Patria Investments Ltd Q1 FY2023 Earnings Call

Good day, and thank you for joining us. Welcome to the Patria First Quarter 2023 Earnings Call. Please be aware that today's conference is being recorded. I will now turn the call over to your speaker, Josh Wood, Head of Shareholder Relations. Please proceed.

Thank you. Good morning, everyone, and welcome to Patria's First Quarter 2023 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 first quarter 2023, 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 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. Patria generated distributable earnings of $39.1 million or $0.27 per share for 1Q '23. We declared a quarterly dividend of $0.226 per share payable on June 8 to shareholders of record as of May 17. With that, I'll now turn the call over to Alex.

Thank you, Josh, and good morning to everyone. Patria delivered solid results in the first quarter of 2023, delivering $0.27 of distributable earnings per share as we make progress in some key areas and march towards our targets for the year. Post-tax distributable earnings were $39 million in the quarter, which included $31 million of fee-related earnings and also $10 million of performance-related earnings. Fundraising in Q1 totaled $390 million, anchored by strong momentum in our Brazil-focused products, including contributions from the Brazil feeder for our latest vintage flagship private equity fund, our Credit 365 fund, which brings private investment opportunities to individual Brazilian investors and REITs managed by VBI, our real estate platform in Brazil. And importantly, we are making good progress towards significantly larger fundraising results in the next few quarters. Already in Q2, we have secured approximately $370 million of additional inflows, including a follow-on in our core infrastructure fund and additional inflows from VBI, bringing our year-to-date fundraising through April to more than $750 million. That is capital primarily raised outside of our flagship funds, which we expect to contribute more significantly by the close of Q2, including the first closing for our next flagship infrastructure fund. On the people front, we also just announced Marcelo Fedak to serve as our Head of Real Estate, further strengthening the leadership structure across our asset class verticals. Overall, we're happy with the performance in the quarter and continue to feel good about our fundraising target of $5 billion to $6 billion and fee-related earnings guidance of $150 million for the full year 2023. How is it that we are able to maintain confidence in our trajectory in spite of volatile market conditions? It's because of the resilience of our business model. We depend on deposit-based funding. Much of the capital base is locked up for multiple years, and even products that offer more frequent liquidity have shown considerable stickiness because of their solid track record. We also run a light balance sheet, meaning we don't require significant capital at the firm level to deliver our earnings stream for shareholders and likewise, don't have significant mark-to-market exposure that impacts our balance sheet assets. While we, of course, aren't immune to the macro environment, we believe we have a model that allows us to deliver consistent and growing fee-related earnings, with the upside from performance fees as we deliver returns to our clients over the cycle. On the macro front, our business continues to thrive despite fresh challenges in the West and Western Europe, brought by the high-profile bank failures and rescues. One of PAX's investment tenants is the low correlation between Latin America and other geographies. Investors in the region have indeed begun to price in near-term interest rate cuts in major Latin American economies because of the sharp reduction in consumer inflation, a consequence of preemptive monetary policies implemented by vigilant central banks. In that context, Chile seems to be the best candidate to start the cycle of monetary easing. Consumer inflation peaked in 2022, the government budget has already turned into surplus, and the country is posting significant progress in the institutional area. In Brazil, consumer inflation peaked in April 2022, and there are now convincing signs of fiscal consolidation by the new administration. Despite sometimes closely rhetoric, the executive and logistical branches have agreed on the basics of a new fiscal framework to secure a breakeven next year and primary surplus afterward. There is also political consensus to pass comprehensive tax reform, which would be gradually enacted from 2024 onwards. Constructive domestic developments in major Latin American economies are taking place amid favorable terms of trade and robust foreign direct investment flows. Latin America is increasingly perceived as being in a sweet geopolitical spot and an attractive destination for near or friendly shoring CapEx. This outlook has led to currency appreciation against the U.S. dollar year-to-date and thus proving further evidence of the region's low correlation with the rest of the world. Now, turning to some details across our platform. In private equity, we generated $10 million in performance-related earnings in Q1 through an agreement with fund investors to crystallize a portion of the performance fees related to Lavoro, a leading Latin American agricultural inputs retailer, which completed an IPO at NASDAQ in Q1. This crystallization was made possible outside of our standard waterfall structure, which Ana will cover in more detail. The focus on divestment for Fund V continues, and we do expect to make meaningful progress this year. In Q1, we sold an initial small tranche of our investment in SmartFit, the leading fitness market company in Latin America by membership, and we are in advanced stages of the exit process for multiple additional portfolio companies. While the fundraising environment for private equity remains challenging, we are advancing