Tetragon Financial Group (TFG) aims to generate returns on equity of between 10% and 15% per year across cycles. The company has net assets of $2.2bn, and is traded on the specialist-fund segment of the LSE (primary listing on Euronext Amsterdam) with both a US-dollar and an unhedged-sterling share class.
TFG invests in a diversified set of alternative assets, including bank loans, real estate, convertible bonds and event-driven equities via hedge funds. As at 30 April 2020 around 43% was invested in those asset types, while 53% was invested in private and public equities (the majority in private) and credit.
TFG’s long-term returns have been strong, ranking tenth over ten years of the entire AIC listed-funds universe (as at 01/06/2020). Over the five years to 31/12/2019, the NAV per share total return has averaged 11.5% per annum, against 8.41% for the MSCI ACWI Index. Aside from this outperformance, it is worth noting that these returns have been achieved with correlation of only 0.21 to equities (Source: Morningstar).
Since our initiation note, there have been two main developments to the portfolio. Ripple Labs now features in the top ten holdings (7.1% of NAV). Ripple is a private company, and uses blockchain technology to facilitate financial institutions’ transactions globally. Additionally, TFG has established Banyan Square Partners to advise on minority private-equity and venture-capital investments.
Despite the NAV falling by only 7.6% over Q1 (before rebounding 2.8% in April), the discount has been adversely affected. Also, despite TFG possessing very different assets, the share price has de-rated as much as that of listed private-equity trusts. The discount stands at 61% (as at 29/05/2020).
According to the AIC website, TFG trades on amongst the widest discounts in the entire investment-company sector. The discount implies that there are perhaps serious problems hiding within the portfolio that have not yet been reflected in the NAV. However, as we discuss in the Portfolio section, there appear to be no specific issues that are especially worrisome.
We performed a basic sense check on TFG’s discount by comparing the broad asset types held within the portfolio with the current discounts in other London-listed fund sectors. In this way, we ascribed a comparable ‘sum of the parts’ discount for TFG of 28%. Against this the shares trade on a discount of 61%, a difference of c. 33 percentage points.
Perhaps the market finds it hard to ascribe value to TFG Asset Management, which constitutes 31% of TFG’s NAV. The long-term ambition for this business is to achieve an IPO and a listing of shares. Although this is by no means imminent, if any steps towards this were taken, this could be a positive development for TFG’s share price.
In the short term, upcoming events include the imminent tender (NAV uplift of between 2.25% and 1.6%), and the 31/06/2020 NAV (which should be published in mid-July). As such, the current discount of 61% could be too wide, particularly given TFG’s defensive qualities amidst the background of a resurging equity market.
|Strong historical returns, outperforming equity markets over the long term with attractive risk characteristics||Opacity of portfolio means investors find it hard to get a clear sense of underlying risks
|Alternative asset classes, with an experienced team who have flexibility to invest where they see opportunities||High fees, which are unlikely to change|
|Exceptionally wide discount gives large 'margin of safety' for value investors||Non-voting shares mean investors need to have implicit trust in the independent directors of the company|