Tetragon Financial Group Limited (TFG) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining Tetragon's 2026 First Half Investor Call. [Operator Instructions] 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, www.tetragoninv.com. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn you over to Paddy Dear to commence the presentation.

As one of the principals and founders of the Investment Manager of Tetragon Financial Group Limited, I'd like to welcome you to our investor call, where we will focus on the company's 2026 first half results. Paul Gannon, our CFO and CEO, is actually unable to participate in today's call. So I will review the company's financial performance for the period. And then Steve Prince and I will talk you through some of the detail of the portfolio and performance. As usual, we'll conclude with questions, those taken electronically via our web-based system at the end of the presentation as well as those received since the last update. The PDF of the slides is now available to download on our website and if you're on the webcast directly from the webcast portal. Before I go into the presentation, some reminders. First, Tetragon shares are subject to restrictions on ownership by U.S. persons and are not intended for European retail investors, and these are described on our website. Tetragon anticipates that its typical investors will be institutional and professional investors who wish to invest for the long term and who have experience in investing in financial markets and collective investment undertakings who are capable themselves of evaluating the merits and risks of Tetragon shares and who have sufficient resources both to invest in potentially illiquid securities and to be able to bear any losses that may result from the investment, which may equal the whole amount invested. I would like to remind everyone that the following may contain forward-looking comments, including statements regarding the 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. And with that, let's look into the financial performance for the first half. Tetragon continues to focus on 3 key metrics when addressing how value is being created for and delivered to Tetragon shareholders. First, how value is being created by NAV per share total return; second, how investment returns are contributing to the value creation measured as return on equity; and third, how value is being returned to shareholders through distributions, mainly in the form of dividends. So first, let's look at NAV per share. As you can see on the bar chart, the fully diluted NAV per share was $40.6 at 30th of June 2026. So the NAV per share total return for the first half was a negative 2.5%. Second, looking at return on equity. For monitoring investment returns, we use the ROE calculation. And as you can see from the chart here, this was negative 4.5% for the first half in 2026, and that is net of all fees and expenses. And the third, dividends. Tetragon declared a dividend of $0.12 for the second quarter 2026. That is an unchanged dividend from Q1 and give the shares an annualized yield of approximately 3.6%. This next slide shows what we call the NAV bridge, breaking down into its component parts, the change in Tetragon's fully diluted NAV per share, which fell from $41.88 at the end of last year to $40.6 per share at the end of June this year. And that is made up as follows: investment income and losses reduced the NAV per share by $1.47. Operating expenses, management and incentive fees reduced NAV per share by $0.35 and a further $0.11 per share reduction due to interest expense incurred on the revolving credit facility. Moving to the capital side. Cash dividends reduced the NAV per share by $0.24. And in addition, there was dilution of $0.24 per share here labeled as other dilution, and this primarily reflects the impact of dilution from dividends that investors take in stock plus additional recognition of equity-based compensation shares. And then the last column shows a positive increase of $1.13 per share, and that is due to the share repurchases in the first half of the year. As on previous calls, before we delve into the details of our first half performance, I'd like to put the company's performance in the context of the long term. Tetragon began trading in 2005 and became a public company in April 2007. So the fund has 21 years of trading history. And this chart shows the NAV per share total return, that's the thick green line at the top; the share price total return, which is the dash green line and those since IPO. The chart also includes 2 equity indices, the MSCI ACWI and the FTSE -- all share. And then lastly, it shows the Tetragon hurdle rate of SOFR plus 2.75%. So as you can see in the graph, over time that Tetragon has been trading as a publicly listed company, our NAV per share total return is 612%. And we continue to believe that our somewhat idiosyncratic structure of a listed fund owning alternative assets as well as a diversified alternative asset management platform has enabled us to create an alpha-driven ecosystem of ideas, expertise, insights and connections that help us to generate investment returns. Continuing the theme of looking at the long term, here are a few more performance metrics. Our ROE or investment return for the first half, as stated, was negative 4.5%. And our target return is 10% to 15% per annum over the cycles. And our average since IPO is 11.5%. So obviously, the first half performance was somewhat below both the target range and our average since IPO. Second thing I would highlight from this table is that 42.2% of the public shares are owned by the principals of the investment manager and employees of Tetragon Partners, and that is up from 39.4% at the end of last year. We continue to believe this is an important metric as it demonstrates a strong belief in what we do as well as a strong alignment of interest between the manager, our