Patria Investments Ltd Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Patria Second Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s 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 Josh Wood, Head of Shareholder Relations.

Thank you. Good morning everyone and welcome to Patria's second quarter 2023 earnings call. Speaking today on the call are our Chief Executive Officer, Alex Saigh; our Chief Financial Officer, Ana Russo; and our Chief Corporate Development Officer, Marco D'Ippolito; and we are also joined by our Chief Economist, Luis Fernando Lopes for the Q&A session. This morning, we issued a press release and earnings presentation detailing our results for the second quarter 2023, which you can find posted on our Investor Relations website 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 form. As a foreign private issuer, Patria reports financial results using International Financial Reporting Standards or IFRS as opposed to US GAAP. Additionally, we will report and refer to certain non-GAAP industry measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with IFRS. Reconciliations of these measures to the most comparable IFRS measures are included in our earnings presentation. On headline metrics, Patria generated distributable earnings of $43.6 million or $0.295 per share for 2Q 2023 including fee-related earnings of $33.8 million and performance-related earnings of $10.7 million. We declared a quarterly dividend of $0.251 per share, payable on September eight to shareholders of record as of August 16th. With that, I'll now turn the call over to Alex.

Thank you, Josh, and good morning, everyone. In the second quarter, Patria delivered excellent financial results for our shareholders and we are also seeing accelerating momentum in key drivers of our business. Second quarter distributable earnings of $43.6 million or nearly $0.30 per share was driven by the predictable and growing base of fee-related earnings and again the positive contribution of performance fees from Infrastructure Fund III. With fee related earnings of $65 million year-to-date, we continue to see the outlook on track to reach our target of $150 million in 2023 with more growth coming in the back half of the year. Performance fees have been a more regular contributor to earnings recently. And while we have not had them every quarter, the $11 million generated in Q2 and $40 million over the last three quarters demonstrates the early stages of a performance fee realization cycle that can be a powerful driver of shareholder value over the coming years. Capital formation continues to accelerate with $1.9 billion in organic inflows through the end of the second quarter and more than $2.2 billion secured through Q3. If we include pending new AUM from the recently announced joint venture with Banco Colombia expected to close in Q3, total capital formation will reach approximately $3.4 billion year-to-date and nearing a cumulative $8 billion since the beginning of 2022, tracking towards the four-year cycle target of $20 billion by the end of 2025. While the fundraising environment remains very challenging in some areas, this is where platform diversification shines. With more than 30 products and counting, Patria enjoys many vectors for growth as we still see the path to reach our target of $5 billion to $6 billion of organic inflows in 2023 across all products. Looking specifically at our drawdown funds, we also still believe we can achieve the previously noted $6 billion to $7 billion in fundraising over this vintage cycle through a diversified product offering including our flagship private equity and infrastructure funds, as well as newer strategies like growth equity, venture capital, infrastructure credit, and private credit. We also continue to diversify our sources of capital hard as we see the financial deepening in Latin America to raise more money locally. We have been successful in Brazil-focused products with AUM growing more than threefold since our IPO, and in Chile, with the addition of Moneta's platform. We are now seeing the joint venture with Banco Colombia, which will provide a new anchor in Colombia. We are carefully moving forward with our strategy for our presence in Mexico. Notably, we expect that $2 billion to $3 billion out of the $5 billion to $6 billion inflows target for 2023 could come from Latin American-based investors. Fee-earning AUM growth of 8% since last quarter, and 15% over the last year is also a testament to asset class diversity, with permanent capital real estate and liquid public equity strategies leading the way. Put simply, this doesn't mean our strategy is changing. It means it is working. We're also seeing traction on divestments, with a transaction for Delis and block sales of SmartFit in private equity fund fire during Q2. Over the last 12 months, our flagship funds have secured proceeds of approximately $2.2 billion for fund investors delivering a multiple of 2.7 times invested capital on these investments in US dollars. And finally, in late June, Patria was added to the Russell 2000 and 3000 indices, an important step in our journey as a public company which expands our exposure across the investment community, presenting positive catalysts for our investment profile moving forward. So overall, a great quarter for the business, but importantly, we also see positive sentiment building around the regional macro story, a result of structural factors as well as timely economic policy actions. Latin America has long enjoyed the benefits of low geographical risk and richness of natural resources. Now, with war in Eastern Europe and growing US-China tensions, the region is benefiting from its new strategy and stability within emerging markets and trends of nearshoring and friendly shoring are certainly constructive. The comparatively lower indebtedness of individuals and companies in the region allowed governments to preemptively tighten monetary and fiscal policies to combat inflation, starting in 2021, which also helped mitigate adverse shocks from abroad. Sharp disinflation for several months have now paved the way for cuts in short-term interest rates, and countries such as Chile, Uruguay, and Costa Rica have already embarked on cycles of monetary easing. Brazil is expected to follow them in the third quarter. A scenario of stronger fiscal positions, decreasing inflation, and comparatively higher interest rates led to substantial carry gains in Latin America, with several region currencies being global top performers versus the US dollar in 2023. An important institutional factor frequently overlooked, is the effectiveness of checks and balances in the region. Most of