Tetragon Financial Group Limited (OTCPK:TGONF) Q2 2021 Earnings Conference Call July 30, 2021 10:00 AM ET
Paddy Dear – Co-founded Investment Manager-Tetragon
Paul Gannon – Chief Financial Officer
Steve Prince – Head-TFG Asset Management
Conference Call Participants
As one of the principals and founders of the Investment Manager of Tetragon Financial Group, I’d like to welcome you to our investor call, which will focus on the company’s 2021 first half results. Paul Gannon, our CFO, will review the company’s financial performance for the period. Steve Prince and I will talk through some of the detail of the portfolio and the performance, and Steve will spend time discussing the outlook.
As usual, we will conclude with questions, those taken electronically by our web-based system at the end of the presentation, as well as those received since the last update. The PDF of the slides are 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, just a few reminders. First, Tetragon’s shares are subject to restrictions on ownership by U.S. persons and are not intended for European retail investors. These are both 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 the capital appreciation and income producing investments.
These investors should have experience in investing in financial markets and collective investment undertaking and be capable themselves of evaluating the merits and risks of Tetragon shares. And they should 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.
I’d 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 facts. So with that, I’d like to pass over to Paul.
Thanks, Paddy. Tetragon continues to focus on three main metrics. We look at how value is being created via NAV per share total return. We also look at investment returns measured as a return on equity. And we monitor how value is being returned to shareholders through distributions, mainly in the form of dividends.
The fully diluted NAV per share was $26.38 at the 30th of June ‘21. After adjusting for dividends reinvested at the NAV, the NAV per share total return for the first half of the year was flat 0%, which compares to down 1.9% for the same period in 2020.
For monitoring investment returns, we use an ROE calculation, which was positive 1.5% for the first half of the year, net of all fees and expenses. With reference to that target, the average ROE achieved since IPO is 11.8% which is within our target range of 10% to 15%.
Later on in the call, we’ll get more color as to how the specific asset classes contributed to the return this year.
Finally, moving on to the last key metric dividends. Tetragon declared a dividend of $0.10 for the second quarter, which represents a dividend of $0.20 for the year-to-date. Based on the share price at 30th of June of $9.62, the last four quarters dividend represents the yield of approximately 4.2%.
Finally, on to the NAV bridge. This breaks down into its component parts the change in Tetragon’s fully diluted NAV per share from $26.57 at the end of 2020 to $26.38 per share at 30th of June ‘21. Some of the highlights investment income increased NAV per share by $0.79 per share.
Operating expenses management and incentive fees reduced the NAV per share by $0.35, with a further $0.03 per share reduction due to interest expense incurred on the revolving credit facility. On the capital side, gross dividends reduced NAV per share by $0.20, and there was a net dilution of $0.40 per share, which is labeled as other share dilution in the bridge. This bucket primarily reflects the impact of dilution from stock dividends plus the additional recognition of equity based compensation shares.
With that, I will now hand back over to Paddy.
Thanks, Paul. And as on previous calls, I’d like to put the company’s first half 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 roughly 16 years of trading history.
This chart shows the NAV per share total return, which is the thick line at the top. And share price total return, which is the dashed line. And the chart also includes equity indices, the MSCI, All-Share, and the FTSE All-Share. And it also includes the Tetragon Hurdle rate of LIBOR plus 2.65%.
As you can see, Tetragon has returned 332% since IPO on a NAV total return basis, so over a four-fold increase in the value since IPO. The last six months return of 1.5%, return on equity compares with about 11.1% for the FTSE All-Share, and 12.5% for the MSCI World Index. So equity markets have had a strong first half of the year, and Tetragon, on a comparative basis has had a quiet first half with only a small positive performance.
Moving on but continuing the theme of looking at the long-term, here are some more performance metrics. Our return on equity or investment return target is 10% to 15% per annum over the cycles. And the average return since IPO is 11.8%. Notwithstanding the last few months inflation numbers, as the world tries to emerge from COVID induced lockdowns, and also the volatility that was created in longer dated bonds, risk free interest rates still remain very low.
The implication being that we should naturally expect all risk assets to return at the lower end of long-term expectations. And as with respect to Tetragon, this means ex-ante that our return expectations are at the bottom-end and possibly even lower than the 10% to 15% range that we expect over the site.
