Tetragon Financial Group Limited ("TFG") Q3 2016 Report for Period Ended 30 September 2016

LONDON, Oct. 31, 2016 /PRNewswire/ -- Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment⁽ⁱ⁾ of the main market of London Stock Exchange under ticker symbol "TFG.LN".  In this report, we provide an update on TFG's results of operations for the period ending 30 September 2016.⁽ⁱⁱ⁾

This summary release should be read in conjunction with the full Q3 2016 Report which follows.

Key Metrics⁽ⁱⁱⁱ⁾

• Annualised Fair Value Return on Equity ("RoE") year to date through Q3 of 6.4%^(iv)
• Fair Value EPS of $1.02 year to date through Q3 2016
• Fair Value NAV Per Share Total Return of 7.8% year to date and Fully Diluted Fair Value NAV per Share of $20.05 at the end of Q3 2016
• Dividend Per Share for Q3 2016 of 16.75 cents (dividend yield of 6.3%)

Highlights During Q3 2016

• All asset classes were profitable during Q3 2016
• TFG became a member of the Association of Investment Companies
• TFG commissioned Edison Investment Research Limited to publish reports regarding the company
• TFG has a five-star Morningstar Rating™ from Morningstar, Inc. as of 30 September 2016
• TFG intends to conduct at tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million
• TFG Asset Management's assets under management totaled approximately $18.6 billion at 30 September 2016

About TFG:

TFG is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment of the main market of the London Stock Exchange under ticker symbol "TFG.LN".  TFG'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.  The Company'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 and infrastructure.

This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.

This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction.  The securities of TFG have not been and will not be registered under the US Securities Act of 1933, as amended, and may not be offered or sold in the United States or to US persons unless they are registered under applicable law or exempt from registration.  TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States.  In addition, TFG has not been and will not be registered under the US Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act.  TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the Financial Markets Supervision Act as a collective investment scheme from a designated country.

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Delivering Results Since 2005⁽¹⁾⁽ⁱ⁾

(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Please refer to end notes for important disclosures.

Tetragon Financial Group Limited ("TFG" or the "Company") is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment⁽²⁾ of the main market of London Stock Exchange under ticker symbol "TFG.LN".  In this report, we provide an update on TFG's results of operations for the period ending 30 September 2016.⁽³⁾

31 October 2016

EXECUTIVE SUMMARY

TFG generated Fair Value earnings of $49.7 million in Q3 2016, giving an annualised Fair Value Return on Equity ("RoE") for the first nine months of the year of 6.4%.⁽⁴⁾

Fair Value NAV Per Share Total Return ("NAV Total Return")⁽⁵⁾ grew 1.3% in Q3 2016 and 7.8% year to date through 30 September 2016.  As in the Half Yearly Report, we show a chart showing this metric since TFG's IPO at the end of this Executive Summary.

During Q3 2016, all asset classes were profitable.  Noteworthy positive performers were: CLO 1.0 investments, which had Fair Value Net Income ("Net Income")⁽⁶⁾ of $20.6 million; equities (European event-driven and mining strategies) which had Net Income of $20.3 million; and a distressed fund investment which had Net Income of $9.9 million.

The third quarter dividend was declared at 16.75 cents per share, giving a 12-month rolling dividend growth of 3.9%.

During the third quarter, TFG increased the size of its revolving credit facility (the "Revolving Credit Facility") from $75 million to $150 million with the addition of a second lender to the facility.

In September, TFG became a member of the Association of Investment Companies (AIC), the trade body for closed-ended investment companies.⁽⁷⁾

TFG also commissioned Edison Investment Research Limited to publish a report regarding the company, and we expect Edison to publish updates on a quarterly basis.⁽⁸⁾

In addition, TFG has a five-star Morningstar Rating^TM from Morningstar, Inc. as of 30 September 2016.  The five-star rating relates to TFG's overall performance, as well as over three years and over five years.⁽⁹⁾

TFG intends to conduct a tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million, to be held as treasury shares.  Deutsche Bank AG, London Branch will act as dealer manager in the tender offer, which will use a modified Dutch auction structure.  Details of this planned tender offer will be announced shortly.  A repurchase of TFG shares at a price below NAV will be accretive to Fully Diluted Fair Value NAV Per Share ("NAV Per Share").

Finally, TFG's next Investor Day will follow the release of its full year 2016 results, and thus is scheduled for 8 March 2017 in London.  More details on this event will follow in due course.

Figure 2

TFG Fair Value NAV Per Share Total Return Since April 2007 IPO⁽¹⁰⁾
Total Return 186.9%; 11.8% Annualised to 30 September 2016

TFG OVERVIEW

TFG is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Segment of the main market of the London Stock Exchange under ticker symbol "TFG.LN"⁽¹¹⁾.

TFG'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.  The Company'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 and infrastructure.  

TFG's Fair Value Net Asset Value ("NAV") as of 30 September 2016 was approximately $1.9 billion.  Figure 3 shows the Company's current net asset breakdown including TFG Asset Management at full estimated Fair Value.

Figure 3^(i)(ii)

To achieve TFG's investment objective of generating distributable income and capital appreciation, TFG's current investment strategy is:

• To identify attractive asset classes and investment strategies.
• To identify asset managers it believes to be superior.
• To use the market experience of TFM, TFG's investment manager, to negotiate favourable terms for its investments.
• Through TFG Asset Management, and where sensible, to seek to own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on its capital.

