Patria Investments Ltd Q3 FY2022 Earnings Call

Hello. Thank you for standing by and welcome to Patria’s Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I’d now like to hand the conference over to your speaker today, Josh Wood, Head of Shareholder Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Patria’s third quarter 2022 earnings call. Joining today are our Chief Executive Officer, Alex Saigh; our current Chief Financial Officer, Marco D’Ippolito, as well as our incoming Chief Financial Officer Ana Russo. Earlier this morning, we issued a press release and earnings presentation detailing our results for the third 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 and 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 latest Form 20-F annual report. Also note that no statements on this call constitute an offer to sell or a 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 U.S. 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 IFRS measures are included in our earnings presentation. On headline metrics, Patria generated fee-related earnings of $31.7 million and distributable earnings of $29.7 million, or $0.20 per share for the third quarter of 2022. We declared a quarterly dividend of $0.171 per share payable on December 7 to shareholders of record as of November 15. Before I turn the call over to Alex, I want to highlight that last week, we announced Patria’s first Investor Day event to be held on Monday, December 5, in New York. We look forward to seeing many of you there in person to engage with our leadership team, and the event will also be webcast live with registration available on our IR website. Since we’ll be giving you a comprehensive update on our multiyear outlook at this event, please note that we will defer most commentary on forward-looking topics beyond 2022 to the Investor Day. With that, I’ll now turn the call over to Alex.