The last figure I’d point to on this table shows that approximately 35% of the public shares are owned by principals of the investment manager and employees of TFG Asset Management. And we believe this is a very important number as it demonstrates a strong belief in what we do, as well as also a strong alignment of interests between the manager TFG Asset Management employees, and of course Tetragon shareholders.
So moving on, this next slide shows the composition of Tetragon assets. So it looks at the breakdown of the $2.5 billion of net asset value. The colored disks show the percentage breakdown of our asset classes and strategies as of the 30th of June 2021. And that is on the right hand side. And that compares then with year-end 2020, on the left hand side.
There are only some small changes but the ones I’d like to point out are TFG Asset Management has grown to 35%. And that’s up from 34%. And as we’ll discuss, a lot of that is due to continued growth in assets under management to these businesses.
The second I would note is private equity and venture capital has moved up to 17% from 16%. And that’s mainly due to new third party LP investments made. And the third point of note is net cash is now down below zero. And Steve will talk more about that later.
So now let’s move on to discuss the year’s performance or the first half performance in more detail. The NAV bridge that Paul showed was a high-level overview of NAV per share. What this table shows is a breakdown of the composition of Tetragon’s NAV at the end of the first half 2021 and compares it to the end of 2021. And does that by asset class.
And also the factors contributing to both those changes in that. So it shows an investment performance plus capital flows. And that then ties back to the changing NAV. As you can see from the bottom row of the table, the aggregate investment performance, labeled gains and losses, generated a gross profit for the period of $74 million.
Specifically, TFG Asset Management, our private equity holdings and asset management businesses had gains of $65.2 million and was the strongest performing asset class as you can see. And these Asset Management businesses continued to perform well. I mentioned the growth in a AUM and at the end of the half that was $32.8 billion in client dollars, and that was up from approximately $30 billion at year-end. So strong first off.
Secondly, event driven equities, convertible bonds and other hedge fund strategies had a positive contribution of $16.3 million. The main Polygon funds had positive net returns in the first half in part due to continued robust convertible bond issuance. But also, as we’ve discussed a strong backdrop for equity markets.
Thirdly bank loans, and these are investments in CLOs. These generated a gain of $29.7 million. Primarily as credit fundamentals continue to improve from there COVID low. Real estate lost a $1 million overall, our losses in U.S. real estate funds were nearly offset by gains both in Asia and our Paraguayan farmland.
First item here private equity and venture capital. In aggregate this lost $4.9 million in the first half the losses were driven by Hawke’s Point investments. These are unrealized losses i.e. mark-to-market basis and partially driven by a softer gold prices over the second quarter.
But these losses were partially offset by gains in other funds and current investments, including Banyan Square Partners and our investments in direct private equity.
And finally, other equities and credit lost $31.5 million over the first half. These were the losses were all in equities with a small gain in our – in our credit investment. And now what we’d like to do is go delve down and give you more detail on each of these categories. So we’ll start with TFG Asset Management. And for that I will pass over to Steve.
Thanks, Paddy. Our private equity investments and asset management companies through TFG Asset Management represented the largest and strongest performing asset class in the portfolio at the end of the period. They produce gains as Paddy said of $65 million, driven primarily by Equitix.
Equitix produced gains of $29 million in the first half, primarily driven by the rate at which the company has continued to increase capital raised and deployed, which in turn flows into the business model. Assets under management increased by approximately GBP340 million during the first half of the year. The valuation gain was tempered by the expected increase in the future UK corporate tax rate.
TFG Asset Management investment in LCM gained $18.5 million during the first half, the second best performing investment. LCM launched two new CLOs during the period, which increased its AUM to $9.5 billion.
In addition, a decrease in the discount rate applied to the discounted cash flow model and an increase to approximately 3%, in the market multiple utilized in the price to a AUM valuation approach also contributed to the increased valuation. While gains amongst our other asset managers were more modest, I want to share a few of their notable developments.
BentallGreenOak, despite the ongoing challenges of COVID-19, the business continued to grow AUM at full year 2020 results exceeded the original plan. There were pre-tax distributions to TFG Asset Management of $10.7 million reflecting a combination of fixed quarterly contractual payments, variable payments and carried interest. This investment is valued using the present value of the various cash flow elements of the BentallGreenOak merger deal which comprises those three elements plus a call option, as well as Tetragon’s share of co-investments.
