Paddy Dear - Principal, Founder & CEO Phil Bland - CFO David Wishnow - Principal & Founder

Good afternoon. Thank you for joining Tetragon's First Half 2015 Investor Call. You are all in listen-only mode. The call will be accompanied by a live presentation, which can be viewed online by registering at the link provided in the company's conference call press release. This press release can be found on the Homepage of the company's website at www.tetragoninv.com. In addition, questions can be submitted online while watching the presentation. As a reminder, this conference call is being recorded. I will now turn you over to Paddy Dear to commence the presentation.

Thank you very much. Good morning, and good afternoon everyone. As one of the Principals and Founders of Investment Manager of Tetragon Financial Group Limited, I'd like to welcome you to our investor call. We'll focus today on the company's first half results for 2015. I'll give an introduction, Phil Bland, our CFO will review the company's financial performance for the period, and then David Wishnow and I will talk through some of the details. We'll take questions electronically by our web based system at the end of the presentation, as well as answering certain questions received since the last update. I would like to remind everyone that the following may contain forward-looking comments including statements regarding intentions, beliefs or current expectations concerning performance and financial condition on the products and markets in which Tetragon invests. Our performance may change materially as a result of various possible events or factors. So if we go to the first slide, you all have seen it before from our quarterly report on our website, but viewing this investment strategy, TFG's investment portfolio now comprises of broad range of assets including an asset management business, TFG asset management and couple of bank loans, real estate, equities, credits, convertible bonds and infrastructure as such. This next slide shows the total return analysis on an annualized basis. We look at the value created for shareholders being the total return, i.e. share price plus dividend. And what we show here is that total returns for one year, three years, five years, and things like them, and all of these to the end of June. With that as a very brief introduction, I'll hand over to our CFO, Phil Bland, to discuss our key financial metrics for the first half.

Thank so much, Paddy. And welcome to everybody. As usual on these calls, I'll be providing some high-level comments especially on certain of the key metrics that we continue to focus on. Paddy and David will then discuss the underlying dynamics featured the business lines. As we discussed in the past, we focus on certain main metrics at the TFG level, earnings, which we measure both as return-on-equity and earnings per share, net per share and distributions particularly in the form of dividends. Let me start looking at the first of our earnings measures, return-on-equity, and this defined as net economic income divided by net assets at the start of the year which were around $1.8 billion. ROE for the first half of 2015 was an annualized 12%, so that's very close to middle of TFG's long term target range of 10% to 15%, reflecting what we think is a good start for the year across many of the business areas. TFG generated net economic income of $109 million in the first half of 2015, compared with $86 million in the equivalent period in 2014, so that represents a healthy increase of 27%. As we'll discuss in more detail during today's call, both of TFG's businesses had a strong start for the year, including CLOs, real estate investments, and equity investments. The TFG asset management investment also performed well boosted materially by the addition of Equitix from early February. Our review of TFG ends operating performance later in the call. The second way to review earnings is in the form of earnings per share as I mentioned. In the first half, net economic income was $109 million but I just mentioned when divided by the average number of U.S. GAAP shares and issue during the period, resulted in earnings per share of $1.13, which was TFG's highest first half of the year adjusted EPS result since 2012. Our next metric is NAV per share, which we think is a good reflection of how volume has built within the company. Total NAV of TFG rose just over $1.9 billion at the mid-year point which equated to pro forma fully diluted NAV per share of $17.66. The 3.6% growth in NAV per share recorded in the first half of the year is after a distribution of dividends of $0.315 during that period. So the NAV per share growth after adjusting for those dividend distributions was actually approximately 5%. Our final TFG level metric that I'm going to cover today is dividends per share, and we view this as an important measure of how value is being returned to U.S. investors. TFG continues to follow its progressive dividend policy which targets a payout ratio of 30% to 50% of normalized earnings, and that's based on the long term target return-on-equity of 10% to 15%. TFG declared that Q2 2015 dividend per share of $0.1625, an increase from the previous quarter. On a rolling 12-month basis, this equates to a dividend of $0.6325 per share representing a 6.3% increase over the prior 12-month period, and that equated approximately to an annualized dividend yield of 6.3% using the mid-year share price of $10.07. So having reviewed the TFG level metrics, I'll now put you back to Paddy.

