Patria Investments Ltd Q4 FY2022 Earnings Call

Good day. Thank you for standing by. Welcome to Patria's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would 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 fourth quarter and full year 2022 earnings call. Joining today are our Chief Executive Officer, Alex Saigh; our Chief Financial Officer, Ana Russo; and our Chief Corporate Development Officer, Marco D’Ippolito. This morning, we issued a press release and earnings presentation detailing our results for the fourth quarter and full year 2022, which you can find posted on our Investor Relations website. 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 statement. 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 $35.3 million and distributable earnings of $53.3 million or $0.36 per share for Q4 '22. We declared a quarterly dividend of $0.308 per share payable on March 22 to shareholders of record as of March 1. For the full year 2022, fee-related earnings were $130 million and distributable earnings were $147.1 million, or $1 per share, bringing cumulative dividends to shareholders to $0.85 per share for the full year. With that, I'll now turn the call over to Alex.

Thank you, Josh, and good morning to everyone joining today as we close out our second year as a public company. Patria generated strong results in the fourth quarter of 2022, and again demonstrated our ability to deliver on our earnings guidance from the beginning of the year. In 2022, this required performing amid a backdrop of uncertainty and transition across the globe, and conditions that caused many companies to fall short or adjust expectations. We continue to execute on our growth plans and strategically position the firm to achieve our ambitions in the coming years. We generated $147 million of distributable earnings or $1 per share in 2022. The resulting $0.85 in dividends per share would give a shareholder who bought the stock at the beginning of the year a 5.2% annual yield. With fee-related earnings of $130 million, we delivered on our annual growth target of 50%, highlighting the resiliency and predictability of this earnings stream, even in a challenging environment. We've demonstrated real progress on the divestments of our mature drawdown fund portfolios. Our third generation infrastructure fund reached the threshold with crystallized performances, realizing $19 million net in Q4, following the exit transactions of ODATA, our data center platform, and Entrevias, one of our toll roads in Brazil. While it was a challenging year across our industry on the fundraising front, we raised $3.1 billion and including acquisitions totaled $4.5 billion in overall inflows. While timelines have lengthened in areas like private equity, we are also seeing strength in areas like infrastructure, where we now see a larger first closing for the next flagship fund in early 2023 versus a smaller one at the end of 2022. We clearly shared our aim to grow the platform through M&A and following our major transaction with Moneda in late 2021, we have continued that effort in 2022 through our transactions with Kamaroopin in growth equity, VBI in real estate, and more recently Igah in the venture capital space. We have also made great progress in our corporate areas, making systems and process improvements, hiring key talents, and creating a scalable framework that makes us a better public company, and also facilitates smooth M&A integration as we continue to grow. We closed the year with our first PAX Investor Day event in December, where we gave a comprehensive showcase of our platform and people as well as an update of our multiyear outlook. Namely, our targets include reaching $50 billion of AUM and $35 billion of fee-earning AUM by the end of 2025, driven by $20 billion of total new capital formation from 2022 through 2025, growing fee-related earnings to $200 million to $225 million by 2025. And with significant realization of performance fees from our mature drawdown funds, we believe we can roughly double our equivalent distributable earnings per share over the next few years compared to the prior three years. Our accomplishments in 2022 provide a great start. And now we must continue to build momentum in 2023. As noted at our Investor Day, we anticipate fee-related earnings growing to $150 million in 2023. This year should also see the bulk of fundraising for our flagship drawdown funds as we continue to fundraise for private equity and look to raise a substantial portion of the next infrastructure development fund. We also expect meaningful contributions from new drawdown fund products like our infrastructure credit and growth equity funds, and a host of perpetual products with continuous fundraising. Overall, we are aiming towards $5 billion to $6 billion of organic inflows this year, not including the potential inflows from M&A activity as we track towards the longer-term capital formation target. Let me now spend a moment on the macro front and then give some color across the platform. Latin America navigated well through the distress in global financial markets last year. On top of better terms of trade, higher domestic interest rates, lower fiscal deficits, and reduced geopolitical risk, long-term trends such as near-shoring or friendly shoring by U.S. and European firms, led to larger net capital inflows to the region last year. In Brazil, it happened through traditional ways, a large trade surplus of $62 billion and robust foreign direct investment of $90 billion or approximately 4.8% of the Brazilian GDP. In Mexico, the region's second largest economy, it also took place through unconventional channels. Mexicans working abroad set a record $58 billion or approximately 4.1% of the Mexican GDP to their homeland. Latin American exchange rates generally strengthened in 2022, while most of the global currencies depreciated against the U.S. dollar, and equities generally outperformed peers in emerging markets and advanced economies alike. The local dynamics have been a bit more complex in our region. The larger Latin American nations elected center-left administrations in their latest election cycles. And like in the U.S. these days, these governments have ambitious ESG agendas that call for additional public spending. Because there is a commitment to preserve fiscal discipline, the only feasible way to deliver on the promises is to increase the tax burden, which, along with a more challenging environmental regulation, should have adverse impacts on certain industries. But then, the fundamental framework of solid institutions, independent central banks, and legislation that is friendly to private investments stands out in the region. It also helps that the elected legislators are more conservative, maintaining a crucial check and balance to excesses of state activism by the executive branches. Assuming that the worst of the adjustment of economic policies in advanced economies is behind us, the external outlook bodes well for Latin America in 2023. Even expecting noise from government domestic actions and thus some headwinds for economic growth this year, the combined scenarios should gradually become net positive and lead to larger capital flows to the region. Operating in any environment, Patria has an edge in the region because of our ability to attract top homegrown talent and the diversity of our platform. We now have more than 30 products across five asset classes, accessing a full spectrum of distribution channels, allowing us to be more opportunistic in our approach to both investing and raising capital.