In addition, TFM's current investment strategy is to continue to grow TFG Asset Management – as TFG's diversified alternative asset management business – with a view to a possible initial public offering and listing of its shares.

As part of its investment strategy, TFM may employ hedging strategies and leverage in seeking to provide attractive returns while managing risk.

The Investment Manager seeks to identify asset classes that offer excess returns relative to their investment risk, or "intrinsic alpha."  It analyses the risk/reward, correlation, duration and liquidity characteristics of each potential capital use to gauge its attractiveness and incremental impact on the Company.

The Investment Manager then seeks to find high-quality managers who invest in these asset classes; selects or structures suitable investment vehicles that optimise risk-adjusted returns for TFG's capital; and/or seeks for TFG (via TFG Asset Management) to own a share of the asset management company.  TFG aims to not only produce asset level returns, but also aims to enhance these returns with capital appreciation and investment income from its investments in asset management businesses that derive income from external investors.

Certain considerations when evaluating the viability of a potential asset manager typically include: performance track records, reputation, regulatory requirements, infrastructure needs and asset gathering capacity.  Potential profitability and scalability of the business are also important considerations.  Additionally, the core capabilities, investment focus and strategy of any new business should offer a complementary operating income stream to TFG Asset Management's existing businesses.  The Investment Manager looks to mitigate potential correlated risks across TFG Asset Management's investment managers by diversifying its exposure across asset classes, investment vehicles, durations, and investor types, among other factors.

TFG's asset management businesses can operate autonomously, or on the TFG Asset Management platform.  In either case, the objective is for them to benefit from an established infrastructure, which can assist in critical business management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence.

Figure 4⁽¹²⁾

(i)(ii)(iii)(iv)(v)(vi)(vii)(viii) Products/mandates listed are not necessarily open for new investment and are not an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction, but to illustrate the TFG Asset Management platform strategy.

TFG Asset Management consists of:

• LCM Asset Management⁽¹³⁾ – a CLO loan manager.
• The GreenOak Real Estate⁽¹⁴⁾ joint venture – a real estate-focused principal investing, lending and advisory firm.
• Polygon Global Partners⁽¹⁵⁾ – a manager of open-ended hedge fund and private equity vehicles across a number of strategies.
• Equitix⁽¹⁶⁾ – an integrated core infrastructure asset management and primary project platform.
• Hawke's Point⁽¹⁷⁾ – a business that seeks to provide capital to companies in the mining and resource sectors.
• Tetragon Credit Income Partners (TCIP)⁽¹⁸⁾ – TCIP acts as a general partner of a private equity vehicle that focuses on CLO investments relating to risk retention rules, including majority stakes in CLO equity tranches.
• TCI Capital Management LLC (TCICM)⁽¹⁹⁾ – a CLO loan manager.

Assets under management ("AUM") for TFG Asset Management as of 30 September 2016 totalled approximately $18.6 billion.⁽²⁰⁾

TFG's Board of Directors

TFG's Board of Directors is comprised of six members, four of whom are independent directors who have significant experience in asset management and financial markets.  Biographies of the directors can be found in Appendix IX.

• Rupert Dorey (Independent Director)
• Frederic Hervouet (Independent Director)
• David Jeffreys (Independent Director)
• William P. Rogers, Jr. (Independent Director)
• Reade Griffith
• Paddy Dear

KEY METRICS

The Company focuses on the following key metrics prepared on a Fair Value⁽²¹⁾ basis, when assessing how value is being created for, and delivered to, TFG shareholders:

• Earnings: Fair Value Return on Equity and Fair Value EPS
• Fair Value NAV Per Share: NAV Per Share Total Return and NAV per share
• Dividends

EARNINGS – FAIR VALUE RETURN ON EQUITY

Annualised Fair Value RoE year to date through Q3 2016 was 6.4%.⁽²²⁾

Although 2016 has so far proved to be a difficult environment in general for investment funds, TFG was pleased to continue to produce a positive set of results in the first three quarters, recording a Net Income⁽²³⁾ of $94.8 million.  This resulted in an annualised RoE of 6.4% for the first nine months of the year, an increase on the annualised RoE of 4.5% for H1 2016.

On a year-to-date basis, all investment classes across the portfolio have positively contributed to TFG's RoE.

Figure 5⁽ⁱ⁾

Average RoE is calculated from TFG's IPO in 2007.  2015 RoE includes a fair value adjustment for certain TFG Asset Management businesses, the value of which has accumulated over several years.  Consequently, the full year return of 14.5% is not prepared on a like for like basis with prior years.  Like for like performance for 2015 was 8.2%.

FAIR VALUE EARNINGS PER SHARE ("EPS")

TFG generated a Fair Value EPS⁽²⁴⁾ of $1.02 year to date through Q3 2016

The Fair Value Net Income of $94.8 million resulted in an EPS of $1.02.  The EPS of $0.55 generated in Q3 2016 represents a significant increase over the aggregate EPS result of $0.47 for the first two quarters of 2016.  As detailed in last quarter's report, the 2016 EPS continues to significantly trail the results from the same period last year, reflecting not only the generally adverse and volatile conditions in 2016, but also some strong one-off contributions in 2015.⁽²⁵⁾

Figure 6

Further detailed information on the drivers of the Company's performance is provided later in this report.  Please see the section "Q3 2016 In Review" for further detailed information on the drivers of the Company's performance.