Thank you, Josh, and good morning, everyone. Patria continues to perform very well through a year where the world has faced significant uncertainty. We delivered $0.20 of distributable earnings per share in the third quarter, bringing us to $0.64 per share for the year-to-date, all driven by steady and predictable fee-related earnings. FRE per share is up 54% year-to-date in 2022. And given our 85% payout ratio, a shareholder buying around the current share price could expect an annualized dividend yield north of 5% from fee-related earnings alone, an attractive proposition in just about any market environment. Our fundraising progress continued in the third quarter with more than $500 million of new capital inflows across multiple products, bringing us to more than $2.7 billion raised for the year-to-date. Valuations were generally up in the third quarter, taking our net accrued performance fee balance up to $428 million and driving nearly $450 million in positive impact to AUS. Lastly, we added some great talent to our team, welcoming Ana Russo to the firm as our incoming CFO, and we are excited for the perspective and value she brings to Patria. She will also introduce herself to you shortly here on the call. Before expanding on our platform, I want to first touch on the broader Latin America macro landscape and a highly differentiated economic backdrop emerging in our part of the world. It pays to diversify. And right now, Latin America is making a solid case to attract allocations. A busy political cycle is coming to an end as the region’s largest economy, Brazil, has just gone through general elections. In early October, the composition of the new Brazilian Congress came to light and both the health of representatives and the Federal Senate now have the most conservative and business-friendly trend since the return of democracy in the 1980s. State governors also elected last month have the same profile, along with an independent judiciary branch, a free press, and solid market foundations that speak of a functional liberal market democracy. By the way, that is the prevalent situation in most of Latin America. As for the presidential contest, there were no unknowns. The runoff had former President Lula facing the incumbent President Bolsonaro. Lula won, an outcome that was largely anticipated by markets since he has led the polls over the past months. Patria’s successful business model and investment strategies are not predicated on the particularities of the campaign program of any country leader in any specific geography. But that being said, there are rational grounds to assert that President Lula is likely to implement the same effective policies and reforms that yielded him a job approval rating of over 80% when he stepped down on January 1, 2011, after serving two four-year terms. Lula managed to reduce poverty in the country by 51%, whereas Brazil’s GDP in U.S. dollars climbed to $2.2 trillion from $510 billion. Public indebtedness fell to 62% of GDP from 76%, whereas international reserves soared to $289 billion from $38 billion. Admittedly, we benefited a lot from the unfolding commodity super cycle, but it is worth noting that over the past couple of years, the relative prices of primary products have increased significantly as well. Lula leads a broad center-left coalition that will try to enact an ambitious agenda with a focus on sustainable development and inclusive growth while preserving fiscal and monetary discipline, thus updating the script followed in his past administrations. If we take the broader Latin American perspective, we see evidence from recent election cycles in Colombia and Chile, for instance, that strongly suggest Latin American societies may not change, but they are constantly readjusting extreme departures from the existing status quo. Very importantly, there has been no compromising of prudent economic policies, nor of the friendly stance towards private investments. Lastly, it is worth remembering that there are no geopolitical conflicts in the region, no nuclear weapons, no religious or ethnic clashes, while natural resources are plenty. As the reference alternative asset manager focused on the region, we believe these factors should continue accruing to the benefit of Patria. In our portfolio performance, our ability to attract new customers to our products and our capacity to successfully divest from assets indeed corroborates the year-to-date performance of Latin American assets and markets. The Latin America’s MSCI index of listed equity in U.S. dollars is up 12% in 2022, while the global index is down 24%. A basket of Latin American currencies adjusted for each country’s GDP size shows an appreciation of 2% against the U.S. dollar, while other global currencies like the euro and the Japanese yen are posting double-digit depreciation. M&A activity in the region has grown by 43%, while in the rest of the world, it has stagnated or is decreasing sharply. These distinctions are important. There’s a clear view that while our industry clearly benefits from the powerful long-term trends in asset allocation, it may face some macro headwinds in the short term, and we are certainly seeing that reflected in sector valuations. As you think about Patria, it’s important to consider the backdrop in which we operate. And right now, we think Latin America looks quite compelling compared to most parts of the globe. Turning back to our business, I’ll go a little deeper on fundraising and then add some color from our asset class verticals. Fundraising in the quarter included a notable closing of Brazil-based capital of our newest private equity fund. We talked a lot about diversifying our platform and product offering, but this is a great example of our efforts to diversify our distribution channels and further democratize alternatives in the region. The closing of BRL1 billion focused on the high net worth and qualified retail channel included more than 7,000 investors with check sizes ranging from more than BRL1 million all the way down to BRL10,000. It is a prime example of how we believe we can harness the financial depth in the region to drive AUM and earnings growth. We targeted $4 billion of fundraising in 2022 across a diverse range of products, and each piece of that target is now well within our sights. While our target closing date should get us there in Q4, it is possible that this piece could slip past the end of the year into early 2023. Over 2022 and 2023 together, we are targeting $6 billion to $7 billion in long-dated closed-end drawdown fund structures. This is coming not just from our two flagship funds, but also from a growing offering of complementary products targeted at both the international and local investor universe, including strategies like growth equity, infrastructure credit, and private credit. And that $6 billion to $7 billion doesn’t include fundraising in our more perpetual strategies that can constantly fundraise, where we have already seen inflows of more than $1.4 billion so far this year. It also doesn’t include our permanent capital strategy, where we now have more than $1 billion in AUM across REITs, real estate investment trusts, and core infrastructure products and expect to add another $1 billion next year through organic fundraising and additional M&A. Now looking at some highlights across the platform. For private equity, in addition to the fund closing, we announced the agreement for Lavoro, a leading agricultural input retailer in Latin America and the largest in Brazil to become a U.S.-listed public company. This is an important step forward in the divestment process for Fund V and a great case study of our success in the agribusiness sector and the execution of a pan-regional consolidation strategy with more than 20 M&A transactions completed to build the company we see today. In infrastructure, we continue to see an accelerating fundraising cycle as we target the first closing of our next flagship fund in the coming months, more than one year ahead of what we anticipated back at the time of our IPO. We also closed our second infrastructure core vehicle targeted to local Brazilian investors in Q3. The divestment process continues to move along with some key assets with an expectation to deliver significant realizations to our limited partners in the next few quarters. Credit continued to show strong relative performance despite historically challenging market conditions in the asset class. The high-yield strategy is outperforming its benchmark by an impressive 660 basis points year-to-date, with about 90% of outperformance attributable to asset selectivity, with a yield to maturity of more than 13% at the end of Q3. The local currency strategy is also outperforming its benchmark with a yield to maturity of more than 15%. On a broader basis, these two products are both performing 1,500 to 2,000 basis points better than the world’s Aggregate Bond Index, which is down 20% year-to-date. Our public equities platform delivered solid performance in Q3 as LatAm equity markets were a clear bright spot relative to the U.S. and most of the world markets. The Chilean small-cap strategy, for example, returned 12% in Q3 and outperformed its benchmark by 370 basis points. And in real estate, BBI raised more than BRL100 million to allow the new REIT, real estate investment trust vehicle focused on credit assets. This continues to be an area where we remain active on the M&A front and believe there is a very replicable permanent capital strategy to be pursued in other key Latin American countries. Let me now turn things over to Marco to give some more details on the numbers.

