Tetragon's (TGONF) CEO Paddy Dear on Q2 2016 Results - Earnings Call Transcript

| About: Tetragon Financial (TGONF)

Tetragon Financial Group (OTCPK:TGONF) Q2 2016 Earnings Conference Call July 29, 2016 9:00 AM ET


Paddy Dear – Principal, Founder, and Chief Executive Officer

Phil Bland – Chief Financial Officer

David Wishnow – Investment and Risk Committee Member, Executive Committee Member

Steve Prince – Head of North America



Good afternoon. Thank you for joining Tetragon's 2016 Half Yearly 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 Web site, 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 the call over to Paddy Dear to commence the presentation.

Paddy Dear

Great. Thank you very much. As one of the Principals and Founders of the Investment Manager of Tetragon Financial Group Limited, I'd like to welcome you all to our Investor Call, which will focus on the company's first half results.

I will provide an introduction; Phil Bland, our CFO will review the company's financial performance for the half; David Wishnow, Steve Prince, and I will talk through some of the detail and we will conclude with questions, both taken electronically via our web-based system at the end of the presentation as we've both received since the last update.

I'd like to remind everyone the following may contain forward-looking comments including statements regarding the intensions, belief or current expectations concerning performance and financial condition on the products and markets in which Tetragon invests. And our performance may change materially, as a result of various possible events or factors.

So the first slide here has key highlights and it's an update of what we had last quarter obviously, using a slightly different format. Firstly on the top left you have return on equity target at being 10% to 15%, the average of being 13% on a fair value basis. And as we have said many times over the last couple of years, in a low-LIBOR environment as we currently have we would expect returns to be at the lower end of that target range.

The annualized fair value return on equity for the first half was 4.5%. Now, that is a little bit below that target range but none the less we are pleased with our result giving performance of both market industries over the period as well as alternative asset management more generally.

On the right-hand side of this slide, we have the shareholder returns. On the top we have the NAV per share total return, which is a new metric that we are showing for the first time and we'll talk a bit more about that in a moment.

And underneath that we have the share price total return. So you can see that on a total return or NAV per share showing a 12% increase on the year and a 16% per annum increase over the last five years, and share price returns again on a total return basis that is 7% on one year and 10% per annum over the last five years. Dividend, which we've paid quarterly roughly 6.6% yield currently. Also on the slide you can see $1.9 billion of fair value NAV.

Also in the first half some principal and employee increased their holdings in the public share of TFG. So including all shares owned outright and those held under deferred schemes, these holdings now total approximately 23 million shares or approximately 23% of TFG's shares.

A few other things to note; firstly, the company bought back approximately $10 million shares in June of an average price of $10 per share. This reduced the fair value NAV by approximately $100 million, but boosted the fair value NAV per share as it reduced the pro forma fully diluted number of shares in issue.

Secondly, Phil Bland, our long-standing Chief Financial Officer for both the investment manager and TFG Asset Management, will be retiring later this year. He will be succeeded by Paul Gannon, who have been at the firm for 10 years and has had significant experience with all aspects of the Company's investments and financial reporting already. Paul has been promoted to Co-CFO and will work closely with Phil during the implementation of the succession plan.

Also the team changes in the TFG Board. After 11 years on the TFG Board as a non-executive director, Byron Knief stepped down earlier this year. Mr. Knief has been replaced by William Rogers. Mr. Rogers has worked with TFG for many years and comes to the Company with a wealth of knowledge of corporate matters. He retired from Cravath, Swaine & Moore LLP in December 2015 after 36 years at the firm. His full biography can be found in Appendix VIII of the half yearly report. And I'll just like to thank Byron publicly for the 11 years of the service on the Board.

So moving now to slide four, this shows the NAV per share on a total return basis since conception. And NAV per share on the total would be a key metric for TFG and in line with other investment companies what we're now sharing an reporting is the fair value NAV per share on a total return basis. So in addition for the simple fair value NAV per share in our key metrics, we are using the traditional standard. We are using the industry standard with the association of western companies or the AIC put forward where the dividend are reinvested prevailing NAV per share.

As mentioned the fair value NAV per share total return with 6.4% in the first half of the year, obviously slightly stronger than return on equity itself given the share price max the dimension. This chart shows the metrics in CFG's IPO in April 2007 and reset this firstly against TFG's hurdle rate, which obviously is a liable flat total rate. And secondly we've added a global equity in there.