on our next closing for the next fund vintage, and we believe divestment and return on capital in the older vintage funds will be a strong catalyst for that fundraising process. Operating metrics at underlying portfolio companies continue to look good with EBITDA growing at approximately 15% year-over-year based on available data for the quarter. We did reflect a downward impact on our net accrued performance fees in Fund V in Q1, mainly driven by the volatility in the share price of Lavoro, immediately following its IPO, which is not uncommon in a de-SPACing process. We continue to feel great about the company, which recently reported impressive results for the most recent semester with adjusted EBITDA up 88% compared to the prior year. We expect to see the valuation improve considerably based on fundamentals and similar industry comps. Moreover, we feel great about the full portfolio and the value we can deliver to shareholders over the next few years. In infrastructure, we are approaching our first closing of the next-generation flagship fund, which we expect to commence here in Q2. Strong realizations from Infrastructure Fund III in 2022 were led by the sale of ODATA, our data center platform, and partial exit of Entrevias, one of our toll roads in Brazil. These and prior divestments account for more than $2 billion in proceeds to limited partners and with a 13% net IRR in U.S. dollars. We are now in the performance fee realization phase of the fund with a high-performing portfolio still remaining. These are likewise great supporting factors for fundraising and should allow us to deliver a sizable first close on the new flagship fund. Just after the end of the quarter, we also announced a follow-on offer for our non-listed infrastructure core vehicle, which we call PEER. The offering closed in the first week of April, making for a Q2 fundraising result, but it attracted BRL215 million of new permanent capital AUM and was even larger than the initial offering that we completed last year. It is a great example of how we are expanding our product menu in this asset class to reach new client channels and facilitate the expansion of alternative allocations for local investors in the region. Our credit strategies continue to perform well with both Pan-LATAM and local Chilean strategies delivering a strong result in the quarter. The largest fund, LATAM High-Yield Corporate Credit, outperformed its benchmark by 180 basis points in the first quarter and 130 basis points over the past year, which was a very challenging period for the asset class. We also expect to complete the first closing of our infrastructure credit fund in Q2, which already has anchor commitments in place from three multilateral agencies, as we have noted. Leveraging our long-tenured experience in LATAM infrastructure development as well as transaction diligence through existing pipelines, this product will provide a new angle for Patria to serve clients across the capital stack in infrastructure. In Public Access, our Chilean equity strategies again were a highlight, with the main fund, Pionero, outperforming by 180 basis points in Q1. For LATAM equities more generally, we see an attractive setup looking forward in the second half of 2023 and 2024. Valuations remain at their lowest point since 2008, with a broad LATAM index trading at approximately 7x earnings. We are also seeing a historically large gap between local interest rates and following inflation. This backdrop is generating some early traction in our investor base, and we think this is constructive for both performance and flows in the coming quarters. In real estate, we further strengthened our leadership team with Marcelo Fedak joining Patria as a new partner to serve as our Head of Real Estate across the region. Marcelo has built a successful 14-plus year track record managing over $4 billion of real estate-focused AUM for large financial institutions, and we are very excited about his arrival at Patria to lead our growth in this asset class. VBI, our platform in Brazil, is performing very well and continues to grow with nearly $50 million of inflows in Q1, mostly into an office-focused REIT. Just in early April and therefore yet to reflect in our metrics, VBI has secured nearly $250 million of additional inflows by gaining market share with Brazilian institutional investors and consolidated management of smaller or single-asset REITs. Marcelo will partner with VBI's superb leadership team to continue our momentum in Brazil and also look broadly to how we can replicate that model in other regional markets. Advisory and distribution is an area we don't typically highlight as often, but has quietly been growing nicely with AUM up 13% over the last year and $156 million of inflows in Q1. Here, we are currently doing a few things: traditional wealth management services, fund-of-funds for global alternatives, and even direct fundraising through global partnerships. On the last point, for example, we raised more than $50 million in Q1 for direct third parties, which does not reflect in our AUM, but does earn incremental placement fee revenue. While this part of our business is still relatively small as an earnings driver, it represents the strategic ambition to be a trusted knowledge partner and conduit for LATAM investors to access alternatives more broadly across the globe. That can take a number of different forms, which we are exploring, and we believe there is potential as a meaningful vector of growth in the coming years. So again, overall, I'm pleased with a solid quarter, and we are on track for our 2023 targets of $5 billion to $6 billion of organic inflows and fee-related earnings of $150 million. We are making great progress behind the scenes, which we believe will drive results to be seen in the next few quarters. Let me now turn things over to Ana to cover the numbers in a little more detail, and then Marco will add some comments on our corporate development efforts.