The investment in Polygon recorded a gain of $7.9 million during the first half, which reflects both the positive performance generated by the two main hedge funds, as well as some additional capital raised. The value of Tetragon Credit Partners increased by $1.5 million in the first half, mainly due to an increase in the projected carry payable by Tetragon Credit Partners funds as the CLO market continued to recover. Its most recent vehicle TCI IV, had its second close in July, and this will be factored into the Q3 2021 valuation.
Tetragon’s investment in Hawke’s Point recorded a loss of $0.9 million during the period. Tetragon’s investment in Banyan Square Partners was valued at $0.8 million unchanged from the end of the year. Lastly, Tetragon’s investment and contingency capital has not yet been valued by a third party valuation specialist. Contingency Capital began to raise capital for its commingled fund during the first half.
At the end of the first half of 2021 TFG Asset Management’s EBITDA was $27.5 million, compared to $37.8 million for the same period in 2020, whilst total income grew 8% when compared to the first half of last year. Operating expenses increased at a faster rate. Management fee income grew by $3 million. Whilst core, recurring management fees in Equitix continued to grow strongly. The management fee line in 2020 was positively impacted by a material one-off fee, which makes this growth less apparent.
Performance and success fees grew by 1.4 million, with increases in performance fees being largely offset by a decline in Equitix, primarily – primary income recorded during the period. Other fee income grew year-on-year and comprises income generated by Equitix on management services contracts, which is known as the EMS business and certain cost recoveries from Tetragon related to seeded Polygon hedge funds.
Operating expenses increased by $13.9 million versus the first half of last year. There were three main drivers for the increase in expenses, with the primary one being an increase in headcount, as existing businesses added additional investment and operational capability. Secondly, there were increased expenses associated with the setup of Contingency Capital, with the expectation that this will start to bear fruit as capital is raised and invested.
Finally, businesses with operations in the United Kingdom saw their costs rise in U.S. dollar terms as the average spot rate between the periods increased by approximately 10%. Paddy will now go over hedge fund investments.
Thanks Steve. Tetragon invests in event-driven equities, convertible bonds and other strategies through hedge funds. And the majority of these investments through the polygon managed hedge fund. Our investment in the Polygon European event-driven strategies were up $6.7 million across the three different trading strategies. As you can see in the chart.
Our investment in the polygon convertible bond fund made $9.7 million in the first half. And as I mentioned, the first half was a strong period for convertible bond issuance. So it continued at that record global pace, which was obviously positive for our performance.
And during the period, we redeemed $25 million from EEOF and ELB, so the two top funds there. And made a small new investment into a third party hedge fund as shown in the bottom line of this chart.
Next, we move on to bank loans. Tetragon predominantly invests in bank loans through CLOs. And predominantly by taking majority positions in the equity tranche. Tetragon’s investments are split as shown here between LCM deals, non-LCM deals and funds managed by Tetragon credit partners.
As you can see an aggregate our bank loan exposure recorded a gain of 30 million for the first half. And this is as credit fundamentals continued to remain healthy and supportive of CLO investments. Specifically our directly owned LCM CLOs generated $13.4 million of profit during the first half.
And fair values benefited from as I say the sustained improvement in the underlying loan fundamentals but also the recalibration of certain modeling assumptions used to valid positions that take into account with a strong recovery in economic conditions.
These investments also return $13.8 million of cash to Tetragon during the first half. Tetragon also purchased securities in two new LCM deals during the first half for a total of $18.6 million between them. And it was a majority stake in the equity tranche of LCM 31 and a 5% interest in each tranche of LCM 32. A European risk retention-compliant U.S. CLO.
Tetragon’s investments in vehicles managed by TCP, or Tetragon Credit Partners, generated profits of $13.4 million. And similar to the LCM deals, which was driven by sustained improvement of the underlying loan fundamentals, as well as the recalibration of certain modeling assumptions. During the first half, we completed refinancing in three CLO transactions.
And this reduced the interest cost of debt and increases the cash flow generation ability both equity investments. In the first half these TCP investments returned $19.7 million of cash income to Tetragon. We also closed the TCP Opportunity Hedge Fund in the first half, with both principal and profits being returned to investors. And this was as the dislocation in prices that it was established to take advantage of during the crisis last year, and subsequently been reversed in the market and therefore that opportunities played out.