employees and other Tetragon shareholders. The next slide shows the breakdown of the $3.6 billion of NAV by asset class. So these colored discs show the percentage breakdown of our asset classes and strategies at the end of June this year on the left and compares them with the end of December last year on the right. So just to highlight a couple of changes. Tetragon's investment in private equity stakes and asset management companies, so GP stakes and collectively known as Tetragon Partners, is down from 42% to 35%, and this is mainly driven by the sale of BGO and to a lesser extent, the sale of LCM CLO management contracts. Second, private equity and venture capital decreased slightly to 20% from 21%, primarily driven by the decline in the Ripple share price. And the third thing I'd point out is equity funds, which comprise investments managed by Hawke's Point, Westbourne River and Tetragon Life Sciences. These increased to 26% from 22%, and that's mainly increased due to allocations to the Life Sciences business. Now let's move on to discuss the first half performance in more detail. The NAV that I talked about was a high-level overview of NAV per share. And what this table does is shows a breakdown of performance by asset classes and the factors contributing to the changes in NAV. So this table shows investment performance plus capital flows, and thus that ties back to the change in NAV. So as you can see from the bottom row of the table, Tetragon's aggregate investment performance during the first half was a net loss of $131.4 million. And this was driven by a small number of significant idiosyncratic positions, both positive and negative. First, the private equity and asset management companies, also known as Tetragon Partners, gained $120.2 million during the first half, of which the largest contributor was our GP stake in BGO, a real estate-focused principal investing lending and advisory firm. Second, private equity and venture capital investments had a loss of $138.9 million, mainly driven by Ripple and the price of Ripple stock observed in the private market reduced from $150 a share to $109 a share. Third, other equities had a loss of $69.2 million, and that loss was driven predominantly by mark-to-market losses in UiPath, and Steve will cover that in more detail in a moment. Fourth, equity funds had a loss of $39.8 million as the investment in Hawke's Point funds and co-investments were down $1.2 million, driven by mark-to-market losses followed by the metal sector selloff during the first half. So now let's get into a little more detail on each category. And to start that off, I'm going to hand over to Steve.

Thanks, Paddy. I'm now going to discuss the performance of Tetragon Partners. Our private equity investments in asset management companies through Tetragon Partners recorded an investment gain of $120.2 million during the first half of 2026, driven by our investments in BGO and Equitix. Equitix is a leading international investor, developer and fund manager in infrastructure. Tetragon's investment in Equitix made a gain of $34.4 million in the first half of the year. The valuation increased by 1% due to an increase in the EBITDA used in the market multiples valuation approach. Tetragon also received a dividend of $17.9 million from Equitix during the period. Our investment in BGO, a real estate-focused principal investing, lending and advisory firm, generated an investment gain in the first half of $191 million. At the end of last year, December 31, 2025, Tetragon Partners held approximately a 13% interest in BGO, which was subject to a call put agreement. The valuation of $325.1 million consisted of $258.5 million of expected value to be received from the exercise of the call option by Sun Life and related payments and $66.6 million of carried interest. On the 27th of February of this year, 2026, the call was exercised by Sun Life and Tetragon received $294.5 million in the first half of the year in relation to the call option and related payments, net of taxes, and that was $36 million higher than where the position was marked at the end of 2025. In February 2026, Tetragon Partners also agreed with Sun Life Financial to relinquish certain ongoing rights at [ Helidon ] BGO in return for a payment of $155 million, which produced a gain of the same amount as those rights had previously been valued at 0. These proceeds are separate from and additional to the call exercise proceeds. Tetragon retains its ownership of carried interest in certain GreenOak and BGO real estate funds. This carried interest valued at $66.6 million has been transferred from BGO within private equity and asset management companies to BGO funds and co-investments within our real estate category. Moving on to LCM, our bank loan asset management company, that generated a loss of $63.8 million during the first half of 2026. Following a strategic review of that business, Tetragon Partners made the decision to exit the CLO management space entirely. In June 2026, LCM's collateral management contracts were sold to Clearlake Capital Group for an upfront consideration of $40.5 million net of transaction fees which we received those proceeds in June of 2026. We also have future contingent payments that were valuing at $2.8 million at the end of June or the end of the first half of the year. Tetragon Partners' other asset managers consist of 8 diversified alternative asset managers, Westbourne River Partners, Acasta Partners, Tetragon Global Equities, Tetragon Credit Partners, Howxpoint, Banyan Square, Contingency Capital and Tetragon Life Sciences. Details of each of these can be found on our website. The collective loss on Tetragon's investments in these managers and the platform was $41.4 million during the first half of the year, owing to the working capital support provided to some of the relatively nascent businesses. Paddy is now going to go over our fund investments.