Given the TFG has an absolutely return target, we are not benchmarked to equities, but we do fail at useful [ph] comparisons particularly when looking over long periods of time.

Moving out of TFT investment strategy, obviously this slide is familiar to many of you. But a way of reminder, we are always looking for asset classes that generate alpha. Secondly, we are looking to identify and seek out management teams that add alpha. Thirdly, we concentrate on structuring the investments. And the last one is we look to create health [indiscernible] some off or all off the asset management businesses themselves, and now, TFG's assets for both actual investments and investments in operating asset management businesses. These asset management businesses can be Board, [indiscernible] and joint ventures and are collectively known as TFG Asset Management and that represent approximately 20% of the fair value NAV of the company. As a reminder, there maybe or might be a potential for IPO of this TFG Asset Management business should be appropriate over the next few years.

So, moving now to a look at the breakdown in assets at the end of the first half and indeed the top holdings; so this is a portfolio snapshot that was shown before. On the left-hand side is the pie chart with the breakdown of $1.9 billion of total asset and it's certified by asset class. The phone starts at 12 o' clock.

CLO equity represents our largest asset class 26.8%. We then have equities. And these are predominantly event driven and that's for hedged equities of 16.2% of the portfolio. Credit is predominantly hedged fund exposure and again that's for absolutely return with 7.8% exposure. Real estate is 8.7%. And as I've just mentioned TFT asset management at 21%, the remainder had been made up of net cash.

So, when compared to the last quarter, there are no major changes in terms of the allocations. On the right-hand side, previously you can see the top ten holdings of the fund. And you can see through looking at both, not any diversification but the focus is on private [indiscernible] but both assets that aren't easily be replicated in the market.

Without going through the 10 in detail, I'll just note a few themes. Firstly, I've expected these all alternative assets. Secondly, to [indiscernible] of TFG-owned assets, one of which is TFG Asset Management, an operating asset management business; and thirdly, as I've mentioned the diversification of the portfolio.

So without introduction, I'll hand over to Phil Bland, to discuss the key metrics in our first half results.

Phil Bland

Great. Thanks so much indeed Paddy. And warm welcome. So as usual in earning calls, I'm going to be providing some high-level commentary on some of TFG's key metrics. Paddy, Steve and David will then discuss some of the underlying dynamics with each of the individual business lines.

You'll be [indiscernible], so we continue to focus on four main metrics at the TFG level. We consider earnings and we measure those both as fair value return and equity and fair value EPS. We are going to have values being accumulated in the company by our fair value NAV to share metric. And as Paddy has already mentioned, we've introduced alongside the fair value NAV per share total return more with rate. And it's funny, we see value being returned to shareholders through thorough distributions and that's mainly dividends, but this was recent quarter in form of buybacks.

Let's take a look at our first measure. And it's a measure operating performance is the form of fair value ROE and cut buyback by taking our fair value net income of $45.1 million, the first half, divide that by our fair value net assets at the start of the year of just under $2 billion. The fair value ROE in the first half gave us an annualized number of 4.5%. And as Paddy mentioned, this is a little bit below long-term target range. But in the complex of the challenging environment, we believe this will resulted pretty favorably to a number of fund and market metrics, move it later.

Our second measure of earning is EPS and this is currently again using the value less economic income. This time divided by the average U.S. GAAP shares in the period. So as I mentioned before the NEI was $45.1 million, and that gave us a fair value EPS of $0.47.

During the first half, [indiscernible] generated fair value net income with the one exception of TFG Asset Management which recorded an unrealized loss of $1.9 million as evaluations of these investments were kind of recalibrated. I'll talk about that in more detail later.

Just touching the year-on-year comparison to the largest year-on-year changes, we relate to firstly of the equities; and secondly TFG's real estate investment, both of which had generated exceptionally strong fair value income in the first half of 2015 compared with positive, but really more normalized returns in the first half of 2016.

During the first half of this year, the weighted average number of GAAP shares was mainly influenced by two factors; primarily, the buyback of the $10 million shares that's reducing the number of GAAP share cap. And this is slightly offset by investors taking shares in lieu of dividends which is seen as common trends over many quarters now.

Paddy had mentioned in his early remarks about the NAV share total return as our new metric, and again, this is in large part useful we think, because it enables to benchmark across investment companies or funds in the industry. Paddy's early slide showed the cumulative metric and this slide shows the NAV total return for the past 4.5 years industry periods.

