Patria Investments Ltd Q1 FY2022 Earnings Call

Good day and thank you for being here. Welcome to the Patria First Quarter 2022 Earnings Call. I will now turn the conference over to your speaker today, Josh Wood, Head of Shareholder Relations. Please proceed.

Thank you. Good morning, everyone, and welcome to Patria's first quarter 2022 earnings call. Joining on the call today are our Chief Executive Officer, Alex Saigh; and our Chief Financial Officer, Marco D'Ippolito. Earlier this morning, we issued a press release and earnings presentation detailing our first quarter which you can find posted on our Investor Relations website at ir.patria.com or on Form 6-K filed with the Securities and Exchange Commission. Any forward-looking statements made on this call are uncertain, do not guarantee future performance, and undue reliance should not be placed on them. Patria assumes no obligation and does not intend to update any such forward-looking statements. Such statements are based on current management expectations and involve inherent risks, including those discussed in the Risk Factors section of our Form 20-F Annual Report filed in April. Also note that no statements on this call constitute an offer to sell or solicitation of an offer to purchase an interest in any Patria fund. As a foreign private issuer, Patria reports financial results using International Financial Reporting Standards or IFRS, as opposed to US GAAP. Additionally, we will report and refer to certain non-GAAP industry measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with IFRS. Reconciliations of these measures to the most comparable measures calculated in accordance with IFRS are included in our earnings presentation. On headline metrics, Patria generated fee related earnings of $32 million and distributable earnings of $35 million, or $0.24 per share for 1Q ‘22. We declared a quarterly dividend of $0.20 per share payable on June 16, to shareholders of record as of June 2. With that, I'll now turn the call over to our Chief Executive Officer, Alex Saigh.