Thank you, Alex, and good morning. Patria's first quarter 2023 results were in line with our guidance from the last call regarding fee-related earnings, and we were able to generate performance-related earnings, which added some upside to the distributable earnings and the dividends. Our fee-related earnings were $31.2 million in first quarter '23, at similar levels to our first quarter '22 of $31.9 million. This result is consistent with our comments that first quarter FRE was likely to be more in line with the 2022 run rate with growth coming in the later quarters of the year. Total fee revenues were $57.1 million in Q1 '23, up 4% from $55 million in Q1 '22 with the positive impact of capital deployment in our drawdown funds and the addition of VBI. This was partially offset by the impact of outflows in open-end credit and public equity funds and the contractual end of the fee terms of another vintage infrastructure fund. Total operating expenses for first quarter '23 were up 12% from first quarter '22, driven by expenses related to recent acquisitions and also increases in compensation and certain costs driven by inflation and the expansion of our platform. This resulted in a consistent FRE level and an FRE margin of 55% in the first quarter 2023. The margin is down from 58% in first quarter '22 but is still in line with our guidance range, achieving our overall FRE guidance for the year implies that the margin will likely rise slightly in later quarters. Performance-related earnings for first quarter '23 were $10 million and were generated for Private Equity Fund V. These performance fees were crystallized in conjunction with the IPO of Lavoro. For this specific case, the limited partners in the fund and Patria agreed that as a consequence of successful completion of the transaction, part of the performance fee was crystallized through Lavoro shares to Patria. Given the opportunities, we are pleased to be able to deliver this value to shareholders here in the first quarter. Note that we have adjusted our presentation of net accrued performance fees beginning in first quarter '23 to reflect the balanced growth of related corporate taxes, where it was shown net in all previous reports. This change makes sense in order to fully align the performance-related earnings in our P&L with this operating metric, which represents the potential inventory for the line items and excludes an impact which will be reflected below in the corporate tax line item of the P&L. The net accrued performance fee balance stands at $437 million as of March 31, 2023, down from $478 million at December 31, '22, driven primarily by the quarter-end share price of public holdings in Private Equity Fund V, as Alex noted. This continues to equate to approximately $3 per share of value that can accrue to our shareholders as this portfolio is dissected. Distributed earnings of $39.1 million in first quarter '23 is up from $35 million in the first quarter '22, primarily driven by the benefit of performance-related earnings in the current quarter. Our dividend per share of $0.27 will generate a dividend to shareholders of $0.226, which translates to roughly a 6% yield on an annualized basis at recent share price levels. Total AUM was $27.3 billion at the end of Q1, roughly flat for both the quarter and trailing years, with inflows from fundraising and acquisitions, offset by the impact of the market environment on portfolio company valuation as well as the outflow pressure we have seen in some of our open-end products. Fee earning AUM of $19.9 billion is up 4% for the quarter and up 5% from one year ago, consistent with our increasing fee revenues. Remember that for fee earning AUM, valuation impact is more muted and limited to funds that charge a management fee on NAV as opposed to cost base. In fact, valuation was actually a positive driver in the first quarter '23 and prior year bridge. This reinforces the relative stability of our management fee stream when public markets are volatile. As Alex noted, we are still on track for our 2023 fee-related earnings guidance of $150 million at a margin in the upper 50% range. We believe this growth will be concentrated in the back half of the year. I will now turn the call to Marco for a few words.