We are obviously pleased that the metric for the first half of 2016 reflects positive performance. Again, it's a challenging backdrop, but also as mentioned earlier this metric was certainly materially boosted by the buyback of 10 million shares at a discount for now.

It's worth nothing that Morningstar are certainly publishing NAV total return data numbers and have placed TFG's in their flexible investment category. Based on this thicker metrics, TFG is currently the best for going funds in that group of funds of both the one-year and the five-year time horizon, and its currently number two on a three-year period.

Moving now to the discreet fair value NAV per share metric and we're taking here of fair value NAV of $1.9 billion dividing it by the fully diluted share count. This is more the fully diluted share count-based number. As already alluded to the increase here, you can see here that a shift from first half of '15 to the first half of '16 was significantly boosted by the buyback. We've already talked about that in Q2, but also in that period there was a further buy back of $60 million at the end of 2015. So again, that's made a further contribution in relation to the operating performance.

Remembering here that this kind of pure NAV per share metric is also the distribution of dividends, which were $33.25 in the first half of '16 and roughly $0.66 in total during the course of the last four quarters, and that's a segue into next slide, taking a look at Fund metric given per share. We continue to follow a progressive dividend policy which targets the payout ratio of 30% to 50% of normalized earnings and based that normalize earning context on the long-term target return equity of 10% to 15%, Paddy mentioned earlier.

TFG declared a Q2 of $0.1675 per share, an increase on Q1 so continuation of our progressive pattern. I've mentioned the rolling 12-month basis of $0.66 per share which represents a 4.3% increase over the preceding 12-month period and our Q2 dividend equates to approximate dividend yield of 6.6% on the Q2 share price of $9.99.

So the second form of this recent course, again we believe is in the form of buybacks. The buyback of the last 10 million shares in Q2 brings us to a cumulative number of 67.1 million shares or 41% of the total share outstanding. The company has cumulatively used over $486 million in the form of buybacks. And Slide 30 in the back is way to see that graphically and you could currently quote out on the screen what you see.

And with that now, I will hand back to Paddy to discuss the competition of TFG NAV.

Paddy Dear

Thank you, Phil. We'll now go in some detail of performance by asset class.

So first here we have the slides showing the breakdown on the portfolio and this is the same that I showed earlier, but this time it compares the June 30, 2016 by end of the first half with where we were at the end of 2015. And as I've said before, you can see that's more clearly on the charts that there have only been small changes to asset allocation over the first half of the year.

So moving now to a more granular breakdown of the performance, this is a table which you've seen before. It gives a detailed breakdown of the assets showing the net asset value at the end of the first half of 2016 compared that to the end year of 2015 and so it's a fair value net income for the half year.

From focusing here on the second column, which is indeed the fair value net income for the half year. And if we just take these from the top, let's starts with CLO's and for that, I'll pass over to David Wishnow.

David Wishnow

Thanks, Paddy. TFG's U.S. CLO 1.0 investments contributed $12.5 million in fair value net income over the first half of 2016. This segment in the portfolio continues to naturally amortize and now as the end of the first half of the year has seen a reduction of over 27% from year end 2015.

We continue to monitor our opportunities to maximize value and we expect U.S. CLO 1.0 deals will continue to convert into cash as they unwind over the near in medium term. TFG's U.S. CLO 2.0 investments produce $23.7 million in fair value net income during the first half of the year. As we intend to achieve our exposure to new issue CLO Equity Investments via our investment in TCI II over the medium terms, we do not expect that directly held U.S. CLO 2.0 segment to grow in a material way.

The European CLO segment appeared in the portfolio produced $8.7 million in fair value net income during the first half of the year. We expect to see this segment of the portfolio continues to convert into cash as we do not feel the European CLO equity market as attractive compared to other opportunities at this time. All TFG's CLOs were in compliance with their junior-most OC test as of the end of the first half of 2016.

TFG's CLO investment vehicle, TCI II, continues to make new issue investments during its ramp up period. Through the end of the first half of the year, TCI II had made or committed to make the investments with the total cost of approximately $100 million. TFG's available undrawn capital commitment totaled $50 million. During the first half of the year, TFG received a small distribution of income from TCI II.