Thanks, Phil. As you can see from the next slide, it show us the breakdown of the company's assets at that year-end 2014, and then at the end of the first half of 2015. If we just take this through from clockwise, you can see field of equity is still our largest asset class. Over the years since inception, we've invested in 83 CLOs, the majority of which we've earned controlling efficient in the equity, noted since inception. And our exposure therefore at any point in time by design is a blend of all deals that are amortizing new deals that are being written and coming on into the portfolio, and we expect this blend to continue. The second category of equities on our equity exposure is primarily an event driven approach, thoroughly focusing on alpha to the extent possible as opposed to beta. Our allocation over the first half of the year remains broadly unchanged. Third, continuing around clockwise is our exposure to credit, which again has been fairly stable over the first half for the year. And again, our exposure here is mainly to distressed assets through the Polygon Distressed Opportunity Fund and convertible bonds through the Polygon Convertible Opportunity Fund. And again, I would highlight this – both of these funds to the extent possible are seeking to focus on alpha returns, not beta returns. Next category is real estate, and this has increased somewhat over the first half as forecast. We've been increasing our exposure, both the new investment vehicles and indeed being drawn down on earlier commitment to GreenOak existing funds. The next category is TFG asset management. And TFG AM has grown in NAV terms of equity access is now included and accounted for fair value, and so that's an increase in the first half of the year. I'll remind you that in contrast, LCM and Polygon currently consolidated, and more about in a minute. And lastly, net cash which has obviously reduced a little bit over the first half of the year. Moving now to commentary on the net income for the first half, this next slide shows a slightly more detailed breakdown of the asset but also the net income for the asset category. So let's start with CLO equity and for that review I'll hand over to David Wishnow.

Thanks, Paddy. Our U.S. 1.0 CLOs performed well during the first half of 2015 with stable underlying credit quality combining with the slower pace of structural deleveraging resulting in a number of optional redemptions, and what we believe were timely sales. CLO 1.0 has generated net income for the first half of the year, $36 million. CLO 2.0 has also performed well. We took advantage of favorable market conditions to refinance liabilities on LCM 12, thereby reducing the deals financing costs. CLO 2.0 has generated net income for the first half of the year at $26.1 million. European CLO income generation was weak due to a number of transactions suffering realized losses in their underlying loan portfolio segments, negatively impacting CLO equity valuations. This portfolio segment generated net income of $1.6 million in the first half of the year. In regards to the CLO market, a few comments, risk retention remains a key focus as both debt and equity investors seek to invest with managers who have a viable risk retention compliance strategy. As of December 2016, implementation deadlines for U.S. risk retention rules in the years; the market is seeing a greater number of risk retention compliant deals come to the market despite the fact that compliant is not yet required by regulators. We anticipate that this trend will accelerate in the future and will remain an important driver of the overall deal execution success. During early Q3 2015, the CLO market receives some potential regulatory relief and clarity with respect to applicability of U.S. risk retention regulations, the deal is priced before December 24, 2014 which seeks to refinance their debt trenches after December 23, 2016. In the no action letter to an investment manager, the SEC clarified that under certain scenarios such deals may refinance their debt tranches within four years of each deals issuance without the need to become risk retention compliant where their coupons are reduced and no other changes in terms occur. We believe that this guidance is positive for the CLO equity investor in this vintage of transitions such as TFG as it may allow them a path to exercise their refinancing option without potentially triggering risk retention. We continue to believe that these market developments may provide a good opportunity for investors with access to long term capital like TFG to possibly provide risk retention solutions to CLO managers for whom access to risk capital and other solutions becomes an increasingly significant growth constraint. This type of long term CLO equity investing is consistent with our investment strategy to-date and may allow us to leverage our experience. We continue to be positive on CLO equity, we believe that with TFG support, LCM is well positioned to meet new requirements. We also continue to look for market opportunities where TFG could assist other managers in meeting risk retention requirements. Overall, we continue to explore creating products that could focus on these developments. I'll now hand it back to Paddy.

Thanks, David. So, next equities, TFG had very good first half, both made investments in the Polygon event from a European Equity Fund, and as we mentioned in the first quarter, a sale of a single equity position that would help at some time. In credit, as mentioned earlier, TFG exposure is through Polygon's Convertible Bond Fund and Polygon Distressed Fund with a few direct loans held on the balance sheet as well. In all cases, returns for the first half were small positive. And the next pocket down is real estate, and real estate has a good first half and that's predominantly driven by investment returns from GreenOak Fund One in the U.S. and GreenOak Fund One in Japan, both funds have tremendous investment result and a nearing maturity, possibly the majority of their asset could be sold by the end of this year. TFG asset management had a steady and positive first half with net income of $13.9 million. And now I'll turn back over to Phil who will cover TFG asset management's operating results and give further breakdown on that $13.9 million.