the recent Latin American elections resulted in less leaning presidents, but without their coalitions holding a congressional majority and with an independent judiciary in place to limit their discretionary powers. Against this backdrop, we have indeed seen the necessity of moderation in proposed new legislation and the tax reform efforts moving forward in Brazil are a good example of that. Progressive administrations are still committed to delivering ambitious social agendas, but they must preserve fiscal and monetary discipline while building an enabling environment for private investments. Accordingly, markets are upgrading Latin America economic growth forecasts for 2023 and beyond, which is driving asset appreciation. That translates to a backdrop that is constructive across each phase of Patria’s investing cycle, fundraising, deployment, value creation, and divestment, although factors can impact asset classes differently. In private equity, making progress on divestment was critical as we enter 2023 and we are indeed seeing results. So far this year, Private Equity Fund V has completed the NASDAQ listing of Lavoro, a leading agricultural inputs business, completed two block sales of SmartFit, the well-known fitness company and also signed the transaction for the sale of Delly’s our food distribution platform, where another financial sponsor will partner with Patria Private Equity Fund VII to support this company's next phase of growth. The divestment pipeline continues to be very active, and we think the improving macro backdrop can be a solid tailwind in the second half of the year and into 2024. On the fundraising side, we continue to make progress in private equity with more than $360 million of inflows in Q2 between the newest flagship private equity fund, the first closing in the next vintage venture capital fund led by the team from MIGA and the recognition of Kamaroopin's legacy growth equity funds following the closing of the second tranche of that transaction and Patria's full acquisition of the platform. The structural challenges in the private equity space remain, however, particularly in the U.S. market. Although we are seeing upside in other parts of the world like Asia, the Middle East, and Latin America, the headwinds will likely impact the size of this flagship vintage. Should we ultimately close this fund under our targets, we expect the diversification into growth equity and venture capital to help compensate in the short-term to reach the $6 billion to $7 billion target for this overall drawdown fund vintage. And note these funds carry a similar structure to the flagship funds. Looking forward, a solid investment pipeline should also bring us back to the market for the flagship fund sooner than the typical cycle. Turning to infrastructure. As we indicated last quarter, we are completing the initial closings of our newest flagship development fund with approximately $550 million secured as of today, with $350 million closed in Q2 and another $200 million secured in early Q3. We continue to be optimistic about the momentum here and expect to reach roughly $1 billion mark by the end of Q3 representing approximately 40% of the funds cover target. The $11 million of performance fee-related earnings in Q2 was generated from Infrastructure Fund III. And as of quarter end, this fund remains five active investments at nearly $130 million in net accrued performance fees. And remember, the realization impact is enhanced in this initial catch-up phase as the majority of commitments are subject to a 100% catch-up, which enhances our performance fee impact until we reach our 20% share of the cumulatively investment gains. Out of the current $130 million accrual, the catch-up phase will account for approximately the next $60 million of realizations. In credit, encouraging trends continued as the redemption pressure we saw during 2022 has faded as debt flows were positive in Q2. Our credit platform achieved scale with the acquisition of Moneda in 2021. And while I usually highlight the flagship high-yield fund and its phenomenal long-term track record it is important to note the increasing breadth of this vertical. The benefits of diversification across Pan LATAM Brazilian and Chilean strategies, hard currency and local currency strategies, further expansion of private credit and soon infrastructure credit means multiple vectors of growth and the ability to capitalize when certain strategies are in high demand. For example, our local LATAM strategies have delivered outstanding absolute returns over the last year enhanced by currency performance against the dollar. The main LATAM local currencies fund delivered a 12% return just in Q2 and 27% over the last year. Our Chilean fixed income strategy has also seen strong inflows and performance returning more than 10% over the last year and now seeing its AUM top $500 million. We have launched our locally focused credit 365 product in Brazil and continue to work towards our formal first close of infrastructure credit, which already has backing from multilateral agency as anchor investors. On public equities, our funds have had a phenomenal quarter in terms of both inflows and fundraising as the improving sentiment in the region drove capital to both the large and small cap pan-regional products. Inflows were nearly $370 million in Q2 and net of redemption activity we were up nearly $290 million. Including the strong market appreciation total and fee earning AUM were both up 23% in Q2 alone fully recovering from the pressure seen in 2022 to reach a new high mark. In real estate our major story was of course the announcement of the new joint venture with Banco Colombia, which is expected to close in Q3. I'll now allow Marco, to give more detail on that in a moment. But there were also strong inflows in the quarter of more than $300 million driven by VBI our real estate platform as they continue to expand their platform in Brazil. Real estate is an asset class where we really aim to gain scale over the next few years. Indeed, the AUM has grown from $400 million at the end of 2021 to more than $1.8 billion today. With incorporation of the new joint venture with Bancolombia, AUM will nearly reach $3 billion in the coming months and more to come. To summarize, Q2 was another solid quarter of results for our shareholders. We are executing our growth plans amid an improving macro backdrop that is positive across our investment cycle. Our 2023 targets for fee-related earnings and fundraising remain well in sight. Let me now turn things over to Marco to talk about our latest corporate development views, and then Ana to walk through the results in more detail.