Now if you come on the CLO market. The CLO investor universe continues to differentiate CLO managers by historical performance and their ability to satisfy new risk retention requirements. The gap between the top-tier and lower-tier manager's liability pricing has reached a level that creates significant road blocks for underperforming and undercapitalized CLO managers. Liability pricing can be as much as 30 basis points wider for these lower-tier managers resulting in unacceptable projected equity returns for this group of CLO issuers.

AAA debt CLO debt investors are concerned with the execution risk of certain lower-tier managers leading these debt investors to avoid managers where there is not an upfront committed equity investor that can lend confidence to the deal certainty of execution. This has made the vertical-wise risk retention solution initially popular given the low amount of manager capital required less attractive to managers, underwriters and investors due to the large amount of equity needed to be distributed and the resulting high level of execution risk and less sufficient structure given the cost of the vertical financing.

This manager-tearing effect has influenced the amount of new issues CLO issuance down 59% from 12 months ago and has heightened the importance of working with top-tier managers who more afforded attractive liability pricing and efficient deal execution. We believe that the current new issue CLO environment is consistent with our philosophy of taking majority equity stakes in CLOs managed by top-DSL [ph] performing managers.

Let me hand it back to you, Paddy.

Paddy Dear

Thanks David. The next goes down equities and you can see that fair-value net income for equities with $18.3 million for the first half. Our largest investments that in Polygon European have been driven in equity funds which after a strong Q1 held on to that performance was flat in Q2.

The second largest investment is the mining equity fund which is another Polygon Hedge Fund and that has particularly strong performance over the second quarter showing therefore about 11% during the first half. Other equities were small positive contributor. And Steve will talk more about the Polygon strategies as part of TFG Asset Management review.

The next item down is credit. Three areas here, positive net income across the board of $2.8 million, the [indiscernible] occasions remains unchanged, the two major investments in Polygon's Convertible Opportunity Fund and Polygon Distressed Opportunities Fund with a small exposure directly to the U.S. corporate loans. All segments that is to say Convertible, Distressed and Direct loans made positive contributions and again, specific information on the Polygon funds will be reviewed in the TFG Management section.

Moving on down, real estate contributed $5.8 million to net income in the first half and that was mainly driven by assets sales in Japan and the UK. And the next asset class down is where we hold private securities collectively known as TFG Asset Management. You can see that the net income for the first half was a negative $1.9 million. And I'm going to move on to another side to give little bit more information on that.

So as you know, this shows the fair value for those individual businesses as valued at the first half of the year and you can see the competition by individual asset manager, and just to reiterate the aggregate loss of $1.9 million for the first half.

TFG's investments in Polygon, GreenOak and LCM all recorded unrealised losses and they reflected a combination of multiple factors, including some of the following, the application of lower market multiples and/or discount rates, and/or change in increased in weighted average cost accountable. And in some cases, a more conservative view on elements of projected performance this year and there are full details on those evaluation in the first half report.

Notwithstanding evaluation approach, we continue to believe that actually underlying economics and momentum of these businesses remain positive and Steve is going to cover that in a moment or two. But before he does that, I'll just pass back to Phil to give you more color on the operating performances of TFG Asset Management.

Phil Bland

Great, thanks so much. So let's begin with couple of slides on the operating performance. And let's start by looking at kind of high-level matrix. So what a main drive in future growth in the potential value of TFGM will certainly be the underlying operating performance. And indeed EBITDA is already an important metric used when determining fair value of many of the asset matter businesses.

EBITDA equivalence to the majority of TFGM businesses made what we view as a regional start of the year at $17.6 million. Although there is a drop in overall EBITDA year-on-year for this first half period, this at large explained by a high Q1 2015 in terms of performance in success fees which tends, quite frankly, not to follow seasonal [indiscernible].

Well, let's have a look at the next slide at the EBITDA in more detail and give you bit more flavor as to what's been going on. A quick reminder, as I mentioned I'm only focusing on the maturity of business so current excluding [indiscernible] at this time.

So we were pleased to continue the positive upward trend in management fee income, obviously have the bedrock for any asset management business. And these rose around 26% year-on-year for the first half. And Steve will discuss TFGMF's AUM trends later on this call, which fairly drive back hearts of the P&L.

Moving to performance and success fees, well, unrealized hedge fund performance fees were actually pretty decent in the first half of the year showing you increase of approximately $0.25 compared to the first half of 2015. With a point on actually-focused hedge fund is performing particularly well and indeed the convertible on hedge fund are holding it firm.