Thanks, Steve. Tetragon invests in equities primarily through funds managed by Hawke's Point, Westbourne River Partners and Tetragon Life Sciences and all of these are part of Tetragon Partners. As mentioned earlier, Tetragon's resource finance investments managed by Hawke's Point generated a loss of $61.2 million during the first half, and that was driven mainly by mark-to-market losses as discussed. Second, our investments in Westbourne River European event-driven strategies had a loss of $29 million during the first half, and these losses were driven by weaknesses in dislocation and corporate restructuring trades in Europe as well as losses from the portfolio hedges. Third, Tetragon Life Sciences Fund, which invests in both public and private markets, targeting opportunities throughout the drug development cycle. The investment strategy is focused on high-impact therapeutic areas such as immune-mediated diseases, cardiometabolic and renal conditions, neurological disorders, rare diseases and precision oncology. In the first half, Tetragon invested $141 million of capital and received $115 million of capital from sale of investments with generating a gain for the first half of $46.2 million. And finally, investments in other focused equity funds had a gain of $3.9 million. So now moving on to credit funds. Tetragon invests in credit primarily through contingency capital funds, the Capa Partner Funds and Tetragon Credit Partners Funds, again, all part of Tetragon Partners. So first, in contingency capital funds. These funds combine credit structuring and legal underwriting, the idea being to create pools of legal assets and lend against them in a manner consistent with how traditional asset-based lender would lend against receivables or inventory. Tetragon has committed capital of $74.5 million to contingency capital vehicles, $55.2 million of which has been called to date and a gain of $9.6 million was generated in the first half. Acasta Partner Fund or the Acasta Global Fund invests opportunistically across credit universe with a particular emphasis on convertible securities, distressed instruments, metals and mining and volatility-driven strategies. Acasta Partners also manages Acasta Energy Evolution Fund, a portfolio targeted at opportunities driven by the transition of energy to renewable resources. Tetragon's investment in Acasta fund generated a gain of $3.7 million during the first half. Thirdly, Tetragon Credit Partners Fund. Tetragon invests in bank loans indirectly through the Tetragon Credit Partners Fund. TCI II, TCI II, TCI IV and TCI V of CLO investment vehicles established by Tetragon Credit Partners. During the first half, Tetragon's investments in funds managed by TCP generated a loss of $2.1 million. And finally, U.S. CLOs. These are directly owned U.S. CLOs, and they generated a loss of $11.7 million during the first half. Performance here was negatively impacted by realized and unrealized losses on certain older vintage loan exposures. Next, I'm going to move to real estate. Tetragon's real estate investments are primarily through principal investment vehicles managed by BGO. And these investments are geographically focused and include investments in the U.S., Canada, Europe and Asia, generally taking an opportunistic private equity style investment approach. Over the first half, these BGO funds and co-investments had a net loss of $3.8 million. As discussed earlier, this category now includes $66.6 million of carried interest in the BGO real estate vehicles, and that was previously held in our private equity and asset management company section. Other real estate, Tetragon holds investments in commercial farmland in Paraguay, managed by a specialist third-party manager and performance in this investment was flat during the first half of 2026. And with that, I'll hand you back to Steve.

