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Edited Transcript of TFG.AS earnings conference call or presentation 31-Jul-19 2:30pm GMT

Half Year 2019 Tetragon Financial Group Ltd Earnings Call

ST PETER PORT Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Tetragon Financial Group Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 2:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* Patrick Giles Gauntlet Dear

Tetragon Financial Group Limited - Principal and Director

* Paul Gannon

Tetragon Financial Group Limited - Group CFO

* Stephen L. Prince

Tetragon Financial Management LP - Head of North America




Operator [1]


Good afternoon. Thank you for joining Tetragon's 2019 Half Yearly Report Investor Call. (Operator Instructions) The call will be accompanied by a live presentation, which can be viewed online by registering at the link provided in the company's conference call press release. This press release can be found on the homepage of the company's website, www.tetragoninv.com. (Operator Instructions) As a reminder, this call is being recorded. I will now turn you over to Paddy Dear to commence the presentation.


Patrick Giles Gauntlet Dear, Tetragon Financial Group Limited - Principal and Director [2]


Thank you very much. As one of the principals and founders of the Investment Manager at Tetragon Financial Group, I'd like to welcome you to our investor call, which will focus on the company's half year results.


Paul Gannon, our CFO, will review the company's financial performance for the period. Steve Prince and I will talk through some of the details of the portfolio and performance, and Steve will spend some time discussing the outlook. As usual, we'll conclude with questions, both those taken electronically via our web-based system at the end of the presentation as well as those received since last update.


The PDF of the slides are now available to download on our website, and if you're on the webcast, directly from the webcast portal.


I'd like to remind everyone that the following may contain forward-looking comments, including statements regarding the intentions, beliefs or current expectations concerning performance and our financial condition on the products and markets in which Tetragon invests. Our performance may change materially as a result of various possible events or factors. And with that, I'd like to pass over to Paul.


Paul Gannon, Tetragon Financial Group Limited - Group CFO [3]


Thanks, Paddy. As a reminder, Tetragon continues to focus on 3 main metrics. We look at how value is being created via NAV per share total return. We also look at investment returns measured as return on equity, and we monitor how value is being returned to shareholders through distributions, mainly in the form of dividends.


Fully diluted NAV per share was $23.94 at the end of H1 2019. After adjusting for dividends reinvested at the NAV, the NAV per share total return was 8.1% in the 6-month period, which compares quite favorably to 4.4% in the equivalent period in 2018.


Amongst the investment returns, we continue to use an ROE calculation. In H1 2019, this has been 6.7% which is net of all fees and expenses. On an annualized basis, this created 13.3%, which, of course, has been in the target of 10% to 15% return rate. And matches against an average ROE of 12.4% since IPO. Later in the call, we'll get more color as to how specific asset classes contributed to the return this year.


Finally, moving on to the last key metric. Tetragon declared a dividend of $0.185 for the second quarter. Over the last 12 months, the aggregate payout has been $0.73 per share, which equates to a dividend yield of 5.9% using the June 30 share price of $12.45. This is in-line with our progressive dividend policy, which targets a payout ratio of 30% to 50% of normalized earnings.


So now on to, what we call, the NAV bridge. This breaks down into its component parts the growth of Tetragon's fully diluted NAV per share, which started the period at $22.48 and increased to $23.94 per share at the end of H1.


Firstly, investment income contributed $2.10 per share. Moving along, operating expenses and management fees reduced NAV per share by $0.52, with a further $0.02 per share reduction due to interest expense. On the capital side, gross dividends reduced the NAV per share by $0.36.


Finally, there is a net accretion of $0.26 per share, which came from the aggregate of an accretion of $0.52 from the 50 million share buyback which settles in January, less the $0.26 per share, which is labeled in the graph as other share dilution. This bucket primarily reflects the impact of dilution from stock dividends plus the additional recognition of equity-based compensation shares.


I will now hand over to Paddy.


