FY20 (4.5% of NAV) when the NAV total return stood at 9.5%. In the first four months of 2022, Tetragonās NAV decreased 0.6% in total return terms, compared to a 12.8% decrease in the MSCI ACWI Index. Portfolio revaluations reduced NAV by 2.5pp, which was offset by a 3.3pp NAV per share accretion stemming from a share buyback. Tetragon conducted a US$42m tender offer, buying back 4.3m shares at US$9.75 per share (compared to end-FY21 NAVPS of US$29.86 ā a 67% discount). Asset-wise, the main drivers of ytd performance were directly held public investments shedding almost half of their value (part of which came from one biotechnology stock) and a 3% downward revaluation of TFG Asset Management. As investments and distributions were broadly equal in the period (net distributions of 0.6% of opening NAV at US$17m), Tetragonās net debt increased to 2.1% of NAV (from 0.3% net cash at end-2021) due to share repurchase and ongoing costs. '''Exhibit 3: Tetragonās NAV per share development in FY21 and until April 2022 (US$/share)'''<ref name=":0" /> [[File:Tetragonās_NAV_per_share_development_in_FY21_and_until_April_2022_(US$-share).png|600x600px]] '''Exhibit 4a: Price, NAV and benchmark total return performance, one-year rebased'''<ref name=":1">Source: Refinitiv, Bloomberg, Edison Investment Research. Note: *Performance data to end-April 2022, three-, five-, and 10-year performance annualised.</ref>[[File:Image6-6a9e7f8615868ef2676177f7ed26bd38.png|504x504px]] '''Exhibit 4b: Price, NAV and benchmark total return performance (%)<ref name=":1" />''' [[File:Image7-d80793a467150fe07c2fe909027b4a47.png|504x504px]] {| class="wikitable" |+Exhibit 5: Five-year discrete performance data<ref>Source: Refinitiv. Note: All % on a total return basis in pounds sterling.</ref> !12 months ending !Share price (%) !NAV (%) !MSCI AC World (%) !UK All-Share (%) !S&P 500 (%) |- |30/04/18 |0.5 |3.4 |7.8 |8.2 |6.4 |- |30/04/19 |12.9 |22.0 |11.6 |2.6 |19.9 |- |30/04/20 |(21.2) |4.1 |(1.2) |(16.7) |4.2 |- |30/04/21 |2.7 |4.1 |33.4 |25.9 |33.0 |- |30/04/22 |22.7 |26.2 |4.7 |8.7 |10.5 |} === Performance by asset class === As presented in Exhibits 6 and 7, Tetragonās best-performing assets in FY21 were TFG Asset Management increasing in value 53% y-o-y and contributing 17.9pp to Tetragonās NAV performance, followed by private equity (+30% y-o-y; +4.9pp NAV) and bank loans (+17% y-o-y; +2.0pp NAV). The remaining assets performed broadly flat and had limited impact on Tetragonās NAV in FY21. So far in 2022, the best performing asset class has been bank loans, with their 11% value increase adding 1.1pp to Tetragonās NAV in the first four months of FY22 (4M22). However, the largest impact on NAV development came from quoted assets (down 47% since end-21; -3.8pp impact on NAV). In 2022 year to date, the portfolio lost 47% of its value, reducing Tetragonās NAV by 3.8pp, driven predominantly by a significant price decline at one biotechnology company. '''Exhibit 6: FY21 and 4M22 performance by asset class (%)<ref>Source: Tetragon Financial Group, Edison Investment Research. Note: Share of Tetragonās NAV at end-April 2022 stated on x-axis labels.</ref>''' [[File:Image8-aa95304f94bd4fd2eb26fd7dbb7c830f.png|506x506px]] '''Exhibit 7: FY21 and 4M22 NAV attribution by asset class (pp)<ref>Source: Tetragon Financial Group, Edison Investment Research Note: Share of Tetragonās NAV at end-April 2022 stated on x-axis labels.</ref>''' [[File:Image9-810b23f9c2e66f6149c524cc520003cd.png|507x507px]] === TFG Asset Management === Given the high share in Tetragonās overall portfolio value, Edison Investment Research examines the FY21 performance of TFG Asset Management in more detail. Similarly to FY20, Tetragonās major NAV TR driver in FY21 was the year-end revaluation of TFG Asset Management (for which earnings forecasts are updated annually), which overall contributed US$442.2m in gains in FY21. As a result, Tetragonās private equity investments in asset management companies represented 44% of NAV at end-2021 (vs 34% at end-2020). The majority of the gains came from the core infrastructure asset manager Equitix (US$348.8m), followed by the CLO manager LCM (US$59.8m) and real estate manager BentallGreenOak (US$34.3m). In 4M22, the carrying value of TFG Asset Management