Thank you, Josh. Good morning, everyone. And we hope you are all well. I first started ‘22 very strongly delivering excellent first quarter financial results and significant new inflows to our platform. We are on track for our 2022 FRE revenue guidance, with first quarter fee related earnings of $32 million, which are up 85% compared to the first quarter of 2021. Distributable earnings of nearly $0.24 per share are up 90% compared to the prior year quarter. And thus our dividend to shareholders of $0.20 per share is up 90% as well. Our platform is growing, with total AUM up 96%, totaling approximately $27.5 billion, and fee earnings AUM up 136%, totaling approximately $19 billion driven by both organic growth and our M&A activity. Just in the first quarter, total AUM is up 16% and fee earning AUM up 6%, which is all organic with Moneda already included in the beginning. We're now seeing significant AUM inflows from fundraising, with $1.5 billion raised in the first quarter across a diverse range of products, putting us in a good position to raise more than $4 billion organically this year, including our first closing of more than $800 million for our seventh generation private equity fund, one year ahead of expectations at the time of our IPO. That capital is available for us to deploy immediately. And that fundraising process will continue as we move through 2022 and in early 2023 as we normally keep our flagship funds open for fundraising 12 to 18 months after the first closing. We also listed our first SPAC Patria Latin American Opportunity Acquisition Corp, a $230 million effort, which gives our private equity business a versatile pool of capital to pursue attractive investments that may not fit our flagship fund profile. Our funds continue to perform very well reflected in our net accrued performance fee balance of $503 million, which is up 45%, just from last quarter, and has doubled from one year ago. All of these points illustrate that Patria’s growth trajectory is on track, and the strength of our business model allows us to maintain this momentum. While major geopolitical events and economic policy developments have undoubtedly changed the world around us in the past few months, Patria continues to march forward, and we believe our business continues to be well positioned for success in this environment. Indeed, the current global landscape clearly makes a favorable differentiation between Patria’s target geography, Latin America, and the rest of the world. Latin American economies are typically net exporters of commodities that are in high demand today, which speaks of increasing trade surpluses and stronger foreign investment inflows. Also, geopolitical risk for the region has been historically very low and uncorrelated with more problematic areas. Furthermore, there were never experiments with zero interest rates or massive quantitative easing programs in the region, which resulted in current lower leverage in public and private sectors compared to advanced nations or even other emerging markets. Lastly, most Latin American economies have lower fiscal deficits, higher domestic interest rates, and exchange rates that are still undervalued vis-à-vis other geographies which is quite a suitable mix to face turbulent times. This is not simply fortuitous that the S&P, Goldman Sachs commodity price index was up 34% in US dollars year-to-date to the end of April, and the MSCI stock market index for Latin America had also risen by 9%. In the same period, the broader global MSCI index was down by 13.5%. Currencies, fixed income, and other assets were showing similar performances. This uncorrelated Latin American performance is by no means an anomaly. On the contrary, it has happened time and again. Against this backdrop, economic activity, and investment returns in Latin America have outpaced most of the rest of the world. Now turning back to Patria, we saw strong progress across all of our major asset class verticals in the first quarter. Both value creation and strong currency appreciation benefited the current portfolio in the quarter. And we are in the early stages of a fundraising cycle that we reload our platform for the next several years. In private equity, we had more than a $1 billion of AUM inflows, driven by the first closing of more than $800 million in our next vintage flagship fund, as well as the SPAC listing, which raised an additional $230 million. While the SPAC will not earn management fees like our funds, it can contribute significantly to our earnings in the future through the sponsor promote that Patria earns in the form of shares in the resulting business combination. The private equity portfolio continues to generate outstanding performance with Fund V and Fund IV generating 32% and 27% net IRR in US dollars, respectively. Fund V now has accrued more than $300 million in net performance fees. We also closed the first tranche of our previously announced transaction which comes out of FEAUM which anchors our new growth equity strategy. In infrastructure, the current funds continue to deliver performance and some great stories in the portfolio. Infrastructure Fund III is now generating a two times multiple and 13% net IRR in US dollars and has quickly ramped up its net accrued performances from less than $10 million one year ago to $110 million to date. Infrastructure Fund IV is much earlier in its lifecycle. But it's generating a 1.7x multiple and 37% net IRR in US dollars. The team looks to finish committing the funds capital this year. Our investment team continues to evaluate a pipeline of actual projects, totaling more than $25 billion, which, by the way, is more than 10 times the size of our current fund. Most of the AUM in credit and public equities relate to our Moneda products. And we are off to a great start as we continue to integrate and pursue cross-selling synergies. Credit AUM is up 7% in the quarter, driven by both new inflows and solid performance. It was a challenging quarter for credit markets globally, with the increasingly hawkish US Federal Reserve driving the yield curve upwards and the situation in Ukraine contributing to wider credit spreads. Despite this backdrop, Moneda’s flagship credit strategies beat their benchmarks during the period. For example, our LATAM high yield strategy outperformed the benchmark by more than 320 basis points in this first quarter, and by more than 850 basis points over the last 12-month. As noted earlier, the Latin American region benefits from having well capitalized corporate issuance, many of them commodity producers, which resonates well with clients in this higher interest rate environment. Public equities AUM increased 18% in the quarter, driven mostly by strong portfolio performance, as we saw the best quarter for Latin American equities since 1991. The combination of higher commodity prices, depreciated currencies, and companies with capital expenditures discipline are producing record free cash flow which is being distributed to respective shareholders. Looking at some of the sparks, I see a scaling investment platform that is delivering outstanding performance to investors across a diversified range of products and asset classes, with opportunities to expand asset classes, improve our local distribution capabilities, and continue our journey to become a truly comprehensive provider of alternative investing in the region. With that, I'll now turn it over to Marco D'Ippolito for more details on the results. And I’ll come back with some final thoughts on the year ahead, Marco?

