Risk factors

The financial risks inherent in Tetragon’s portfolio are primarily market-related or are otherwise relevant to particular asset classes. Operational risks include those related to Tetragon’s organisational structure, investment manager, legal and regulatory environment, taxation, financing and other areas where internal or external factors could result in financial or reputational loss.

The risks and uncertainties discussed in this section are those that Tetragon believes are material, but these risks and uncertainties are not the only ones that the company faces. Additional risks and uncertainties that the company does not presently know about or that it currently believes are immaterial may also adversely impact the company’s business, financial condition, results of operations, the value of its assets or the value of an investment in Tetragon’s shares. If any of the following risks actually occur, the company’s business, financial condition, results of operations, the value of its assets and the value of your investment would likely suffer.

Risks relating to organisational structure

Tetragon has approved a very broad investment objective and the investment manager has substantial discretion when making investment decisions. In addition, the investment manager’s strategies may not achieve Tetragon’s investment objective.

Tetragon’s listed shares do not carry any voting rights other than limited voting rights in respect of variation of their class rights. Tetragon’s voting shares are owned by Polygon Credit Holdings II Limited which is a non-U.S. affiliate of Tetragon’s investment manager and is ultimately controlled by Reade Griffith and Paddy Dear, who also majority own the investment manager. Pursuant to an agreement between Reade Griffith and Paddy Dear, Reade Griffith is the controller of Tetragon’s voting shares and the investment manager. Tetragon’s voting shares control the composition of the Board of Directors and exercise extensive influence over Tetragon’s business and affairs.

Under Tetragon’s Articles of Incorporation, a majority of its Directors are required to be independent (Independent Directors), satisfying in all material respects the UK Corporate Governance Code definition of that term. However, because the Board of Directors may generally take action only with the approval of five of its Directors, the Board of Directors generally are not able to act without the approval of both Directors who are affiliated with the holder of Tetragon’s voting shares. The holder of the voting shares has the right to amend Tetragon’s Articles of Incorporation to change these provisions regarding Independent Directors and to remove a Director from office for any reason. As a result of these provisions, the Independent Directors are limited in their ability to exercise influence over Tetragon’s business and affairs.

Tetragon’s organisational, ownership and investment structure creates significant conflicts of interest that may be resolved in a manner which is not always in the best interests of Tetragon or its shareholders.

Tetragon’s Directors and its administrator may have conflicts of interest in the course of their duties.

Tetragon’s ability to pay its expenses and dividends will depend on its earnings, financial condition, fair value of its assets and such other factors that may be relevant from time to time, including limitations under the Companies (Guernsey) Law, 2008, as amended.

Risks relating to Tetragon’s investment manager

Tetragon’s success depends on its continued relationship with its investment manager and its principals. If this relationship were to end or the principals or other key professionals were to depart, it could have a material adverse effect on Tetragon’s business, investments and results of operations.

Tetragon is reliant on the skill and judgment of its investment manager in valuing and determining an appropriate purchase price for its investments. Any determinations of value that differ materially from the values Tetragon realises at the maturity of the investments or upon their disposal will likely have a negative impact on Tetragon and its share price.

Tetragon’s arrangements with its investment manager were negotiated in the context of an affiliated relationship and may contain terms that are less favourable than those which otherwise might have been obtained from unrelated parties in an arm’s-length negotiation.

The holders of Tetragon’s listed shares will not be able to terminate its Investment Management Agreement with the investment manager, and the Investment Management Agreement may only be terminated by Tetragon in limited circumstances.

The liability of Tetragon’s investment manager is limited under Tetragon’s arrangements with it, and Tetragon has agreed to indemnify the investment manager against claims that it may face in connection with such arrangements, which may lead the investment manager to assume greater risks when making investment-related decisions than it otherwise would if investments were being made solely for its own account.

The investment manager does not owe fiduciary duties to Tetragon shareholders. However, these contractual limitations do not constitute a waiver of any obligations that the investment manager has under applicable law, including the U.S. Investment Advisers Act of 1940 and related rules.

The investment manager may devote time and commitment to other activities.

The fees payable to the investment manager are based on changes in Tetragon’s NAV, which will not necessarily correlate to changes in the market value of its listed shares.

Tetragon’s compensation structure with its investment manager may encourage the investment manager to invest in high-risk investments. The management fee payable to the investment manager also creates an incentive for it to make investments and take other actions that increase or maintain Tetragon’s NAV over the near term even though other investments or actions may be more favourable.

The compensation of the investment manager’s personnel contains significant performance-related elements, and poor performance by Tetragon or any other entity for which the investment manager provides services may make it difficult for Tetragon’s investment manager to retain staff.

Tetragon’s investment manager relies on two entities that are part of Tetragon Partners for a broad range of services to support its activities. The services include (i) infrastructure services such as operations, financial control, trading, marketing and investor relations, legal, compliance, office administration, payroll and employee benefits and (ii) services relating to the dealing in and management of investments, arrangement of deals and advising on investments. Tetragon Partners has implemented a cost-allocation methodology with the objective of allocating service-related costs, including to Tetragon’s investment manager, in a consistent, fair, transparent and commercially based manner. Tetragon Partners then charges fees to Tetragon’s investment manager for the services allocated to it on a cost-recovery basis that is designed to achieve full recovery of the allocated costs. Tetragon’s Independent Directors, who are specifically mandated to approve, among other things, related-party transactions, are required to approve the methodology for allocating costs and in their sole discretion the application of that methodology as part of their oversight processes. As such, the annual cost allocation methodology update and the actual annual cost allocations that result based on these cost methodology policies and procedures are separately approved by the Independent Directors.