So successes fees the main cause of the drop year-on-year and largely, as I mentioned before, is because we are comparing it with a particularly strong early parts of 2015 and particularly for the Equitix business. Taken together, success performance fees were $11.2 in Q2. So that's [indiscernible] in Q1, obviously could see that positive trends and then marginally below the average of the preceding for quarters which was $11.9 million. And we tend to look at the competitive [indiscernible] for the quarter over that kind of averaging period rather than worry too much about individual quarter which is the corresponding period the year before.

Under the other free income, this includes third-party CLO management fee income relating to some U.S. CLO 1.0 transaction and recently to define in low expectations as these transactions amortize down. In addition this category includes some cost recoveries from TFG relating to seeded part of hedged funds and these fell year-on-year. As the performance improved in the seeded funds, we will discuss it a bit more later.

And thus less seeding subsidies required from TFG show some positive trend despite the fact that the team supporting these funds has actually continued to grow. As the businesses mature and build third-party capital we [indiscernible] expect them to generate higher income and the cost recoveries should reduce further overtime.

In other income cash, we also include some fee income generated by Equtix on some its management services contracts which continues to be a strongly growing part of the Equitix business.

Moving to expenses, the general operating expenses for the business ruled by around by 32% in the first half compared to H1 2015. And this is partly [indiscernible] by the addition of the Equitix business early in the year, last year so that reflects five months of the year compared to six months in 2016. Hopefully let to know that with [indiscernible] to the team supporting both the Equitix business and also to some degree Polygon, Hawke's Point and TCIP businesses.

With that I'll now hand over to Steve Prince to provide initial detail on TFG AM's business lines.

Steve Prince

Thanks Phil. As we've discussed TFG Asset Management is designed to enhance asset level returns by owning asset management businesses that to drive income from external investors. Our asset management platform comprises multiple brands with the focus on alternative investment strategies.

As of the end of the first half of 2016, the fair value of TFG Asset Management represents approximately 21% of our fair value net asset value. The assets under management of our six businesses increased slightly during the first half and with $17.8 billion at the end of June.

Most notably TCI II had a second close of $60.5 million in March bringing committed capital to $203.4 million. TCI capital management were TCICM specialist in below-investment grade U.S. broadly syndicated leverage loans recently commenced operations. TCICM is a subsidiary of TCI II and access a CLO collateral manager and sponsor for CLO investments. TCICM will typically utilize the services of third party sub advisors in the performance of certain of its duties as a collateral manager.

In terms of headcount, we now stand at 230 employees, reflecting new hires primarily at GreenOak and few hires supporting Equitix, Hawke's Point, Polygon and TCIP. Turning to the next slide as you can see, there is $17.8 billion of AUM within TFG Asset Management and it's well diversified across our business units.

Our largest manager by AUM is our joint venture with GreenOak with assets under management of $6.8 billion incurred to $6.6 billion at year end 2015. Our next largest manager is our CLO manager, LCM with assets of $6.4 billion an increase of year end assets of $6.1 billion.

Equitix, our infrastructure manager manages $2.6 billion of this figure is a slight decrease from year end at dollar terms due to the weaker pound and sterling turns AUM increased from £1.80 billion to £1.94 as it continued to raise money for its fund for. Our hedge fund business Polygon has $1.5 billion under management which is flat on year end.

Moving to the chart on the right, you can see the diversification by fair value of our businesses. Equitix by fair value remains our most valuable business representing a $167 million of value. As with AUM FX, as with the AUM, FX moves will have an impact on the fair value amount reported by TFG.

LCM represents a $102 million, GreenOak $66 million and Polygon $63 million largely unchanged from last quarter. TCIP and Hawke's Point two of our more nascent businesses today represent us small part of the total map of our mangers but we are hopeful as we execute on their respective business plans that value will grow. As mentioned in quarters past, there are few key things we focused on with regard to our asset management business namely returns, profitability and profitable AUM growth.

We're pleased that on this last metric, comfortable AUM growth, we have increased AUM considerably since we embarked on building an asset management business. In the past four months TFG Asset Management AUM grew by 20% to $17.8 billion and this compares to AUM of $17.1 billion at year end.

Well, some of that growth was via acquisition we're pleased that our underlying businesses also shared continued strong organic growth. I'll now going to dive on little deeper into the underlying TFG Asset Management businesses starting with LCM. LCM continued to perform well in the first half of 2016. At the end of June, its default for 0.2% of its AUM compared to the LFTA universe which has 4.5 of defaults for the same period.