Thank you, Alex and good morning everyone. Expansion of product offering, geographic expertise, and distribution capabilities are the three pillars of our corporate development strategy and the joint venture with Bancolombia announced a few weeks ago touches each aspect. Not only are we bringing in $1 billion of permanent capital AUM to the real estate platform, but we are expanding that asset class into the Colombian market. We are gaining a distribution partner that can help us reach Colombian investors with a broad suite of alternative investment products. Patria will contribute capital into the joint venture over a multiyear period to fund operations and GP commitments to funds meaning cash consideration is quite minimal upfront. To help you frame the immediate impact, we've disclosed that Patria will have 51% and thus, controlling ownership in the JV. Assuming $1 billion of fee earnings AUM, earning typical market rates, and a similar FRE margin to Patria you would calculate an annualized fee-related earnings contribution of a few million after adjusting for the JV ownership. While that's certainly a positive and we believe there are further reconsolidation opportunities in this market, the long-term vision for this partnership is the broader facilitation of alternative products to the local investor base across multiple asset classes. Bancolombia is the country's largest bank by assets and shareholders' equity. It has been serving clients in Colombia and Central America for nearly 150 years, giving them tremendous depth of relationships with companies and investors and the brand power that we view as unmatched in the country. We believe the financial deepening in the region is real and poised to accelerate further with interest rates trending downward. Leveraging Bancolombia's client base and distribution capabilities and Patria expertise in private markets and alternatives, we can provide access to Patria existing diverse offering of regional products and also design new alternative products tailored for the local market in the local currency. We're very excited to move this relationship forward following the expected closing of the transaction in Q3 and confident it will be a driver of platform growth and accretive to our shareholders. We've been successful in leveraging the financial deepening in the region in both Brazil and Chile and now in Colombia. As we look to the remaining countries in the region, we believe Mexico continues to be the next logical country for geographical expansion. We remain active in pursuit of deals.

Thank you, Marco. Good morning everyone, and great to be with you again. Patria delivered distributor earnings of $43.6 million in the second quarter of 2023, equivalent to nearly $0.30 per share and generating a dividend for shareholders of $0.25 per share. Year-to-date we have now delivered a DE of $82.8 million, which is up nearly 30% from the same period last year. For an investor who bought shares at the beginning of the year, the fourQ22 dividends paid in March combined with Q1 and Q2 2023 dividends already amount to a yield of well over 5% with the Q3 dividend still left to be paid during 2023. Let's now look at how the DE is composed. Our consistent management fees were $61.6 million in Q2 2023, up 11% from Q2 2022, driven by both organic and inorganic FAUM growth. As the second half of the year unfolds, we will see a more relevant increase with new deployments of the drop-down funds and expiration of fee holiday for our latest vintage private equity fund. Note that for the latest vintage flagship funds we can generally collect retroactive management feedback to the same mission date on additional closings. On the expense side, personnel expenses were $16.8 million in the second quarter 2023, flat compared to the first quarter and up 7% compared to last year. Together with administrative expenses, operating costs were up 9% compared to the second quarter 2022, reflecting the acquisitions of VBI IgA and Kamaroopin as well as inflationary pressure on salaries and expenses of around 4%. As a result, our fee-related earnings were $33.8 million in Q2 2023, up 9% from Q2 2022. The second quarter FRE margin of 56% is in line with prior year and ticked up slightly from the first quarter. Year-to-date fee-related earnings were $65 million and as we suggested in previous quarters, reaching our FRE target of $150 million for the year implies stronger growth in the second half of 2023 with margins expected to move higher within our general range of 55% to 60%. We generated $11 million of performance-related earnings in the second quarter 2023, which is effectively an incremental true-up from Infrastructure Fund III based on the final net proceeds realized from the exit of ODATA and Entrevias. Net accrued performance fees rose to $472 million at June 30th, which is up 8% from both the prior quarter and a year ago, adding back the $40 million of performance fees realized over the last 12 months, the implied increase in the net accrued would be closer to 17%. Note that in the disclosure of the composition of the accrual, we have now added approximately $10 million related Kamaroopin's legacy funds following the closing of the second tranche of the transaction. Turning to assets under management. Total AUM grew to $28.2 billion, an increase of $0.9 billion versus prior quarter and up 7% from one year ago. The quarterly rise in total AUM is driven by new inflows of $1.5 billion and positive valuation, mainly driven by share price of publicly-traded portfolio companies and foreign currency impact of $1.4 billion offset by $2.1 billion of outflows. Notably, $1.7 billion out of the $2.1 billion outflow is from divestments in our drawdown funds, which are, of course, a positive aspect of our business cycle. Fee-earning AUM rose to $21.6 billion, up 8% from the prior quarter and up 15% from one year ago, adding nearly $3 billion as it crossed the $20 billion threshold for the first time. The growth from last quarter is driven by nearly $1.2 billion of inflows led by public equities and real estate. Remember that Q2 will not include the normal biannual adjustment for the drawdown funds that we typically see in Q1 and Q3. The growth was enhanced by more than $700 million of positive impact from valuation and currency appreciation. As we look to the second half of the year, I will reiterate that we expect a rise in quarterly fee-related earnings driven by multiple factors along with a slight increase in the margin in order to achieve our $150 million fee-related earnings target. As you know, we don't offer short-term guidance of performance without clear line of sight, but I want to echo our Investor Day targets estimated to amount a cumulative $180 million to $300 million through the end of 2025. Given that all of the Infrastructure Fund III is actively in the realization phase today and private equity fund sits is still working towards that threshold, it's likely that 2023 realizations will be lower than the next two years. Let me now turn back to Alex for some final remarks.

