London, UK, 28 April 2021
Edison issues outlook on Tetragon Financial Group (TFG)
Tetragon Financial Group (Tetragon) reported a 9.5% NAV TR in FY20 in US dollar terms. Its main value driver remains TFG Asset Management, which delivered a 24% return in FY20 as it continues to expand its assets under management (AUM, up by 10% in FY20 mainly assisted by Equitix). In contrast, Tetragon's CLO and real estate investments were a drag on FY20 performance. Moreover, Polygon funds (the majority of Tetragon's exposure to hedge funds) delivered positive returns, but below broader equity markets. As a result, Tetragon posted a 7.6% return on equity, below its long-term target of 10-15%. Still, its long-term performance remains intact with an average 13.7% NAV TR pa over the last 10 years.
Despite the long-term NAV returns Tetragon demonstrated, its shares continue to trade at a wide discount of 63%, which is ahead of the already wide 10-year average of 43% and visibly higher than its peers. This may at least partly come from its incentive fee structure (which also dampened the NAV TR in FY20), only non-voting shares being available to investors (which means Tetragon cannot enter LSE's premium segment) and TFG Asset Management's carrying value being based on private valuation. The recent enforcement action of the US Securities and Exchange Commission (SEC) against Ripple Labs (7.3% of Tetragon's NAV) may add to this. Nevertheless, the current discount offers considerable downside protection to investors, who are also rewarded through dividends (4.1% yield on a last 12 months basis) and NAV-accretive share buybacks. Tetragon sees room for further growth in AUM of TFG Asset Management and does not expect to float the business in the near term (which, however, remains its long-term intention).
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