Great, thanks Paddy. So as we've discussed on prior calls, TFG emphasis our company accounting for in two distinct groups in accordance with U.S. GAAP. So the first group as you can see on the slide comprises Equitix and GreenOak, and those are both fair values which as many of you will know is default accounting for investment companies like TFG. Equitix and GreenOak were valued at $145.4 million and $67.2 million respectively at the mid-year point, and together they added approximately $7.3 million of unrealized investment gain in the first half. For Equitix was still of course very close to deal date, so the uptick in value is primarily representing a cause on the loan notes held by TFG as part of that deal, and is being no re-rating of the underlying equity and more of these sales [ph] are available in the financial statements in the first half reports. For GreenOak, performance looks to be well on-track, unless the valuation point was moved to be the midpoint of the valuation range as June 30th. For the second group in U.S. GAAP terms comprise Polygon LCM and Hawke's Point and that can probably consolidated and as combined sharing value of $48.1 million. Together they added approximately $6.6 million of net income before tax in the first half of the year. As we noted in the executive summary to the first half report, investment management is reviewing how the considerable value has been created in TFG asset management, might be delivered to TFG shareholders over the medium term. One option under consideration is to see to have an initial offering and listing of shares of TFG AM in the next three to five years, and Paddy is going to cover this later in more detail in the presentation. If that strategic plan is agreed upon, one result would be that all the businesses that invite TFG AM will be required under U.S. GAAP to move to a consistent basis of accounting, mainly fair value, rather being partly fair valued and party consolidated as I've just covered. This would have the obvious advantage of providing a certain consistency and we would think clarity to the financial statements of TFG. For the details on this matter I also said out in the recent report. And this next slide, we show a pro forma year-to-date statement of operations for all of the majority end businesses of TFG asset management, so that's excluding GreenOak. As this is refocusing on the underlying operating performance irrespective of the U.S. GAAP reporting, so we split fee income into some more categories for this disclosure and we'll continue to do so going forward. And the reason for that is in particular to differentiate recurring management fee income from success and performance fee income which is also very important but maybe somewhat more volatile. Total TFG asset management income grew by 68% in the first half year-on-year, with over 30% growth in management fees as TFG AM added material fee bearing AUM through both organic growth and the acquisition of Equitix which brought approximately $2 billion of new AUM. It was also a particularly strong first half performance on success fees which grew by over 200% again significantly helped by the acquisition of Equitix but both LCM and Polygon also contributed to this category of income. Other fee income includes third-party CLO management fees, and those are generated from some CLO 1.0 contracts which continue to decline in line with expected amortization of both CLO deals when we covered that on past quarter as well. This decline was more than offset during the period by an increase in certain cost recoveries in TFG. And these relate to ceded funds in which the teams have been growing year-on-year. General operating expenses at TFG asset management grew by little over 61% from the first half in 2014 to first half 2015 with a growth driven largely by the addition of the 60 plus Equitix team and also some additional compensation amounts. We've added resources to the Polygon and the Hawke's Point investment teams since last year and also selectively to the support team particularly to the U.S. compliance function which you believe is quite common with much of the industry. In general, we see the infrastructure and the team running it is offering plenty of operation leverage as the businesses continues to grow. Now with that I'll pack you back to Paddy who will provide additional detail on TFG AM's businesses in the first half.

