Valuation

The administrator for Tetragon, TMF Group Fund Services (Guernsey) Limited, values the investments of Tetragon on an ongoing basis. The net asset value, or NAV, per share is expected to fluctuate over time with the performance of Tetragon’s investments. The NAV of Tetragon and the NAV per share are determined as at the close of business on the last business day of each fiscal quarter, or a Valuation Day, for purposes of calculating incentive fees.

Valuation principles

Tetragon owns a 100% interest in Tetragon Partners which holds majority and minority private equity stakes in asset management companies. The valuation calculation for Tetragon Partners is prepared by a third-party valuation agent engaged by Tetragon’s Audit Committee. Although Tetragon Partners is valued as a single investment, a sum of the parts approach, valuing each business separately is utilised. This approach aggregates the fair value of all asset managers held by Tetragon Partners, overlaying the central costs and net assets at Tetragon Partners level, and adding the fair value of the infrastructure platform that Tetragon Partners provides to asset management businesses. Currently, no premium has been attributed to the valuation of Tetragon Partners in respect of diversification or synergies between different income streams.

The two main approaches to value the asset management companies are the Discounted Cash Flow, or DCF, approach and the market multiple approach.

The DCF approach calculates the enterprise value of the investments by utilising a business specific model to estimate the generation of future net cash flows. Each model reflects the business plan over a specific period of 5-10 years which includes, where applicable, assumptions (which may not be linear) around planned capital raising and/or organic growth through investment returns. The DCF approach may also include a terminal value which is calculated by applying a growth formula to the projected cash flows in the terminal year or to the average of yearly cash flows in the business plan. This terminal value calculation is used in the DCF approach for Equitix, Westbourne River Partners, Contingency Capital and Acasta. All estimates of future free cash flows and the terminal value are discounted at a weighted average cost of capital that captures the risk inherent in the projections. From the enterprise value derived by the DCF approach, market value of net debt is deducted to arrive at the equity value.  An adjustment is made to account for a discount for lack of liquidity.

The market multiple approach applies a multiple, considered to be an appropriate and reasonable indicator of value to certain metrics of the business, such as earnings or assets under management, to derive the enterprise value. The multiple applied in each case is derived by considering the multiples of quoted comparable companies. The multiple is then adjusted to ensure that it appropriately reflects the specific business being valued, considering its business activities, geography, size, competitive position in the market, risk profile, and earnings growth prospects of the business. The valuation agent considered a multiple of earnings such as a company’s earnings before interest, taxes, depreciation and amortisation, to perform this analysis. These multiples are then adjusted for control premium if the comparable companies are valued on a minority basis.

Investments in unlisted investment funds are valued utilising the net asset valuations provided by the managers of the underlying funds and/or their administrators. Tetragon has an investment in an externally managed investment vehicle that holds farmlands in Paraguay. These farmlands are valued utilising inputs from an independent third-party valuation agent.

Investment in unlisted stock is valued using the most appropriate methodology applicable to that particular investment such as broker quotes, pricing from private market platforms, pricing from latest financing round and expected value of future cash flows.

For listed stock and traded equity options in an active market, the closing exchange price is utilised as the fair value price. Traded equity options with low transactions are valued using mid of bid and ask price.

A mark to model approach using discounted cash flow analysis has been adopted to determine the value of the equity tranche CLO investments. The model contains certain assumption inputs that are reviewed and adjusted as appropriate on a quarterly basis. CLO debt tranches are valued using the broker quotes obtained at the valuation date.

Forward foreign exchange contracts and currency options are recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are based on observable foreign currency forward rates, recent market transactions, and valuation techniques, including discounted cash flow models, as appropriate.  All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The best evidence of fair value of a forward foreign exchange contract at initial recognition is the transaction price. The currency options are recognised initially at the amount of premium paid or received.

Tetragon enters into contracts for difference, or CFD, arrangements with financial institutions. CFDs are typically traded on the over-the-counter market. The arrangement generally involves an agreement by Tetragon and a counterparty to exchange the difference between the opening and closing price of the position underlying the contract, which are generally on equity positions. Fair values are based on quoted market prices of the underlying security, contract price, and valuation techniques including expected value models, as appropriate.

For all other financial assets and liabilities, the carrying value is an approximation of fair value, including other receivables, amounts due from/to brokers, cash and cash equivalents, loans and borrowings, and other payables.

Any value (whether an investment or cash) denominated other than in U.S. Dollars is converted into U.S. Dollars at the rate (whether official or otherwise) which the Board of Directors in its absolute discretion, deems applicable as at the close of business on the relevant Valuation Day, having regard, among other things, to any premium or discount that it considers may be relevant and to costs of exchange.

The Board of Directors or the administrator, as the investment manager’s appointed designee, may, at its discretion, permit any other method of valuation to be used if it considers that such method of valuation better reflects value and is in accordance with good accounting practice. To the extent feasible, expenses, fees and liabilities are accrued in accordance with International Financial Reporting Standards, or IFRS. Reserves (whether or not in accordance with IFRS) may be taken for estimated or accrued expenses, liabilities or contingencies. Where there is any conflict between IFRS and the valuation principles set out in Tetragon’s Memorandum and Articles of Incorporation and herein in relation to the calculation of NAV, the latter principles shall take precedence. However, IFRS will take precedence for the purposes of financial reporting. Fully Diluted NAV per share will be made available to shareholders on a monthly basis through Tetragon’s website.

The information contained in this webpage supersedes any other disclosure by Tetragon with respect to such information. Subject to the foregoing, additional information with respect to Tetragon’s valuation policies may be found in the company’s annual audited financial statements.