Thank you, Alex. And good morning, everyone. As Alex noted, we are off to a great start in 2022. And the results clearly tell the story. Fee related earnings of $32 million in 1Q ‘22 are up 85% compared to 1Q ‘21 and up about 30% compared to last quarter when adjusting to the incentive fees revenue that is seasonal in the fourth quarter. The FRE margin of 58% here in Q1 is a little higher than our 2022 guidance. But assuming some incentive fees hitting the top line in Q4, we still expect the full year margin to be in the low to mid-50s range. Management fee revenue of $54.6 million is up 74% compared to 1Q ‘21 and also up about 30% compared to last quarter, reflecting both the full impact of Moneda as well as incremental fees on the $750 million we deployed in our drawdown fund in the second half of 2021. We earned incentive fees on certain Moneda funds as well as our IV Fund, which are measured and realized each year relative to performance against the funds benchmark. Most of which are realized in the fourth quarter. As of March 31, we have accrued approximately $4.2 million in incentive fees at current performance levels. On the cost side, personnel expenses of $15.1 million are up 46% from 1Q ‘21 and up 36% from 4Q, ‘21. Mostly reflecting the addition of the Moneda team. To put into context the FRE compensation ratio, we expect personnel expenses in 2022 to ultimately be around 30% of net revenue. Looking below FRE, we generated $4.8 million in net financial income in 1Q ‘22, driven by both realized and unrealized gains, mostly attributable to the balance sheets investment in our infrastructure core fund launched last year. On corporate taxes, our effective rate for Q1 was approximately 5% on pretax distributable earnings. As we noted in the past, we expect this rate to gradually rise to around 10% over the course of ‘22 and ‘23. Our net accrued performance fee again rose to a new record high of $503 million, up significantly from $348 million last quarter, driven by both positive valuation impact and the improvement in the local currency rates during the quarter. The accrual now equates to more than $3.40 per share, and is becoming more diversified each quarter as firms like Infrastructure Fund III and Private Equity Fund IV continue to progress alongside Private Equity Fund IV. We believe our current valuation is getting very little credit for this embedded value to be monetized in the future periods. Total AUM of $27.6 billion is up 96% compared to one year ago, driven not just by the addition of Moneda, but also by $1.5 billion of fundraising inflows and more than $3.6 billion of valuation and currency gains. The AUM is up 16% just in the first quarter, with both the resurgence of fundraising activity and the positive moves in the FX rate. Fee earnings AUM of $19 billion is up 136% compared to one year ago, with about 30% of that increase being organic and driven by our strong deployment paid in 2021. Fee earnings AUM was up 6% compared to December 31 as our flagship fund added net deployment from the second half of 2021. We saw some nice appreciation in our credit and public equities products. As we look to the remainder of the year, you've heard our message that FRE guidance is on track. A 50% increase from the $86 million generated in 2021 equates to just under $130 million for 2022. For perspective, annualizing just the Q1 FRE result of $32 million would imply year-over-year FRE growth of 48%. That does not account for any FRE growth throughout the year as we deploy capital, nor does it account for any incentive fees, which would be crystallized in Q4. We don't guide on performance-related earnings because it's simply too difficult to predict exit timing. But one thing is clear. Our portfolio continues to generate gains for our investors and accrue a larger inventory of performance fees for shareholders. Private Equity Fund IV and Infrastructure Fund III are more mature and beginning their divestment cycle. And these funds have multiple paths to return capital and satisfy the waterfall threshold necessary to begin realizing the accruals. The timing and pace of divestment activity will determine when we reach that point. And we will have to see how that progresses during the year. To conclude, I'm very pleased with our results for the quarter and our trajectory toward another great year. I will now turn back to Alex for closing thoughts.

Thank you, Marco. At Patria we will build our reputation as trusted long-term investors, and likewise, we have a long-term vision and mindset for what Patria can become in the future. Along the way, we believe there is tremendous value for shareholders as we scale and expand the platform and grow our earnings capacity. We're also excited about the timing in Latin America as we think the region stands out as a particularly attractive investment destination for global investors, given the emerging challenges elsewhere in the world. Our top priority is always investment performance because that is the core of what we do. And it drives every other element of our business. With that as a constant, we have a few key areas of focus this year. Number one is FRE execution. We are in year two as a public company, and our management team is highly focused on delivering our guidance. And as demonstrated by our first quarter results, we are well on track. Number two is fundraising for a growing suite of products. Our team is hard at work raising the remainder of our newest flagship Private Equity Fund, soon to be followed by flagship infrastructure, which will effectively reload our dry powder for several years to come. Number three is divestment progress. Our professionals are searching for great deployment opportunities, as always, but also particularly focused on divestment opportunities in more mature funds, like Private Equity IV, and already for a relatively young fund, like Infrastructure III. Divestment progress, of course, returns capital to our LPs, which helps fundraising efforts and also brings us closer to monetizing the substantial accrued performance fee in those funds. And finally, number four is platform expansion through M&A. Our team continues to evaluate and pursue a number of interesting targets, which could be a great fit for the Patria platform, and enhance product offering geographic expertise, and local distribution capability. We will be focused not just on increasing the size of our platform, but joining with partners, we can expand our collective investing expertise and the ability to generate alpha for our clients. We hope and expect to have more specific news to share on that front. So as we execute on these fronts, we will continue to deliver significant value to our shareholders and finish the year with an even larger platform position to deliver significantly higher distributable earnings in the coming years through both fee related earnings and performance fee. Thank you all for joining us today. And we are now happy to take questions.