FULLY DILUTED FAIR VALUE NAV PER SHARE

Fully Diluted Fair Value NAV Per Share ("NAV Per Share") is $20.05 at the end of Q3 2016.  NAV Total Return is 7.8% year to date through Q3 2016.

• NAV Per Share increased significantly during the year as the positive impact from operating performance was boosted by an H1 2016 repurchase of 10 million shares for an all-in cost of $100.7 million.
• Although the share repurchase reduced net assets, by buying its shares at a discount to NAV, TFG increased the NAV Per Share by approximately $0.94. As noted in the Executive Summary, TFG intends to conduct another tender offer for a number of TFG non-voting shares with a maximum value of up to $50 million.

Figure 7

Figure 8⁽ⁱ⁾

(i) Source: NAV Per Share based on TFG's financial statements as of 30 September of each of the years shown.  Please see Figure 22 on page 27 for more details on the calculation of NAV Per Share.

DIVIDENDS PER SHARE ("DPS") ⁽²⁶⁾

TFG's quarterly dividend was 16.75 cents per share for Q3 2016.

• TFG declared a Q3 2016 dividend of $0.1675 per share, unchanged from Q2 2016. On a rolling 12-month basis, the dividend of $0.665 per share represents a 3.9% increase over the prior 12-month period and equates to an annualised dividend yield of 6.3% on the 30 September 2016 share price of $10.60.

• This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q3 2016 DPS of $0.1675 brings the cumulative DPS declared since TFG's IPO to $4.585.

Figure 9

Q3 2016 IN REVIEW

The figure below illustrates the composition of TFG's Fair Value Net Assets as of 30 September 2016 and 31 December 2015. 

Figure 10: Fair Value Net Asset Composition Summary^(i)(ii)

Top 10 Holdings as of 30 September 2016

The table below highlights the fair value of TFG's ten top holdings as of 30 September 2016.

Figure 11

Net Asset Breakdown and Income for Q3 2016

Figure 12

Figure 12 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q3 2016 compared to 2015.

CLOs

• U.S. CLO 1.0: TFG's U.S. CLO 1.0 investments contributed $20.6 million in Fair Value Net Income over the third quarter of 2016, and $33.1 million year to date through the end of Q3 2016. We sold one position during Q3 2016 that generated $16.2 million in net income. The income on this U.S. CLO 1.0 investment was driven primarily by unrealised mark-to-market gains in equity assets received from various distressed workout securities reorganised during the 2008 credit crisis. We continue to monitor this amortizing segment of the portfolio for opportunities to monetise the Company's remaining investments. As of the end of Q3 2016, all of TFG's U.S. CLO 1.0 deals were passing their junior-most O/C tests.⁽²⁷⁾

• U.S. CLO 2.0: TFG's U.S. CLO 2.0 investments produced $7.0 million in Fair Value Net Income during Q3 2016, and $30.7 million year to date through the end of Q3 2016. As stated in the past, we intend for our new issue CLO investment activity to occur primarily via the Tetragon Credit Income II L.P. ("TCI II") private equity vehicle, subject to market conditions and that vehicle's investment strategy. As of the end of Q3 2016, all of TFG's U.S. CLO 2.0 were in compliance with their junior-most O/C tests.⁽²⁸⁾

• European CLOs: The European CLO segment of TFG's portfolio produced $2.3 million in Fair Value Net Income during Q3 2016, and $11.0 million year to date through the end of the quarter. Our European CLOs continue to amortise and the fair value of our positions have reduced by approximately 33% from the prior year-end. All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of Q3 2016.⁽²⁹⁾

• CLO Equity – TCI II: The Company's investment in TCI II produced $0.2 million of Fair Value Net Income during Q3 2016, and $0.4 million year to date through the end of the quarter. TCI II had made, or committed to make, investments with a total cost of $150.1 million through the end of Q3 2016. TFG's available undrawn capital commitment totalled $62.0 million.

EQUITIES

• Equity Funds: Polygon's event-driven equity investments generated Fair Value Net Income of $9.0 million during Q3 2016 and $21.3 million year to date, with positive performance coming from investments in the Polygon European equity strategy, which was up 4.5% net during Q3, bringing year-to-date net performance to 9.8%. The Polygon mining equities fund was up 4.0% net in Q3 2016, and 16.7% net year to date. Please refer to page 23 for further details on the performance of the individual funds.

• Other Equities: These assets generated Fair Value Net Income of $11.3 million in Q3 2016 and $17.3 million year to date through the end of Q3 2016.

CREDIT

• Convertible Fund: The Polygon convertible fund investment contributed Fair Value Net Income of $2.7 million during Q3 2016, and $4.8 million year to date. The Polygon Convertible strategy returned 5.0% net during Q3 2016, bringing year-to-date net performance to 9.3%.

• Distressed Fund: The Polygon distressed fund investment generated $9.9 million of Fair Value Net Income during Q3 2016, bringing the total to $10.1 million through the end of Q3 2016. The fund returned 9.2% net in Q3, bringing year-to-date net performance to 11.5%.

REAL ESTATE

• Real Estate: TFG's investment in Real Estate contributed $4.3 million of Fair Value Net Income during Q3 2016, and $10.1 million year to date through the end of Q3 2016, reflecting a combination of realised and unrealised gains in certain investment vehicles.