was down by 3% (or US$34.9m). As a result, Equitix represented 25.3% of Tetragonās NAV at end-2021 and given Tetragonās high discount to NAV (see below for details), it now equals 71% of its market capitalisation. The business grew its AUM by c 23% to Ā£8.0bn (US$10.8bn) in FY21, resulting in a 13% y-o-y increase in management fees (though its primary income declined in FY21). Equitix also increased its income from management services contracts (EMS business) by 21% y-o-y. It expanded its headcount during the year to further stimulate growth in the business and as a result the increase in its operating expenses was responsible for little over half of the US$32.5m opex growth of TFG Asset Management during the year (see below). Equitix was revalued by 90% (US$349m) in FY21 on the back of (1) a revised five-year AUM growth assumption of 14.1% (vs 6.6% previously and Equitixās 2016ā21 five-year CAGR of 31%), (2) the introduction of a 20% premium for control (Equitix has been majority-owned by TFG Asset Management since 2015) and (3) a reduction in the illiquidity discount from 15% to 10%. Moreover, Edison Investment Research notes that Equitix was valued using a blended discounted cash flow (DCF, with 9.5% discount rate) and market multiples approach. The latter was reintroduced by Tetragonās third-party valuation agent this year (after switching to a pure DCF approach in FY19), which the agent justified by recent listings of more directly comparable asset managers. In this context, Edison notes for instance the recent IPO of Antin, an infrastructure asset manager focused on investments in energy and environment, telecom, transportation and social sectors with AUM of US$20.3bn at end-2021 (of which US$13.8bn is fee-paying). Equitix was also an important driver of ytd 2022 NAV changes, with a US$60m (8.2%) decrease in valuation in Q122 (latest available data) due to contraction in the multiples of publicly quoted peers. LCM (8.3% of Tetragonās NAV at end-2021) grew its AUM by 26% y-o-y to US$11.2bn after launching six new CLOs in FY21 with an aggregate AUM of US$2.8bn. The business was revalued by c 34% in FY21, assisted by a revised five-year AUM growth assumption of 10% from 6.5% previously and the introduction of a 20% premium for control. LCM continues to be valued using a blended DCF (12.25% discount rate) and market multiples approach, but in the latter case the ratio was changed from 2.5% price/AUM to 12.5x EV/EBITDA as it is a more forward-looking ratio. The prospective AUM growth assumptions were also revised for BentallGreenOak (to 18.4% from 11.9%) and Polygon (to 9.9% from 8.6%). The valuation of LCM further increased in Q122 by US$37m (16%). Overall, TFG Asset Managementās pro forma income remained broadly stable in FY21 at US$249.1m, as higher management fees (up by 14.0% to US$143.4m), other fees (up 27.0% to US$24.0m) and distributions from BentallGreenOak (up 19.3% to US$21.6m), were offset by lower performance and success fees (US$59.6m vs US$81.6m in FY20) and lower interest income. TFG Asset Managementās total income includes US$12.0m management fees and US$5.0m performance fees charged on Tetragonās own investments in funds managed by TFG Asset Management. Coupled with an increase in operating expenses related primarily to team expansion (Equitix, Contingency Capital) and scaling up of the infrastructure (Contingency Capital) to facilitate further AUM growth, this led to a 32.6% decline in net income (āEBITDA equivalentā) to US$50.7m in FY21. {| class="wikitable" |+Exhibit 8: TFG Asset Management pro-forma income statement (US$m)<ref>Source: Tetragon.</ref> ! !2017 !2018 !2019 !2020 !2021 |- |Management fee income |74.8 |85.7 |111.2 |125.8 |143.4 |- |Performance and success fees |45.8 |24 |51.8 |81.6 |59.6 |- |Other fee income |12.4 |13 |15.5 |18.9 |24.0 |- |Distributions from BentallGreenOak |8.4 |13.2 |10.8 |18.1 |21.6 |- |Interest income |4.1 |3.6 |3.8 |4.1 |0.5 |- |Total income |145.5 |139.5 |193.1 |248.5 |249.1 |- |Operating, employee and administrative expenses |(83.5) |(93.9) |(124.3) |(145.8) |(178.3) |- |Minority interest |(7.4) |(6.3) |(9.3) |(27.5) |(20.1) |- |Net income ā āEBITDA equivalentā |54.6 |39.3 |59.5 |75.2 |50.7 |}
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