Thank you, Ana. To close here, we believe that Patria is the premier gateway for alternatives in Latin America. Our business was born in the region, and we have honed our investing strategy for more than 30 years of experience on the ground. We believe Patria is the reference trusted partner for sophisticated global investors who want to allocate capital to alternatives in the region. We also believe we can facilitate the development and adoption of alternative products for local investors in the region and be a conduit for them to access alternative investments globally. Our growth strategy is built around those pillars, and we communicated ambitious goals at our Investment Day last year. We are now on our way and I continue to have confidence in our ability to deliver. We thank all of our stakeholders for your support and we are now happy to take your questions.

Thank you. We will now conduct a question-and-answer session. And our first question comes from Craig Siegenthaler with Bank of America.

Good morning, Alex and Marco. How are you both doing?

Hi Craig. Thanks for participating in the call. I am here with Marco and all is well here. Thank you.

So my question is on fundraising. And I want to come back to some of the comments you made around P Fund VI in the prepared remarks. What do you think are the two biggest challenges that you're facing with respect to raising the buyout fund?

Thanks, Craig. This is Alex here. Well, I think first and foremost, the general feeling for fundraising for private equity has not been as it was. I think pre this whole inflationary issue in the mainly in the US. So, as mentioned in prior earnings calls, I think we are underperforming in the US for this specific fund. The US market has been an important contributor of around one-third of the fund. We are managing to overperform in other markets as also mentioned in other calls, specifically the Middle East, including Israel, Asia, and Latin America. I am very much surprised with the Latin American interest for this fund. I think investors see the monetary cycle here easing in Latin America, as mentioned in the macro part of my little short speech. They want to actually come into products that have very high returns like our private equity Fund VI. So, all in all, in order to compensate for the large group of investors, the North American investors mainly from the US and Canada, we have to effectively overcompensate the other regions. We're doing that, but I think as of today, we had a target of reaching around $2.5 billion to $3 billion for this fund. I think that it's more realistic to see the number closer to $2.5 billion now. A composition of other products has kind of eroded some of the demand for that. Growth equity competes with private equity Fund VII. Some investors, mainly the endowments and some smaller institutional and family offices, like the risk-return profile of growth equity, given that our flagship buyout private fund became more mainstream which is fine. It is a cannibalization that happens internally. Both funds are 2020 vintage drawdown funds, so it doesn't really matter for us, but we see some communication going on there as well. Some of our investors were actually asking for a product like growth equity because, as our flagship fund got bigger and became more mainstream, they wanted to invest in that part of the segment of the private equity market in Latin America. Our venture capital fund does not compete with our flagship private equity fund, but the growth equity fund does and cannibalizes some of that demand. So when I add the underperformance in the US because it's a tough market out there. You read the reports; I'm saying here what I read. I haven't gone out and checked the numbers, but some of the big consultants in the market say that for every $3 in the US, only one will be raised. So it's not a Patria specific thing. I think it's a market-specific thing. The good news about this is we managed to build our Latin America no local-based distribution capabilities. Out of the $5 billion to $6 billion being raised this year organically, closer to $3 billion is now being raised locally from Latin American investors. That's a major number. Normally, 80% of our fundraising came from global institutional investors and of course, the number was a lot smaller than the $5 billion to $6 billion. Now it's half and half. We're still growing in these countries in LATAM. We still have to increase and strengthen our base in Colombia and also strengthen our base in Mexico. This number of $2 billion to $3 billion is basically coming from Brazilian and Chilean investors—95% from Brazilian and Chilean investors. Some from Peru, but not much from Colombia and Mexico, which if I add Colombia and Mexico basically doubles the market there. So I'm very excited about this opportunity which is then compensating the fact that we are underperforming in the US for private equity fund VI. Overall, Craig, I don't think we'll get to $3 billion. I think we'll be at around $2.5 billion. I still see the upside of $2.5 billion as possible. Also, if we add the other products that are being raised within the private equity vertical like growth equity and the venture capital fund which both are doing well then I'm going to have a continue to have a very strong funding profile for 10-year, three products, and two flagship private equity verticals there. I hope I answered your question.