Thank you, Alex, and good morning, everyone. Looking first at the P&L results, we generated fee-related earnings of $31.7 million in the third quarter of 2022 and $94.6 million year-to-date, up 46% and 57%, respectively, from the comparable prior year periods. FRE was in line compared to the second quarter, following a similar pattern in the fee revenues and fee-earning AUM. Several known factors coincided to limit the uplift that we typically see moving into the second semester of the year, and our trajectory remains on track for our full-year guidance. Our second infrastructure fund reached the contractual end of its fund term in June, and the lack of that fee stream offsets the additional revenue generated by infrastructure deployment in the first half of the year. Also, as noted last quarter, there is a fee holiday on the first closing of our latest private equity fund, meaning the private equity deployment in the first half, while still fee-earning AUM in nature, is not effectively generating management fees yet. Finally, the outflows from credit in the middle of the year, which have low and we believe turned the corner, have resulted in credit fee earnings being lower than we hoped at the beginning of the year. Despite these offsetting factors for management fee growth during the year, fee revenues have remained very stable, demonstrating the stability that makes our fee earnings predictable. In the fourth quarter, we expect to deliver similar management fee revenue with the addition of the year-end incentive de-crystallization adding to the FRE results. This should allow us to deliver our financial guidance of 50% FRE growth, which we first conveyed exactly one year ago, through an environment where maintaining guidance has proved difficult for many companies. The FRE margin was 57% for both the quarter and year-to-date period, continuing to run on the higher side of our mid-50s guidance as both personnel and administrative expenses have remained relatively consistent with first-half levels. Net accrued performance fees rose to $428 million, up from $49 million last quarter and up 23% since the beginning of the year. The quality of our private equity and infrastructure portfolios continues to support significant embedded value for shareholders, and exit processes continue to move forward for several portfolio companies. As we look to the fourth quarter, there remains a possibility of a performance fee realization event with the outcome now being more binary. It’s safer to assume an event that crystallizes in 2023, though we would expect to have clarity by the time we announce our Q4 earnings. Turning to AUM, total AUM was $26.5 billion at September 30, up slightly from the prior quarter, with the inflows in private equity offset by outflows in credit and positive valuation impact offset by currency impact. Total AUM is up 76% from one year ago, reflecting the expansion with Moneda and up 11% year-to-date. Fee-earning AUM was $18.6 billion at September 30 compared to $18.8 million at June 30, with a quarterly change generally driven by the same factors affecting fee revenue that I mentioned a moment ago. The contractual fee turn-off of infrastructure is the largest driver. While we also saw some additional net redemptions in credit for the quarter, driven largely by Chilean clients, we are seeing the macro headwinds for those flows as we enter Q4, following the strong rejection of the proposed new constitution in Chile. I will close with a quick reminder of my upcoming transition to focus my time more fully on Patria’s growth strategy in the coming years as Chief Corporate Development Officer. It has been a privilege to serve as a CFO in these recent years, and I want to assure you that I will continue to be a regular presence to Patria shareholders from the senior leadership team. Bringing Ana Russo to our management team adds a distinctive set of skills that will take our finance and accounting team to the next level as a public company. In turn, it is going to allow me to best leverage my strengths to achieve our future vision for the growth of the platform. You’ll hear a lot more from Ana in the coming quarters. But for now, I will turn it to her for just a few quick words.