And finally, the non-LCM managed CLO segment generated a gain of $2.9 million and distributed $2.1 million of cash income during the first half.
Next asset class is real estate. And as a reminder, Tetragon holds most of its investments in real estate through BentallGreenOak managed funds and co-investment vehicles, as you can see here on the chart. The majority of these are private equity style funds, concentrating on opportunistic investments targeting middle market opportunities in the U.S., Europe and Asia, where BentallGreenOak believes it can increase value and produce positive unlevered returns by sourcing off-market opportunities where it sees pricing discounts and market inefficiency.
You can see in the first half that European investments had a small loss of $0.3 million. Investments in the U.S. funds lost $9.7 million. And this was driven by revaluations in properties held in U.S. fund II and these are really due to where the fund has exposure to some hospitality and commercial assets in New York City and L.A. in particular.
You can see that the Asian funds had a small gain and the other real estate bucket increased in value by $6.7 million. And this is our commercial farmland in Paraguay managed by Scimitar, a specialist manager in South American farmland. And during the first half the farmlands were revalued by an independent valuation specialist. But with that, let me hand you back to Steve.
Thanks Paddy. I’m going to talk about Tetragon’s private equity and venture capital investments. So Tetragon’s private equity and venture capital investments are split into the following subcategories. One investments managed by Hawke’s Point. Two investments managed by Banyan Square Partners. Three other funds and co-investments where Tetragon invests in a non-affiliated fund as a limited partner or a special purpose vehicle as a co-investor. And finally four direct, those are investments that comprise direct private equity investments on the balance sheet, and those also include venture capital investments.
This entire segment generated losses of $4.9 million during the first half. Starting with Hawke’s Point, Tetragon’s mining finance investments, managed by Hawke’s Point generated a loss of $38.3 million during the first half. Driven by softness in the gold mining sector associated with a decline in the gold price. Hawke’s Point continues to actively seek and progress new opportunities. In fact, Tetragon invested 6 million into a new co-investment vehicle managed by Hawke’s Point during the first half of the year.
Next Banyan Square Partners. Banyan Square Partners investments made gains of $2.5 million during the first half of the year. As of the 30th of June, these comprised five positions. Capital called during the period was $9.5 million.
Within other funds and co-investments through the first half of the year Tetragon’s allocations to investments in private equity funds and co-investment vehicles in Europe and North America generated $17.5 million in gains, capital called by these various investments during the period totaled 14.3 million.
Finally, the direct category in this category currently hold two pre-IPO positions, including the investment in the Ripple Labs Series C preferred stock. During the first half of the year, generated gains of $13.4 million reflecting the accelerate – the accretion of the Series C preferred stock dividend.
Our direct balance sheet investments in the other equities and credit category produced losses of 31.5 million during the period. Our other equities bucket generated losses of 34.3 million. These investments comprised European and U.S. listed public equities and technology, biotechnology and the financial services sectors. The other credit bucket generated a small gain of 2.8 million during the first half.
Finally going to talk about Tetragon’s cash position. You can see that at the bottom part of this chart Tetragon’s net cash balance, which is cash adjusted for known accruals and liabilities short and long dated, was negative $93.9 million. As of the half year mark, Tetragon has in place a 10 year 250 million revolving credit facility. As of June 30, $150 million of this facility was drawn, and this liability has been incorporated into the net cash balance calculation.
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 Tetragon used approximately 170 million of cash to make investments and $12 million to pay dividends. $136 million of cash was received as distributions and proceeds from the sale of various investments. Future cash commitments are approximately 200 million, they can prize hard investment commitments to BentallGreenOak funds of $52 million; private equity funds of $27 million, Tetragon Credit Partner funds of $11 million. Contingency Capital funds of $25 million and working capital loan to Contingency Capital of $10 million.
There’s also soft investment commitments and those included commitments to Banyan Square Partners of $51 million and Contingency Capital of $25 million.
I’m going to now turn to the following table, which lays out some of our expectations for the overall portfolio resulting from those various cash flow moves that I just discussed. Going to go through some of our expectations. But it’s always worth pointing out that one of our advantages is our ability to be opportunistic as it relates to investing and what we see as the most compelling investment opportunities.