Patrick Giles Gauntlet Dear, Tetragon Financial Group Limited - Principal and Director [4]


Thanks, Paul. As on previous calls, I would like to discuss the 2019 first half performance in the context of the longer term. Tetragon began trading in 2005 and became a public company in April 2007. This chart shows the NAV per share total return, which is the thick line at the top; the share price total return, which is the dashed line beneath it; and the chart also includes equity indices, both in MSCI and the FT allshare; and then lastly the Tetragon hurdle rate of LIBOR plus 2.65. As you can see, Tetragon has returned 275% since IPO on a NAV total return basis.


Continuing the theme of looking at the long term, this next slide has some more long-term performance data. Our return on equity or investment return target is 10% to 15% per annum over the cycle. And as you can see, the average return since IPO is 12.4%. Paul has just shown that Tetragon's return on equity for the first half was 6.7%, and he also gave you an annualized number of 13.4%. So we're within that 10% to 15% range and we're pleased with the 2019 performance so far.


The last figure on this table shows that as of June 30, 2019, 28% of public shares are owned by principals of the Investment Manager and TFG Asset Management employees. We believe this is a very important number, as it illustrates the strong alignment of interest between the manager, TFG Asset Management employees and Tetragon shareholders.


This next slide shows the composition of Tetragon's assets. So this is looking at the breakdown of the $2.2 billion of net asset value. These colored discs show the percentage breakdown of our asset classes and strategies, as at year-end 2018 on the left, in comparison with where we are now by the end of -- by the end of the first half of 2019.


There are 2 small changes in the first half of this year worth noting. First of all is the growth in private equity from 7% to 9%, and this is a deliberate result of making new investments due to allocations to external managers and a strategy that we discussed at some lengths last year and in the annual report. We reported a small decline in cash from 12% to 8%, mainly due to the share back executed -- share buyback executed in Q1.


So now let's move on to discuss the year-to-date performance in a little more detail. The NAV bridge that Paul showed was a high-level overview of the NAV per share. What this table does is it shows a breakdown of the composition of Tetragon's NAV at the first half, and showed changes from December 2018 by asset class and the fact it's contributing to the changes in NAV, mainly the investment performance from capital flows.


As you can see from the bottom row of the table, investment performance, labeled gains and losses, generated $197.2 million of gross profits for the half year. Looking at the breakdown of that, TFG Asset Management, which is our private equity holding asset and management company, generated $91.2 million of that, and that itself was driven primarily by Equitix and LCM.


Secondly, hedge fund strategies made $45.1 million in the first half, particularly strong performance from Polygon's investment opportunity fund. Bank loans generated $27.6 million for gross profits and that was with a backdrop of broadly stable credit conditions in the U.S.


You can see real estate generated $22.7 million, the primary source of low profits being asset sales in Japan. Private equity generated a positive $18 million and other equities generated a loss of $11.4 million. Both of those losses too were actually dominated by a single position in each, and those that mark-to-market profits and losses as we still hold those positions.


Now I would like to expand on each category and I'll hand over to Steve to discuss TFG Asset Management, our private equity investment and asset management company.


Stephen L. Prince, Tetragon Financial Management LP - Head of North America [5]


Thanks, Paddy. Our private equity investment and asset management companies, through TFG Asset Management, represented the largest asset class in the portfolio at the end of the first half and produced over $91 million in gains during the period. Equitix was the most significant contributor during the first half with an investment gain of $57.3 million. This gain was primarily driven by a combination of performance, capital raising and accelerated capital deployment. AUM, at the end of the first half, was USD 6 billion when converted, which is up from $5 billion at the end of the year. When Tetragon acquired Equitix in 2014, Equitix's AUM was GBP 1 billion. Fund V closed in the second quarter of 2019 at GBP 1 billion, being GBP 250 million higher than the original capital rating target and with an expectation that the capital will be fully invested by the end of the year, which represents an acceleration of the business plan.


