Hedge Fund Lakewood Bets on Tetragon Greed as CLOs Jump

Anthony Bozza is counting on the greed of a debt investor almost left for dead in the financial crisis to make money for his hedge fund.

The founder of $2.8 billion Lakewood Capital Management LP has added to its stake in Tetragon Financial Group Ltd. (TFG), a publicly-traded company that owns the riskiest parts of leveraged loan funds, according to a letter sent to investors last week. The stock, which trades at about $10, or 40 percent below the value of its holdings, could double if the assets perform as expected and the company buys stock at discounted prices, the New York-based firm wrote.

“There is little doubt this management team is greedy, and we are hopeful that this greed will finally be for the benefit of shareholders,” Bozza wrote. If management gets “the stock to trade at its forward net asset value of $20 per share, the Tetragon management team would have a stake worth over $400 million.”

That would be a major turnaround for executives including Reade Griffith and Paddy Dear, who co-founded hedge fund Polygon Global Partners LLP in 2002 and Tetragon three years later. The fees Tetragon paid to Polygon, corporate governance issues and the way it’s treated shareholders have brought criticism from investors including Leon Cooperman’s Omega Advisors Inc., which owns more than 10 percent of the Guernsey, Channel Islands-based firm. In a 2011 interview with Bloomberg, Cooperman described Tetragon as “abusive to stockholders as anyone I’ve ever seen.”

Jonathan Gasthalter, a spokesman for Tetragon at Sard Verbinnen & Co., declined to comment.

Shares Tumbled

Tetragon rose 0.8 percent today to $10.05 in European trading. The shares had tumbled more than 90 percent from a peak in 2007 to 67 cents in 2009 as investors anticipated a wave of corporate defaults would wipe out the riskiest pieces of collateralized loan obligations, which pool leveraged loans and slice them into securities of varying yields.

“At the time of our initial investment, the market had all but written off the value of Tetragon’s CLO portfolio,” wrote Bozza, who started Lakewood in 2007. He declined to comment on the letter.

Instead, after six years of the Federal Reserve holding interest rates near zero, the default rate is at the lowest level since 2008 and investors are clamoring for CLO equity. GSO Capital Partners LP, the credit unit of Blackstone Group LP (BX), raised 260.5 million euros ($350 million) this month for a fund to buy European loans and invest in CLOs after Marathon Asset Management created a CLO equity fund, according to a regulatory filing.

Stock Recovery

CLO investments represent about 60 percent of Tetragon’s assets, according to Lakewood. About two thirds of that come from deals originated prior to 2010 that may be valued conservatively. Tetragon also invests in corporate loans and owns a money-management business that Lakewood forecasts will generate over $20 million in net income annually.

Even as Tetragon’s share price recovered -- it gained 64 percent including reinvested dividends in 2012 -- Cooperman railed against the company. In May that year he wrote a letter to the board criticizing Tetragon for the incentive fees paid to Polygon, a lack of transparency and a failure to repurchase enough shares.

After Tetragon bought Polygon Management LP for about $99 million in October 2012, Omega sued Tetragon’s officers and directors claiming they used the purchase to funnel company assets to themselves.

Tetragon has previously called the suit “factually and legally” without merit.

“It is unfortunate that Leon Cooperman has come up with these specious claims with no basis in fact or law nearly eight months after the announcement of the Polygon acquisition and notwithstanding the 27 percent increase in TFG’s share price since its announcement (with dividends reinvested),” Tetragon said in a June 2013 statement.

More Aligned

Lakewood acknowledges that “many investors have shunned” Tetragon because of compensation agreements, including payments in 2009 and 2010. The managers’ interests though are now more aligned with shareholders through increased equity from the Polygon purchase, Lakewood wrote in the letter.

Cooperman, Tetragon’s largest outside investor, agrees the stock is “very undervalued.” That’s for a reason, the 71-year-old investor said in a telephone interview yesterday.

“Unless they change the way they deal with shareholders the stock is not likely to change,” he said.

To contact the reporter on this story: Meghan Morris in New York at mmorris109@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net

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