Our outlook has not changed much since the start of the year. As you’re no doubt aware, we launched Contingency Capital with Brandon Baer at the end of 2020 and Tetragon made a $25 million commitment to its commingled fund in June. Beyond that this remains the largest unknown in terms of cash requirements, because we remain very opportunistic as it relates to deals, that being TFG Asset Management as a whole. We expect our event driven equity exposure and our exposure to our convertible strategy to remain relatively stable, subsequent to our $25 million redemption from our Equity Opportunity Fund and the Long Bias Fund.
Speaking of turning to CLOs, our pre-crisis CLOs are now fully amortized, but we expect to invest in CLOs via various Tetragon Credit Partners vehicles, while at the same time receiving cash back from some of their initial funds. In terms of the BentallGreenOak funds, we have various commitments to them, but we also expect some of our existing investments to continue distributing capital. So on the whole, we would expect our real estate investments to be relatively stable over the next 12 months.
In terms of our private equity allocations, we expect them to grow over time. There are a few small additional LP commitments we have yet to fund and we expect our Hawke’s Point and Banyan Square allocations to continue to grow.
Similar to what I said about TFG Asset Management, i.e., we expect to continue to invest in opportunities as they come along. We have a similar sentiment with our other equities and credit bucket. The timing of investments are not certain. But we expect to continue to be opportunistic as it relates to investments that we see. And lastly, we’re hopeful that in this current environment, there’ll be additional allocations that we’ll be making to new asset classes.
I’m going to now turn it back to Paddy , who will kick-off for Q&A.
A - Paddy Dear
And thanks, everyone, we’ve had a lot of questions, which is, which is great. I will try and sort of format them and maybe answer them in bunches. And hopefully, if I don’t get your questions specifically, I may have answered it by answering someone else’s.
Firstly, I think I’m going to tackle questions on dividends and share buybacks and various different questions, but a very specific one, I’ll start with on dividends, which reads is the board considering my proposal to reinstate the 2019 dividend and have a transparent link between the dividend and the NAV?
This refers obviously to last year’s decision in Q2 where the Board chose a more flexible approach in dealing with dividends and share repurchases. And, and the headline answer is no, the Board has not changed that dividend policy.
But to give a little bit more color, the idea was to have flexibility for both dividends and all buybacks and use whichever is most appropriate, so to have a meaningful dividend whilst at the same time if discount was high, to be able to use cash for buybacks. And actually, if we look at 2020 as an example, whilst we cut the dividend, total money spent on dividends and buybacks was about $86 million, which is obviously rather more than if we hadn’t cut the dividend. But it did allow us to spend that more money on buybacks.
So last year’s bias, obviously, was to use extra capital for repurchases and giving the discount. So where are we today? Well, about a 4.2% yield. So not an insignificant yield.
But also, the discount is still greater than 60%. So I think our position is that the – we’re still in the same framework where we would have a bias towards buybacks rather than dividends. But as we’ve just gone through on the analysis, there is very little, we have negative 92 million cash at the moment as Steve has gone through so we don’t have the free cash to be able to, to enact buybacks currently.
In a related topic, we should tackle some questions on share repurchases. And I might just read out a few first one reads, what are the reasons to not do a buyback?
And if there weren’t any, why should one not then be considered given the deep discount, and alternative investment options?
A second one reads on the 2000 – or the 2020 Investor Call, there were a number of questions around the share prices discount to NAV. Since then equity and credit markets have continued to rally toward relatively expensive levels. It’d be interesting to understand more detail than what was explored on the last call on where Tetragon is able to invest at a higher potential return than buying its own stock of over 60% discount.
And maybe if I just read a third one here, it says over the past year, past eight years Tetragon share price is down but including dividends, this translates to a modest compound shareholder return. And I’d humbly suggest that management takes some dramatic action to improve the share price whether it be reinstating the previous dividend level instituting a significant tender or buyback reducing management fees or some other corporate actions such as a spin-off. I personally favor large discount buybacks over dividends.
And in my view, the dramatic dividend cut is the primary reason the share price remains weak. So obviously all of those focusing on buybacks, but also sort of leaning into the dividend question as well. And I intend to address these together because as we’ve stated before the dividend policy we do want to be able to flex between both share buybacks and dividends.