As has been previously highlighted, GreenOak announced in December 2018 a merger with Bentall Kennedy, Sun Life Financial's North American real estate and property asset management firm, to form BentallGreenOak. The merger closed on the 2nd of July, and TFG Asset Management will continue to own nearly 13% of the combined entity. There are a number of cash flow elements to the transaction, which are set out in the Figure 10 commentary and Figure 18 commentary in Tetragon's 2018 annual report.


During the first half of 2019, this investment contributed a gain of $6 million. This world-class distribution of carried interest as well as both a reduction in the discount rate applied and the unwinding of the discount, now that the future needs of the call and productions have become fixed as a result of the deal closing.


TFG Asset Management investment in LCM contributed $18.3 million, which reflects a combination of the continued growth in AUM and favorable movements and market valuation metrics. AUM increased from $8.3 billion to $9.1 billion during the first half of the year and EBITDA grew 50% compared with the same period in the prior year.


TFG Asset Management's investment in Polygon recorded an investment gain of $3.5 million, driven primarily by performance in the Polygon European Equity Opportunity Fund.


Within Tetragon Credit Income Partners, TCI III had its final close in January 2019 at $430 million and it is 41% deployed at 30 June 2019.


The increase in capital commitments, the amount of capital deployed as well as an increase in projected carry contributed to an uplift of $6.1 million in valuation during the first half.


At the end of June, TFG Asset Management had approximately $32 billion in aggregate assets under management. In the first half of 2019, TFG Asset Management's EBITDA was $25.1 million, which represents a substantial increase compared with the same periods in 2018 and 2017. Management fees, performance and success fees and other income reported increased compared with those prior periods. Management fee income grew by 18.5% compared to the prior period.


Performance fees grew considerably compared to prior periods, up $12.5 million due in large part through significant contributions from Equitix and Polygon. While operating expenses were also up year-on-year, this was primarily due to the increased cost base at Equitix, reflecting the growth of that business. Paddy will now go over hedge fund investments.


Patrick Giles Gauntlet Dear, Tetragon Financial Group Limited - Principal and Director [6]


Thanks, Steve. First, investing event-driven equities, convertible bonds and quantitative strategies through hedge funds. As of the end of June 2019, 3 of these 4 investments are through Polygon managed hedge funds, with the fourth being through QT, an external manager. Our largest investments are the most profitable in the first half within the Polygon European event-driven strategy, which was profitable at $41.3 million across the hedge fund and the long bond share class. Equity markets in Europe were positive, they were constructive for events, and M&A also provided a boost, all in the first half. Elsewhere, movements in hedge funds were relatively small, and [therefore] the Polygon convertible fund was profitable plus $2.5 million for the half year, and the rest in the Polygon global equity [fund there was a] small loss of $0.4 million for the year. And lastly, our investment in QT, the quantitative fund was a small positive up $1.7 million for the year-to-date.


We continue to view the hedge fund sector in general as somewhat saturated, and we believe many strategies are competing for increasingly diminishing opportunities for intrinsic alpha. And now we believe that the capacity constrain, niche and targeted approaches, such as the event-driven business at Polygon and the convertible bond strategies with Polygon, are more likely to be [both] -- to provide good investment.


Moving on to bank loans. Tetragon invests in bank loans primarily through CLOs by taking majority positions in the equity tranches. The performance was strong during the first half of 2019, up $27.6 million in terms of profitable gains for the business. And this was in the backdrop of credit conditions, generally stabilizing from the end of 2018.


Among other things, Tetragon's investments in CLO equity were aided by supportive credit spreads in a leverage-loan market, which we believe allowed our CLO managers to increase the cash flow generation potential of our investments without increasing credit risk.


