Tetragon Financial Group Limited ("TFG") First Quarter 2016 Results Announcement

LONDON, April 29, 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 Market^([1]) of the 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 31 March 2016.^([2])

This summary release should be read in conjunction with the full quarterly report which follows.

Key Metrics for Q1 2016^([3])

• Annualised Fair Value Return on Equity ("RoE") of 4.1%^([4])
• Fair Value EPS of $0.21
• Fully Diluted Fair Value NAV per Share of $19.05
• Dividend Per Share for the quarter of 16.5 cents (dividend yield of 6.8%)

Highlights During the Quarter

• TFG generated fair value earnings of $20.3 million
• Principals of the manager bought 2.4 million TFG shares, increasing total share ownership for principals of the manager and employees to TFG Asset Management to approximately 21%
• TFG Asset Management's assets under management stood at $17.2 billion at 31 March 2016

About TFG:

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.

([1])    TFG's 'home Member State' for the purposes of the EU Transparency Directive (Directive 2004/109/EC) is the Netherlands.

([2])    TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited ("TFGMF"), in which it holds 100% of the issued non-voting shares.  In this report, unless otherwise stated, we report on the consolidated business incorporating TFG and TFGMF.  References to "we" are to Tetragon Financial Management LP, TFG's investment manager (the "Investment Manager").

([3])    Please refer to Figure 20 and related notes of the attached Q1 2016 Report for full definitions of Fair Value RoE, Fair Value EPS and Fair Value NAV per Share.

([4])    TFG seeks to deliver 10-15% Fair Value RoE per annum to shareholders.  TFG's returns will most likely fluctuate with LIBOR.  LIBOR directly flows through some of TFG's investments and, as it can be seen as the risk-free short-term rate, it should affect all of TFG's investments.  In high-LIBOR environments, TFG should achieve higher sustainable returns; in low-LIBOR environments, TFG should achieve lower sustainable returns.

Tetragon Financial Group Limited – Q1 2016 Report (Period Ended 31 Mar 2016)

Delivering Results Since 2005⁽¹⁾⁽ⁱ⁾

Figure 1

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 Market⁽²⁾ of the 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 31 March 2016.⁽³⁾

29 April 2016

EXECUTIVE SUMMARY

TFG generated Fair Value⁽⁴⁾ earnings of $20.3 million in the first quarter of 2016, giving an annualised Return on Equity ("RoE") of 4.1%.  Although this return is below that of last year's first quarter and below our target return of 10-15%⁽⁵⁾, it was achieved against a backdrop of particularly volatile capital markets during the quarter.

The majority of TFG's investments produced small positive returns (CLOs, European event-driven equities, convertibles, global real estate investments and TFG Asset Management) during the quarter and there was a small loss in the distressed strategy.

TFG Asset Management, TFG's diversified alternative asset management business, had a steady first quarter in terms of capital raising, with assets under management ("AUM") rising slightly from $17.1 to $17.2 billion ⁽⁶⁾, including a second close for TCI II⁽⁷⁾.

The first quarter dividend was declared at $16.5 cents per share giving 12-month rolling dividend growth of approximately 5%.

During the quarter, principals of TFG's investment manager, Tetragon Financial Management LP ("TFM" or the "Investment Manager"), bought another 2.4 million TFG shares and TFG Asset Management implemented a long-term incentive plan, both of which further align the interests of the Investment Manager, employees and shareholders.

In order to give TFG flexibility going forward, in particular to exploit opportunistic investments, the Company has obtained during the quarter a $75 million revolving credit facility.

TFG OVERVIEW

TFG is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol "TFG.NA" and on the Specialist Fund Market of the London Stock Exchange under ticker symbol "TFG.LN"⁽⁸⁾.

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 31 March 2016 was approximately $2.0 billion.  Figure 2 shows the company's current net asset breakdown including TFG Asset Management at full estimated Fair Value.