Thank you, Ana, and hello, everyone. With my new role focusing time more fully on Patria's corporate development efforts, I can reiterate that we remain highly focused and active on this vector of growth. Our goals through M&A are clear: expanding our product offering, extending our geographic expertise, and enhancing our distribution channels and capabilities. Each of the four acquisitions we closed in our first two years since IPO achieved one or more of those aims. Moneda brought credit and public equity verticals as well as extensive expertise and client relationships in Chile. Kamaroopin and Igah both brought talent and track record to expand our private equity vertical into growth, equity, and venture capital. And VBI brought us expertise in real estate along with a significant platform of permanent capital AUM. Looking forward, we've conveyed our interest in three key priorities: 1, geographic expansion into Mexico, where we see significant opportunities stemming from near-shoring trends in the coming years; 2, continued expansion of our real estate business, both in and beyond Brazil, which we believe is still subscale relative to its potential in the region; and 3, expanding our ability to serve as a conduit in the region for investing in global alternatives. We're actively exploring opportunities in these areas, and we'll continue to keep you posted on our progress. Let me now turn it back to Alex to close.

Thanks, Marco and Ana. This earnings call marks the first step in a new calendar year, and Patria starts 2023 with clear ambitions for growth as we continue our journey as the gateway for alternative investments in Latin America. We continue to operate in a challenging environment, and we must continue to deliver consistent, attractive returns and second to none service to our clients as we scale and expand the investment platform. We have assembled a world-class team across asset classes and functional areas to meet those demands, and I believe we are very well positioned to succeed. We shared our goals over the next few years with you at our Investors Day late last year, so the stage is set. Now it's our job to execute. And assuming we do, I believe there is no question that Patria looks very attractive at today's valuation. I'm proud and privileged to lead this group and to serve our clients and our shareholders. We're now happy to take your questions. Thank you.

Our first question comes from Tito Labarta from Goldman Sachs.

I guess my question is just to follow up a little bit more on the FRE outlook for the year. I know you said you're on track and margin is going to improve a bit from here. But just to think about how that will evolve, right? Because, I mean, with the $31 million, you probably have to get maybe about $40 million in the second half of the year to deliver that $150 million target. Would that be just increased fee-earning AUM? Should fee revenues be the driver there? Or do you see improvements here on the margins, right at margins at the low end of the guidance? If you could just help us think about those dynamics from here on out to be able to reach that $150 million? And then a second question just on the performance-related earnings, good performance in the quarter. Is there room to realize more performance fees this year given the realization of Lavoro, and any color you can give on the outlook for the performance fees for the...?