Secondly, the tightening of the 1-month LIBOR and 3-month LIBOR basis and eventual inversion of the U.S. LIBOR curve had a small positive impact on our investments, as the majority of the underlying loan assets and CLOs are benchmarked to 1 month LIBOR, while CLO debt is generally linked to 3 months LIBOR. And lastly, credit losses remained well below annual average expectations over the first half of the year.


The TCI II investment vehicle, as of the first half, Tetragon's commitment to TCI II was $70 million and that is fully funded. And during 2019 to date, Tetragon's investment in TCI II has generated $2.9 million of income.


The TCI III investment vehicle, as of the end of the first half, Tetragon's commitment was $85.9 million, of which $33.4 million have been funded. And that actually includes the July funding. And overall with CLOs, we continue to view them as an attractive structure to get long-term exposure to the bank term asset class.


Next is real estate. Tetragon holds most of its investments in real estate through GreenOak managed funds and coinvestment vehicles. The majority of these funds are private equity style funds concentrating on opportunistic investments, targeting middle-market opportunities in the U.S., Europe and Asia, where GreenOak believes it can increase value and produce positive unlevered returns by sourcing off-market opportunities where it sees pricing discounts and market inefficiencies.


In July 2019, GreenOak merged with Bentall Kennedy, Sun Life Financial's leading North American real estate and property management firm, and the combined entity is called BentallGreenOak. So the profit for the year, as you can see, real estate investments generated $22.7 million of gains during the first half of 2019. Just running through the table, small numbers from Europe, up $4.2 million , the U.S., $0.3 million. The major contributor was Asia, up $21.2 million for the first half, and this was generated by the sale of some of the fund investments and coinvestments predominantly in Asia, both specifically in Tokyo. Debt funds, a small positive at $0.2 million, and as you saw in the first quarter, a small change in the annual revaluation of Paraguay farmland, minus $3.2 million. So with that, I'll hand back to Steve.


Stephen L. Prince, Tetragon Financial Management LP - Head of North America [7]


Turning to our private equity investments, and thanks, Paddy. The company's private equity investments are split into 2 categories of direct, comprising investments on the balance sheet; and funds and coinvestments, where Tetragon invests in a fund as a limited partner or in a special purpose vehicle as a coinvestor.


Investments generated net income of $18 million during the first half of the year. The direct investment category currently comprises several investments in growth companies in North America, some of which have had positive developments during the first half of 2019, with one in particular contributing the majority of the positive net income. This segment now represents 4.7% of NAV.


There are a number of investments within the second subcategory, including Hawke's Point. This category generated a gain of $7.3 million in the first half, primarily being unrealized gains in coinvestment vehicles.


Turning to the last category, other equities and credit as well as cash. Our direct balance sheet investments in the other equities and credit category produced losses of approximately $11.4 million in the first half of the year. Our other equity bucket generated losses of $11.5 million. Investments in this bucket comprised European and U.S. listed public equities and the losses were in long-standing positions that have not been sold.


Turning now to cash. Tetragon's net balance sheet, which is cash adjusted -- net cash balance, sorry, which is cash adjusted for net liabilities, was $178.2 million at 30 June 2019. Approximately 13% of the cash is held in secured arrangements. The remaining balance is held in unsecured arrangements, with Tetragon's operating cash balance held at State Street. All of Tetragon's cash is at highly rated banking institutions, in on-demand arrangements, thereby ensuring it is not exposed to any term risk.


The company actively manages its cash levels to cover future commitments and to enable it to capitalize on opportunistic investments and new business opportunities. During the first half of the year, the company used $154 million of cash to make investments, $50.3 million to repurchase shares and $22.3 million to pay dividends. Future cash commitments were approximately $193.1 million comprising hard and soft investment credits. These include commitments to GreenOak of approximately $64 million; TCI III of approximately $60 million; Hawke's Point of approximately $45 million; and third party-managed private equity vehicles of $25 million. Tetragon has a $150 million revolving credit facility in place, of which $38 million has currently been drawn.