Figure 2^(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 3

TFG Asset Management consists of:

• LCM Asset Management⁽⁹⁾ – a CLO loan manager.
• The GreenOak Real Estate⁽¹⁰⁾ joint venture – a real estate-focused principal investing, lending and advisory firm.
• Polygon Global Partners⁽¹¹⁾ – a manager of open-ended hedge fund and private equity vehicles across a number of strategies.
• Equitix⁽¹²⁾ – an integrated core infrastructure asset management and primary project platform.
• Hawke's Point⁽¹³⁾ – a business that seeks to provide capital to companies in the mining and resource sectors.  
• Tetragon Credit Income Partners (TCIP)⁽¹⁴⁾ – TCIP acts as a general partner of a private equity vehicle that, among other things, makes investments in CLOs relating to risk retention rules.

Assets under management for TFG Asset Management as of 31 March 2016 totalled approximately $17.2 billion.⁽¹⁵⁾

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 VIII.

• Rupert Dorey (Independent Director)
• Frederic Hervouet (Independent Director)
• David Jeffreys (Independent Director)
• Byron Knief (Independent Director)
• Reade Griffith
• Paddy Dear

KEY METRICS

The Company focuses on the following key metrics prepared on a Fair Value⁽¹⁶⁾ 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; and
• Dividends.

EARNINGS – FAIR VALUE RETURN ON EQUITY ("Fair Value RoE")

Annualised Fair Value RoE for 2016 was 4.1%; below TFG's long-term target range of 10-15%.⁽¹⁷⁾ 

Despite a challenging environment in Q1 2016, TFG was successful in recording a positive set of results, with Fair Value Net Income⁽¹⁸⁾ of $20.3 million.  This equated to an annualised Fair Value RoE of 4.1%.

There were positive contributions from nearly all of the investment classes across the portfolio, including TFG Asset Management on a fair value basis.

Figure 4⁽ⁱ⁾

FAIR VALUE EARNINGS PER SHARE ("Fair Value EPS")

TFG generated a Fair Value EPS⁽¹⁹⁾ of $0.21 in Q1 2016

The Fair Value Net Income of $20.3 million resulted in a Fair Value EPS of $0.21.  These results are significantly down from the same period last year, reflecting the generally adverse and volatile conditions in Q1 2016 as well as some strong one-off contributions in Q1 2015.⁽²⁰⁾

Figure 5

Further detailed information on the drivers of the Company's performance is provided later in this report.

FULLY DILUTED FAIR VALUE NAV PER SHARE

Fully Diluted Fair Value NAV per Share was $19.05 at the end of Q1 2016, up 8.4% from the same period in 2015.

• Total Fair Value NAV for TFG rose to $1,994.8 million at 31 March 2016, which equated to Fully Diluted Fair Value NAV per Share⁽²¹⁾ of $19.05.
• The 8.4% growth in Fully Diluted Fair Value NAV per Share recorded year on year is after distributing dividends of $0.6475 during that period.  The Q4 2015 dividend of $0.165 was distributed in Q1 2016.
• In addition to the operating performance of TFG, this metric was boosted by $0.49 per share through the repurchase of $60 million of shares in Q4 2015.  In Q1 2016, the fully diluted share count rose by 0.5 million shares, 0.2 million of which related to the implementation of equity-based compensation plans for certain employees of TFG Asset Management.  Such plans are described in more detail in Appendix VII.

Figure 6⁽ⁱ⁾

DIVIDENDS PER SHARE ("DPS")

TFG maintained its quarterly dividend at 16.50 cents per share in Q1 2016

• TFG declared a Q1 2016 DPS of $0.165, unchanged from Q4 2015.  On a rolling 12-month basis, the dividend of $0.655 per share represents a 4.8% increase over the prior 12-month period and equates to an annualised dividend yield of 6.8% on the 31 March 2016 share price of $9.65.
• This dividend declaration continues TFG's progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings.  The Q1 2016 DPS of $0.165 brings the cumulative DPS declared since TFG's IPO to $4.25.