Tito, this is Alex. Thanks for your questions. And going back to the first question here, yes, it's exactly as you said, we see both increases during the year. As we did raise the first close of our flagship private equity fund late last year, we're now investing that fund and you know that we charge fees on invested, and not uncommitted on that fund. And also for our flagship infrastructure fund, as we mentioned, we target to have a first close in this quarter in the second quarter of 2023. And then we start investing in that fund, and we also charge on invested capital there. So these two are big flagship funds, Private Equity Fund VII that I just mentioned and the first close of Infrastructure Fund V coming in the second quarter, gives us a lot of dry powder or committed capital but not invested. And as we invest throughout the year, that should drive revenues up. And those revenues come with basically no cost, right, because we already have the teams in place to manage and invest the two funds that I just mentioned. In addition, our Brazil-driven strategies, as I tried to convey during the call, are doing extremely well in managing to raise and overperform in Latin America, as previously also stated in other earnings calls like this one. We are also overperforming in the Middle East. We're overperforming in Asia, compensating a little bit still for the underperformance in the U.S. on the fundraising side. So in general, when we add up all the numbers, we still feel comfortable that we will do and reach the $5 billion to $6 billion of organic fundraising for 2023 and $150 million of fee-related earnings for 2023. In addition, we also see the business scaling a little bit, as you also mentioned, Tito, because revenue is going up, and expenses are more or less under control. So the margin should notch up a little bit as we move through 2023, reaching then the numbers that you just mentioned on a quarter-by-quarter basis to the whole summing up of $150 million of FRE by the end of the year for 2023. On the performance fee side, yes, I think we're getting now more and more comfortable on that side, I think because of the big divestments that we have for our Infrastructure Fund III during the year of 2022. As we conveyed and you follow very closely, we did send back to investors for over $1.4 billion just throughout the last year for that specific fund, totaling $2 billion in total with previous divestments for that Infrastructure Fund III. That actually generated a small amount of carry for 2022 of approximately $19 million or $18.9 million, whatever, $19 million for 2022 and did put us in the catch-up or bracket there. So everything that we sell from that fund, 100% will come as performance fees. So raising the possibility of us having performance fees from Infrastructure Fund III this year and the performance fees that we had in the first quarter of 2023 came from Private Equity Fund V investments Lavoro, our agricultural input distribution company, not from the Infrastructure Fund III that I just mentioned. So I'm happy there on the performance fee side, and I think we can do well on that side. Overall, on a three-year basis, as mentioned in our PAX Day late last year of $180 million for the general partner. I think we're on target. Of course, performances, as you know, can slip a quarter here, a quarter there, a year here, a year there, but I'm comfortable and getting more comfortable there with that number. Why is that? And the last point here, just on this catch-up phase, bracket of Infrastructure Fund III, there's another $100 million performance fees. We already generated $19 million last year with this $10 million. That's $29 million. With this another $100 million, $129 million we say that we guided $180 million for the whole three years, 2023, '24, '25. So it gets me to a comfort level here on that front. So that's why I come back and say look at 2023, I'm comfortable with the $150 million FRE. And also, I think we're going to generate as we move into the year. I hope I answered your questions.

Our next question comes from the line of Craig Siegenthaler of Bank of America.

Alex, Mark, good to hear that you're still on track with your targets against a tough backdrop. With the U.S. alt managers in this more difficult backdrop, many of the first closes have come in fine, maybe 50% of the target in a pretty short period of time. This can include raises from long-term clients, so it might be viewed a little easier. But the second through final closes have been a lot tougher, both in terms of time and size. So how should I think about this sort of risk when I'm modeling both Private Equity VII and Infra V?

It was great to speak with you, Craig. I hope you and your family are doing well. You’re absolutely correct about our flagship fundraising. We experienced a substantial first close, comprising about 40% to 50% of our fund’s target, followed by smaller, more scattered second and third closes, which contrasts with our previous fundraising patterns. For our Private Equity Fund VII, we’ve seen a significant initial close, and now we are securing several smaller closes approximately every two to three weeks. As we bring a group of investors together, we move toward another close. Additionally, for Private Equity Fund VII, I want to highlight that we are attracting investments from various global markets. We are performing exceptionally well in regions like LATAM, the Middle East, including Israel, and Asia, although we are still seeing slower growth in the U.S. fundraising. We have established specific vehicles for different regions, such as Brazilian and Colombian feeders for local investors, which contributes to the varied closing sizes. Overall, I am confident in our fundraising momentum for Private Equity Fund VII, as well as our Infrastructure Fund III. The first close for Infrastructure Fund III has exceeded my expectations, largely due to the divestments I previously mentioned. The strong VBI numbers are also a key driver for our fundraising efforts. I anticipate a significant first close in the second quarter, followed by additional closings throughout the year, and I feel positive about meeting our targets for both funds. On the private equity side, we've been seeing a wave of divestments, which is providing us with several exit opportunities for our previous vintage funds, enhancing their VBI numbers and improving our fundraising prospects. As you noted, our approach to diversified fundraising across multiple regions is helping compensate for the underperformance in the U.S. We are seeing success in Asia, the Middle East, including Israel, and LATAM, which has pleasantly exceeded my expectations. In these regions, especially in the Middle East and LATAM, we are witnessing significant fundraising activity, driven by inflows and interest from sovereign and pension funds. Furthermore, geopolitical tensions are prompting companies to consider LATAM more favorably when looking to expand outside their home countries. Many companies from Asia are evaluating LATAM as a strategic opportunity due to the current risks associated with the U.S. and Europe. This has led to increased foreign direct investment in LATAM, particularly from Chinese investors, which benefits us in terms of both limited partners and strategic interest for our portfolio companies. Consequently, we are seeing strong performance in Asia as well as the Middle East, reflecting the current global investment climate. The increased engagement from Chinese delegations in Brazil and their diligence in our funds and portfolio showcases this positive shift. I hope this addresses your inquiry effectively.