Thank you, Marco, and good morning, everyone. It is a pleasure to be here with you on the call today and I look forward to meeting soon in person. I plan to spend this fourth quarter working closely with Marco and the team getting up to speed, and we are off to a great start since my arrival at the beginning of the month. Marco has built a wonderful team, and I’m excited and honored to have the opportunity to step into this leadership role. Obviously, I would defer any business-related questions to Alex and Marco at this time. I will turn it back to Alex for the closing words.

Great, and wonderful to have you on board, we are adding important talent to our leadership team for our growth as a public company and positioning our team to really maximize their strengths to drive Patria forward. I want to reiterate thanks to Marco for the incredible job he’s done leading Patria through this chapter in a very wide-ranging CFO role, and it begs that I pause and reflect on what we have accomplished in the seven quarters since the IPO. We expanded our platform organically and inorganically with total AUM up 84% and fee-earning AUM up 141% since the end of 2020. Our IPO capital has driven three strategic M&A transactions, giving us a substantial credit vertical, a new public equities and PIPE expertise, a talented growth equity team, and an anchor for real estate in Brazil. Our fundraising cycle continues to run ahead of our expectations at the IPO, even given the difficult environment here in 2022. Our drawdown funds have deployed $3.2 billion to new investments to drive organic fee-earning AUM growth of 27%. Our portfolio is performing very well with the two most recent vintages of both private equity and infrastructure funds, all accruing performance fees today. An overall performance fee accrual is up 55% since the end of 2020 or up 76% when accounting for the interim realizations. We have also committed to giving you some guidance on our fee-related earnings where we delivered in 2021 and now reiterate we expect to deliver again in 2022 on 50% growth. On that note, I’ll close by again encouraging you to attend or tune in to the Investor Day event we have coming on December 5. It’s a great timing for us to provide a clear vision on what we want to accomplish over the next several years, and we are planning on an engaging program that will showcase our platform with presentations from across our leadership team. I think you will leave with a renewed view on what we are today, what we want to become, and the value we can deliver to you as shareholders along the way. We’ll now be happy to take your questions.

Our first question comes from Craig Siegenthaler with Bank of America. You may proceed.

So far, the Brazilian stock market and the whole have reacted pretty positively to Lula’s win. And that’s a positive for the valuation of your portfolio companies, the return translation, USD, and also the realization outlook. But I want to think on this a little deeper. So besides the market impact, do you see any other potential positives or negatives from a Lula administration, especially on the domestic fundraising front? And I’m also wondering if infrastructure spending could also be an important catalyst for Patria.

Yes. I think the answer is yes. I think we see that as a catalyst, to be honest. First and foremost, if I go back 20 months ago, 24 months ago, to be honest, Craig, Bolsonaro as the President, and we were in the middle of COVID, and I think he was trying to do a good job, but he was very criticized by civilians and the international community in how he handled COVID, et cetera. In the end, I think he did a good job in the vaccination programs. We’re up to now over 90%, et cetera. But I think the country was going through this general criticism around the world of how Mr. Bolsonaro was handling things. Now we turn to 24 months after that to today, I think investors are a lot more positive about Brazil, and also on a relative basis, from then 24 months ago to today, I think Mr. Bolsonaro came back and had a more positive stance on COVID. The economy is open again, and comes the war and with Ukraine, and the region doesn’t have any geopolitical risks, et cetera, everything that we said over the call, and you did see how the markets reacted to all of this very positively. Finally, I think some of our investors were waiting for the election. I think that if Mr. Bolsonaro had won, we would also be in a positive stance. I think there were more concerns in this handover, pass over, and I think we talked about that over our dinner in London a couple of weeks ago or a month ago. Now what we listen from our investors is, like, okay, the page is turned, let’s move forward. Additionally, I think with the international community, I think Mr. Lula does stand as a positive outcome. I think he will play to the international community audience, where he’s going to focus on a few things which will be very well accepted on the environmental front, number one, on civil rights, number two, and maintaining fiscal and monetary discipline, number three. On the first two, they’re already there in acting and inviting to be the Environmental Minister of a person that is very engaged with the international community. The international audience, which today is center-left, left, is already applauding. Now, Mr. Biden in the U.S. already congratulated Mr. Lula, saying we can do so many things together. You have the Norwegians coming back and already saying that the funds for the Amazon Forest recuperation are already back on $2.5 billion. They had hosted that flow of money to Brazil because of Mr. Bolsonaro's stance on the environment. You have Mr. Macron, and you have a center-left government in Germany, also applauding Mr. Lula. We have China, which I was very impressed with the congratulations letter that Mr. Lula received from the leadership in China, again, you are the person that we expect to really deepen the relationships with Brazil. And of course, China being center-left has the same sentiment. So the international audience is pretty much aligned with Mr. Lula’s speech. So yes, I think that investors now have a positive view towards Brazil. And, of course, liquid securities come first because they react immediately to a positive stance. But I think that our fundraising locally and internationally will definitely benefit from that. On the local front, notably, we did raise a record high for a private equity fund in Brazil in the month of October prior to the election, even with interest rates at 13.75%. So that also shows a positive sign of how investors are willing to invest more in alternatives, and of course with Patria. So now, we’re positive here and I think Mr. Lula will do the right thing. He is everything but not pragmatic. He’s a very pragmatic person. He will definitely play for the international community crowd and audience, and I think he’s already been well accepted, and I think he will continue to be. That plays very well with our investors.