Figure 7

Q1 2016 IN REVIEW

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

Figure 8: Fair Value Net Asset Composition Summary^(i)(ii)

Top 10 Holdings as of 31 March 2016

The table below highlights the fair value of TFG's ten top holdings as of 31 March 2016.

Figure 9

Net Asset Breakdown and Income for Q1 2016

Figure 10

Figure 10 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q1 2016 compared to 2015.

• U.S. 1.0 CLOs: TFG's U.S. 1.0 CLO investments contributed $6.8 million in Fair Value Net Income over the first quarter of 2016. Although we did not direct the redemption of any such investments during the quarter, the natural amortization of the 1.0 portfolio and the unwinding of CLOs previously redeemed in 2015 reduced the fair value of this segment by nearly 20% over Q1 2016. Unlike the U.S. 2.0 CLOs, TFG's U.S. CLO 1.0 CLOs may be more affected by mark-to-market volatility of underlying loan assets, as such CLOs are generally no longer able to reinvest a significant amount of their principal proceeds (with a handful of exceptions). Loans were particularly volatile during Q1 2016, with the S&P/LSTA Leveraged Loan Index rallying to a 2.8% gain during the month of March, more than offsetting losses in the first two months of the year.^([22]) As of the end of Q1 2016, all of TFG's U.S. CLO 1.0 deals were passing their junior-most O/C tests.^([23])
• U.S. 2.0 CLOs: TFG's U.S. 2.0 CLO investments produced $7.4 million in Fair Value Net Income in Q1 2016. As with the U.S. 1.0 CLO portfolio, the underlying loan prices of the U.S. 2.0 CLOs were volatile, but we believe in many cases, this may have produced opportunity for our CLOs that were still within their reinvestment periods. As of the end of Q1 2016, all of TFG's U.S. 2.0 CLOs were in compliance with their junior-most O/C tests.^([24])
• European CLOs: The European CLO segment of TFG's portfolio produced $5.3 million in Fair Value Net Income during Q1 2016.  Unlike in the U.S., European loan prices remained supportive of early optional redemptions of CLOs, and during the quarter, we initiated the redemption of one European CLO (please see "Q1 2016 Major Asset Sales and Optional Redemptions" for more detail).  All of TFG's European CLOs were in compliance with their junior-most O/C tests as of the end of Q1 2016.^([25])
• Equity Funds: Polygon's event-driven equity investments generated Fair Value Net Income of $7.9 million during Q1 2016, compared to $9.6 million in Q4 2015.  Polygon's European event-driven strategy returned 5.1% net during Q1 2016, and its mining equity vehicle returned 1.1% net; the HFRX Event-Driven index^([26]) was down 1.2% during the same period.  Please refer to page 21 for further details on the performance of the individual funds.
• Other Equities: These assets generated Fair Value Net Income of $4.7 million in Q1 2016, compared to $4.2 million in Q4 2015.
• Convertible Fund: Polygon's convertible fund investment contributed Fair Value Net Income of $0.6 million during Q1 2016, the same level as during Q4 2015.  The fund's performance was 1.1% net, compared to -1.1% for the HFRX Convertible Index.^([27])  Please refer to page 21 for further details on the fund's performance.
• Distressed Fund: This asset subcategory had a loss of $2.5 million during Q1.  Polygon's distressed fund performance was down 2.0% net during the quarter, compared to the HFRX Distressed Index which was down 1.5% during the same period.^([28])  Please refer to page 21 for further details on the fund's performance.
• Real Estate: TFG's investment in Real Estate contributed $3.2 million of Fair Value Net Income during the quarter, primarily driven by an increase in the value of the Japan Fund.  In addition, $4.5 million of cash was returned during the period.
• TFG Asset Management: TFG's investment in TFG Asset Management generated $0.8 million of capital appreciation and investment income during Q1 2016, as the valuations of these investments were recalibrated.  The main positive contribution came from an increase in the carrying value of TFG's investment in Equitix.  LCM, Polygon and GreenOak were all marked down slightly as a result of a combination of more conservative forecasts driven by Q1 2016 market volatility and uncertainty, and, where applicable, lower peer market multiples. We believe, however, that the underlying economics and momentum of these businesses remains positive, as described in the TFG Asset Management section in this report.  For further information on the basis for determining the Fair Value of the TFG Asset Management investment, please see Appendix IV.  TFG Asset Management's pro forma operating results are set out in Figure 14.
• Net Cash: TFG held $423.5 million of Fair Value in net cash at 31 March 2016.  The Company actively manages its cash levels to cover future commitments and to enable it to capitalise on opportunistic investments.

Figure 11

Q1 2016 Major New Investments

• TCI II: During Q1 2016, TFG made a commitment of $15.0 million to TCI II, bringing TFG's total commitments to $50.0 million.
• Real Estate: TFG continued to add to its real estate exposure with drawdowns of $12.5 million into GreenOak-managed vehicles with exposure across the United States, Europe and Asia.

Q1 2016 Major Asset Sales and Optional Redemptions

• European CLOs: TFG initiated an optional early redemption of one European CLO in Q1 2016. Shortly after the end of the quarter, TFG received approximately €11.3 million from unwind proceeds from this CLO. The Company expects to receive substantially all liquidation payments from the redeemed CLO before the end of Q2 2016.
• Real Estate: It was a relatively quiet quarter with approximately $4.5 million being returned in total, with a significant portion coming from GreenOak's U.S. Fund I.

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 31 March 2016, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke's Point and TCIP⁽²⁹⁾ (please see Figure 12 for the breakdown of AUM and Fair Value by business line).  TFG Asset Management has approximately $17.2 billion of assets under management⁽³⁰⁾ and approximately 220 employees globally.  Figure 13 depicts the growth of that AUM over the last five years.

Figure 12⁽³¹⁾

Figure 13⁽³²⁾

TFG Asset Management Pro Forma EBITDA (Ex-GreenOak)

Figure 14

• Overview: Figure 14 shows a pro forma statement of operations which reflects the operating performance of the majority-owned asset management companies within TFG Asset Management.  Although they are currently reported under U.S. GAAP, 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: TFG Asset Management made a solid start to the year with an EBITDA of $9.3 million.  Largely as a result of a very strong Q1 2015 for performance (realised and unrealised) and success fees, the EBITDA equivalent for the majority-owned TFG Asset Management businesses fell by 51% between Q1 2015 and Q1 2016.  With more than 50% of the income now coming from management fees we believe that the quality of earnings is continuing to improve.  
• Management fee income: Management fee income continued to increase with the growth of the TFG Asset Management businesses.  As shown in Figure 14, fee-paying capital increased significantly year on year, primarily through organic growth of the Equitix, Polygon and LCM businesses since Q1 2015.  See Figures 12 and 13 for further information on TFG Asset Management's AUM.  Management fees grew by 33% between Q1 2015 and Q1 2016.
• Performance and success fees: Compared to Q1 2015, performance and success fees fell by 51% primarily to due to a particularly strong Q1 2015 performance from Equitix's primary business.  Such fees do not tend to follow seasonal patterns and indeed this aspect of the Equitix business is working on an active deal pipeline.  The Polygon businesses overall had a stronger start to 2016 than to 2015 in terms of unrealised performance fees, with the European Equity fund making a major contribution.
• Other fee income: This category includes third party CLO management fee income relating to certain U.S. CLO 1.0 transactions, which continued to decline in line with expectations as these transactions amortised down.  In addition, it includes certain cost recoveries from TFG relating to seeded Polygon hedge funds which fell year on year.  The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report, decreased slightly year on year although the teams supporting those seeded funds continued to grow.  As these businesses mature and build third party capital, such cost recoveries should reduce.  The other income category also includes fee income generated by Equitix on certain management services contracts, which is a strongly growing part of the Equitix business.
• Operating expenses: Operating expenses rose by approximately 26% in Q1 2016 compared to Q1 2015, partly driven by the addition of the Equitix business in early February 2015 so Q1 2015 only reflects a partial quarter's costs, plus additions to the teams supporting the growing Equitix, Polygon, Hawke's Point and TCIP businesses.

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 the quarter.

All data is at 31 March 2016, unless otherwise stated.

LCM

GREENOAK

POLYGON

(i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund administrator at 31 December 2012, 2013, 2014, 2015, and 31 March 2016.  Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited.

EQUITIX

(i)USD-GBP exchange rate at 31 March 2016. 

HAWKE'S POINT

TCIP

Q1 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 which are consolidated under U.S. GAAP, and provides comparative data where applicable.  Where Q1 2015 comparative data is provided this has been presented on the basis of TFG's investment in Equitix being fair valued rather than consolidated, which was the basis for presentation in the Q1 2015 quarterly report.^([35])

FINANCIAL HIGHLIGHTS

Figure 20

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

• Fair Value Net Income ($20.3 million): Adds back to the U.S. GAAP net income ($24.7 million) the imputed Q1 2016 share based compensation ($5.1 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction, and the Fair Value adjustment ($9.5 million) attributable to Polygon, LCM, Hawke's Point and TCIP which are currently consolidated under U.S. GAAP but are reflected in TFG's key metrics as if they are held at Fair Value and not consolidated.  Please see Appendix IV for further details.
• Fair Value Return on Equity (1%): Fair Value Net Income ($20.3 million) divided by Net Assets at the start of the year ($1,987.3 million).
• Pro Forma Fully Diluted Shares (104.7 million):  Adjusts the U.S. GAAP shares outstanding (97.0 million) for various dilutive factors (7.7 million shares).  See Figure 38 for more details.
• Fair Value EPS ($0.21): Calculated as Fair Value Net Income ($20.3 million) divided by weighted-average U.S. GAAP shares⁽ⁱ⁾ during the period (96.2 million).
• Fully Diluted Fair Value NAV per Share ($19.05):  Calculated as Fair Value Net Assets ($1,994.8 million) divided by Pro Forma Fully Diluted shares (104.7 million).

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

FAIR VALUE EPS ANALYSIS Q1 2014 – Q1 2016

Figure 21

STATEMENT OF OPERATIONS (FAIR VALUE BASIS)

Figure 22

Performance Fee

A performance fee of $4.7 million was accrued in Q1 2016 in accordance with TFG's investment management agreement.  The hurdle rate for the Q2 2016 incentive fee has been reset at 3.276958% (Q1 2016: 3.259558%) 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 23

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⁽ⁱ⁾

Figure 24

FAIR VALUE NET INCOME TO U.S. GAAP RECONCILIATION

Figure 25

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 $9.5 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 $5.1 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 mechanic and future vesting schedule for the Polygon transaction are described in more detail in the 2015 TFG audited financial statements.  The long term compensation plans are detailed in Appendix VII.

APPENDICES

APPENDIX I

CERTAIN REGULATORY INFORMATION

This Performance Report constitutes TFG's quarterly report.  This report is made public by means of a press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) pursuant to 5:25i and 5:25m of the Dutch Financial Markets Supervision act and 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 constitutes regulated information ("gereglementeerde informatie") within the meaning of Section 1:1 of the FMSA.

TFG shares (the "Shares") are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFM 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 potentially 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 26

U.S. CLOs modelling assumption

Figure 27

European CLOs modelling assumption

Figure 28

Discount Rates

APPENDIX III

FAIR VALUE DETERMINATION IN 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 31 March 2016, this consolidation exemption was applied to TFG's holdings in Polygon, LCM and Hawke's Point (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"^([36]) 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 31 March 2016.

Figure 29 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 ("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 Manager.

Figure 29

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 30 details the impact of such a change in accounting treatment for LCM, Polygon and Hawke's Point 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 ($28.8 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 30

Figure 31 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 30, the reconciliation shows the removal of the operating P&L for Q1 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 30.