Turning now to our final slide, which focuses on our future investment expectations.


I will go through a few of our expectations, but it's fully worth pointing out that one of our advantages is our ability to be opportunistic, as it relates to investing and what we see as the most compelling investment opportunities.


Starting with TFG Asset Management. We have no new businesses to report. Notwithstanding that, this remains the largest unknown in terms of cash requirements. Although, there are a number of businesses, which over time, TFG Asset Management will have the opportunity to expand either geographically or with product offerings, and in some cases, both.


Next, event-driven equities and convertible bonds. We expect our event-driven equity exposure to remain relatively stable and our exposure to our convertibles bond strategy to increase somewhat over time.


Bank loans via CLO equity. With regards to our CLO 1.0, which are our precrisis CLOs, those will continue to amortize. But we continue to expect to invest in CLOs via TCI III and subsequent vehicles at the rate of approximately $25 million to $75 million per year.


Next, real estate. We have commitments to GreenOak funds, which we talked about previously when I outlined our cash expectations, and we expect to be drawn on $25 million to $65 million of capital over the next 12 months. [As of late], the timing of capital returns are less certain.


The private equity bucket. That bucket, we expect to grow over time. There are a few small additional LP commitments we have yet to fund and we expect Hawke's Point allocation will also grow.


And lastly, the other equities and credit bucket, which is similar to TFG Asset Management in terms of its potential cash needs. We expect to continue to invest in opportunities, but the timing of those investments is less certain.


So with that, I'd like to thank you all for joining us. And we're now going to proceed to Q&A. And we'll start with the first question.


Questions and Answers


Patrick Giles Gauntlet Dear, Tetragon Financial Group Limited - Principal and Director [1]


Thanks very much, Steve, and thank you, everyone. We've had a lot of questions come in. A few before the meeting, but many over the last 30 minutes or so. But what I'm going to try to do to the extent that I can is categorize them together, and so bear with me as I do that.


So first one. On the U.S.-based investment and some of my clients hold shares in Tetragon in their accounts. With the large and growing discount of the share price of NAV per share, why not increase the level of stock buybacks? Although stock buybacks have been part of the capital allocation strategy over the last several years, they have not seemed to be enough to close the gap. However, with the discount to NAV now approaching 50%, wouldn't stock buybacks be the best use of capital? Are there any other mechanisms that the company's discussing to decrease the gap between the share price and the NAV per share?


So this question, it's obviously getting 2 important points. One is buyback and the second is the discount to NAV. To some degree, they're correlated, but sometimes they're not. So I want to tackle those -- the first question with buybacks first.


We said in the past and we continue to take a balanced view on the pros and cons at any point in time when deploying cash. So that means that all uses of cash are compared for namely investments, dividends and/or share buybacks. And so in a way, we're always evaluating the possibility of buybacks, and indeed, since IPO, we've spent about $660 million on repurchasing shares. So you can gather from that, that obviously we're strong advocates of share buybacks, and fully understand how accretive they can be to NAV per share, especially when purchased at a wide discount to net asset value.


However, I would say that we believe that the long-term growth and success of the business is about making good investments and building valuable asset management businesses, and thus creating, growing and compounding enterprise value for shareholders.


The buybacks can be a useful way to increase NAV per share, and obviously particularly buying at a discount to NAV, and can indeed sometimes be positive for the share price. But in our view, that's certainly not a panacea for narrowing discounts. And in fact, the evidence that we have seen from the U.K. and the Euronext closed in some market, not just Tetragon, is that buybacks have little effect on discounts themselves. I think, the other thing worth noting about buybacks is they can have some drawbacks. As amongst other things, they may reduce liquidity of the shares, they tend to concentrate the risk in existing assets, obviously, and they don't create any new value. And thus, as I said at the beginning of our answer is it's always a balance.