As of the end of the quarter all of LCMs cash flow CLOs that were still in their investment period remaining compliance with their coverage tests continuing to base senior and subordinated management fees and to generate cash flows for their equity tranches. One new issue LCM managed CLO, LCM 21 closed in April.

GreenOak continued to perform well during the first half across the European, U.S. and Asian businesses. During the period GreenOak sold all of its Central London office assets well ahead of Brexit, achieving targeted gross IRRs and equity multiples from a pair of City of London office investments.

GreenOak also realised its first sale from its Spain Tactical program, which acquired eight retail assets in Spanish cities including Madrid in July of 2014. In the past 15 months, GreenOak's Europe Fund I has fully committed its €250 million of equity. In March, GreenOak closed a $650 million Japan-oriented fund.

Turning now to Polygon. Polygon hedge funds all closed to positive net returns in the first half, during a challenging year from many of our peers. Our European event driven strategy had never returns of 5% through the end of the first half compared to the HFRX Event Driven Index which returned 3.3%.

Annualized net performance since inception is 11% versus two for the benchmark. Our convertible strategy was up 4.1% net during the quarter compared to the HFRX convertible e Arbitrage Index of 1.5%. Annualized net performance since inception for the fund is 16.4% versus 5% for the benchmark.

On mining strategy was up over 11% during the first half. The GDXJ was up 122% but on an annualized basis Polygon strategy has returned 5.8% since inception versus a negative 14% return for the GDXJ. Lastly our distressed strategy was up 4.1% compared to the benchmark HFRX distressed index which was up 7.4% in the first half. Annualized net performance since inception stand at 4.3% for the Polygon fund compared to a negative 1.1% for the HFRX index.

Turning to the next slide I'd like to discuss the current AUM of our hedge fund strategies. Today our Polygon businesses managed $1.3 billion in its open products. Our larger strategy is European equities with $650 million under management. We continued to believe that the long term out the generation of this strategy represents a compiling proposition for allocators. The event driven team has successfully navigated volatile European markets over the past seven years. We believe that over the next few years they will continue to find opportunities to make good returns with a high alpha component well avoiding created trades.

Equitix's AUM has grown from £1.80 billion to £1.94 billion since the end of 2015. Equitix funds four achieved total commitments of £486 million through the end of the first half and as further commitments due in the coming months. From one, two and three are now past generative and fully invested or committed.

Finally I'd like to spend a minute or two on our two needs in businesses Tetragon credit income partners and Hawke's Point. TCI II invested CLOs managed by TCICM, TCI II made a initial commitment to invest $36 million in the equity tranche of a TCICM managed CLO in this investment flows just after the end of June.

During the current committed capital TCI II, TFG share of this investment is possibly $8.8 million. Hawke's Point continues to find compelling the flow, our team is strong and we are seeing increased opportunities created by the continued disrupt in the metals and mining space.

I will now hand it back to Pad.

Paddy Dear

Thanks Steve. And again that the slide that everyone had seen before just updated the end of the first half from giving some indication of our, our future investments expectations and so [indiscernible] grade CLO equity, we still keep value in CLO equity very much.

We're looking to invest somewhat we expect between $15 million to $100 million of potential new investments in CLO equity over the coming 12 months and we do expect that exposure to come mainly through TCIP and discussed by both David and Steve and obviously TCIP is a major investor in our entity.

Secondly an event-driven equity that's incorporate credit as well with the current markets we expect stable allocation so, don't expect any changes in other allocations firm. Real estate we are expecting to be grow on current commitments and potential new commitments and they have marked somewhere between $25 million and $75 million of capital to be grown over the next 12 months or so.

TFG Asset Management, there were no new businesses to report but I can't say that our pipeline of businesses on review is larger than ever and we have regular process making sure we see them review as many opportunities as possible to give you some idea, we have seen collectively about 100 businesses in the first half of the year.

Money finance as Steve mentioned no investments to report to date, the team already analyzed many potential investments and will come [indiscernible] on several but no capital committed profile and but just to reiterate we have aim of potentially up to $100 million of investments over the coming 12 months, we have added to the team and not only we're well placed about the long term prospects of the investments in the asset class but also the prospects regarding client franchise and asset management business over time.

And lastly as you can see from report, no asset classes to report. So with that, that concludes the formal session of the presentation but we do have a few questions here, and maybe if I start with one for Phil and let me just follow.