TFG ASSET MANAGEMENT (privately-held securities in asset management business)

• TFG Asset Management: TFG's investment in TFG Asset Management comprises a diverse portfolio of alternative asset managers. TFG Asset Management recorded Fair Value Net Income of $3.8 million during Q3 2016, and $1.9 million year to date through the end of Q3. After adjusting for FX hedging, TFG's investment in Equitix made a positive contribution year to date of approximately $14.0 million, reflecting the performance of this business. The value of TFG's investment in TCIP has also increased during the year as it continues to deliver against its business plan for its first vehicle, TCI II. TFG's investments in Polygon, GreenOak and LCM have all recorded unrealised losses during 2016, reflecting a combination of factors, including, in some cases, the application of less favourable market multiples or discount rates, and a more conservative view on elements of projected performance this year. We continue to believe that the underlying economics and momentum of these businesses remain positive, as measured by, among other things, EBITDA and AUM growth, as described in the TFG Asset Management section in this report. Please see Appendix IV for further information on the basis for determining the Fair Value of the TFG Asset Management investment. Additionally, please see Figure 16 for TFG Asset Management's pro forma operating results.

Figure 13

CASH AND BORROWINGS

• Net Cash: TFG held $423.1 million of Fair Value net cash at 30 September 2016. The Company actively manages its cash levels to cover future commitments and to enable it to capitalise on opportunistic investments.

• Borrowings: As previously reported, in April 2016 TFG obtained its Revolving Credit Facility for an initial maximum facility amount of $75 million, with a stated maturity date of 1 April 2019. In August 2016, with the addition of a second lender to the facility, the maximum facility amount increased to $150 million. The drawdown as of quarter-end was $38.0 million and this is reflected as an adjustment to the net cash number disclosed above.⁽³⁰⁾

Q3 2016 Major New Investments

• CLO Equity – TCI II: During the third quarter, TFG made an additional capital commitment of $12.0 million to TCI II, bringing TFG's total capital commitments to $62.0 million. There have been no capital calls as of the end of Q3 2016.

• Real Estate: TFG made some additional capital contributions to existing investment programs across Europe, the U.S. and Asia.

• Equity Funds: In September, an additional $7.0 million subscription was made into the Polygon European Equity Fund.

• Direct Loans: A £3.0 million loan was made to GreenOak in connection with its acquisition of Grafton Advisors, a UK property adviser. See page 21 for further details.

Q3 2016 Major Asset Sales and Optional Redemptions

• U.S. CLOs: As mentioned above, TFG sold one U.S. CLO 1.0 equity investment during Q3 2016 realising gross proceeds of $33.0 million. Shortly after the end of the quarter, TFG initiated an optional early redemption of another U.S. CLO 1.0.

• Real Estate: During the third quarter, TFG realised $20.4 million in capital and income through distributions from a number of GreenOak managed investment programs, across Europe, the U.S. and Asia.

TFG Asset Management Overview

One of TFG's significant investments is TFG Asset Management, a diversified alternative asset management business that owns majority and minority stakes in asset managers.  At 30 September 2016, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke's Point, TCIP and TCICM (please see Figure 14 for the breakdown of AUM and Fair Value by business line).  TFG Asset Management has approximately $18.6 billion of assets under management⁽³¹⁾ and approximately 250 employees globally.  Figure 15 depicts the growth of that AUM over the last five years.  Each of the asset management businesses on the platform is privately-held.

Figure 14⁽³²⁾

Figure 15⁽³³⁾

TFG Asset Management Pro Forma EBITDA (Excluding GreenOak)

Figure 16

• Overview: Figure 16 shows a pro forma statement of operations that reflects the operating performance of the majority-owned asset management companies within TFG Asset Management. Although, under U.S. GAAP, they are currently reported partially at Fair Value and partially on a consolidated basis, the aim of also presenting the underlying performance in this way is to give investors insight into a key driver behind that valuation. GreenOak, in which TFG holds a minority interest, is not currently included in the calculation of pro forma EBITDA.

• EBITDA: During Q3 2016, TFG Asset Management's EBITDA was $12.8 million, resulting in a year-to-date 2016 EBITDA equivalent of $30.4 million. Whilst tracking below EBITDA for the equivalent period in 2015, the shortfall in 2016 has decreased from over $10.0 million at the end of H1 2016 to $3.5 million at the end of Q3 2016, with growth in performance and success fees driving this change. In addition, as was observed in the Half Yearly Report, management fees in 2016 now account for a greater percentage of total income than they did in the prior year. We believe that this is an indication of an improvement in the quality of the earnings year on year.

• Management fee income: Management fee income continued to increase year on year as shown in Figure 16. In particular, fee income generated in the Equitix business grew as capital was put to work (thereby earning full fees) and fee-paying AUM was increased in new fund vehicles.

• Performance and success fees: Performance and success fees have grown period on period, primarily reflecting the positive performance across the Polygon hedge funds, which has led to a marked increase in unrealised performance fees. The other main component of this category is primary fee income from the Equitix business, which is close to, but slightly behind the equivalent period in 2015.

• Other fee income: This category includes a number of different income streams, including third- party CLO management fee income relating to certain U.S. CLO 1.0 transactions. This stream continued to decline as expected as these transactions amortised down. In addition, this category includes certain cost recoveries from TFG relating to seeded Polygon hedge funds. The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report, decreased year on year, although the teams supporting those seeded funds continued to grow. As these businesses mature and build third-party capital, we expect that such cost recoveries should decrease. The other fee income category also includes fee income generated by Equitix on certain management services contracts, which grew year on year.