The second part of the question is what you're doing about the discount to NAV. And I want to read out a few other questions that discuss the same topic. So the first is here. I'm a member of the Board of VFB Federation of Flemish Investors and Investment Club. And I have the responsibility for the creation of new investment clubs in Flanders, Belgium and for supporting assistance for the existing investment club. My experience, when I'm talking to investors and investment clubs in Belgium about Tetragon, is that Belgian investors don't even know the company exists. And so despite the fantastic NAV performance and the huge discounts to NAV, the stock has not picked up by Belgian investors. So my first question is, will Tetragon make measures to promote their company or their stock?


The second question is the discount to NAV is very huge and still growing. Maybe there's a link with what I just wrote. Another question is will Tetragon take more initiatives to tackle the huge discounts to NAV. And another phrase of this is, are there any proposed actions to narrow the gap between NAV and share price?


So all these are obviously critical questions about the current discount to NAV and what, if anything, we are and can do about it. I think, the first thing to point out is we believe there may be multiple reasons for the discount, and therefore, there's no single solution that would solve the issue. But at the risk of stating the obvious, we need to create more buyers and sellers. And most investors or many investors, as indeed one of the questions pointed out, still don't know that we exist as a company. So to give a broad answer to the question, this is what we're focused on. Firstly, continuing to build a good business that compounds returns for a consistent return on equity, NAV per share growth and dividend. Second, to demonstrate that the assets, in particular TFG Asset Management, can grow and to some extent have repeatable earnings streams, i.e., supporting the sustainability of our return on equity. Third, we're striving to make the business easier to understand for investors and for potential investors and analysts, and we demonstrate this through our monthly, quarterly, semiannual and annual reports, plus obviously the annual Investor Day. Fourth is we're trying to ensure broad analyst coverage written research and commentary from the investment community. Fifth, we would like to see and are looking to try and increase the liquidity of our shares by encouraging investors to trade on a single exchange and indeed have added a sterling settlement line for U.K. domestic investors, and this was via the post of the 10 or so OTC exchanges that currently exist for our shares.


Six, we're looking to broaden the universe of potential shareholders and this is obviously the key point, getting out to intermediaries that are the dominant holders of U.K. closed end funds, looking to educate as many potential investors as possible, traveling to see investors to tell our story as being introduced by our joint brokers [Stifel] and JPMorgan as well as through Edison and others. And we're happy covering the U.K. regions as well as London, covering the U.S. and then the needs of Continental Europe. And for that outreach program, I think it's the most critical.


Next question on a -- well, related topic, but several -- the question goes as follows. Several dollar-denominated investment trust that trade in Europe including Pershing Square Holdings, Third Point Offshore and Tetragon, trading at massive discounts to NAV. Do you have any ideas, what is driving European investors to shun these vehicles despite solid performance?


We observed the same. I mean there are many examples of funds traded in the U.K. with great performance and not just dollar-denominated ones but trading with consistent discounts. And I'm afraid I don't have a simple answer as to why. But what I can do is give you some of the answers that investors tell us about these companies, and that is they quote their complexity, their illiquid assets, their private equity holdings where some people may be unsure of how the valuations are done. Fees can be an issue, particularly with alternative asset managers and particularly with intermediaries where underlying fees get added and they become an input to their decision-making as opposed to focusing on the net return.

So in short, there are some of the reasons given, but I don't have an easy answer to the question. There's a small one here. I think it's just a misunderstanding, but the question is, your year-to-date return on equity is 6.7% versus a target of 10.15%. What has caused the undershoot and are you revising your full year target?



I mean actually -- and apologies if this wasn't understood, the first half was 6.7%, and therefore the annualized return would be 13.3% on that, which is obviously bang in the middle of the 10% to 15% return. And that's why we think that's still a good target for the year. But I would remind people that, that is our long-term target over the cycles, it's not necessarily what we think we're likely to hit in any given year.


There have been a couple of questions on the employment agreement for Reade Griffith, and so I'll read some out. So here goes.