Please discuss how the investment management firms are valued. Phil can answer to that?

Phil Bland

Yes, with pleasure. So investment management [indiscernible] TFG AM and we have in our half-year report on page 37, appendix three right of this how this works but let me describe it in short. First thing to [indiscernible] that the valuation process and reinforcing to TFG's independent audit committee, they have commissioned an independent financial expert to value the TFG AM business on quarterly basis, it's a bottom up exercise by business line by business line and it uses the latest performance metrics that historical performance and indeed any update to forecast by the slide.

To that the internal experts then oblige the market perspective what is happening in peers, what is happening in terms of market multiples et cetera, et cetera. So the valuation expert apply certain market standards, valuation approaches and those could include things like discounts and cash flows analysis, earnings based approaches such as taking EBITDA and applying market multiple typically based on pay groups and those multiple would also typically be adjusted for a lack of liquidity, so discount the lack of liquidity in short.

And that also typically determine an enterprise value based on a percentage of AUM where applicable and in some cases where a business line is in its very early stages of development but may have no AUM or may have no profitability track record and replacement of approach may be used and that is used somewhat increasingly but has been used.

Typically multiple methodologies will be applied to each business where applicable and one methodology for example at DCF methodology maybe the primary driver of the valuation range and then another methodology or two might be used to then check the initial results and in the table on Page 57 of report you will see five business line different methodologies that has used, the ranges, the cost multiples for each of methodologies as well.

Paddy Dear

Great, thank you, Phil. And there is another one here about portfolio in Phil's account as well, if you could follow. I was wondering whether TFG have a systematic policy of sweeping cash up from TFG AM, for example TFG AM recorded $9.3 million of net income in Q1, 2016 if we assume to the sector convenience that this was all cash [indiscernible] if this isn't the case leads to some of the performance fee income being unrealized, would it be customary for the full amount to be distributed up to TFG?

Phil Bland

So thanks for that, there are already two quite different components I think to the question and let me break it out, the first thing is what in cash, how do we think about it in relation to TFG AM, the second component is what the simple difference is between the accounting or reported P&L and the cash flows and what kind of causes those to arise. So in relation to the cash requirements, we're reviewing those to TFG AM on an ongoing basis, we're producing full-monthly financials flow ultimately into the group reporting and obviously we are therefore considering our cash requirements on a monthly cycle that fits within as you might imagine, the overall liquidity management process that is in place with TFG as a group, as a fund and we will move excess cash from TFG AM up to TFG as needed obviously just depending on whether it's unencumbered cash.

And just to give you an example earlier this year, we've had fees received from GreenOak, we've had certain fees received on third-party CLO deals but consideration would be to be required within TFG AM and that is why they flowed up to TFG. So that kind of give you a kind of working example of yes the process and how it has worked in recent times.

Your second question is just kind of counter, you have come with notes EBITDA as one metrics for in determining the kind of cash flow and why we point out that there will be some mismatches between accounting recognition and cash flow timing and there is a typically the -- as a result of performance fees in typically hedge funds performance fees, we paid out at the end of a quarter early in the Q1 following the bigger performance here and similarly Equitix's success fees again there may be a slight lag between whose those success fees are accrued and when that physically received.

On the cost of things typically vast majority of our costs are kind of the accounting in the cash flows are pretty close and I think the only thing to flag into the material events relates to bonuses where we tend to defer the payments of some bonuses in order to have that additional stickiness to stocks so that is for the deferral period at the year end.

And the final thing has caused TFG AG as it generates operating profitability will be required to pay some operating cash and that again with the requirements of cash. [Indiscernible] force them.

Paddy Dear

Great, thanks very much. Next one is [indiscernible] says cumulative tender offer as a long- term sell appreciate this to grow 9% and return of capital to travel with very strong dividend policy, giving a challenging – sorry given a challenging macro environment, what you currently see is most attractive areas to deploy capital.

And I think I'm going to just tackle that one and I think the best place to start is probably the last slide that we showed which is on our future investment expectation and I guess before even tackling that, you should point that with we like the investments we have, we particularly like the diversification were built over last few years but I think the question is more focused on new allocations.

So really just if we look at the allocations, we do think that attractive value in CLO FD particularly through the structure we have at TCIP and indeed earning our own manger at LTM and therefore getting not just the return both the CLO equity investments but potentially receiving fees at LTM and indeed potentially at TCI as well, so collectively that is a business that we feel to see very good opportunity.