Thank you, Alex. As planned, we have transitioned the CFO role to Ana Russo effective as of the beginning of this year, but we will accordingly cover the 2022 results, and then turn over to Ana for commentary as we look forward. Rest assured, you will continue to hear from me as I will remain highly involved with our shareholder relations effort from the executive level. We generated $35.3 million of fee-related earnings in fourth quarter '22, up 20% compared to fourth quarter '21 and $130 million for the full year 2022, up 51% from 2021 and reaching the guidance we’ve reiterated throughout the course of the year. Total fee revenues of $227.1 million were up 55% in 2022 compared to the prior year, supported by 52% growth in management fee revenue as well as higher transaction and other fee revenue. Of the 52% management fee growth, approximately 38% was generated by the addition of Moneda and VBI to our platform, with the remainder resulting from organic growth driven primarily by deployment in our drawdown fund. Operating expenses increased 61% year-over-year, driven primarily by the addition of Moneda and VBI as well as increased costs related to public company functions. Our FRE margin remains in the 56% to 58% range for each quarter in 2022, slightly higher than our expectation, demonstrating our ability to maintain consistent margin levels following a major acquisition. We generated $19 million of performance-related earnings in fourth quarter '22 and full year 2022 from the first realization of performance fees in our Infrastructure Fund III. While this compares to $58 million in 2021, it's worth noting the different circumstances. Our 2021 PRE came from the final exit and realization in our Private Equity Fund III, meaning no additional performance fees coming from that fund. In 2022, however, we are seeing just the beginning of the performance fee stream from the Infrastructure Fund III, a fund with still $129 million in net accrued performance fees as of the year-end. Now that we are through the phase of returning capital and hurdle, we will expect subsequent exit events for this to generate realized performance fees for shareholders. Distributable earnings were $53.3 million or $0.36 per share for fourth quarter '22, up from $27.7 million or $0.19 per share in fourth quarter '21. For the full year 2022, distributable earnings of $147 million equate to $1 per share, closely in line with $1.02 per share we delivered last year. So overall, the year-over-year dynamics for DE are higher FRE, in line with our guidance, offset by the lower performance fees and additional shares related to our transaction with Moneda. As Alex noted, the 2022 total dividend of $0.85 per share delivers a yield of more than 5% to an investor who bought our stock at the beginning of the year. For an investor in our IPO, the 2021 and 2022 dividend combined delivered a cumulative two-year yield of more than 10%. We believe a very nice income stream to compensate the headwind we’ve seen on valuation in our sector and across the equity market. Turning to AUM. Our total AUM of $27.2 billion is up 14% from one year ago, driven by the $4.5 billion of organic and inorganic inflows previously mentioned. Looking by asset class, private equity AUM increased 21% on the year, driven by the ongoing fundraising for our upcoming fund. Infrastructure increased 15% driven primarily by strong portfolio appreciation. And real estate grew by nearly $1 billion through the transaction with VBI. Fee earnings AUM ended the year at $19.2 billion, up 7% from one year ago, with inflows from drawdown fund deployment and M&A partially offset by the redemption pressure in credit and public equities, as well as the end of the contractual fee term in our second infrastructure fund. After delivering strong performance in a challenging year, I see our platform and business well positioned to deliver on our multi-year goals.