Our first question comes from Marcelo Telles from Credit Suisse.

Hi, good morning, everyone, and congratulations on the very strong results. I had two questions. The first one regarding your fundraising activity. I mean, congrats, you had your first closing on our next generation fee fund. My question with that regard is how do you see that play out going forward? Is this amount being better that are in line with your expectations? Has this volatile environment affected in any way? Let's say that the timing of your fundraising or maybe not. And it also connotation the nearly $450 million in fundraising in Moneda. And if you could dig a little bit deeper, and understanding I mean how much of that was related to what they should synergies with Patria or if this was really more related to investors searching for like higher yield investors, as you commented a little bit in your initial remarks will be great to understand that. And the other question with regards your divestments going forward, I mean, we've seen a big increase in M&A transactions in Brazil and lockdown in this environment. Do you think that facilitates your ability to divest in ’22, can you expect some figure that I know you don't give formal guidance for that. But how should we think about your divestment schedule in this higher M&A environment? Thank you.

Hello, Marcelo. This is Alex Saigh. Thank you for being with us this morning. I hope to see you in person soon. Regarding your first question about fundraising for Private Equity VII, we're in the position we expected to be, aligned with our previous fundraising efforts. Typically, we aim for a first close of about 25% to 35% of our target, which is $3.5 billion with a potential hard cap exceeding $4 billion. Currently, we have raised $800 million, which adheres to our expected timeline. Following the first close, we usually keep the fund in fundraising mode for 12 to 18 months, meaning we could have until October of next year to meet our fundraising goals. The market conditions have improved for Latin America, especially since we are regarded as a leading alternative asset manager in the region. Over the last 18 to 24 months, the challenges of low vaccination rates and fiscal discipline questioned in leadership have mostly resolved favorably, boosting confidence in our region. We also saw a commodity upswing starting in the second half of 2021, which benefitted net exporters, especially given the geopolitical tensions from the Ukraine war that, while unfortunate, have redirected investment interest to Latin America. As a result, we're on track with our fundraising for our Private Equity Fund VII, having already planned for a second close this quarter. However, we are facing increased competition as other funds also performed well in 2020 and 2021. Investors are now recalibrating their allocation to private markets due to the significant outperformance compared to public markets, which can lengthen the fundraising process. Regarding our partnership with Moneda, we are beginning to see positive outcomes, but the real benefits will become more evident as 2022 progresses. Moneda raised an impressive amount in Q1, largely due to their solid performance and relationships with substantial institutional clients. Last year, we focused heavily on investments due to earlier COVID impacts, but we are now shifting towards divestments, capitalizing on favorable conditions, stronger local currencies, and a growing economy. We are currently engaged in sale processes for over 15 out of 35 companies in our portfolio, with significant interest from global strategic investors, demonstrating the region's attractiveness. We've even sold notable assets like the largest elderly living company worldwide to a French firm. In summary, while we're excited about these developments and divestment opportunities, we acknowledge the challenges we face in a competitive fundraising landscape. Thank you for your questions.

You did address, thank you so much. And there are very detailed answers, and congratulations on the results again, great start of the year.

Our next question will come from the line of Tito Labarta from Goldman Sachs.

Hi, good morning, Alex and Marco. This is Tito from Goldman. Thanks for the call. Also congratulations, solid results for the year. My question is on the deployment, just want to see how you think about the ability to deploy capital in the current market environment. You highlighted you had to deploy on $2 billion over the last 12-month in the quarter, it was only $55 million in mostly in others and not in private equity or infrastructure. So where do you see opportunities to deploy capital, any particular industry just given the current market environment? How do you think about that outlook? Thank you.