I just had one follow-up on Moneda. What new product has Moneda launched since the acquisition? Or said a different way, what existing funds that they had before the merger are now sold to a new client segment? I'm just looking for an update on the specific synergies of where Moneda is leveraging Patria and Patria's client distribution network?

Yes, thanks for your question. On the credit side, I mentioned, I think during the call, I should have said it more clearly, I'm sorry, that we are doing a good job fundraising for a product called Credit 365. 365 means that this fund has a one-year liquidity gate. That's why the 365 is attached to the name. And that was a Moneda product, designed by Moneda's credit team for Brazilian investors. In the last year, I think we had a lot of the Moneda team understanding the Brazilian market and trying to tailor their credit expertise to meet Brazilian client needs. So we identified several of our client needs in Brazil mid-last year. We started working with these clients, and we already launched one product under this new synergic team that I just mentioned. I think that's one of the main reasons that we did associate ourselves with Moneda to use their credit intelligence. I'll talk about public equities but use their credit intelligence to develop products for the Brazilian clients. We see that as having great potential. Of course, as you know, in Brazil, given the high interest rates, credit is a sought after product, right? So I think that's why the credit product is also doing very well. As we raised our Private Credit Fund II in Brazil as well, we already had Private Credit I in Patria. The Moneda credit team did help us expand the addressable market of that product and, therefore, expand the potential size of our Private Credit Fund II. We are identifying a lot of needs from our Brazilian clients also on the public equity side, and we are doing the same there. We haven't launched any projects yet, using the public active intelligence of Moneda. But definitely, it's on the other side. We are making new solutions for our clients. On the other side of the equation, we are, of course, raising money with Chilean institutional investors. And what we did, first, Craig, is focus on our Private Equity Fund VII and now Infrastructure Fund V, which are already two products. So we focus on these two products and use the Moneda distribution channel to raise money for our two flagship funds before actually introducing other products through that channel. We did the same in Colombia. Moneda has an interesting distribution capability in Colombia. We're doing the same, focusing first on the two Patria flagship products. So we have not designed any products yet for the Chilean institutions, the Colombian institutions. The main reason there is that we want, again, to focus the fundraising on the two flagship funds. But we are cooking several new ideas. We had the whole management team of Patria in Colombia last week. We do our quarterly management committees in different offices. Last week was Bogota. We spent a whole week there. And there are so many exciting things going on. We are talking to distributors on the real estate investment trust front, on the infrastructure investment trust funds, very, very interesting, also given the high interest rates in Colombia, the credit-related products. So we're waiting to finalize the fundraising for the two flagship funds to start introducing a new level of products to the Colombian clients and the Chilean clients. I hope I answered your question.

Our next question comes from the line of William Barranjard of Itau BBA.

My question here is regarding the capital market conditions in Brazil. Since the beginning of the year, it has tightened in credit and equity as well. So it would be interesting to understand how this environment is impacting you, be it in terms of opportunities for investments at or overvaluations or extra care for current invested names that are having maybe a harder time due to tighter credit markets here?