• Operating expenses: This category of expenses was $14.9 million higher than the equivalent period in 2015, reflecting a number of different factors. Firstly, TCIP is a new and growing business which was not recording any material level of expenses during the comparable period in 2015. Secondly, Equitix continues to grow its business, including the management services segment, resulting in an increase in both costs as and revenues. Finally, TFG Asset Management continued to invest by increasing headcount in a number of areas, which will support any continued growth of the platform.

BUSINESS OVERVIEWS

The following pages provide a summary of each asset management business and a review of AUM growth and underlying strategy / investment vehicle performance during Q3 2016.

All data is at 30 September 2016, unless otherwise stated.

LCM

GREENOAK

POLYGON

EQUITIX

HAWKE'S POINT

TCIP and TCICM

Q3 2016 FINANCIAL REVIEW

This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the "Master Fund"), adjusted from Q3 2015 to reflect the Fair Value of TFG Asset Management's businesses that are consolidated under U.S. GAAP, and provides comparative data where applicable.  Comparative data presented for periods prior to Q3 2015 are disclosed as they were reported at the time and have not been adjusted retrospectively to be presented on a Fair Value basis.

FINANCIAL HIGHLIGHTS

Figure 22

TFG uses, among others, the following metrics to understand the progress and performance of the business:

• Fair Value Net Income ($94.8 million): Please see Appendix IV for reconciliation to U.S. GAAP net income.

• Fair Value Return on Equity (4.8%): Fair Value Net Income ($94.8 million) divided by Net Assets at the start of the year ($1,987.3 million).

• Fully Diluted Shares Outstanding (97.1 million): Adjusts the U.S. GAAP shares⁽ⁱ⁾ outstanding (87.8 million) for various dilutive factors (9.3 million shares). Please see Figure 35 for more details.

• Fair Value EPS ($1.02): Calculated as Fair Value Net Income ($94.8 million) divided by weighted-average U.S. GAAP shares⁽ⁱ⁾ during the period (93.0 million).

• Fully Diluted Fair Value NAV Per Share ($20.05): Calculated as Fair Value Net Assets ($1,946.3 million) divided by Fully Diluted Shares Outstanding (97.1 million).

(i)   The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year.

FAIR VALUE EPS ANALYSIS Q3 2014 – Q3 2016

Figure 23

STATEMENT OF OPERATIONS (FAIR VALUE BASIS)

Figure 24

Performance Fee

A performance fee of $10.8 million was accrued in Q3 2016 in accordance with TFG's investment management agreement.  The hurdle rate for the Q4 2016 incentive fee has been reset at 3.505748% (Q3 2016: 3.301208%) as per the process outlined in TFG's 2015 audited financial statements and in accordance with TFG's investment management agreement.  Please see TFG's website, www.tetragoninv.com, and the 2015 TFG audited financial statements for more details on the calculation of this fee.

BALANCE SHEET (FAIR VALUE BASIS)

Figure 25

Please see Appendix IV for the reconciliation between the U.S. GAAP consolidated balance sheet and the balance sheet prepared on a Fair Value basis.

STATEMENT OF CASH FLOWS (FAIR VALUE BASIS)⁽ⁱ⁾

Figure 26

FAIR VALUE NET INCOME TO U.S. GAAP RECONCILIATION

Figure 27

TFG is primarily reporting earnings through a non-GAAP measurement called Fair Value Net Income.

The reconciliation on the table above shows the adjustments required to get from this measure of earnings to U.S. GAAP net income. 

1. Adjustment one takes into account a Fair Value adjustment of $6.8 million for Polygon, LCM, Hawke's Point and TCIP as if they were de-consolidated and held at Fair Value rather than consolidated as they currently are for U.S. GAAP purposes.  Further details are provided in Appendix IV.
2. Adjustment two removes share-based compensation of $17.5 million as, under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting, as well as in relation to certain long-term compensation plans.  This mechanism and the future vesting schedule for all share-based compensation related shares are described in more detail in the 2016 TFG unaudited interim financial statements.  The long-term compensation plans are also detailed in Appendix VII.

APPENDICES

APPENDIX I

CERTAIN REGULATORY INFORMATION

This Performance Report is made public by means of a press release, which contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation, and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten).  In addition, this report is also made available to the public by way of publication on the TFG website (www.tetragoninv.com).

An investment in TFG involves substantial risks.  Please refer to the Company's website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG.

This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction.  The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act"), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration.  TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States.  In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act.  TFG is registered in the public register  of  the  Netherlands Authority  for  the  Financial Markets  under  Section  1:107  of  the FMSA as a collective investment scheme from a designated country. 

This release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.

TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFS trading markets are less liquid than other major exchanges, which could affect the price of the Shares.

There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person.  These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a "Qualified Purchaser" or a "Knowledgeable Employee" (each as defined in the Investment Company Act of 1940), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a "Qualified Purchaser" or a "Knowledgeable Employee" under the Investment Company Act of 1940.  These restrictions may adversely affect overall liquidity of the Shares.

APPENDIX II

FAIR VALUE DETERMINATION OF CLO EQUITY INVESTMENTS

In accordance with the valuation policies set forth on TFG's website, the values of TFG's CLO equity  investments  are  determined  using  a  third-party  cash  flow  modelling  tool.  The  model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined through, for example, forward- looking observable data) might impact the performance of TFG's CLO equity investments.  Since this involves modelling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter's historical data.