And both are in a way returns of capital to shareholders. I think, there are nuances to the difference. Obviously, dividends are treated as income and buybacks if you’ve participated is a capital return and you get different tax treatments, et cetera.
But again, you’re at the risk of stating the same answer, the – we’re not announcing a buyback at this time. We don’t have free cash to be able to do so. But that is a perhaps an overly simplistic answer. And I accept that the question is, is also about why are we investing in anything other than buying back shares? And I think it’s sort of pertinent therefore to address that.
I would think of it as being maybe two approaches to that answer. The first is, and as I’ve said before, on these calls, our view of share buybacks. And this is based on market evidence, not just for our company, but in the market in general, is that whilst they’re attractive and accretive, if at a big discount for NAV per share, they’re certainly not a panacea for the discount. I mean, we traded at a very wide discount. And that’s not withstanding, many, many millions of dollars of share buybacks over the years.
So we do treat it as an opportunistic approach, as I say, not a single solution for the discount. And the second is more about sort of the view of the long term, sort of put it in the context of the investment strategy, which we believe is the ultimate way to optimize value for shareholders in the long term. As I think people know, we’re looking for attractive asset classes, we’re looking for asset managers. We like to own part of the asset management company. And to that end, we’re trying to build, continue to build TFG Asset Management.
And we think that having a number of uncorrelated businesses across different asset classes, is creating value. So what we’re trying to do is build new asset management businesses, and obviously, that takes capital, both working capital and investment capital.
And Contingency is a good example of that right in the mix at the moment. But we believe that that strategy will create value for shareholders, and we want to continue to invest in the future just as we have done in the past.
So that is the context, having said that, as I always say, we need to get a balance. We look to return cash to shareholders, as and when we can. And obviously we appreciate that with a wide discount. We appreciate how accretive share buybacks can be.
Another one related question, I’ve got here on the dividend. And the question reads, would it not make sense to stop the scrip dividend policy, it’s highly dilutive to other investors, particularly given the current discount, and also partially negate some of the impact of the dividend on reducing the discount.
In addition, by stopping the scrip dividend, those investors who wish to reinvest their dividends can do so by buying shares in the market, again, helping to reduce the discount. I think this summary is -- I know there were strong views on both sides here. But the simple answer is we provide a scrip dividend alternative at the request of shareholders.
As I understand it, the script dividend has certain tax benefits for UK taxpayers. And that’s why we do it. And the tax treatment would obviously be different, if they were receiving income, and then subsequently buying shares with that income. So, I don’t see that as a solution. But just to reiterate, it is -- it is a request to shareholders. And I believe it’s particularly driven by UK tax situation.
We have had several questions now on our position in Ripple. So maybe just to read out there lots of them, but just -- maybe just to read out a few can you give more progress on an update on the Ripple investment dispute? What costs have been incurred by Tetragon legal or otherwise? How does Tetragon assess the Ripple fundamentals now? What is the valuation process for Ripple and has it changed in any way? Or is any change being considered?
So let’s just sort of run through those. Our dispute with Ripple is over, we felt we were entitled to be repaid our capital. But we lost that request. So that is over, and specifically to the legal fees, I mean, I’m not going to disclose what our legal fees are. And part of the reason is we have legal fees associated with lots of our investments, we’re very active investor and it’s all part and parcel of the business we’re in. So we don’t disclose those on a trade-by-trade basis. Valuation process, no change, third-party value has been from day one, and that continues to be the case.
What do we think of the fundamentals? Well, I’m not going to go into detail on Ripple and its fundamentals as a private company, but I would say the following, we still own the same security that we negotiated for in 2019. So we have the same exposure that we always have. We are excited about the prospects for the company and we like the security that we own, so that that hasn’t changed. And I know that obviously Ripple is a private company. But if people are interested XRP the currency does trade I mean, it happens to be super volatile as might expect for a cryptocurrency. But for benchmarking back in 2019, when we invested XRP was on the order of $0.20. It has been incredibly volatile probably will continue to be incredibly volatile, but currently trades at about $0.70. So that, I hope gives people a sort of color on where we are with Ripple.