Thanks, Phil. In our first half report, we discussed that the investment manager is reviewing how the considerable value that's already been built within TFG asset management might be delivered to TFG shareholders over the medium term. We did not that one option on the consideration is to seek to have an initial public offering and listing of shares of TFG AM in the next three to five years. And as part of that consideration, we've engaged a strategic and capital market specialist advisor to the feasibility of an IPO and review strategic options of further optimizing value in TFG asset management prior to an IPO. We would expect to update shareholder on this aspect of our investment strategy in the Q3 report and subsequent call. Here in slide 14, we show the asset from the management breakdown by the different brands, and that's in the pie chart, and then on the right hand side, we show the assets under management growth in the bar chart. You can see from these that assets have grown both organically and by acquisition over the last few years at a compound rate over 40%. And we believe that each of the businesses within TFG AM has further organic growth potential. So if we look over the medium term, we're seeking with TFG AM to add organic AUM growth in existing products to develop new add-on business lines within existing businesses and also add new brands and businesses for start-ups, joint ventures and acquisitions. Moving to better color for the first half, if I take each of these in turn, I will focus on each of the brands and as always look at their fund level performance and indeed the AUM growth. So if we start with LCM, performance remains exceptionally good with the trailing 12-month to forthright through June at 0.02% for LCM deals, and that compares to 3.4% for TFG [ph] index. So continue to have strong outperformance against the market. Secondly, if we look at assets under management, the growth that is shown here on the chart and indeed another CLO close in July for LCM was approximately a further $600 million for the asset. Next, if we take a look at GreenOak, I mentioned performance earlier, GreenOak has had exceptional performance in some of its earlier funds, particularly the first funds in Japan and the U.S. both of which are reaching maturity, and so we have the sort of pre-numbers, so performance continues to be great for GreenOak. And the chart here again shows the assets under management which have continued to grow across a range of products from funds to debt funds and indeed managed accounts from the U.S. to UK and Europe and Japan. Moving next to Polygon for the first half, you can see that the assets under management have continued to grow in the first half from the chart. And then if I move to the second Polygon slide, this has very specific details for the various different funds, and just in summary, although obviously the detail is here on the slide, we believe that each of these products has outperformed their respective hedge fund indices or hedge fund benchmarks in the first half of 2015. Next is Equitix, again performance has continued to be strong at the funds in the first half of the year, and in terms of asset, they've had a successful first close to fund for which has another 25 year UK infrastructure fund and that was in July as they fell to the production of these figures, and that fund is targeting between 500 million and 750 million sterling. I don't have any slides on Hawke's Point yet given that as yet no asset under management. So moving to cash balance and potential new investment slide, we've used again in the last few quarterly showing that cash balance and where we expect investments over the next coming months. Our cash balance currently about $330 million, but it is worth bearing in mind that many of our underlying investments have debt, although Tetragon itself doesn't have any debt to the corporate level, and many of the investments do albeit at a non-recourse basis to the TFG entity level. So for example, CLO is obviously highly leveraged instrument where we own the equity, many of the real estate vehicles that we own are levered at the individual real estate level. Equitix is part of TFG asset management, has leverage against it, obviously convertibles tend to have leverage within the fund, infrastructure asset then have leverage etcetera, so important to understand the cash in context. Notwithstanding that, if we look at potential new investments, really I think that these falling instead of two different categories, the first three of where we have made either hard or soft commitments to continue to grow businesses, so CLO is obviously we look to build and continue to build LCM and looking to create new CLOs. Real estate, we have made certain commitments that we get draw down and drawn down in the GreenOak fund, and as we have said before, Hawke's Point with soft circle to $100 million if we find good investments in the mining finance arena. The latitude categories are obviously rather more opportunistic, both in terms of co-investments and where if the opportunity arises, we need capital to put to work and with MR potentially between north of $100 million here on slide, and again new businesses obviously by nature we don't have any known amount but we want the opportunity to be able to make joint venture to all acquisitions. Now as you can see from math on that, so obviously we don't have enough cash to do all of these things and thus we wrapped the investment case for each opportunity as and when it arises. And now say just to comment on the specialist fund market. We've mentioned advance of the admitted for trading on London SFM. And so far this is going ahead of plan, and although we count for sure that the application will receive approval, we currently anticipate that dimension to the SFM will be completed in November 2015. And lastly, just to mention as in previous years, we plan to an analyzed stroke Investor Day and with MR fit for the November 17. With that, I will then move to questions. Q - Unidentified Analyst: We have a couple of questions here. The first is as follows, I know you're tired of this question by now, but it must be asked. Given that most asset classes of your expenses, would you please reconsider investing in your own stock buyback considering there are few places where you can earn 63% risk free return which is the amount of accretion by buying shares at current price levels even if the discount amount does not narrow, the IRR is too compelling to ignore. And if you like the asset management business, what better investment than buying it to the big discount?

So just to tackle that, the answer is, I have not thought of answering this question, I think it's a very permanent question and it is certainly one that we review on a very regular basis. I mean, as it happens to share repurchases, continues to remain the same as it has done historically. And that is to say we take a balance of the year of the pros-and-cons at any point in time and all uses of cash are compared. So namely, we look at new investments, we look at dividends, and we look at potential for share buyback. So we're always evaluating that possibility. I'm not sure about the math of the 63% risk free return, when I look at the math, if one – a few in the portfolio had a 12% IRR and you could buy at 14% discount to NAV then implicitly you would be receiving a 20% IRR. So I think our math might be slightly different to the question. But notwithstanding that, it's also worth noting that we believe the long term growth and success of the business is about making good investments, about building valuable asset management business and not creating growing, and compounding enterprise value for shareholders. So within that context, we believe that share buyback can be a useful way to among other things as the question points out, increased now per share if you're buying at a healthy discount to NAV, and can sometimes as well be positive for the share price. However, we do see the buyback of limitations as they can reduce liquidity of the shares, they concentrate risk in existing assets, and they don't create any new value amongst other things. Thus we believe it is very much a balance. So by way of reference, I would point out that since IPO, we've spent $325 million on share repurchases, and have brought back 41 million shares in the process. So clearly we do believe in, and have been very active in share repurchases. And so not a boring question at all, we do underline this on a very regular basis.

The second question I've got here is what is the equity that produces 50% profit in the first half?

Now I think this is referring to – when we went through the net income in our equity part of the portfolio, I commented that we had a very strong performance in Q1 from the sale of an equity position. We haven't disclosed that name publicly on these calls. And I can say it's a UK asset management business, so very much up the middle of the fairway from core competence but we haven't disclosed it publicly. And I think that completes all the questions.

So thank you very much everyone for joining us. And I look forward to talking to you in the near future.

Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.