Subject to the foregoing, when determining the U.S. GAAP-compliant Fair Value of TFG's portfolio, the Company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark the model inputs and resulting outputs to observable market data when available and appropriate.

The below modelling assumptions are unchanged from last quarter.

Figure 28

U.S. CLOs modelling assumption

Figure 29

European CLOs modelling assumption

Figure 30

Discount Rates

APPENDIX III

FAIR VALUE DETERMINATION OF TFG ASSET MANAGEMENT

In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies (the "Guide"), as an Investment Company, TFG  carries all of its investments at Fair Value.  However, as outlined in section 7.10 of the Guide, operating entities should be consolidated where TFG (i) has an economic interest in excess of 50%; (ii) is deemed to have control over the significant operational and financial decisions of the entity; and (iii) where the purpose of the operating entity is to provide services to the Investment Company (i.e., TFG) rather than realise a gain on the sale of the investment.  As at 30 September 2016, this consolidation exemption was applied to TFG's holdings in Polygon, LCM, Hawke's Point and TCIP (the "Consolidated Businesses") because these businesses were managing some of TFG's investment capital and thus could be deemed to be providing services to TFG.  In contrast, Equitix is not managing TFG's capital so is not subject to point (iii) above, and GreenOak is minority-owned so is not subject to points (i) or (ii) above.

The resultant inconsistency of treatment under U.S. GAAP of the businesses in TFG Asset Management is potentially confusing to the reader of TFG's financial statements, particularly since the determination and articulation in Q3 2015 of the "IPO Strategy"⁽³⁷⁾ for TFG Asset Management, which confirmed that the primary commercial purpose for TFG Asset Management, including the Consolidated Businesses, is to be held as an investment for capital appreciation, in line with TFG's investment objective.  Consequently, from Q3 2015, TFG has prepared and presented its non-GAAP financial metrics and performance information using a consistent Fair Value basis for all of TFG Asset Management.  Some of the differences resulting from the presentation of non-GAAP metrics are reconciled in Appendix IV.

TFG's investments in the TFG Asset Management businesses are considered to be "Level 3" investments in the U.S. GAAP valuation hierarchy and the Audit Committee of TFG, comprising the Independent Directors, has engaged third-party valuation specialists to determine an indicative valuation for each of these businesses.  These valuations have been adopted for the purposes of reporting the Fair Value impact in TFG's non-GAAP metrics as at 30 September 2016.

Figure 31 sets out the valuation approach utilised for each of the businesses as well as the range of market metrics utilised in determining Fair Value.  Both management and performance fees (collectively, the "Fees") continue to be calculated based on the U.S. GAAP measure of Net Asset Value and thus the non-GAAP adjustments do not currently impact the Fees payable to the Investment Manager.

Figure 31

APPENDIX IV

RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS

This section describes how the non-GAAP Fair Value adjustments relating to LCM, Polygon, Hawke's Point and TCIP have been made to the U.S. GAAP financials to arrive at the Key Performance Metrics.

Figure 32 details the impact of such a change in accounting treatment for LCM, Polygon, Hawke's Point and TCIP in terms of carrying value and performance fees.

In arriving at the imputed performance fee, the change in NAV is adjusted by the full amortisation of the remaining base cost ($27.7 million) of the purchase of 25% of LCM in 2012.  Previously, this was being amortised on a straight-line basis over 10 years, and each quarter an applicable adjustment is made to reduce the performance fees payable to the investment manager.

Figure 32

APPENDIX IV

RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS (continued)

Figure 33 shows a reconciliation between the Statement of Operations prepared on a full Fair Value basis and on a U.S. GAAP basis.

In addition to adding in the unrealised Fair Value as detailed in Figure 32, the reconciliation shows the removal of the operating P&L for H1 2016, and the reversal of certain balance sheet items relating to Polygon, LCM, Hawke's Point or TCIP.  Such items include the remaining intangible asset balance relating to Polygon's management contracts and a reversal of a deferred tax liability.

We adjust for change in notional performance fees as calculated in Figure 32.

In addition, as in prior periods, we back out share-based compensation of $11.5 million as, under ASC 805, TFG is recognising the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting.  This mechanic and future vesting schedule for share-based compensation are described in more detail in the 2016 Interim Master Fund unaudited financial statements.

Figure 33

RECONCILIATION BETWEEN U.S. GAAP AND FAIR VALUE BASIS (continued)

Figure 34 shows a reconciliation between the Balance Sheet prepared on a full Fair Value basis and on a U.S. GAAP basis.

In addition to adding in the unrealised Fair Value of $167.0 million as detailed in Figure 32, the reconciliation shows the removal of certain balance sheet items relating to Polygon, LCM, Hawke's Point and TCIP, including the value of Polygon's un-amortised management contracts ($20.9 million), cash of $36.8 million held in TFG Asset Management, a small amount of fixed assets, a deferred tax asset and receivables, which mainly relate to cost recoveries.  On the liability side, we reverse certain accrued expenses including compensation and add back a notional performance fee of $27.1 million relating to the Fair Value adjustment as detailed in Figure 32.

Figure 34

APPENDIX V

SHARE RECONCILIATION AND SHAREHOLDINGS

Figure 35⁽³⁸⁾

SHAREHOLDINGS

Persons affiliated with TFG maintain significant interests in TFG shares.  For example, as of 30 September 2016, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below:

*The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares.  In addition to the foregoing, as of 30 September 2016, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.4 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees.

