Patria Investments Ltd Q4 FY2023 Earnings Call

Hello, and thank you for joining us. Welcome to Patria's Fourth Quarter 2023 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. I will now turn the call over to your host, Josh Wood, Head of Shareholder Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Patria's Fourth Quarter 2023 Earnings Call. Speaking 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. We're also joined by our Chief Economist, Luis Fernando Lopez, for the Q&A session. This morning, we issued a press release and earnings presentation detailing our results for the quarter, 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 and do not guarantee future performance, and undue reliance should not be placed on them. Patria assumes no obligation and does not intend to update any such forward-looking statements. Such statements are based on current management expectations and involve inherent risks, including those discussed in the Risk Factors section of our latest Form 20-F annual report. Also note that no statements made on this call constitute an offer to sell or a solicitation of an offer to purchase an interest in any Patria fund. As a foreign private issuer, Patria reports financial results using International Financial Reporting Standards, or IFRS, as opposed to U.S. GAAP. Additionally, we will report and refer to certain non-GAAP industry measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with IFRS. Reconciliations of these measures to the most comparable IFRS measures are included in our earnings presentation. On headline metrics for the quarter, Patria generated distributable earnings of $70.5 million or $0.47 per share for 2023. We declared a quarterly dividend of $0.399 per share, equating to 85% of distributable earnings per share and payable on March 8 to shareholders of record as of February 22. With that, I'll now turn the call over to Alex.

Thank you, Josh, and good morning, everyone. 2023 marked Patria's third year as a public company, and I’m very pleased with the performance we delivered in the fourth quarter and the full year. We generated $47 million of fee-related earnings in Q4 '23, bringing our full year 2023 FRE to $148 million, with an FRE margin of 60%. This is up 14% from 2022, driven mostly by organic growth. Performance-related earnings for Q4 2023 were $27 million, driven mostly by Infrastructure Fund III, and we finished the full year 2023 with $47 million of PRE. With strong performance in both earnings streams, we delivered more than $70 million of distributable earnings or $0.47 per share for 4Q '23, bringing distributable earnings for the full year 2023 to $188 million or $1.26 per share. That translates to EPS growth of 26% year-over-year for our shareholders, and the resulting $1.07 in dividends equates to a yield of 7.7% based on our share price at the beginning of 2023. This was also our first year on the path to deliver the multiyear targets shared at our 2022 Investor Day, which look out through 2025. We aim to grow fee-related earnings from $130 million in 2022 to more than $200 million in 2025, equating to an annualized growth rate of approximately 15% or more. Given our performance in 2023, our organic growth initiatives, and the additional earnings power embedded in our pending M&A transactions, I’m confident in our path to meet these targets. While it's challenging to guide you on PRE in a given quarter or year, we said we could generate $180 million of performance fee realizations between our Investor Day and the end of 2025. Including the amount realized in the fourth quarter of 2022, we have now delivered more than $66 million of PRE since the Investor Day, putting us right on pace to deliver this target as well. In terms of growing the platform, we also set targets for total AUM to reach $50 billion and fee-earning AUM to reach $35 billion by the end of 2025. To achieve that, we estimated a need for at least $20 billion of capital formation from a combination of organic fundraising and M&A between 2022 and 2025. Starting from a base of $24 billion of total AUM and $18 billion of fee-earning AUM in the beginning of 2022. Over the last 2 years, we have had organic inflows of nearly $8 billion and added nearly $3 billion of additional inflows from acquisitions that have already closed to our fee-earning AUM base. As you know, we have also recently signed 2 significant M&A transactions, which we expect to close during 2024. Based on existing AUM levels, we expect these transactions to add more than $10 billion of additional fee-earning AUM to the platform. When you put that all together, combined with our goal to raise around $5 billion of gross organic inflows again this year, we believe that by the end of 2024, by the end of this year, we should have already achieved the $20 billion of capital formation and $35 billion of fee-earning AUM a year earlier than expected. We are not only growing; we are growing with quality by adding stable and sticky AUM. Our permanent capital AUM is expected to grow to near 20% of total fee-earning AUM with the closing of pending M&A. With over 70% of fee-earning AUM continuing to be denominated in hard currency. In looking at this progress and the meaningful evolution of our platform, we expect to host another Investor Day event late this year to share our vision for the next phase of growth. Now looking at some highlights and updates across the platform for the quarter and