Yes, thank you for the question, William. It's interesting to note that in Brazil, the credit markets have tightened significantly due to a specific case that has unsettled the market. The retailer Americanas, along with events related to Silicon Valley Bank and First Republic, have contributed to this situation. I believe the main driver of the current tightness is the Americanas issue rather than external factors affecting the local credit market. Let me break this down into different sectors. In private equity, our companies are not highly leveraged, with about 1.3 times EBITDA leverage when excluding seller financing. We are pursuing a consolidation strategy and do acquire some businesses using seller financing. However, most of this financing is related to escrows and contingencies that we settle five or six years after closing. While we do owe money to the sellers, our financing is structured over the long term, and there are contingencies involved that can mitigate potential liabilities. This represents a very effective way of leveraging. The average cost of our seller financing is relatively low at inflation plus 2%. With inflation around 5%, that brings us to roughly 7%, making it a manageable cost. Additionally, we don't carry much bank debt on our balance sheet, although we recognize that overall credit tightness does have an effect since we manage 42 companies in Brazil and Latin America. Generally, while we feel the credit tightening, we aren't facing significant issues due to the solid balance sheets of our companies and the availability of capital in most of our funds. On the infrastructure side, we focus on project finance-related debt, ensuring that we have commitments secured before initiating any investments. When we enter a concession bid, we have all costs and debt already arranged for that specific project. If we win the bid, everything remains set, and our debt structure is tied to the asset's cash flow projections. We also raise project finance debt in inflation plus terms because our revenues are adjusted by inflation, allowing us to lock in spreads from the beginning. In terms of credit, we are currently benefiting from the tightening conditions since most debt in the region is variable. We have strategically managed our debt with a short duration before the interest rate hikes, which has resulted in our funds performing well. For instance, our high-yield LATAM credit funds now have a new maturity rate of 17% in U.S. dollars, presenting a compelling investment opportunity. Although we notice the tightening, it has not significantly impacted our ability to take on new debt, especially for quality infrastructure projects. We continue to close partnerships for new concessions, and the spreads for projects we’re exploring have remained relatively stable compared to six months or a year ago. I hope this answers your question.

Our next question comes from the line of Domingos Falavina of JPMorgan.

I had a question regarding the net accrued performance fees specifically on P5. You recognize the performance on the Lavoro deal, which was a $10 million contribution to the performance and to the earnings. But you had a markdown of $44 million. I'm curious to know how much of the $44 million is linked to the Lavoro deal?

Thank you for your question, Domingos. I appreciate it. We have a substantial inventory of Lavoro. Fund V holds about $800 million to $1 billion in Lavoro stock. The inventory you mentioned, which totals around $40 million, is actually a small percentage of the overall $1 billion. This makes it appear as a large absolute number, but in the context of Fund V's total investment in Lavoro, it is relatively minor.

Just to clarify the numbers, were you saying that you had initially valued it at $800 million and then reduced that value by $800 million, leading to a performance of 20% based on that $800 million figure?

Yes, exactly.

I'm sorry, it was overvalued at $200 million, with a 20% adjustment amounting to $44 million.

Yes, that's correct. Let's say it's $1 billion. The figures are pretty much consistent with that. Coincidentally, we held $1 billion worth of stock in Lavoro. When we went public at the end of the first quarter, we needed to evaluate the company based on the share prices. After the IPO, the share prices decreased by approximately 20%, dropping from $1 billion to $800 million, which represents a $200 million reduction. This decrease also affects our performance fees by $40 million. So, your example aligns perfectly with that scenario, and the figures are similar to what you mentioned. After going public, we do not assess the company based on our discounted cash flow model; we rely on the stock price instead. In these de-SPAC transactions, there can be significant stock price volatility. The company achieved remarkable numbers in 2022, posting an over 80% increase in EBITDA. However, after the IPO, the stock showed considerable fluctuations, rising 30% initially, then falling 20%, followed by a 15% increase, and then a 10% decrease. We need to calculate the average of the last ten days, which we use for our evaluations, and that corresponds exactly with what you stated.

Super clear. Just to clarify, since this is already showing performance, what other significant assets are involved, like the $800 million from Lavoro and anything else?