As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the "Vested Shares")) that were issued pursuant to TFG's acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the "Polygon Transaction") have vested with certain persons (other than Messrs. Griffith and Dear), all of whom are employees or partners of TFG-owned or affiliated entities, pursuant to the Polygon Transaction.

Certain of these persons may from time to time enter into purchases or sales trading plans (each a, "Fixed Trading Plan") providing for the sale of Vested Shares or the purchase of TFG shares in the market, or may otherwise sell their Vested Shares or purchase TFG shares, subject to applicable compliance policies.  Applicable brokerage firms may be authorised to purchase or sell TFG shares under the relevant Fixed Trading Plan pursuant to certain irrevocable instructions.  Each Fixed Trading Plan is intended to comply with Rule 10b5-1 under the United States Securities Exchange Act of 1934, as amended.  Each Fixed Trading Plan has been or will be approved by TFG in accordance with its applicable compliance policies.

For additional information regarding the Polygon Transaction and the future vesting schedule for shares issued thereunder, see Note 22 to the 2015 Tetragon Financial Group Master Fund Limited audited financial statements.

Rule 10b5-1 provides a "safe harbor" that is designed to permit individuals to establish a pre-arranged plan to buy or sell company stock if, at the time such plan is adopted, the individuals are not in possession of material, non-public information.

Prior to publicly announcing their tender offer, TFG (through TFGMF) entered into an agreement to repurchase approximately 593,653 non-voting shares of TFG (plus scrip dividend shares payable in respect of the Q3 2016 dividend) held by Michael Humphries, a manager of certain Polygon funds, in connection with the winding up of a swap transaction between the Master Fund and Michael Humphries with respect to the relative values of TFG shares and interests in the Polygon funds following the acquisition of Polygon in 2012.  The purchase price for these shares will be determined on the basis of the volume-weighted average price per share for the first 10 trading days in November 2016.

APPENDIX VI

HISTORICAL SHARE REPURCHASES

Figure 36

Figure 37

Share Repurchases:

The above graph shows historical share repurchases by TFG from inception to 30 September 2016.⁽⁴⁰⁾

APPENDIX VII

EQUITY-BASED COMPENSATION PLANS

In Q1 2016, TFG implemented an equity-based long-term incentive plan for certain senior employees of TFG Asset Management (excluding the principals of TFM).

Awards under the long-term incentive plan, along with other equity-based awards, are typically spread over multiple vesting dates up to 2024 which may vary for each employee and are subject to forfeiture provisions.  The arrangements may also include additional periods, beyond the vesting dates, during which employees gain exposure to the performance of the TFG shares, but the shares are not issued to the employees.  Such periods may range from one to five years beyond the vesting dates.  The shares underlying these equity-based incentive programs typically will be held in escrow until they vest and will be eligible to receive shares under the TFG Optional Stock Dividend Plan ("DRIP Shares").

Where grants under these equity-based incentive programs will only be settled through the issuance of shares rather than through cash, and in accordance with U.S. GAAP rules for share-based compensation, TFG has elected to account for equity-based plans under ASC 718 – Equity-based payments to employees – and is applying the straight-line method for expense recognition and for calculating the share dilution effect.  This means that the total expense of the initial awards is determined at the award date, or at the date that the award becomes eligible to be settled only in shares ("Award Date"), by applying a reference share price on the Award Date to the shares awarded.  Taking into account all equity-based awards granted to TFG Asset Management employees, including the Q1 2016 LTIP awards, approximately 5.1 million shares have been awarded at a weighted average reference share price of $8.76 per share, implying a total share-based compensation charge of approximately $45 million spread over a period of up to eight years, excluding employer-related taxes.

The dilutive effect of the equity-based compensation plans will be reflected increasingly in TFG's fully diluted share count over the life of the plans.  Such dilution will include, among other things and in addition to the award shares, any DRIP Shares and shares that will be required to cover employer taxes.  At the end of Q3 2016, approximately 0.7 million shares were included in the fully diluted share count.

APPENDIX VIII

ADDITIONAL CLO PORTFOLIO STATISTICS

Figure 38

Figure 39

[Figure 39 cannot be reproduced]

APPENDIX IX

BOARD OF DIRECTORS

The Board of Directors currently comprises six directors, of which four are Independent Directors.

Rupert Dorey is a member of the TFG Board of Directors and Audit Committee.  Mr. Dorey has over 30 years of experience in financial markets.  Mr. Dorey was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt.  He held a number of senior positions at CSFB, including establishing CSFB's high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales.  Since 2005, he has been acting in a Non-Executive Directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles.  Mr. Dorey is a former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors.  Mr. Dorey is based in Guernsey.

Frederic Hervouet is a member of the TFG Board of Directors and Audit Committee.  Mr. Hervouet has over 17 years of experience in financial markets and hedge funds, including in multi-asset class investment and risk management, structured products and structured finance.  Until September 2013, Mr. Hervouet was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales.  Previously, Mr. Hervouet was a Director and Global Head of Sales at Diapason Commodities Management SA, a partner at Systeia Capital Management, which is now part of Amundi Asset Management, and a Director and Head of European Market Distribution at BAREP Asset Management, the hedge fund management subsidiary of Société Générale.  Mr. Hervouet has a MSc in Applied Mathematics and International Finance and a Master's Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the Université Paris Dauphine.  He is a member of the Institute of Directors (IoD) and of the Guernsey Chamber of Commerce.  Mr. Hervouet is based in Guernsey.