Thank you, Alex. Very thorough. For my follow-up, I wanted to hit on the expectation for timing and size for Infra Fund V. I think in the prepared remarks I heard that you already raised $550 million to date although I don't think it had a first close just yet because it's not showing up on Slide 17. But my question is do you think it will be significantly larger than the $1.9 billion of Fund IV at this point just given results to date with P Fund VI?

Yes and yes. To go straight to the answer here. We did have a first closing for Infrastructure Fund V. I don't think it was well communicated. But yes, that first closing happened already—$330 million in the second quarter and another $200 million in the early third quarter. So $550 million. We have already secured, because secured I mean when our investors have already gone through all the approvals, we are finalizing negotiations of the PA. But as it is a repeat, because it’s investors that have already invested in prior funds, the LPA, the limited partners agreement, is very well known for them. That’s why I did say in my earnings call here that we're going to get to the $1 billion first close, because normally a first close, the investor gives the papers back to us in one week, the investor gives the papers back the other week whatever. But within this month we get to $1 billion, which is 40% of the $2.5 billion target. So the $2.5 billion is the answer to the second part of your question. I can see the $2.5 billion which is higher or larger than the $1.9 billion for private equity—sorry Infrastructure Fund IV, and I see an upside there. Things are going so well for our infrastructure franchise here. As one of the consultants' reports that I mentioned a couple of minutes ago, the headline of this private equity and infrastructure fundraising report of one of these consultants states that DPI is the new king. That’s what our team has been doing on the infrastructure front—they have sold many companies at great valuations, providing significant returns to the investors, and investors of our Infrastructure Fund III. In reals, they are over two times their money in US dollars over 1.4 times their money. More exits will happen in 2023. So more money is going to go back to investors of Infrastructure Fund III. I think we'll have good news also in Infrastructure Fund IV. It won't reach, of course, the performance fee bracket because we have to deliver all the capital back invested in that fund. But we're beginning also to divest assets from Infrastructure Fund V. All this divestment that generates DPI, and as this consultant mentioned, DPI is the new king, assists in the fundraising plus it is a product that has an inflationary hedge. That's contributing to us being optimistic on the $2.5 billion and now seeing an upside at that. Looking at the $2.5 billion from private equity and then the $2.5 billion with an upside from the infrastructure side, it's $5 billion plus. Then I have all these other credit products—private credit and infrastructure credit—so that’s why I return and say that I'm confident in saying that the $6 billion to $7 billion drawdown funds target will be hit because of the numbers that I just gave you. I think I answered all of your questions; if not, please help me here.

No. That was great. Thank you, Alex.

Thank you. Operator, should we go to the next question please.

Our next question comes from Tito Labarta with Goldman Sachs.

Good morning, Alex, Marco, and Ana. Thank you for the call and for addressing my questions. I would like to ask if you could provide more details about the potential for realizing additional performance fees this year, especially from Infra Fund III. This was a pleasant surprise for us, and I would like to understand how much more you might be able to achieve in the short term from both Infra Fund III and overall.