Good morning, everyone. I'm thankful for Marco and the team for onboarding me during this transition period. I'm looking forward to engaging with all of you. As we bring a successful '22 to a close, we look forward to our task of executing on 2023 and the next few years as we discussed with you at our Investor event. Our top-line outlook remains very strong, even in the current perspective of the world economy and challenges facing our sector. And our footprint and diversification position Patria for attractive growth. As Alex noted, we are targeting to grow FRE to $150 million in 2023, while maintaining a similar margin to 2022 in the high 50% range. Much like 2022, we have at this point good fee revenue visibility based on where we begin the year and our expected deployment pace. We do expect the revenue and therefore the fee-related earnings to ramp over the course of the year in contrast to the more steady FRE results we saw over the four quarters of 2022. Given factors such as the holiday for the first closing of our new private equity fund, we expect FRE in the first quarter of 2023 to be similar to the run rate level we saw in 2022, excluding the impact of incentive fees into Q4 and then ramping up through the rest of the year. As of December 31, our net accrued performance fees stand at $462 million, up 33% from one year ago and that's after realizing $19 million in the fourth quarter. At more than $3 per share, this accrued is predominantly supported by mature portfolios in private equity Fund V and Infrastructure Fund III with more than 80% of the accrual in those two funds. These funds are positioned for divestment and we have already seen that in action for infrastructure at the end of the last year. We think about performance fee realization over the cycle, not individual years. As we noted at Investor Day, we would expect to realize 50% to 80% of the accrual in those two funds by the end of 2025. As we progress in integrating our written M&A transaction, we are focusing on standardizing and automating back office processes, streamlining through systems and ensuring efficiencies throughout the organization. This will be crucial as we pursue a high rate of growth and we enable Patria to mitigate inflationary pressure, reinvest in the business and maintain current margins with continued high standards of controlled environment. The future for Patria is bright, and I'm thrilled to be part of the journey.

Thanks, Ana. Altogether, we're very pleased with the firm's performance in 2022. While it was a year of headwinds in our industry and challenges across the globe, we believe the stability of our business model and talent of our people are the key drivers of our resilience and success. We have set ambitious goals over the next several years, and I'm confident we have the right team and resources in place to deliver on the targets. Delivering on $5 billion to $6 billion of fundraising and $150 million of fee-related earnings this year will have us well on the path to our 2025 goals. And we expect to continue to be active on the M&A front. We believe we are uniquely positioned to be the gateway for alternatives in Latin America. And with success in that endeavor, we can deliver significant value to all of our stakeholders. We're now happy to take your questions. Thank you.

Thank you. Our first question comes from Mike Brown with KBW. Your line is now open.

Great. Hi. Good morning, everyone.

Good morning, Mike. How are you?

Good. Thank you. I wanted to start on the fundraising commentary. So I thought that was certainly positive that you guys are targeting $5 billion to $6 billion of inflows for 2023 and you gave a lot of great commentary on the call. Could you just maybe dimensionalize that a little bit here? I know you don't have a crystal ball. There's a lot of moving pieces in the market. But what would be the main drivers there if you had to kind of split that organic inflow number up a bit?

Hi, there. This is Alex. And thanks for participating and thanks for your question. I think it's hard to give a specific detailed guideline. As you mentioned, we have several moving parts and the market is adjusting itself. What I would say in general terms is that the infrastructure and credit related products are easier to fundraise today. And I think the equity related products are harder to fundraise in this current environment. Of course, the interest rate environment does affect this specifically what I just mentioned, equity related products become harder to fundraise, while fixed income, infrastructure like products become easier to fundraise. So we're on the road, as you know, with infrastructure Fund V and private credit, infrastructure credit, and some other credit products. I think those might be the big chunk of the $5 billion to $6 billion. Of course, we have a fantastic track record on private equity, and as mentioned, we feel confident that as we move into 2023, we're going to be able to reach our targets there, the flagship fund. We're also on the road with our venture capital fund and our growth equity fund, and we will hit our internal target there as well. But of course, it's taking more time on the equity side in general and on the public equity side as well. So all of these moving parts, in the end, I think we'll get to the $5 billion to $6 billion target. But fixed income related will be more of a chunk of the next fundraising.

Yes. Thank you, Alex. That was great. Thank you. If we can maybe double click in a little bit on the infrastructure side here. So clearly investor demand is very strong for that asset class. When we think about PAX, can you just help us understand a little better how do you differentiate your infrastructure strategies versus some of your larger global peers that also invest in the LatAm region? How does PAX approach infrastructure differently?

Okay, and thanks for your question again. Within our infrastructure vertical, I think we have our flagship fund. As I mentioned, we're raising right now our infrastructure flagship number V. The strategy that differentiates that fund, or family of funds, is the fact that we take on development risk. We have dominated that, and I think that's why we continue to perform extremely well. As mentioned also during the call and in some earlier calls late last year, the divestments of two great companies that we had in our infrastructure fund III. What does it mean taking development risk? In the end, what we do is fairly easy to explain. I think it's harder to execute. We buy an asset, take on the risk of that asset by developing the project, and then we sell it. We buy the risk itself and de-risk mainly through development. An example is the data center business that we just sold last year, where we started from scratch, bought a piece of land, constructed our first data center in the outskirts of Sao Paulo, and from there, we created a major data center platform which we sold for over 4x our investment in U.S. dollars. So that's an example of beginning with our thesis from scratch and taking on that development risk.