A note from the interim report the TFG Asset Management has entered into a new long-term employment agreement with Reade Griffith. Could you give some more color on why this new employment agreement is being entered into?








Historically, Mr. Griffith's remuneration was generally received through his interest in the Tetragon Investment manager, which continues to receive a fee of 1.5% and 25% incentive fee over a hurdle.


It would be helpful to understand why this situation has now changed.


So I want to start by giving a bit of context, as some of you may remember Polygon was sold to Tetragon in October 2012. And as part of that transaction, Reade and indeed the other Polygon sellers agreed to work for TFG Asset Management. And in Reade's case, that agreement was for 5 years and that was in exchange for, primarily, share based compensation. And the last of those shares vested in October 2017. Tetragon's independent directors and its Board as a whole have agreed to an employment agreement with Reade or having continue in its role at TFG Asset Management through June 2004. And those roles include CIO of TFG Asset Management, which is responsible for its private equity investments and its platform and non-platform asset management businesses. These roles also include the CIO Polygon event-driven European equity strategies. So Reade's employment agreement will keep him in these roles for the next 5 years, which provides continuity and stability for TFG Asset Management.



Beyond the cash compensation described in the first half financial statements, Reade will be compensated, based in part, on agreed upon investment performance criteria in Tetragon shares and they will be locked up through the period. And that further aligns Reade with Tetragon's shareholders.


And moving to the second part of the question, which if I could paraphrase is, isn't Reade a part of Tetragon's investment managers paid to perform these functions already?


The answer is, Tetragon's investment managers does not perform these functions. It is necessary that TFG Asset Management and the Polygon businesses, particularly Polygon Equity Fund, have one or more individuals to perform these key roles. And we believe that Reade has done a demonstrably excellent job of doing them since October 2012.


There's one more question here on Reade's employment agreement. And I think this is best answered by Paul, but I'll read it out. What is the impact on NAV and NAV per share in this employment contract for Reade? Does it affect Tetragon's ongoing charges and kit?


Paul Gannon, Tetragon Financial Group Limited - Group CFO [2]


Yes. So the compensation arrangement is covered by Reade's employment agreement have been factored into the NAV and NAV per share, which were released this morning. [Dilution] from the shares come via Reade's agreement will be treated in the same manner as other long [incentive plan] shared. We do not expect there to be an impact on Tetragon's ongoing charges or kit.


Patrick Giles Gauntlet Dear, Tetragon Financial Group Limited - Principal and Director [3]


Thanks. One, on credit markets or specifically CLOs. What is your current outlook for CLOs given recent press about outflows in leveraged loan funds?


Well, I think, they -- but -- first of all the question has it right, there's been a lot in the press about loans, loans funds, covenants, etc. recently. We certainly think the covenant deterioration in the leveraged loan market as well as the increasing levels of debt should be for the concerns of long-only corporate debt holders. However, from where we are, we continue to believe that CLO equity remains an attractive investment and there are number of factors in this. They may provide investors with optionality on spread widening, with fix liabilities and floating rate assets, CLO equity can benefit from spread widening and provided that loan reports are well managed, these would ultimately give good return to CLO equity. And so we continue to be constructive on the asset class.


Next question, here we go. Over the past 5 years, Tetragon's headline NAV has risen 40% excluding dividends. The dividends have not grown nearly so fast, increasing by just 19% and resulting in a yield of just 3% of NAV, significantly lower than the high-yield bonds and the FTSE 100. What changes are you planning to make to increase the attractiveness of Tetragon's income seekers?


So I would say the first thing is we don't have an explicit objective to appeal to income investors. Indeed, Tetragon's objectives are on a total return nature, so both dividends and capital growth. So we care about the dividend. We care about a growing dividend, but to be clear we're not explicitly targeting income investors.