Again, another one that had been a few questions on is about the SPAC. And maybe just a straightforward questions. What’s the logic behind the doing the special purpose vehicle listing? And a lot of questions on can you give us an update on the SPAC market, or can you tell us more about the fact that you are you’re entering into. So as you can imagine, I have to be careful, I can’t say too much about the SAPC. But because I can’t say more than what we’ve written in the filing.
But for those that are interested, it’s an S-1 filing with the SEC. And if you Google S-1 filing, SEC in Tetragon, you get the full filing. I think the important points that I would highlight is that the SPAC is a TFG Asset Management entity. So if we are successful, it will be part of TFG Asset Management. The target size for the SPAC itself is $500 million. And as I said, the sponsor is TFG asset management. The banks are Bank of America and JP Morgan. And as we say in S-1 the target acquisition, we’re looking broadly at alternative asset management, as you’d expect from it being part of TFG Asset Management.
And we would be highly focused on the on the high growth sectors. That’s where we think we could we can we can add value. So it fits with the current strategy for TFG Asset Management of owning majority minority positions in alternatives. So that is what we would be looking to do there.
Another question on Contingency? What, can you give us a little bit more color on Contingency Capital? I mean, there’s two or three others, but I think that’s sort of the gist of it. So what, I mean Steve mentioned a bit about this in the presentation. But perhaps to give you a little more color Contingency Capital is an investment manager that focuses on legal assets. So what do I mean by that?
Well, their loans to law firms, that is corporate litigation, portfolios, distressed special fits where there’s some sort of legal tax or regulatory outcome to it. So it’s a, you can think of it as a credit business in a sense, rather than an equity business where you’re investing in an asset that is, that is backed by the legal outcome. So heavily driven by legal process. Brandon Baer is an expert in this field. He started with $1.4 billion of co-investment arrangements. So not in funds, but capital that he can put together. And now we’re going to set about raising a commingled fund for that business, hopefully in the second half of the year.
There have been a few questions on attracting – best way to sum it up is attracting new investors to the business. And I think the maybe the best way to summarize all those questions is how would you bring a potential new investor on board and how would you sell yourself to someone new? That sort of is a summary of several different questions.
And I think the way I would best answer that is anyone buying into Tetragon? I think the first thing they need to do is know that they like the current portfolio of assets, understand the current portfolio of assets, because a lot of them are illiquid and have idiosyncratic growth prospects within them. I think the next piece is a investor would need to understand what Tetragon does what the investment strategy is. And obviously that includes building TFG Asset Management, and believe that that is an investment strategy they want to be part of.
And I guess the third element is they’ve got to believe that the Tetragon management is capable of executing on that strategy. But if they do believe all that, then you get, obviously the current portfolio, that strategy, current yield of 4.2%. And then create a 60% discount to NAV with the management team owning about 35% of the shares.
So strong alignment of interest, you get the growth of that NAV plus obviously a possibility of a re-rating. And whilst as we’ve spent a lot of time talking on this call, and others, there may not be a short term catalyst. I think we all agree and hope that in the long term, the expectation is to achieve NAV or greater. So, I think that is the way I’d phrase it. And indeed do phrase it when speaking to, new and potential investors.
We have, again, a few questions on the other equities bucket. One thing, the worst performance was from other equities and credit which lost $32 million, or approximately 12% on its opening valuation, can you give us more color on these losses? Or a slightly more prosaic question, how can you lose 31.5 million on your equity portfolio in a bull market.
So I think that does make sense to give a little bit more color on that. So at a high level, just to reiterate, this section covers the portfolio positions we have that are in public equities, and debt. The vast majority of this is equity currently. And it is U.S. and European equities, approximately 10 positions. We have a strong focus on technology, and biotechnology healthcare, for the biotechnology healthcare tends to be life sciences and the like.
And the losses have come from a combination really of five positions in the first half offset by gains in one. And to the point about it being an equity bull market, I mean, yes, that is the case. But obviously, a lot of the biotech and life sciences companies are not that driven by markets and are more driven by their own idiosyncrasies. And in all of these, we tend to trade around the positions. These are currently mark-to-market losses. In other words, we maintain those positions, and we trade about them on a quite an aggressive basis.
But yes, that is sort of, obviously not a great half, first half to the year. But that’s what, that’s what we’re doing in that area. There is one here for Paul, which is about accounting. So let me just read out the question, and then I’ll pass over to Paul to answer. We’ve had a few questions about how we account for various LTIP and equivalent share-based compensation programs. Yeah, I think, as you can tell that is sort of amalgamation of three or four different questions. So I’m going to pass over to Paul to answer that one.