Yes. Thank you for all of that color, Alex. I appreciate it.

Thank you. And our next question comes from Ricardo Buchpiguel with BTG Pactual. Your line is open.

Given the performance fee-related booking in the quarter, can you please explain what has happened with this line and efficiency, the margins of the related FRE actually similar in the following quarter? Thank you.

Ricardo, please go ahead.

This is Alex again here. Marco, do you want to take this question?

I'm not sure I fully understood the question due to some audio issues. Can you confirm if I heard correctly that your question is about overall margins and income tax? Are those the two parts of your inquiry?

No, sorry. We just saw that the OpEx were pretty much flat despite the performance of fee-related booking in the quarter. So I am trying to understand what drove this better performance and exactly if you can normalize this level of OpEx for the following quarter? I’m not sure if you heard me now.

Okay. So let's first differentiate the two kinds of expenses. The expenses related to the carry are going to appear below the FRE on the carry interest on location and bonuses for the quarter. That ties to the $29.1 million that you see for the quarter, which is completely different from the personnel and admin expenses that you see on the top. The 58% margin is consistent with the overall margin for the year. It is slightly above what we indicated throughout the quarters during the last year, we indicated in the mid-50s, and we are ending up slightly higher than that. We're gaining some margin on personnel expenses throughout the year. We were losing a little margin on the admin expenses due to some of the fixed costs associated with the acquisition of Moneda that had a lower overall margin. But overall, we can say that we're happy with the margins and with the progress of expenses in a year where inflation hit very strongly.

Very clear. Thank you.

Thank you. Our next question comes from the line of Beatriz Abreu with Goldman Sachs. Your line is now open.

Hi, Alex, Marco, and Ana. Good morning. Thank you for taking my questions. First question would be on the FRE guidance of $150 million for 2023, which implies a 15% increase from 2022. Could you tell us how much of that growth you expect to come from organic growth versus how much coming from inorganic growth, if any? And a second question, if I may, would be on the real estate strategy. So this was a segment that you expected to grow the most in fee AUM by 2025. So if you could give us some color on the segment’s outlook for 2023 and what kind of growth you're expecting, that would be great? Thank you.

Hi, Beatriz. This is Alex. Marco, do you want to take the first question? And I'll take the second please.

Sure. So Beatriz, we don't provide the distinction between what is the FRE organic and inorganic. What you can have as a reference is that we guided on the $5 billion to $6 billion of accretion of capital, and that's entirely organic accretion. This does not encompass any sort of accretion that is coming from acquisitions. I confirm we will remain active on acquisitions. The other data point, if it's worth, is that last year, the accretion of fee paying AUM inorganic was in the vicinity of $1.4 billion out of the total $4.5 billion.

And regarding your second question, I think we really look forward to the whole real estate expansion of our product lines and, of course, our general AUM. We did an acquisition called VBI. This is a very interesting consolidation play on the REIT side. We have been very active in this space. There is a significant opportunity within the Brazilian context with a R$220 billion REIT market, as you know, where we have three thematic REITs managed within this framework. Merging some of the groups of REITs to create larger ones is a great opportunity. We see the same in a lesser extent in countries like Chile and Colombia.

No, that's very clear. Thank you.

Thank you. I would now like to hand the conference back over to Mr. Alex Saigh for closing remarks.

Well, thank you very much, again, for your participation in this call, your patience to go through this 50 minutes, an hour with us. I think as all of us mentioned here, Ana, Marco and Josh, myself, Alex, are extremely pleased with 2022 results. I think we did manage to hit our targets for 2022 and late 2021, when we had a different world environment and a different market for alternative assets. As we look into 2023, I think we're confident that we're going to be able to deliver again on our $150 million guideline for FRE and hopefully be able also to convert some of that performance fees into realizations throughout the next years. We have over $400 million of performance fee inventory, and some of our funds are already in the carry mode. So thanks again. I also want to congratulate the team for an amazing year. Far from easy, but I think the team managed to perform. We wouldn't be having this call here if it were not for the team, their competence, their dedication, and congratulate Ana as well here on her new CFO role. So as we go through '23, Ana will be taking more of a protagonist role here in our finance department as a CFO as Marco leaves our corporate development side and looks for additional exciting acquisition opportunities for Patria. Thanks again. Hope to see you soon. And have a great week. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.