Furthermore, if one looks at distributions, as we talked a little bit about in the past, and one can look at both dividends and share buybacks as uses of cash, and it's of interest to note that actually if you look since IPO, the company has paid out $670-odd million of dividends and spent about $660 million, as I mentioned earlier, on share buybacks. So actually as I mentioned, we see it as a balance between both. But I would say that with the current share price being at a discount to NAV, it means that the yield on the shares is about 5.9% respectively. And I would've thought that would be sufficient for those seeking income. So therefore, I don't actually see why there's a problem in the first place with the yield.


Next question reads as follows: Good evening, gentlemen. Congratulations for the excellent operating performance. I wanted you to know that what you make of the share price, the 48% discount to NAV seems to be wide. Here are my questions. How important is the share price to the management? Why don't you cancel the treasury shares? Have you seen that other closed-end funds trade on the gauntlet and are moving to an open-end fund structure, and I quote (inaudible). Despite that they were trading at near to smaller discount, and thank you again, and congratulations to the excellent operating performance.


So well, firstly, thank you for the plaudits. But moving on to the -- answering the question, how important is the share price to management. I mean the simple answer is very. Speaking personally, it is the vast bulk of my net worth is in shares in the company, so I care hugely. You will see from our reports that 28% of the public shares are owned by myself, Reade and other partners and employees within the business, and I think all of them care hugely. It's also obviously an advertisement, it's the share price advertisement for what we do collectively. And so the answer is yes, we care.


Secondly, why don't you cancel the treasury shares. I don't see this as an issue. The way I think of it is they don't count the NAV per share and they don't count for dividend, and that's what matters in terms of value within the business.


And the last point about have we seen what other funds are doing. Yes, we continue to monitor what all other funds are doing to see if there's something that we should take note of. But absolutely have no current plans to change anything with the structure.


Next question. What plans do you have, if any, to narrow the discount on the shares to NAV? Do you prefer to accrete NAV by buying back stock or to pay dividends, which gives investors $1.00 on the dollar from assets trading at 52% to NAV?


With a fair degree of this question I think I have tackled already, but I think it is interesting because it does show that different investors have different preferences, some for dividends, some for share buybacks, some looking for income, some looking for capital gains, some wanting a long-term investment and some wanting a short-term investment. And so I would sort of take people back to my first answer to the first question, which we're always looking to balance all of these things when looking at investing capital over the long term.


Shareholders are delighted with the long-term NAV performance but less so with the share price performance. Your key performance metrics focus on how value is created for shareholders. These are NAV per share, return on equity and dividends. Why is an explicit share price performance not a goal for the company?


And I think this is an interesting, philosophical point, but I would say the following, that our key performance metrics are those things that we believe the management company has control over delivering, which is to say the investment performance, how that thing gets transferred into NAV per share and what it elects to pay out of dividend in dividend. And the share price is absolutely not something that the manager can control. It is the market that controls the share price. And therefore, in my view, it cannot be and shouldn't be a key performance metric for the management company.


And the last question I've got here is, you have a long-standing return on equity target of 10% to 15%. Do you still see the opportunities to maintain this target?


Not surprisingly, that's a very, very good question. Actually, when we set up the company, the reason -- the way we've got to 10% to 15% was it was sort of roughly LIBOR plus 5% to 10% when LIBOR was 5%. So I think with a low -- in a low LIBOR environment, as we've said several times, we would expect to be near at the bottom end of that range from the top end. Notwithstanding that, we are very excited about the businesses we've built. We've managed to be within that range for the last several years and certainly see a lot of opportunities at the moment that would help us to get there. But we do think longer term, we always think of it as sort of a LIBOR plus 5% to 10% type return. So ex ante we would expect returns to be at the lower end of that over the coming years while LIBOR stays alike.


And that completes the questions. But many thanks, everyone, for bringing all those questions and thank you for staying with us. And with that, we'll close the call.


Operator [4]


This now concludes our conference. Thank you all for attending. You may now disconnect.