Got it. I think the U.S. Vice President will be attending his inauguration too. Alex, my follow-up is on Moneda. Credit AUM declined sequentially. That was a mix of negative flows, depreciation. I know something is going on in Chile with the pension plans. There is some pent-up redemption demand that played out, I think, a year or so ago. Can you just help us with what’s going on with Chile and also help us with the timing and the size of these redemptions if they’re going to continue?

Yes, of course. On September 4, we observed that the Chilean public voted against the new constitution. This decision led to a significant halt in redemptions. It seems to have positively impacted the situation, as many Chileans were concerned about the proposed constitution from President Boric. Over 60% of voters rejected it. Since then, redemptions have effectively stopped, and if we maintain the same or increased inflows in 2023 without further redemptions, I believe we can approach the year with optimism. We are already starting to see some of the funds that were withdrawn being reinvested. The concerns about the new constitution were also tied to how pension funds in Chile operate, as they must align their asset allocations with an average of all pension funds. For instance, if an average fund has 58% in equities and 42% in fixed income, any fund deviating from this must redeem from equities to rebalance. The fear was that the new constitution might impact their performance. Additionally, they wanted to keep cash on hand for potential withdrawals. However, with the rejection of the constitution on September 4, that situation has changed. There’s now a greater desire to invest in Chile and our alternative products, and the need to maintain cash reserves has diminished. Not only have the redemptions ceased, but we are also seeing investors reinvesting in our funds, coming from both institutional channels and family offices. This trend looks promising and should continue into 2023.

Thank you. One moment for questions. Our next question comes from Ricardo Buchpiguel with BTG Pactual. You may proceed.

I have three on my side. First, can you please talk about when the next closing of PE Fund VII and Infra Fund are expected to happen? For my second question, can you please explain what happened with the deployment levels to be flattish quarter-over-quarter when you look at Q3, and what we should expect in the following quarters? And finally, can you please give more color on what drove the loss in financial result this quarter?