the year. Organic inflows to total AUM were $1.4 billion in Q4 and $4.8 billion for the year, including an additional $175 million of commitments that were approved in December and closed in January. Our fundraising for the year really showcases the power of diversity and reinforces why it’s such an important aspect of Patria's growth. Our latest flagship infrastructure vintage raised more than $1 billion in 2023, with more than $400 million in the fourth quarter. Our credit, real estate, public equities, and advisory verticals each contributed $700 million to $800 million of gross inflows with some notable highlights. We secured more than $200 million in Q4 '23 for our infrastructure private credit fund. Our PAN, Latam large-cap and small-cap public exit strategies raised combined gross inflows of more than $740 million. The VBI real estate platform had a fantastic year with broad inflows across the product offering, totaling more than $750 million. While the industry has seen a major slowdown in private active fundraising, we are quite optimistic that our flagship private active funds extension through the end of 2024 will allow us to significantly add to the capital we have already raised to reach over $2 billion. For us to sustain strong inflows, we always have to continue to perform for our clients, and I’m very pleased with the strong returns our strategies are delivering. We saw particularly strong performance in the fourth quarter, with over $1.1 billion in positive valuation impact driving full year 2023 appreciation to more than $1.9 billion. Leading the charge here was strong performance in some of our larger publicly traded positions in the private active platform like Lavoro, our agriculture inputs distributor, SmartFit, our low-cost gym chain, and Ultrapar, our gas station network company. This drawdown for depreciation has driven our net accrued performance fees to $541 million, up more than 15% from the prior quarter and 13% from 1 year ago, even after the realization of $47 million of PRE in 2023. The strategies in our public exits vertical also generated strong gains, with PAN, Latam strategies yielding nearly 29% in U.S. dollars and Chilean equity strategies yielding more than 18% in local currency for the full year. The performance of our credit strategies was also notable, with our Latam high-yield fund, which is dollar-denominated, yielding 14% in 2023, while the local currency fund yielded nearly 30% in U.S. dollars for the year. We have continued to stress that returning capital to our investors has also been a key focus in 2023, and our divestment activity in the drawdown funds continues to gain momentum. We closed sales transactions for all data, our data center business, and Entrevias, one of our toll roads in Brazil in our Infrastructure Fund III, which delivered more than $1.5 billion of proceeds to investments and pushed this fund through the performance fee realization hurdle to generate much of our PRE in 2023. We also announced the sale of Delly's, our food distribution platform, as well as block sales in publicly traded positions which secured more than $600 million of additional proceeds. In total, we realized more than $2.5 billion across the platform for our limited partners during 2023. Finally, I want to take a moment to highlight some new initiatives that are moving forward here in early 2024. We have been very active on the M&A front in 2023, but I want to also give equal attention to some of the great things we are doing organically to grow our platform. First, we are nearing the formal launch of our first infrastructure private credit fund, which is something we have been diligently working towards over the course of 2023. This is a major opportunity to grow our private credit offering while leveraging our extensive experience and deal flow access in the infrastructure space. This fund will have a very long-dated 50-year term structure, making it effectively permanent capital for our platform. As noted earlier, we formally secured more than $200 million in initial commitments for this fund in Q4, anchored by multilateral agencies and now have commitments taking us up to $350 million. We see good momentum for this fund to become a meaningful contributor to fees in the next few years. Second, we are also announcing the start of a new platform within our infrastructure practice. Patria has a long and successful track record in the energy sector, being one of the largest investors in solar, wind, small hydro, natural gas, and transmission assets. Overall, Patria has historically committed $2.3 billion in the sector over the past 18 years, representing more than $5 billion of overall CapEx. In connection with the remarkable growth of the energy free market in Brazil, we are excited to announce the launch of our energy trading platform, which will build on Patria's historical expertise in this area. As energy supply volume continues to migrate from the regulated market, the Brazilian free market is expected to grow from just over BRL 30 billion, approximately $6 billion in 2023, to around BRL 70 billion, approximately $12 billion by 2028. Within this backdrop, we believe there's a compelling opportunity in a very fragmented independent trading space. This initiative will be developed in Q1 '24 in partnership with a talented team with an outstanding track record alongside Patria's team. It will be funded with an initial contribution of BRL 100 