The fund is currently yielding a 2.2x multiple of invested capital net of fees, with a total of $1.8 billion. To simplify, this means $1.8 billion multiplied by 2 equals $3.6 billion, and after subtracting the initial costs of $1.8 billion, we have 1.8 times 20%. This fund is quite notable for us as it's large, scalable, and Lavoro is the first company we are considering exiting through an IPO. Additionally, we took one of the Fund V companies, SmartFit, public in early 2022. SmartFit has been performing exceptionally well since then, rebounding from COVID, which forced us to close all the clubs. We have returned to 2019 performance levels and even exceeded them. We have begun selling some SmartFit shares through block trades, selling a small amount of around $15 million in the first quarter as a market test. Both this company and Lavoro are listed, and we anticipate further offerings and block trades, enhancing liquidity and distributable paid-in capital for Fund V. We are also in advanced negotiations to sell additional assets from Fund V, specifically two in the food distribution and healthcare sectors. Fund V has been very successful for us, and we are pleased with its performance and the potential for generating performance fees.

Our next question comes from the line of Mike Brown of KBW.

Okay, great. Apologies if this has already been asked, Alex, I joined the call a little bit late, but maybe just one for me on infrastructure. So clearly, that's been a very attractive asset class here, particularly in a high inflation environment that we've all been living in globally. As inflationary pressure starts to wane in many markets and perhaps you actually enter into a rate cutting cycle, how do you anticipate LP interest for this asset class to progress? And does it impact your ability to deploy over time? Just interested to hear your thoughts as we move throughout '23 and into '24.

Yes, I believe this infrastructure fund we're discussing is significant. Apologies for not greeting you, Mike, before starting my response. Regarding the strategy, the Infrastructure Development Fund is an actively managed private fund focused on infrastructure. We accept development risks, and if we secure a concession, we construct the asset and then operationalize it before selling it. This fund includes a private equity element, which is why it tends to yield higher returns compared to a yield fund. We combine downside protection with contracted revenues from concessions, which are also inflation-indexed, allowing us to leverage effectively with project finance-type leverage. Additionally, we can benefit from compression because we are creating assets that eventually produce substantial cash flow once operational. While interest rates can influence our strategy, we successfully raised significant funds when rates were low. For instance, our Infrastructure Fund IV, which is a $2 billion fund, was established four years ago in a low-interest-rate environment. Now, we are seeing strong interest in our Infrastructure Fund V, even in a higher interest rate climate, likely due to our differentiating features. The potential in Latin America for this fund is vast, given the concessions and privatization projects ongoing in the area, amounting to over $100 billion in opportunities expected in the next 18 to 24 months, while we manage a $2 billion fund. There is a lack of competition, particularly from financial sponsors in this space. We believe our product is well-positioned in terms of both the opportunities available and the competitive landscape, as we are one of the few sizable players in this market. I remain enthusiastic about our infrastructure team and the potential to replicate our model in other parts of Latin America or globally, as our asset suppliers are international. For example, we're working on a digitalization plant in Chile with technology supplied by an Israeli company that operates globally. Similarly, the equipment for wind farms we construct in Brazil is provided by major global suppliers like GE and Siemens. Overall, I'm optimistic about the confidence we've built and the ongoing fundraising for our Infrastructure Fund V, reflecting a strong appetite for the product. Thank you. I just want to get back to one of Domingos’ points here. Just to be clear, the $10 million of performance fee that we accounted for in the first quarter is the general partner stake of the performance fee, right? The performance fee was $15 million in total, 35% of that, approximately $5 million goes to the team, and then 65% that goes to the general partner, which is the $10 million. Just for clarification purposes here. So when we talk about the $10 million, it means that 65% already. We already netted out the 35% that goes to the team, okay? So just to be clear. All right. Operator, any more questions, please?

Thank you. We do not have any other questions. I would now like to turn the conference back to Alex Saigh, CEO, for closing remarks.

All right. Well, thank you very much for your patience and for the questions on this call. Again, very excited and positive about our first quarter 2023 results. We continue to be positive on the $150 million FRE for the year. And we continue to be positive also in generating more performance fees than we did in the first quarter. So thanks again for your patience. Thanks for your support. I hope to see you guys soon personally. And thanks again. Be well, be safe.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.