There are conflicts of interest created by contemporaneous trading by Tetragon’s investment manager and investment managers that are part of Tetragon Partners.

Risks relating to Tetragon’s legal environment and regulation

Changes in laws or regulations or accounting standards, or a failure to comply with any laws and regulations or accounting standards, may adversely affect Tetragon’s business, investments and results of operations.

Tetragon has and may become involved in litigation that may adversely affect Tetragon’s business, investments and results of operations.

No formal corporate governance code applies to Tetragon under Dutch law and Tetragon reports against the AIC Corporate Governance Guide for Investment Companies (which incorporates the UK Corporate Governance Code) on a voluntary basis only.

The rights of the non-voting shareholders and the fiduciary duties owed by the Board of Directors to Tetragon will be governed by Guernsey law and its Articles of Incorporation and may differ from the rights and duties owed to companies under the laws of other countries.

Tetragon’s non-voting shares are subject to restrictions on ownership by U.S. persons.

Tetragon’s shares have not been and will not be registered under the United States Securities Act of 1933. Consequently, Tetragon shares may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, “U.S. persons” as defined in Regulation S under the Securities Act absent registration or an exemption from registration under the Securities Act. No public offering of any Tetragon shares is being, or has been, made in the United States.

Furthermore, Tetragon shares may not be held by any “benefit plan investor” that is subject to Title I of the United States Employee Retirement Income Security Act of 1974. Tetragon’s Articles of Incorporation prohibit any “ERISA Person” from acquiring or holding Tetragon shares. The consequences of failing to comply with this prohibition include the divestment of the relevant shares and the forfeiture of any dividends previously received with respect to such shares, as well as any gains from their disposition.

These restrictions may adversely affect overall liquidity of Tetragon shares.

Tetragon’s shares are not intended for European retail investors. 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 (which may equal the whole amount invested) that may result from the investment.

Risks relating to taxation

United States investors may suffer adverse tax consequences because Tetragon is treated as a passive foreign investment company (PFIC) for U.S. federal income tax purposes.

Changes to tax treatment of derivative instruments may adversely affect Tetragon and certain tax positions it may take may be successfully challenged.

Investors may suffer adverse tax consequences if Tetragon is treated as resident in the United Kingdom or the United States for tax purposes.

Risks relating to market disruption, terrorism and geopolitical risk

Tetragon is subject to the risk that war, terrorism, climate change, social unrest and related and unrelated geopolitical and other new or novel market disrupting events as well as outbreaks of infectious disease, pandemics or any other serious public concerns, cumulatively Market Disruption Events, may lead to increased short-term market volatility and have adverse long-term effects on world economies and markets generally, as well as adverse effects on the value of Tetragon’s investments. Market Disruption Events as well as other changes in world economic, social and political conditions also are likely to adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment and other factors affecting the value of Tetragon’s Portfolio Investments. At such times, Tetragon’s exposure to a number of other risks described elsewhere in this section can increase. The investment manager’s financial condition is likely to be adversely affected by a significant general economic downturn, and it may be subject to legal, regulatory, reputational and other unforeseen risks that are likely to have a material adverse effect on the investment manager’s business and operations and thereby are likely to impact Tetragon. Moreover, a sustained downturn in the U.S. or global economy (or any particular segment thereof) or weakening of credit markets is likely to adversely affect Tetragon’s profitability, impede the ability of a Portfolio Investment to perform under or refinance their existing obligations, and impair Tetragon’s ability to effectively exit its investments on favourable terms. Any of the foregoing events are likely to result in substantial or total losses to Tetragon in respect of certain investments, which losses will likely be exacerbated by the presence of leverage in a particular Portfolio Investment.

Market Disruption Events, as well as other events beyond the control of the investment manager (such as acts of God and natural disasters) may cause contractual counterparties associated with Portfolio Investments to be effected by force majeure events, which could adversely affect the ability of a contractual counterparty associated with a Portfolio Investment to perform certain contractual obligations until the force majeure event is remedied. The cost to such counterparty or Tetragon of repairing or replacing assets damaged by a force majeure event could be substantial. Repeated or prolonged interruptions of contractual obligations resulting from a force majeure event may result in permanent loss of income opportunities, litigation, or penalties from regulatory or contractual non-compliance. Additionally, major regulatory intervention of an industry, including the assertion of control over a counterparty or its assets, may result in a loss to Tetragon. Therefore, any effects of force majeure events, including any of the foregoing, may adversely affect the performance of Tetragon. Certain catastrophic losses, such as those caused by war, terrorist attacks, natural disasters and other acts of God may be uninsurable, or insurable only at such high rates that to have such coverage would adversely affect profitability of Tetragon. In particular, it has become harder and more expensive to obtain coverage against losses incurred by terrorist attacks and insurance proceeds from covered risks may be inadequate to completely, or even partially, cover resulting losses or increases in expenses. The occurrence of a significant loss for which Tetragon or its Portfolio Investments and/or counterparties are not insured, or where the cost of such loss significantly exceeds the insurance coverage, may adversely affect Tetragon and cause it to lose both invested capital and returns from an investment.