Thank you very much, and nice to talk to you, and thanks for participating in our call, so three questions. Number one, next closing is on private equity fund VI and infra fund V. For private equity fund VI, we did a couple of closings, I think two or three closings during the third quarter with Brazilian clients, Latin clients and outside of Latin America clients, mainly U.S. So we are going ahead. I think we’re having these multiple closings every month or every six weeks. As soon as we have enough volume, around $100 million, we have a closing, which is a straightforward process, to be honest. We keep some of the subscription documents in escrow, and then we know we’ve joined over $100 million because there are legal costs associated with closing, and then we get all these sub-documents signed and do an official closing. That’s what we did during the third quarter. I think with Latin investors, as I said, with U.S.-based investors and with Brazilian investors. The Brazilian fundraising, which is very interesting, we had a record high fundraising for a private equity fund in Brazil with XP being the distributor. The interesting part is different than what I just described in Brazil; when you fundraise for a private equity fund or an alternative asset fund like ours, it’s like an IPO. You have the beginning and end. So you have 20 or 25 working days, you have to fundraise like an IPO. You start day one, and then in two working days, we have to stop fundraising. We announced a target to raise around BRL800 million. There was BRL1.3 billion in demand. We managed to do the hot issue, which was 20% more and reach BRL1 billion. We had an additional BRL300 million that we couldn’t accommodate because by Brazilian regulation, it’s first come, first serve. At the end of 20 working days of fundraising, we had 15 working days of fundraising, and for the other five, we canceled the meetings because we were already over BRL1.3 billion, and we knew that we couldn’t meet the excess demand. After a few months, if I’m not mistaken around four months, I can do another issuance through the process that I just described. We’re very excited that maybe sometime early next year, we’re going to do another one. I think we can do another one, especially after everything that I just answered here to Craig’s question with Lula already being in office and things going in the right direction, and interest rates in Brazil showing that they’re going to go down in the second semester of next year. That’s what the yield curve indicates. On the infrastructure fund V, we haven’t started and now we’re talking to investors. We haven’t had the first closing yet in private equity fund VII. We had the first closing of private equity fund VI back in March of this year. We’re planning to have a first closing sometime this year or early next year. It depends more on bureaucratic issues, and it’s very interesting because we’re having a reverse increase when we’re going to get out with infrastructure fund V. An additional comment here is that, as a general comment, an additional comment here, 30% to 40% of the funds were raised with North American clients from the U.S. and Canadians. The U.S. market, in particular, is crowded, and we’re waiting for a better moment to raise in the U.S. I think we’re going to meet the targets for private equity fund VII, particularly with the U.S. underperforming and we are outperforming in other regions of the world—Middle East, Israel, Asia, and Latin America to compensate for this. If the U.S. improves in 2023, which I think it should, then I think we will do even better. On the infrastructure side, we never really raised much money from U.S. or Canadian investors for our infrastructure fund. Infrastructure is a real asset, but it’s not really an asset class that U.S. pension funds invest in. They are beginning to come into this asset class. So infrastructure fund V has about 10% of investors from U.S. and Canada. The U.S. investor situation is different from what I just mentioned, so it does not directly affect our infrastructure fund in that sense. Infrastructure is a sought-after product today because of the inflationary hedge, et cetera, et cetera. I’m pretty positive on the infrastructure fundraising process as we go along. Now on deployment, what did we do here? And of course, there’s the strategy and then there’s the tactical part of the execution, right. We want to deploy—last year, we deployed around $2.5 billion. It was a very favorable moment for deployment because we saw more of a tactical approach to deployment, an overshooting of our currency’s devaluation. As I mentioned, I think it was a general pessimism exaggerated toward Brazil and Bolsonaro because of what he stands for on COVID. We said, look, I think this is a very interesting moment for deployment. Valuations were depressed because interest rates were going up, et cetera, et cetera. We had a very good year of deployment. Approaching 2022, we thought that things would improve relative to the uncertainty about the elections. We’ve tried to divest considerably. As we do the divestments in the fourth quarter, mainly from our infrastructure funds and private equity funds, we are hitting a very good exchange rate to take the money out and give back U.S. dollars to our investors at BRL5.20, BRL5.14. Interestingly, our private fund VI, which is our latest private equity fund, and an infrastructure fund IV, which is our latest infrastructure fund, are returned in dollars better than reals, which is unusual because as I just said, we invested in BRL5.60, BRL5.70. So we were delayed a little in signing the deals we had in the pipeline. We turned papers slower than we could to understand the election’s implications. Now we believe everything is good. We delayed some papers a little over the third quarter. The strategy remains the same—over the last 12 months, we have deployed commitments of BRL1.4 billion. We should finish the year with BRL1.5 billion, right on target with where we had set the expectation to commit $1.5 billion from our long-tailed closed-end funds—private equity and infrastructure. We are on track there. Regarding your second question, we do not expect anything in Q4 related to the previous fee agreements in the infrastructure sector that would impact revenue. We have a private equity fund IV finishing in June 2023. Again, a lot of micromanagement here, but just to answer your question, no effect in the fourth quarter of 2022. I will turn it to Marco to answer your third question.

