Tetragon surges on hope of £1.5bn Equitix sale

A report that the hedge fund and alternative investment group is looking to cash in its stake in infrastructure manager Equitix sees its heavily discounted shares rally.

Confirmation from hedge fund and asset management platform Tetragon Financial that it was considering the sale of its largest holding, private infrastructure specialist Equitix, for about £1.5bn sent its shares soaring 24% this week. 

Responding to a Reuters report that it had invited investment bankers to pitch for a sale of the rapidly growing infrastructure firm held in its TFG Asset Management arm, the company said its strategy ‘with respect to Equitix will continue to include engaging with strategic partners and financial advisers to explore options for executing on transactions or partnerships that would take advantage of this value enhancement’. 

The spike in the shares narrowed Tetragon’s abnormally wide discount from 70% to 62%. The low rating reflects, among other things, corporate governance concerns over the lack of voting rights for ordinary shareholders and the absence of a high watermark to rein in the managers’ performance fee.

Tetragon bought Equitix in 2014 for £159.6m from Cabot Square Capital. Its prime assets include stakes in HS1 and the M25, and in investment company circles it is remembered as a joint bidder for John Laing Infrastructure Fund in 2018.

Christopher Brown, an analyst at JP Morgan Cazenove, one of Tetragon’s brokers, said Equitix had been a very successful investment for the hedge fund since then and had grown to become the largest holding, with its 75% equity stake valued at $825.4m (£632.5bn) at the end of August. It has $13.9bn of assets under management.

Assuming an equity value of £1.4bn after debt implied a £1.04bn valuation for Tetragon’s holding, said Brown, equivalent to a 66% uplift, or $6.10 per share.

He also highlighted that the ‘very generous’ performance fee of 25% above a 7.5% underlying investment annual return would incentivise the management to maximise the price for Equitix. 

‘A material NAV [net asset value] increase should at least be reflected by the same rise in the share price, but in our view how the discount responds will be how the cash is deployed, though private assets are valued at steeper discounts by the market,’ he said.

Brown said he would like Tetragon to return the cash to shareholders but cautioned that was not a given as the company valued its permanent capital and a large distribution may have adverse tax consequences for co-founders Reade Griffith and Paddy Dear, who own 13.6% and 4.06% of the shares respectively.

‘Overall, we would see a successful realisation of Equitix as a catalyst for a long overdue rerating of TFG shares and remain “overweight”, with the shares a constituent of our model portfolio.’

Brown also identified major holding BGO, which makes up 10% of net assets, as another likely disposal in the near term, with Tetragon’s stake currently valued at $287m.

He added that if Tetragon did indeed monetise 40% of its NAV in the coming years, that would beg existential questions about the asset management arm, whose assets would plummet from $41.3bn to $16.4bn, mainly comprising $10.7bn at collateralised loan obligation manager LCM.