Paddy. Tetragon's private equity and venture capital investments were the largest detractor from performance during the first half, generating a loss of $138.9 million. Investments in this category are split into the following subcategories. The first one, the direct private equity bucket, which was the largest detractor, produced a loss of $125.5 million, primarily related to Tetragon's investment in the Series A and B preferred stock of Ripple Labs, which is a top U.S. enterprise blockchain company underpinned by the XOP token and the XRPL cryptocurrency ledger. The loss was driven by a decrease in the price of Ripple's shares observed in the private market from $150 per share at the end of 2025 to $109 per share at the end of June. Secondly, PE investments in externally managed private equity funds and co-investment vehicles in Europe and North America made a loss of $5.5 million spread across 44 different positions. Lastly, investments in Vania Square's portfolio companies generated a loss of $7.9 million. Vantage Square had 18 positions across its 2 funds at the end of June, which includes investments across application software, infrastructure software and cybersecurity. Next, I'm going to cover our other equities and credit segments. We make direct investments from our balance sheet, targeting idiosyncratic opportunities that are typically single strategy ideas, opportunistic and catalyst driven. These range from listed instruments to private instruments and cover a broad range of assets. The breadth and diversity of our LP investments in managed funds, including through Tetragon Partners, also creates co-investment opportunities and ideas, which we may develop as direct investments. This segment generated a loss of $69.2 million during the first half of the year -- and the segment comprises 15 positions at the end of June. The performance was driven by an unrealized loss on shares of UiPath and equity position that was Tetragon's fifth largest holding at the reporting date and about 70% of the total value of this segment. UiPath is a global leader in Agentic automation, which helps enterprises to harness the full potential of AI agents to autonomously execute and optimize complex business processes. Multiples broadly compressed across the software sector during the first half of the year, driven by fears of AI-driven displacement. We continue to believe, however, that UiPath's Agentic solutions will be a beneficiary of broader AI adoption. There were no other credit positions at the end of the first half of the year. Finally, let's look at Tetragon's cash balances. Tetragon's net cash balance is comprised of the following: Tetragon's cash at bank is -- was $43.6 million at the end of June. Tetragon has in place a $500 million revolving credit facility with a maturity date in December 2034 and $185 million was drawn at the end of June. The net amount due from brokers was $5 million. This includes: one, excess margin held by brokers; two, prime broker borrowing; and three, the unrealized value of derivative assets and liabilities. Net of receivables and payables, that was $0.6 million. Therefore, the net cash figure is negative $135.8 million. So essentially, it's $43.6 million, less $185 million plus $5 million plus $0.6 million gives you net cash of negative $135.8 million. The company actively manages its cash levels to cover future commitments and to enable it to capitalize on opportunistic investments and new business opportunities. During the first half of the year, Tetragon used $558.2 million of cash to make investments, $10.4 million to pay dividends and $71.8 million to repurchase shares. $863.7 million of cash was received as distributions and proceeds from the sale of investments. Future cash commitments are $87.9 million, and they comprise commitments to private equity funds of $23.7 million, contingency capital fund commitments of $19.2 million, DGO funds commitments of $20.1 million, Tetragon Partner Funds of $15 million and Hawke's Point funds of $9.9 million. I am now going to hand it back to Paddy.