Ricardo, hope everything is well with you. Regarding the financial results, I’ll split my answer into two. The first piece on the non-GAAP measures on Page 8 of your presentation, you’re going to see that on the quarter, financial expenses are actually increasing by $100,000. This is very much a reflection of the variance of the assets underneath, driven substantially by GP commitments. So the mark-to-market of the assets drives some of that variance. If your question pertains to IFRS, then—that’s on Page 22 of your presentation—you will see that most of those expenses are driven by M&A activity, which are non-cash expenses. I’ll call attention particularly to a newer line that stands for the market value of the warrants. Again, these are all non-cash expenses. Very clearly, we saw there was an increase in the non-cash expenses looking at this quarter versus the previous one. Is the increase mainly due to VBI's acquisition, or should we consider any other effect?

Precisely that, yes, precisely that.

Our next question comes from Tito Labarta with Goldman Sachs. You may proceed.

Alex and Marco, a couple of questions also. First, on performance fees, you mentioned you probably have some more visibility in the coming quarters and expect to realize those, maybe more in 2023. But just to understand, is there anything in particular you would be waiting for? Is it just more stability in markets? Is there any particular event that you’re waiting to be able to realize some of these performance fees? I imagine primarily it would be from private equity fund VI and infrastructure fund III. Any color so we can think about the timing and how much you could potentially realize that you can give would be helpful? And then second question, a follow-up actually on Chile. Just looking at the pension reform that was announced last night, they call for a public option to compete with the private fund managers. Just wondering if you have any more insight on that, if that can create any potential impact for you there?

Okay. Thanks, Tito. Thanks for participating in our call and for the questions. On performance fees, I think we’re doing as planned, to be honest. We’re seeing good realizations coming up in both funds that you mentioned, private equity fund V and infrastructure fund III. We are in the process of selling several assets, a couple of them are very close to signing or very close to closing. At valuations that we expect, that pushes us very close into the performance fee arena. Sometimes, it could happen by the end of this year. If I look into where we are in some of these asset sales, though it might slip into the beginning of next year, bureaucratic approvals could push things into January or whatever. However, I don’t see any hiccups in the process. The process is proceeding as we expect—going from non-binding offers, then the binding bids, and for some of these assets that I mentioned, we’ve already received binding offers. Now we are negotiating the Sales and Purchase Agreements (SPAs) and so on. So I’m happy with the process, valuations, and exchange rates. Two of the assets, actually, do not have dollar-denominated revenues, but whatever. Still, I’m happy with the whole atmosphere and, going back to Craig’s first question, I think of course the election in Brazil, because these assets are very LatAm, and the other asset is more Brazil-focused. So yes, having the election results and having this peaceful baton pass from Mr. Bolsonaro to Mr. Lula helps. Therefore nothing is expected to interfere, but it’s definitely beneficial for investment committees of these prospective buyers that everything has gone well in Brazil. Regarding your second question, I think it’s a positive move from the Chilean government, increasing the contributions from 10% to around 16% to the pension fund. So in general, the amount of money these pension funds will manage will increase, which is better than smaller amounts. Like in Mexico, which went from 6% to 12%, bigger amounts for these pension funds are beneficial, and they are our clients. We don’t have a lot of detail yet. I’ll pass it to Marco for more insight. But before we have a reaction, we will pay close attention to how the lower and upper house reacts because many radical proposals in the region and in the country have been simply rejected by the population and governors.

This really isn’t new from what Boric laid out during his campaign and his narrative about his intentions for the pension system. It came out last night, and we will study it before reacting. The first note is, as Alex mentioned, the system is going to get bigger, benefitting from greater contributions, part of which is to be paid by employers and part by employees. This will be very inclusive. So it’s going to be a populous-driven proposal. I won’t get into a lot of detail on the outcomes for the economy because that also has another side—increasing the cost of employment in the region. But as a first look for the asset management business, overall, it’s an increase in asset flows, though it remains to be determined how much of this will be driven by public versus private initiatives. The proposal is not completely clear on that yet, and we are going to keep a close watch on how both houses react.