David Jeffreys is a member of the TFG Board of Directors and Audit Committee.  Mr. Jeffreys provides directorship services to a small number of fund groups.  From 1995 until 2010 Mr. Jeffreys worked with EQT, a Scandinavian based private equity group, acting as a director of each of its Fund general partners and, from 2006, establishing and serving as Managing Director of EQT Funds Management Limited, its Guernsey based management and administration office.  Between 1993 and June 2004, Mr. Jeffreys was managing director of Abacus Fund Managers (Guernsey) Limited, where he was involved with private client trust arrangements, corporate administration, pension schemes and fund administration.  He was a board member of Abacus' principal administration operating companies and served on the boards of various administrated client companies.  Previously, Mr. Jeffreys worked as an auditor and accountant for 12 years with Coopers & Lybrand (and its predecessor firms).  He has an undergraduate degree in Economics and Accounting from the University of Bristol and is a fellow of the Institute of Chartered Accountants in England and Wales.  Mr. Jeffreys is based in Guernsey.

William P. Rogers, Jr. is a member of the TFG Board of Directors and Audit Committee.  Mr. Rogers retired from the Corporate Department of Cravath, Swaine & Moore LLP in December 2015 after 36 years at the firm.  His practice encompassed the representation of both corporate and financial institution clients in a wide variety of matters, including international securities offerings, corporate governance and SEC compliance matters, mergers and acquisitions, and derivative financial products.  He was repeatedly cited as one of the United States' leading practitioners in capital markets by, among others, Chambers USA: America's Leading Lawyers for Business; Chambers Global: The World's Leading Lawyers for Business; The Legal 500; and IFLR1000.  Mr. Rogers regularly advised a wide variety of clients, including Royal Dutch Shell plc, Bacardi Limited, Time Warner Inc., Northrop Grumman Corporation, CBS Corporation, INEOS Group Limited, Tetragon Financial Group Limited, Costamare Inc., priceline.com Incorporated, FactSet Research Systems Inc., Morgan Stanley, Citigroup, GasLog Ltd. and Goldman Sachs.  He also regularly advised corporate clients on derivatives matters, including the implications of the new Dodd‑Frank swaps regulation.  He was involved in the formation of the International Swaps and Derivatives Association (ISDA) and, prior to his move to London, regularly represented ISDA on legislative, regulatory and documentation matters.  Mr. Rogers was born in Bronxville, New York.  He received a B.A. from Union College in 1972 and a J.D. from Case Western Reserve School of Law in 1978.  From 1998 to 2001, he served as the Managing Partner of Cravath's Corporate Department and, from 2001 to 2007, headed the firm's London office.  Mr. Rogers is based in New York.

Reade Griffith co-founded Polygon in 2002 and TFM, the investment manager of TFG, in 2005.  He is a Principal of TFM, a member of the TFG Board of Directors, the Head of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, the CIO of Polygon's European Event Driven Equities strategy, a member of the Investment & Management Committee of TCIP and Tetragon Credit Income II L.P.  He was previously the founder and chief executive officer of the European office of Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998.  He was a partner and senior managing director responsible for running the Global Event Driven arbitrage team in Tokyo, London and Chicago for the firm.  He was previously with Baker, Nye, where he was an analyst working on an arbitrage and special situations portfolio.  Mr. Griffith holds a JD degree from Harvard Law School and an undergraduate degree in Economics from Harvard College.  He also served as an officer in the U.S. Marine Corps and left as a Captain following the 1991 Gulf War.  Mr. Griffith is based in London.

Paddy Dear co-founded Polygon in 2002 and TFM, the investment manager of TFG, in 2005.  He is a Principal of TFM, a member of the TFG Board of Directors, the Co-Head of TFG Asset Management, a member of TFM's Investment & Risk Committee, a member of TFM's Executive Committee, a member of the Investment & Management Committee of TCIP and Tetragon Credit Income II L.P. Mr. Dear was previously a Managing Director and the Global Head of Hedge Fund Coverage for UBS Warburg Equities.  Prior to this, he was co-head of European sales trading, execution, arbitrage sales and flow derivatives.  He had been with UBS since 1988, including six years in New York.  Mr. Dear was in equity sales at Prudential Bache before joining UBS and started his career as a petroleum engineer with Marathon Oil Co. Mr. Dear holds a BSc degree in Petroleum Engineering from Imperial College in London.  Mr. Dear is based in London.

FURTHER SHAREHOLDER INFORMATION

Statement Regarding Non-Mainstream Pooled Investments (NMPI)

TFG notes the UK Financial Conduct Authority ("FCA") rules relating to the restrictions on the retail distribution of unregulated collective investment schemes and close substitutes (referred to as "non-mainstream pooled investments"), which came into effect on 1 January 2014.

TFG has received appropriate legal advice that confirms that TFG's shares do not constitute NMPI under the FCA's rules and are, therefore, excluded from the FCA's restrictions that apply to non-mainstream pooled investment products.

TFG expects that it will continue to conduct its affairs in such a manner that TFG's shares will continue to be excluded from the FCA's rules relating to NMPI.

ENDNOTES

SOURCE Tetragon Financial Group Limited

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