Thank you for joining the call. We're maintaining our investment guideline of $2 billion for this year. There are several promising opportunities in private equity, particularly in agribusiness and healthcare, along with logistics and food. Agribusiness has been thriving in the region, especially in Brazil, due to its robust presence. Healthcare, food, and logistics are also performing well. Regional economies have been exceeding expectations, and Brazil, which many thought would experience a downturn, is now projected to grow by 1% to 2%. Our companies, especially those in private equity tied to infrastructure assets, are showing good performance, with overall revenues slightly exceeding budget. We are seeing variations in performance, with most companies falling within a 4% range from our budget. On the infrastructure side, we're focusing on energy and logistics, particularly toll roads, and we anticipate that the $2 billion investment guidance will hold, with an expected increase in deployment in the second quarter and beyond.

Thank you.

And just to complement it, Tito, this is Marco, good morning. The way we allocate our deployment implies that we reserved to get to them get into execution. So there's been a lot of execution of underlying M&A activity going on in the quarter. That doesn't really show up on the bridge. But the M&A teams have been very, very active on the execution of the investment pieces that Alex alluded to.

Great, thank you, Alex and Marco. That's helpful. Yes, I guess that was kind of answers my follow up. Yes, was there anything else specific in a 1Q that you didn't deploy much? Was it just to kind of active in net M&A that you mentioned? Or was there anything else in the quarter that didn't allow you to deploy much capital?

No, it wasn't a significant reason to be honest. I believe it was just the negotiations that were happening. Our expectations regarding value versus salaries played a role, but there was no concrete reason. It seemed like a typical process that sometimes shifts from one quarter to another. However, I don’t see any decline in the momentum of our investment base.

Our next question comes from the line of Robert Lee from KBW.

Great, thanks. Good morning. Thanks for taking my questions. I apologize if you went over this earlier; I caught the call a little late. So could you update us on where you are within Infra V since you're pretty much deployed and reserved on Infra IV I believe? And then also any update on your new growth equity strategy that you are launching and receptivity there and expectations there.

Yes, this is Alex again. Thank you for joining our call. Regarding Infra V, we are on track and actually a year ahead of the schedule we set during our IPO process. We plan to begin fundraising next year, having originally expected to start in 2024 or 2025. We’re building momentum, and interest from limited partners is strong, with many already inquiring about our upcoming fund. There are few opportunities for investors to access real assets in the infrastructure sector in Latin America, and we are positioned as the leading option. We are actively divesting several of our infrastructure assets, which helps drive returns back to our investors and improve our DPI metric. The performance of our funds is looking promising, which supports our plans for a successful Infrastructure V next year. If the strong returns continue as they did in the first quarter for infrastructure, and if we keep making strategic investments in appealing auctions and assets, I believe we will generate good news on the divestment side this year. Our KPIs—investments, divestments, DPI, and returns—are all favorable for a successful fundraising effort. I’m very optimistic about our fundraising for Fund V. We offer one of the best opportunities for investors in the increasingly active privatization and concessions sector in Latin America. For our private equity growth fundraising, we are on track for a strong first close this quarter, aiming to raise $200 million, which aligns with our commodity partners. I believe we have a good chance of exceeding this target. We are already investing from the fund, which supports the fundraising process because investors can see the assets we have secured. We currently have three assets in the fund and are negotiating MOUs for additional ones. For private equity growth, having these assets already in place aids our fundraising efforts significantly. While the $200 million target is important strategically, the focus on early-stage company lifecycles and the potential performance fees generated by this fund are also crucial for us.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn call back over to Alex Saigh for any closing remarks.

No, thank you very much, everyone. And thanks, Rob, also for your questions there from KBW. Thanks a lot for all of your participation there and questions, I think we are, of course, more than available after the call to keep on taking questions. Hope to see you guys in person very soon. Hope all of you are well. Your families are well. And thanks Josh and Marco as well for the call. And if Josh and Marco don't have anything else to add here, I think we are. That's it, Josh. Yes, I think so. Thank you very much, guys. Have a good day. Be well, be safe.

Thank you, everyone.

Thank you. Have a good day.

This includes today's conference call. You may now disconnect. Everyone have a great day.