Secondly as I said we are expected to be growing on investments in real estate, it should be little bit more color on lease, we expect specifically these to be over the larger amounts to be in Japan, the U.S. and in Spain and thirdly although we haven't made investments to date, we are seeing very healthy opportunities in money and finance and we continue to invest to be able to fund attractive investments in that part of the business and lastly I would highlight TFG Asset Management again we haven't done any new deals in the first half of the year but we're looking out to opportunities to buy or build businesses and create value for our ability to build the businesses.

I think both of the areas that are focused on at this point but obviously we continue to be and as always will be opportunistic on top of that in investment strategy.

Okay. Next question is cash holding, how come do you keep cash balances 20% now to get distributed to investors or buy more equity given 20% in investment in TFG at $10 worth NAV at 1995 would increase the NAV with 1.99.

And I think the first one, I make it brief, we absolutely understand the maths of share buyback, we just obviously reported on the most recent share buyback of $100 million in June and the increase that has to NAV and indeed as Phil pointed out, I think the total of share buybacks since IPO is just under $500 million, it's obviously very significant demand but maybe tackling the first part of the question of why do we keep cash at 20% of NAV, the first point, I would illustrate or highlight is the fact, that we do want to keep cash on the balance sheet.

Generally we have our many of our investments; we have leverage at the underlying investment level I mean certainly CLO equities obviously have high leverage in them, the convert fund at the leverage entity, Equitix we have levered at the corporate level. And so in many areas and with the leverage in the business it's just not on the balance sheet and as a consequence we like to keep free cash from the balance sheet.

Secondly, we like to keep free cash for unknown commitments. And I have mentioned the not to deliver the point, but somewhere between $50 million to $100 we expect to potentially going to TCI II with the CLO equities probably for TCI II. We've also talked about commitments to GreenOak-managed real estate vehicles up to $75 million and obviously potentially for the $100 million in remaining finance, so there is lot know commitments of the firm.

Thirdly as I mentioned in my answer to the last question, we like to be able to be opportunistic and that means we need to keep it cash to be able to do that. But lastly, I would point out as we've mentioned we have revolving credit facility the $75 million currently, and we believe that will allow us to be potentially more flexible with our cash on the balance sheet.

Okay, next of the £13.9 of GB inputs in Equitix valid within the fair value for Equitix are separately on TFG's balance sheet.

Paddy Dear

So Phil, I'm taking that. So those are GP interests that are hopefully held by the Equitix Holding Company, and that all they come within the fair value of that group rather than being reported in you value separately on the TFG franchise.

Phil Bland

Fine. Next question here is, could you tell us a bit more about what other equities are?

And yes, I mean this is just referring back to the breakdown of our equities where we have investments in Polygon funds and then we have a brackets that said other equities. And very simply these are equity for the held directly on the balance sheet either not for a fund. They generally have an event driven process to them but that is the straightforward answer to the question.

Next is, how will fall in the pound sterling impact or for I guess it's how it will differ in pound sterling impact results?

And I guess the few things to point out on this. Firstly these the figures that you're all seeing reported as of the end of June. The although sterling continuously relatively volatile and could move any direction toward a sharp move at the end of June in the last few trading days and that were these reflect, any movements up until the end of June.

More broad statement is being a dollar base fund we do hedge assets back to dollars. We don't like to take a lot of currency risk and that's why we do an asset in non-dollar denomination and we do had some back, the largest of these and of the European CLOs and Equitix. And so just to confirm both of those are hedge fund a on the regular basis back to dollars.

There's a question asking for confirmation of shares – by principals and I can confirm as I mentioned in the earlier, that $2.4 million shares were built by principals of the manager earlier in the year and further being $100 million of a share buybacks in June of $2.4 million shares forward by principals and also in the first half. And last question I have here is our dividends paid gross or withholding tax to U.K. residence.

So I think they're going to be paid gross and if you already U.K. residents who is interested in such savings we do offer a dividend reinvestment program which is described on our Web sites and may actually be a good way of proceeding additional exposure in the recently taxation manner. So TFG shares but, I'd encouraged you to look at that as well.

Paddy Dear

Great, thank you, Phil. And with that I complete questions. So thank you very much everyone to joining us. And look forward to speaking to next quarter.

Question-and-Answer Session

Q -

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