Hi, Tito. Thanks for the question and for participating. Yes, I think overall on the performance fees, I think we're—we continue to see the $180 million for the next three years including 2023, which we gave as a guideline during the Pax Day late last year. On private—for Infrastructure Fund III, there are divestments going on and very interesting valuations that we'll be able to get for these assets. Once we sell these assets, it contributes 100% to our performance fee because we are in the catch-up phase. I see news coming from that front, which is more short-term news coming there. On the private equity side, we are also distributing in kind some of our listed products listed securities there and that generates a performance fee there. That’s what we're looking into for the second half of this year, and that's assets of our private equity Fund V. Because of the appreciation of the listed securities in private equity Fund V, mainly SmartFit, we see a lot of divestments still going on for the second semester also for Infrastructure Fund II, but that is not going to generate any performance fees in the second semester. In this order, Infrastructure Fund III continues to be the main driver of performance fees in the second half of the year. Divestments are occurring as we speak. We're selling assets that are still in that fund. We have five remaining assets in that fund. Proposals are coming in, we have organized processes and we're moving ahead and I'm comfortable that we will continue to deliver on performance fees this year and overall for the $180 million that I mentioned during our PAX Day.

Second question: Good performance in public equities and real estate side going into a lower interest rate environment. Obviously, valuation benefited but also we saw good inflows there with limited outflows. Can you give some color on how you see that shaping out for the rest of the year, particularly as we saw the Central Bank of Brazil cut rates last night? Are you seeing more interest in those verticals? Thank you.

Hi, Tito. Thanks for the question and for participating. Yes, I think, on the—overall on the performance fees, I think we're—we continue to see the $180 million for the next three years including 2023, which we gave as a guideline during the Pax Day late last year. On private—for Infrastructure Fund III, there are divestments going on and very interesting valuations that we'll be able to get for these assets. Once we sell these assets, it contributes 100% to our performance fee because we are in the catch-up phase. I see news coming from that front which is more short-term news coming there. On the private equity side, we are also distributing in kind some of our listed products—listed securities there and that generates a performance fee there. So that's what we're looking into for the second half of this year for—and that's assets of our private equity Fund V. We see a lot of divestments still going on for the second semester also for Infrastructure Fund II, but that is not going to generate any performance fees in the second semester. In this order, Infrastructure Fund III continues to be the main driver of performance fees in the second half of the year. Divestments going on as we speak. We have five remaining assets in that fund. Proposals are coming in. We have organized processes and we're moving ahead and that's why I'm comfortable that we will continue to deliver on performance fees this year and overall for the $180 million that I mentioned during our PAX Day. Secondly, we believe that overall the macro backdrop is improving for our fundraising activities. Investors are becoming more interested in Latin America given the changing monetary cycle and positively affecting our credit funds and equity funds. These elevated returns are certainly driving attention and interest, and that, combined with the recent currency appreciation, works in our favor and builds momentum for further investment. So, we are cautiously optimistic about the second half of the year.

And just to address your performance and performance fees and the environment. The recent currency appreciation plays in our favor. It was already present in the second quarter and even more so in the beginning of the quarter. You know that our business on the FRE is mostly dollar-denominated. The PRE currency plays a role both on the performance and on the performance fee. So, things are moving in the right direction and the region benefiting from this economic cycle, we also have a benefit not only by the organic growth of our funds, the natural IRR—but also the currency, which accelerates the hurdle rates, accelerates the catch-up phase, accelerates the carry to be received on the funds that are eligible to pay carry.

Okay. That's great.

Hope we answered your question.

Yes, no, very helpful, very good color and hopefully it's a good time for Brazil and LATAM given they were a bit ahead of the curve here. Thank you.

Thank you.

One moment for our next question. Our next question comes from Ricardo Buchpiguel with BTG Pactual.

Good morning and congrats on the results. I have a couple of questions here. First, can you please give us an update and more details of the levels of inflows in the liquid strategies that we should expect in the following quarters going by each product and what product should benefit the most with the impact from the Chilean interest rate cut? And also, for my second question, do you believe that right now is a good moment to accelerate the consolidation of the LATAM asset management industry? You mentioned Mexico should be an interesting region to take. If you could also comment on what product would make sense to add to your platform, that would also be helpful. Thank you.