Our next question comes from William Barranjard with Itaú BBA. You may proceed.

Alex and Marco, thanks for hosting the call. I have a question here regarding the public equities and the credit operations, so basically Moneda operations. We would like to understand how you see the AUM evolution going forward if you see the mood improving, especially for equities. And then if you see any performance fees for these operations for the next few quarters?

Okay, yes, definitely. I see a better outlook in general because, again, just having the election cycles over in most Latin American countries is positive; people just turn the page. Number one. We have the rejection of the constitution in Chile; number two. We have the peaceful transition between Mr. Bolsonaro and Lula; number three, and several other factors play into us being more bullish on fundraising for this year and next year. Additionally, a reduction in interest rates in Brazil will probably happen in the second semester of next year if the world situation permits it. The Brazilian Central Bank has indicated the same over its last two meetings. I can add so many other comments here, which favor fundraising. You probably know that in October, we had the highest inflow into equity funds all over the world at $23 billion. That is more of a global number, not just Brazil. I think in general, people are anticipating the comeback of economies globally. But specifically, I think LatAm will come out first because it started first with rate hikes, etc. And then the election cycle also being over helps everything I said. So we’re bullish. On the other side of the equation, William, we see the reduction in withdrawals. One side is what you mentioned, which is fundraising and new money coming in. The other side of the equation is important for the net inflows is the redemption. We’ve seen redemptions halt after the constitution was rejected in Chile, and of course, this helps net inflows. This help is positive.

Yes, tying those statements to our presentation and what we laid out, specifically regarding credit and equity, is that we’ve reduced outflows by about 50% relative to the previous quarter, considering that the adjustment—the rejection of the constitution—came out only in the middle of the quarter. That’s an important data point. We cannot call it a trend yet, but it’s noteworthy. The important data point is the inflow coming from what you read as advisory distribution, which is particularly driven by families that are typically first movers. We have a couple of data points to be positive on that trend. Finally, the other important data point is regarding relative performance and absolute performance of these two products. The high yield is performing exceptionally well, being over 10 percentage points above the last year, which is impressive in a world where credit has faced severe challenges. In addition, on the equities side, if you look at Chilean equities, they’re performing in excess of 25% net this year, so all that contributes to the flows.

Yes, the credit fund means 10% better than peers.

Exactly, yes, that’s correct. Regarding your question on incentive fees, I'm glad you asked it because I want to guide you through a quick math exercise that’s quite interesting. If you look at Page 13 of your presentation, you’ll see that the incentive fee accrued to date is $4.9 million. So the answer to your question is yes, we expect to see that kicking in the fourth quarter. If you go back to Page 18 on your presentation on the earnings for the quarter, the year-to-date FRE is $94.6 million. The market consensus for the year is $129 million. That means the gap for the year to go is $34.4 million. If you look at the current quarter, we delivered $31.7 million. As we described earlier in this presentation, we expect this to remain consistent into the upcoming quarter. So if you just account for the amount of the additional incentive fee that’s kicking in, we’re showcasing Page 13, which is accrued at $4.9 million, this will position us ahead of the 50% guidance increase on the FRE for the year.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Alex Saigh, CEO, for any further remarks.

Well, thank you very much for your patience here with us and participating here. I hope to see you all on December 5 for our Investor Day in New York starting at 12:30. We’re excited for the event to showcase our leadership team. If you can’t be there in person, please tune in online. We’re thrilled—we’ve achieved 50% growth over last year—excited about 2023 with everything that just happened in the region, mainly in Brazil with the elections and thrilled about performance fees coming up due to the bids for our assets at our marks. So again, I hope to see you on the 5th and hope to talk to you soon and see you in person as well. Be well and safe. Thank you very much.

Thank you, and enjoy your day.

Thank you. This concludes the meeting. You may now disconnect.