Thank you, Steve. We're now going to move to answer some of the questions that we've received over the previous few weeks and indeed today. And as in previous calls, I'm going to sort of group some questions together. There have been a few questions on valuation or valuations of our assets. And to give you a flavor for the type of questions, I quote, the company needs to achieve evidence that the valuations are reasonable. Would the Board consider selling stakes possibly 20% to 30% in 4 or 5 of the companies, which would completely convince the market that the valuations are real. A second question, I'm just going to refer to a bit of a question, and I quote, it's reference to what appears to be a fictitious NAV. So I think there are quite a lot of questions, as I say, about the NAV. And I get the sense that some investors looking at the discount and they see that the discount is so wide, they're leaping to a conclusion that the NAV itself must be questionable. Now I don't intend to use this call to defend the NAV in any way, and it wouldn't be my place to do so. But there is a lot of information in the annual report. The independent directors go through a very robust process. And for those that are interested, I would recommend you going to the annual report. But I would make a few points. And these are very rough numbers, but I wanted to give you a sort of flavor. If we think of Tetragon's assets in terms of the accounting methodology of Level 1, Level 2 and Level 3 assets, to give you a very high level, approximately 40% of Tetragon's assets and therefore, NAV are what are referred to as Level 1 and Level 2 and 60% are Level 3. But of those Level 3 assets, half of that is Equitix, where we had an external buyer last year and then we have an external process or price. And so together, that's about 70% of Tetragon's NAV. And of the balance, about 15% of the Level 3 is Ripple, where although it's a private company, -- it does trade in the private market and anyone can actually go and buy and sell shares and certainly see where the price is. So the point of all this is that, therefore, roughly 80% of the NAV can be seen to be either Level 1, Level 2 or indeed Equitix for Ripple, which leaves the balance of about 20% as being Level 3 assets that don't have a recent transaction to help with the valuation. The second thing I wanted to address is the question as to could we sell 20% of each asset. I think -- well, firstly, that would be very difficult to do. But the second thing is I'm not entirely sure it would make any difference. And to give you some context, -- we have done several sales over the last few years. To give you a bit of history on BGO, we sold 50% of our position in 2018 and very approximately, our valuation that we held at $100 million on that sale was worth about $200 million. And I don't think the market moved at all. And then this year, we sold the second half of our BGO stake for approximately $450 million, whereas previously, it had been marked at about $260 million. And again, with Equitix, we had a valuation -- an enterprise value last year pre the sale of about $1 billion and probably the enterprise value post the sale is about $1.3 billion, so it's a 30% increase. And my point is not that these things are always worth more than we have them in the books at because indeed, we've had the experience with LCM that has been written down through last year and sold for $44 million. But where we have sold above our marks, the market hasn't taken any notice, which is really the point of the question. So difficult to do, and we're not entirely sure that the premise is a valid one anyway. But I would say with asset management businesses at the risk of stating the obvious, their valuation should track the growth in AUM, which will drive management fees and should track the growth in performance which should track the performance fees. So obviously, what we're looking to do is drive performance and in turn, AUM at these underlying asset management businesses. So that was what I wanted to say about valuations. The second topic, and again, this is one, not surprisingly, we think about a lot and we get questions on the whole time, and that is the discount to NAV. I've tackled in some way, at least the question about valuation. But if the valuation is there, then there's a very real discount to that valuation, and that has been there for some time. And a couple of questions here just to read out. When will the directors take action to ensure that the NAV is reflected in the share price? And the second one, what is your action plan to narrow the gap between the equity share and the NAV? So I've said a lot of this before, and apologies if people have heard it before, but it won't come as a great surprise that there's nothing new in this area. The most frustrating thing despite some people's views is that there's no simple answer. There's no one answer. The industry as a whole has been plagued by discount to NAVs, but that's no excuse for us. But the point is there is no single or simple answer. And so the things that we are doing are broadly the same as we've discussed in the past. But unless things change dramatically, I expect them to continue to be the same. And as I've said in the past, the most obvious thing is to attract more buyers for the shares than there are all sellers. And to that end, we need to attract investors who believe the shares will go up. Not only does one need to, therefore, have belief in the NAV, which we've discussed, which is very relevant, but also people need to see performance and compounding of positive returns, which we strongly believe we'll be able to continue to do, notwithstanding that we haven't done it in the first half. So it's driving value and performance, but also the belief in the ability to generate future performance. And we think that is a very real and important part of what we do. So it's not just about what the performance is but it's how we create what we've described previously as an engine that drives performance, i.e., the ability of having teams of people, idea generation, idea sourcing and our ability to underwrite that to scale our investments and to risk manage it that matters intensely. I think we continue to have an obligation to give people not just confidence in that process, but to educate the market on what we do. I think those of us -- those of you that know us well know that we are very complex. We've talked today about legal assets. We've talked about structured credit, infrastructure, technology, crypto, critical metals, convertible bonds. I mean we do have a lot of complex investments, and we need to educate the market and continue to do so. And lastly, in terms of cash distributions, both dividends and buybacks are important. We don't think they're the sole solution, but we do think they are relevant. And obviously, we've announced another buyback today. So those are the things we're doing. And I think that summarizes the questions because those were the 2 themes that we had most questions on. So with that, I wish you a very good summer and look forward to talking to many of you over the coming weeks. Thank you.

This now concludes our presentation. Thank you all for attending. You may now disconnect.