Of course. Thank you very much, Ricardo. Nice talking to you. We're cautiously optimistic on fundraising for our liquid strategies. We saw good fundraising momentum in the second quarter for our public equity strategies. For small cap LATAM, we're actually reaching a point that we might even close the fund for a while because we were managing a maximum amount of dollars there. We've reached $500 million in basically 60 days—the last 60 days of the second quarter. So no good momentum on the inflows there. And for large cap LATAM, the same. For the Chilean strategies, we have large cap Chile, small cap Chile, and pipe in Brazil. All of the performances have been as I mentioned; 20% plus in local currencies. Then you add the strengthening of the Chilean peso and the Brazilian real—it's really impressive. Of course, that drives the fundraising momentum. I see that momentum continuing in the second half of the year. Yes, it's hard to say exactly a number. But overall I think the $5 billion to $6 billion number that I mentioned earlier in the call for organic fundraising for the year should be met between the drawdown funds. We have fundraising for our flagship drawdown funds going on—Infrastructure Fund V and Private Equity Fund VI mainly, but also growth equity, venture capital, and the private credit funds like infrastructure credit and the Brazilian private credit fund. If we add everything, the $5 billion to $6 billion, I can go—I think it's more effective and productive to go offline. We sit down with you and we go product by product, given that we have 30 products. I don't want to really take your time here and the other part of the audience today, but we're more than gladly to do that with you right after this call. The momentum looks good, Ricardo. On your second question here, yes, I think we had this contrarian view, and I can only thank you guys for supporting us. When we did go public, we were thinking about consolidating this market while Latin America was going through this hard phase of high interest rates, high inflation—high interest rates left is a government—the whole story. We've been around since 1988. We've seen this film so many times. It's like watching Godfather 3—I know what the actors are going to say, and I know let's position ourselves. We need to consolidate this market as soon as possible. I think we moved into Chile at an amazing right moment. We moved into Colombia, I think, in the right moment. Colombia is a little bit behind the curve on handling inflation and handling interest rates there with Patria. But I see we see the selling economic fundamentals of North Chile specifically Brazil. I think we're seeing the benefits of the execution of the strategy now. We're head-on and continue to do exactly that. We need to build a big business in Colombia and even bigger in Mexico. We have to close the JV and then probably in 2024, we're going to start more fundraising there. Mexico is a huge market with the friendly shoring and near shoring. I'm optimistic there. Now if you are just pension fund money in the region, it's around $800 billion, and they're all growing at double-digit rates because the contributions have been raised by these governments. Projections indicate that in five to seven years, this number should increase by 1.5x—$800 billion to $1 billion to $1.4 trillion depending on the projections of the analysts.

I think we should use the Banco Colombia deal to give visibility on how we think about our expansion. We've been saying since the IPO that the priorities in our inorganic program are set to expand our channels, our geographies, and our products, and a partnership like the one we announced with Banco Colombia addresses all three areas. We already had a presence in Colombia since 2014 with over $2 billion on the ground and successful cases there. With the partnership with Banco Colombia, we partner with the player that has nearly 50% market share with over 25 million clients on the ground. It's definitely a good way to get boots on the ground in a different strata of the market, not only on the client side but also on the business community side. The first product we announced with the joint venture with Banco Colombia is a local real estate, local REIT, which is permanent capital. It adds $1 billion of permanent capital, which aligns with our previous goals. I think you can take this as a definite priority. We will continue to foster these types of strategies that may result in acquisitions and mergers or in joint ventures like the case here in Banco Colombia to increase our presence across geographies and aspects of alternatives in the region. We also spoke about Mexico being a priority, alongside Chile. In terms of timing, the motivation for counterparts to partner with us is often centered around our powerful fundraising capability. By joining forces with us, they cater to new money entering the system. Parties want to work with us because they want to benefit from a bigger platform.

Thank you.

One moment for our next question. Our next question comes from Yuri Fernandes with JPMorgan.

Good morning, Alex, Ana, and Josh, Marco. I have a first question regarding your performance in fees this quarter. I guess Marco mentioned effects benefiting a little bit. And I think Alex and the presentation mentioned about an Entrevias sales, so my question here is on Entrevias. I guess you had about a 45% stake in the company. So just checking if you sold this additional stake now or anything? If you didn't sell it, when do you plan to sell this Entrevias stake? And how much do you believe this can help you on further performance fees? That's the first one, and I can have another question after you answer this one. Thank you.

Hey, Yuri. How are you? Thanks again for your coverage there. Yes, are we have performance fees from deals that were already announced, right? We did not sell an additional portion of Entrevias or an additional portion of any other assets from Infrastructure Fund III. What happened here was that we conservatively projected some of the accounts right at closing dates. I'll give you an example here: we sell the company for X. And there are some slight adjustments—working capital, the actual debt—because it depends on how much cash the company generated between signing and closing. We normally take a conservative approach on these assumptions to lower the equity sold, because of course, we have our projections. We are confident that things will turn out positively on working capital and cash flow generation, but we must be conservative. The performance fee we announced on the sale of Entrevias took into account conservative projections for working capital and the indebtedness of these companies at closing. When things came to closing, we were correct. We had a little upside on what we needed to factor in for working capital needs of those specific companies. We were also on the upside regarding debt, which was a little lower than expected because the company generated more cash between signing and closing. All of this contributes to effectively more performance fees. The actual price of the company remains the same, but we had less debt—a bit more equity—and that contributed to more performance fees. We are in the catch-up phase now, where 100% of what comes into Infrastructure Fund III contributes to the general partner. We did manage to have additional performance fees as a result. We do not sell additional parts of any assets; it was just between signing and closing adjustments that were positive. I mentioned, I think when answering one of Craig's questions earlier today, that we are selling other assets of our Infrastructure Fund III. I am cautiously optimistic that we will manage to close the sales of these assets in the second half of 2023, contributing then for performance fees for the general partner for PAX. I hope I answered your question and ready for the next one here.