Sure. The broadly speaking, two buckets of share based compensation plans for TFG Asset Management. First one is a long-term incentive plan in which certain employees received equity based awards, with vesting dates ranging from 2020 through to 2030. These are designed for line and incentivize the recipients with shareholders and are in addition to other compensation of salary and cash bonus.
The second bucket is the time and performance based share compensation, vesting in 2021, and 24, which is awarded to the CIO of TFG Asset Management as part of his compensation package in 2019. And in addition, at the Tetragon level, there are share awards to the independent directors vesting at the end of 2022. Now all of these are referenced on Page 41 of the half yearly report. So I encourage you to have a look there to see more detail.
With respect to the valuation of TFG Asset Management, the currently awarded but unvested shares are not included in the discounted cash flow models as they are non-cash items. And because the shares acquired to settle these obligations should they arise have already been acquired.
With respect to the CIO package, the third-party valuation agent is factored into the central cost assumption and expected annual costs beyond 2024, when the current package ends based on a benchmark CIO salary within the alternative asset management industry. With respect to the employee compensation costs more broadly, the third-party valuation agent takes the company’s model and applies adjustments as it deems necessary to arrive at expected cash compensation expense throughout the life of the model.
And that service is provided in relation to the share based compensation, these shares are recognized in the fully diluted share count, which feeds through into the fully diluted NAV per share. Figure 18 in the half yearly report is where we show the TFG Asset Management pro forma statement of operations. And this shows a net income for the period or EBITDAR equivalent which is a non-GAAP reflection of the current performance of TFG Asset Management.
And for clarity here for the purpose of the compilation of the table, the imputed share based compensation expense has not been included, which is footnoted. Our understanding is that the market practice with respect to this, whether you’re including or not including share-based compensation is mixed. But we’ve opted not to include it. Paddy?
Yes, that’s great. And actually, slightly related question there is one. Can you clarify whether the increased employee shareholding is a result of employees buying shares in the market or via compensation schemes? Also, in both scenarios, how you’re ensuring alignment of incentives? If the deep, deep discount NAV is beneficial to employees still in share accumulation mode?
So, to answer the first part of that question, I think there are three ways thinking off the top of my head, that people can acquire shares internally. The first, as you rightly point out is through long-term incentive plans. The second is buying in the market, or indeed selling in the market, where we have strict regulatory windows after for a couple of weeks, that insiders can deal in shares. And the third is by taking dividends in shares rather than cash.
I can’t speak on behalf of everyone, but certainly, personally, I have bought shares in the market over, over many years and also have taken shares in taking dividends in shares. So, I think all of those are ways that people can increase. To the latter point of -- if everyone is acquiring shares, is a deep discount or positive, I think that it is in everyone’s interest who owns shares, not just to have an accumulation of value. But to be able to spend that money.
I can assure you that everyone who owns shares at Tetragon would rather have a healthy share price that’s liquid trading at NAV or above either to be able to borrow against sell or acquire. And so I think that would be a much more efficient way for people to be able to use that use that value.
One more here on the corporate broker. Can you give some context over the decision to appoint Jefferies as a joint corporate broker and as a result, were there any change to the way that TFG addresses current or potential shareholders?
I think the way would I want to start on this. I think Tetragon interacts with brokers, across many fronts, and probably much more so then a traditional closed end fund. So yes, we’re a closed end fund, but also Tetragon owns an asset management business that manages $33 billion across a global platform, multi-disciplined. We buy and sell businesses. We create new funds public and private, we borrow at the fund level, at the asset level at corporate levels.
So our interaction and transaction based is much greater than a traditional closed end fund. And what we think with Jefferies is that they have a not just a very strong reputation on the closed end fund business in the UK, but also a global platform that we help -- we hope and believe will help TFG Asset Management and the broader Tetragon across a whole range of activities.
And so that is what we want to build on with them is build a close relationship across a multitude of different activities. So that’s, that’s sort of better color on the move. I am going to leave it there. I think we’ve just about covered everything. And we’re coming up to the hour.
So I just want to thank everyone very much for joining us. And leave it there until we speak again. Thanks, right.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines