Tetragon Financial Group

Could this quite possibly, be one of the most undervalued stocks out there, or just another dog in disguise?

https://www.theaic.co.uk/companydata/0P0000A6TO/performance

https://www.londonstockexchange.com/stock/TFG/tetragon-financial-group-limited/trade-recap

As a comparison see below against a popular all world fund. The NAV return doesn’t look too shabby, but yet trades on the red line.

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Factual report from May:

Holdings seem to be mainly in other funds, predominantly vencture capital and loans, both of which might be quite illiquid, but I am not sure.

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High fixed fees compared to ETFs (1.5%) plus a high performance fee (25%) above a benchmark, I don’t know what the benchmark is. Does anyone know:?

Performance has been very good since the IPO. I imagine that the NAV performance includes the fees, so 10.8% returns after fees is very good.

Share price seems to be only 38% of the NAV (based on May´s numbers). Even though the fund is expensive, the discount seems VERY large. It could be worth it if I understood the holdings a bit more.
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It’s the hurdle rate in your screenshot below this statement. 3 months LIBOR + 2.647858, so I’m assuming the annual benchmark is 4x that.

It also seems to struggle to support a 4% yield even at that level - which is fine if they mostly reinvest capital, but if I read correct they are going to stop providing dividend cover figures.

My thoughts are to look at the underlying profitability of the underlying asset management companies and funds to decide if the discount is warranted or not. If not, then could be a bargain hold for 10-15 years.

Is they have a “Return on Equity” of over 10%, a NAV yearly growth of 10% and a 60% discount to NAV, how can they not cover a 4% dividend yield?

Might they be fudging numbers?

Where did you find the dividend cover?

I found the statement about them not publishing in future.

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In the 2020 Annual Report:

I’m also curious, what is the joint corporate broker appointment for. Normally this is to help negotiate contracts so what are they trading?

I’m still looking into this one as curious. When something sounds too good to be true, it usually is.

https://www.morningstar.com/cefs/xams/tfg/total-returns

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Thanks for requesting the stock and sharing the info :slight_smile:

I think you misunderstood, I meant, how do you know that they can barely cover the dividend?

I´d already found “Clause 4” (see my screenshot in post above) I just can’t find the payout ratio (which as per clause 4 is probably not mentioned).

I would also de interested. Although we need to at least know why it has such a discount.
It has also been repurchasing shares, due to the large discount to NAV. This usually props prices up, which makes me think… how low would the price have gone without the buy backs?

Yes I misread you earlier. I’m not sure the buy backs are that high tbh, so probably doesn’t impact the NAV much.

There should be an EPS in the annual accounts so easy enough to estimate dividend cover.

I also want to check the total return by trying to get the historic NAV and market traded price.

Also need to look at risk/volatility of underlying holdings given most are unlisted positions. I am curious - the Morningstar data suggests the NAV has recovered fine post COVID but the share price not. But depending on the sources there are different pictures.

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It seems like this stock is available now :smiley: .

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T212 is doing a great job, adding more Investment Trusts (ITs).

Maybe an ITs batch with all existing ones could be a great opportunity, as it will be less work-intensive for T212 and will make T212 a specialized Investment Trusts trading platform, distinguishing herself even more from all the competition.

Wild suggestion, creating a separate category for ITs in the search feature will help to give more visibility to ITs and potentially their trading volume in T212-

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Is the Ripple Labs (4th position) the same Ripple Labs from XRP crypto?

They are invested in 3 Hedge Funds and stocks from Polygon:

In October 2012, TFG purchased Polygon Management[13] (“Polygon”). In 2013, Polygon was listed as one of the 50 largest hedge fund managers in Europe by The Hedge Fund Journal.

LCM (5th position) :

In 2010, Tetragon acquired Lyon Capital Management LLC (“LCM”)

Equitix (1st position) :

Tetragon acquired Equitix,[15] an investor, developer and long-term fund manager of infrastructure and energy-efficiency assets in the UK. Equitix has raised £4.7 billion of equity, including managed accounts.[16]

Hawke’s Point Fund 1 (8th position) :

Also in 2015, Hawke’s Point, an asset management company focused on the mining and resource sectors, was formed under the TFG Asset Management umbrella.[18]

BentallGreenOak (3rd position) :

In 2019, the GreenOak real estate joint venture was merged with Bentall Kennedy to create a $47 billion global real estate platform called BentallGreenOak; Tetragon remains an investor in the business.[19]

TCI III (9th position) :

Tetragon invests in both externally-managed CLOs and in CLOs managed by TFG Asset Management’s LCM and Tetragon Credit Partners businesses. Tetragon generally buys and holds a majority of the residual or “equity” tranches of CLOs which provide exposure to senior secured loans on a levered basis.

It also have 25% in Hedge funds. After some reading on Wikipedia, it’s seems that are focused in Hedge Funds industry and asset management investments. Seeing the IT portfolio it seems that they use the investors money to invest in the Hedge Funds, PE & VC Funds, and CLOs internally managed by their own subsidiaries. Maybe some conflicts of interest? :wink:

Also they buy and hold a majority of the residual or “equity” tranches of CLOs, the worst part of CLOs (a type of CDOs).

From Investing.com:

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Very interesting points.

To put it into numbers, out of the 72.2% of the NAV that is represented by their top 10 investments:

Numbers 2, 6, 7 & 10.
Approximately: 26.3% of NAV out of 72.2% accounted for in top 10

Investmentsthey partially own (According to RLX numbers 1, 3, 5, 8 & 9): 38.4% out of 72.2% accounted for in top 10

So out of the top 10 holdings, the only one that is not accounted for in either Polygon’s investments or possible conflict of interest is holding number 4, Ripple Labs Inc.

This is not necessarily the end of the world, but it might explain the discount to NAV as there is a risk of conflict of interest, concentration in holdings, complexity and lack of transparency leading to possible unethical actions being overlooked/missed by investors and regulators.

Polygon is a subsidiary:

In October 2012, TFG purchased Polygon Management[13] (“Polygon”). In 2013, Polygon was listed as one of the 50 largest hedge fund managers in Europe by The Hedge Fund Journal.

For what I saw of top 10, they have participation in funds and stocks of their asset management subsidiaries: 1, 2, 3, 5, 6, 7, 8, 9, 10.

The only non-related position on the top 10, is Ripple Labs (4th position) with 7.5% of NAV.

So the related asset management companies & funds on top 10 represent 64.7% of total NAV. I don’t know if the other positions outside the top 10 (27.8%) are also related to the trust.

Basically it’s a fund of their own hedge funds and PE & VC funds with a total of 75% of NAV, plus up to 11% on their CLOs.

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I missed that in your post. Apologies.

So all of this probably justifies a discount to NAV. But should it be as large as it is?

The other question could be, how accurate are their NAV calculations?
I don’t really know how much rigour there is in there estimate, but I would have thought that if their investments are independent funds/product they will have some kind of legal obligation to be transparent.

What do you think?
I don’t know much about how complicated NAV are calculated. I guess it is nos as simple for a portfolio of say properties, compared to a portfolio of stocks with daily market values/trading.

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And as it’s a fund of hedge/PE & VC funds, more specifically a fund of their own hedge/PE & VC funds. It’s adds a 2nd layer of opacity and some concerns, especially if there are some conflicts of interest.

Funds of hedge/PE & VC funds are more costly, due to the cascade of performance fees they usually have (2% + 20%).

Two and twenty (or “2 and 20”) is a fee arrangement that is standard in the hedge fund industry and is also common in venture capital and private equity.

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I guess you mean that they take the most risk?

I was not familiar with CLOs, just started reading this:

So large fee from their funds and on top of that a large fee from this investment in particular (Tetragon Financial Group).
I am surprised that despite this their NAV has grown steadily at a good pace.

CDOs (including CLOs) have several tranches of risk/return.

Payments are made in cascade style from the most senior (less risk/less return) to the least senior (higher risk/higher return). And loan defaults go in inverse order, from the the least senior to the most senior.

E.g. In the GFC, the equity tranche holders of CDOs were all or almost all wiped out (total loss), other tranches holders had several degrees of success in getting their money back.

The less risky tranche as receive first, have less risk and less return, and the last to receive, the equity tranche will have more risk and for that have a higher risk premium (aka return).

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CDOs: (it’s not a complete list of types, but have the more common ones)

Types

A) Based on the underlying asset:

B) Other types of CDOs by assets/collateral include:

  • Commercial Real Estate CDOs (CRE CDOs): backed primarily by commercial real estate assets
  • Collateralized bond obligations (CBOs): CDOs backed primarily by corporate bonds
  • Collateralized Insurance Obligations (CIOs): backed by insurance or, more usually, reinsurance contracts
  • CDO-Squared: CDOs backed primarily by the tranches issued by other CDOs.[105]
  • CDO^n: Generic term for CDO3 (CDO cubed) and higher, where the CDO is backed by other CDOs/CDO2/CDO3. These are particularly difficult vehicles to model because of the possible repetition of exposures in the underlying CDO.

I don’t know the structure of TCI III (9th position), it could be 1 CLO made of dozens/hundreds/thousands of bank loans or made of several CLOs. It have several layers of opacity.

Collateralization is similar to securatization but with several tranches:

1 SPV is created to buy and hold debt instruments (loans, bonds, ABS, MBS, CDOs, CMOs, etc) and issues a debt instrument (CDO) with several tranches to finance the purchase of the credits and pay their management. The purchased credits will be used to pay the coupons and principal.

CDOs objective is to help release the banks or other financial institutions balance sheet, so they can have better liquidity and also less exposition to risk.

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