In addition, as in prior periods, we back out share-based compensation of $5.1 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.  This mechanic and future vesting schedule are described in more detail in the 2015 Master Fund audited financial statements.

Figure 31

Figure 32 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 $165.5 million as detailed in Figure 30, 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 ($22.6 million), cash of $30.4 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 $25.3 million relating to the Fair Value adjustment as detailed in Figure 30.

Figure 32

APPENDIX V

ADDITIONAL CLO PORTFOLIO STATISTICS

Each individual deal's metrics used in the calculation of the figures below will differ from the overall averages and vary across the portfolio.

[Figure 33 cannot be reproduced]

[Figure 34 cannot be reproduced]

Figure 35

CLO PORTFOLIO CREDIT QUALITY

Figure 36

Notes

CLO EQUITY PORTFOLIO DETAILS (CONTINUED)
AS OF 31 MARCH 2016

[Figure 37 cannot be reproduced]

APPENDIX VI

SHARE RECONCILIATION AND SHAREHOLDINGS

Figure 38⁽³⁷⁾

SHAREHOLDINGS

Persons affiliated with TFG maintain significant interests in TFG shares.  For example, as of 31 March 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 31 March 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, nonpublic information.

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 Dividend Re-investment Program ("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 Q1 2016, approximately 0.2 million shares were included in the fully diluted share count.

APPENDIX VIII

BOARD OF DIRECTORS

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

Rupert Dorey has over 30 years of experience in financial markets.  Rupert 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.  Rupert is a former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors.  Rupert is based in Guernsey and is a Non-Executive, Independent Director.

Frederic 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, Frederic was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales. Previously, Frederic 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.  Frederic 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.  Frederic is based in Guernsey and is a Non-Executive, Independent Director.

David Jeffreys provides directorship services to a small number of fund groups.  From 1995 until 2010 David 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, David 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, David 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.  David is based in Guernsey and is a Non-Executive, Independent Director.

Byron Knief is Managing Director of Court Square Capital Advisor, LLC.  Since 1989, he has raised and invested over $3 billion of capital through a series of mezzanine and leveraged debt funds.  Prior to 1989, he ran a variety of businesses for Citigroup in the United States, Europe, Canada and Latin America.  Byron received an undergraduate degree from Northwestern University and an MBA from Columbia University.  He has served as a director on the boards of several public and private companies. Current corporate board memberships include DavCo Restaurants, Inc., JAC Products, Inc. and Olameter, Inc.  He was also formerly a director of Polygon Global Opportunities Fund and certain of its affiliates.  Byron's charitable board memberships include The Milbank Memorial Fund and The Mountain Top Arboretum.  Byron is based in New York and is a Non-Executive, Independent Director.

Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005.  He was previously the founder and former 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.  Reade 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.  At Polygon, he is primarily focused on the trading businesses and risk management.  Reade is based in London and is an Internal Director.

Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005.  He was previously managing director and the global head of Hedge Fund Coverage for UBS Warburg Equities.  As global head of Hedge Fund Coverage and Chairman of the Global Hedge Fund Committee, Paddy was responsible for the delivery of all of the bank's products and services to hedge fund clients globally.  He was on the board of UBS Netherlands, and was a member of both the European Equity Business Committee and the Extended Global Equity Business Committee.  Prior to this, Paddy 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.  Paddy was in equity sales at Prudential Bache before joining UBS.  Prior to working in investment banking, he was a petroleum engineer with Marathon Oil Co.  Paddy holds an undergraduate degree in Petroleum Engineering from Imperial College in London.  His responsibilities at Polygon include risk management, overseeing Polygon's non-trading activities, managing investment bank interfaces and relationships and new business development.  Paddy is based in London and is an Internal Director.

SHAREHOLDER INFORMATION

ENDNOTES

TFG is not responsible for the contents of any third-party website noted in this report.

Executive Summary

TFG Overview

Key Metrics

Q1 2016 in Review

Q1 2016 Financial Review

Appendix III

SOURCE Tetragon Financial Group Limited

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