Great. No guys, thank you for the clarification. I have a second one regarding Banco Colombia's recovery here. I guess you put in the press release and you mentioned some time about Central America operations. I guess this is the smaller portion of the pie. But just checking if the €1 billion AUM you mentioned includes also Central America or if you see like you can also leverage in those other countries that Banco Colombia serves. And a second topic here also regarding Banco Colombia; I know it's not the same company, but usually it's an important distribution channel for asset management products in the region. So just checking if this is only Banco Colombia or if you have any kind of agreement with Sura or not really? Thank you.

The deal that we have with Banco Colombia as of today is Colombia and is only with Banco Colombia, only. As you pointed out, Banco Colombia is the dominant player in Central America—in Panama, Guatemala, and El Salvador. We have not touched those geographies so far; it’s open to explore in terms of distribution. But the REIT business that comes along with Banco Colombia is exclusively a Colombia dedicated vehicle. But we have no limitations to expand the relationship into Central America and, in fact, that is part of the discussion. And regarding Sura, we are not contemplating distribution through Sura in the existing business plan. However, there's no limitations to go into that direction.

Perfect, thanks. Super clear. Thank you guys and congrats on the quarter.

Thanks, Yuri.

One more for our next question. Our next question comes from William Barranjard with Itau BBA.

Good morning, Alex. Here, so regarding a quick one here. So regarding that FRE target of BRL150 million so this target in place that the company should show a good performance in the second half of the quarter around 30% growth in FREs over the first half. So if you could go through it, we would like to understand what are the levers for that improvement?

Yes. Hi, William. Thanks for your question and for participating. Yeah, I think the way that these drawdown funds work is that you do the first close of the fund. As we raise money after the first close, the fees are retroactive to the first close. Contrary to the liquid strategies we discussed with Ricardo—when someone invests or subscribes to liquid fund strategies the fees begin as of that day. In the case of our drawdown funds—like the flagship infrastructure Fund V and Private Equity Fund VI—we do project first closings on them. We did our Infrastructure Fund V closing late in the second quarter—in late June. For example, if I raise $100 million in September of 2023, I won’t charge fees only from September to December; I charge from June to December. Therefore, if I raise $1 billion, I have the entire six months of fees, not just fees as of the date of the raised money. That’s a major contributor to that as I provide this illustrative example: if I have $1 billion of fundraising for the drawdown funds, using $1 billion, 2% of $1 billion is $20 million. If I raised that money in November of 2023, I could collect $10 million for the semester. As I go all the way back for private equity Fund VII to January of this year, I have $20 million in fees, and if I raised for Infrastructure Fund V, I have half a year because I had that first closing in June. If I raise $1 billion for Private Equity fund VII, I have $20 million in fees, even if I raised that money in November. Additionally, we see momentum in the second half of 2023 versus the first half for fundraising in our liquid strategies due to the positive Latin American economic backdrop. This was a noticeable change, as we began seeing that in the second quarter. So, the points contributing to that improvement are the first closing approach and the positive macroeconomic backdrop.

Yeah. I think, I'm not sure if it was clear, most of this growth is already contracted. It's a matter of fee-based. The fee base is the fee-paying AUM that we have indicated, which allows you to build up these numbers. For example, private equity seven is coming out of a fee holiday period that's already contracted, and that kicks into the second half of the year. All the commitments made during the first half will add up to the fee paying AUM for the second half of the year.

I think what we can do is—again, it's more effective if we go offline and explain this in detail by asset class. But broadly, for the illiquid drawdown funds, it's the fact mentioned earlier about the retroactive fee structure post first closing and the expected growth for liquid strategies.

Okay. Thank you. That’s really clear, Alex and Marco.

Thank you.

I’m showing no further questions at this time. I would now like to turn the conference back to Alex Saigh for further comments.

Well, thank you very much for your patience for hanging on for over an hour with us here. Of course, it's a huge pleasure to have you guys with us today. We are honored that you are covering us. Thanks a lot for all your efforts. Be sure that we'll continue to do our best here to deliver on our promises during our PAX Day, on the fee-related earnings of $150 million, etc. I hope to see you guys in person, and I think we have no meetings with most of you in the coming weeks and months. So that would be a pleasure again to see you in person. Thanks a lot for your presence and talk to you soon.

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