million, approximately $20 million from Patria's balance sheet with up to BRL 50 million, approximately $10 million of value at risk. We expect this new strategy to be a positive contributor to Patria's earnings with limited impact in the first few years, but with attractive margins and exciting growth potential over time. After establishing a track record of success, we believe it will progress into an asset management strategy with third-party capital and a relevant contributor in our infrastructure vertical. We expect to provide more details in coming quarters as these initiatives take shape. To finish here, I'm very pleased with Patria's performance in 2023 and our growth path, and I'm very proud of what we have accomplished in the 3 short years since our IPO. Our platform has significantly expanded beyond 2 successful flagship strategies, private equity and infrastructure, to provide a diversified client offering across major asset classes, adding scale and expertise in credit, real estate, and public equities. This expansion turned a limited offering of less than 10 products into a versatile menu of more than 30 products to serve a range of client profiles and needs. We extended our geographic presence in the region in both investment expertise and distribution capability through new partnerships in Chile and Colombia. Through this expansion and diversification, our fee-earning AUM has grown from approximately $8 billion at our IPO to a pro forma of more than $34 billion today, including pending M&A. In turn, we have grown our fee-related earnings from less than $60 million in 2020 to nearly $150 million in 2023, with more growth embedded as we progress towards our 2025 target of over $200 million. Importantly, through this growth, I believe we have maintained the high standards of investment performance that are valued and demanded by our clients, and this always remains the key to our growth over the long term. Let me now turn to Marco for an update on corporate developments and then Ana to walk through the numbers, and I'll be back for some final thoughts.

Thank you, Alex, and good morning, everyone. It was indeed a very active year for Patria on M&A. Since the IPO, we have now signed or closed on 6 acquisition transactions as part of our strategy to expand the platform and grow our earnings capacity. Industry consolidation seems to be the newest hot topic in the sector. So this is certainly nothing new to Patria, as we've made inorganic growth a key part of our strategy over the last 3 years. Through Moneda, we acquired scaled credit and public equities platforms, along with key leadership talent, geographic expertise, and distribution relationships in Chile. We also added flexibility and versatility on the private equity vertical through the acquisition of teams focused on growth equity with Kamaroopin and venture capital with the case of Igah. In real estate, we acquired 50% of VBI real estate with an option to acquire the remaining stake to anchor our presence in Brazil. Recently, in the fourth quarter of 2023, we were able to act on a very attractive opportunity to acquire Credit Suisse Real Estate. Also recently, in the fourth quarter, we signed the agreement to acquire the private equity solutions business from Abrdn. Once closed, this transaction will launch a new vertical for Patria called Global Private Market Solutions, which adds fast-growing secondaries and co-investment strategies and will enhance our ability to offer diversified global alternatives exposure to our clients. In addition to the acquisitions in the Colombian market, we have joined forces in a venture that will anchor our real estate presence in the country and also tap into a massive distribution network to provide a range of locally focused alternative products to Colombian investors. As substantial as our M&A activity has been, it's worth noting that transactions closed in 2023 contributed effectively only $2 million in FRE in the year. Likewise, the major M&A transactions signed in 2023 will also have only partial year impact in 2024, depending on closing timing. We continue to feel good about the process with the private equity solutions business we are acquiring from Abrdn, which is on track to close in the first half of the year. We also feel comfortable with the process for Credit Suisse real estate, which is slightly more complex as we will go through a fund-level shareholder approval process in each REIT vehicle following standard regulatory approvals. All in all, we expect to begin 2025 with these acquisitions fully on board and fully contributing to reaching our earnings targets. With 2 sizable pending transactions, 2024 will be an important year of consolidation and integration as we close the deals. However, we do remain active and will continue to have an opportunistic mindset to achieve our platform growth ambitions through M&A. I will now turn the floor to Ana to go through the results in more detail.

Thank you, Marco. Patria delivered a strong quarter and a solid year, with significant growth of our main KPIs, and we remain on a consistent path to reach our 2025 targets. Our fourth quarter 2023 distributor earnings of $7.5 million were up 32% from Q4 2022. Adding to our year-to-date results, we will reach a full year 2023 of $187.8 million, up 28% compared to the prior year. Our resilient management fee revenues were $64.7 million in Q4 '23, rising 18% compared to Q4 '22, and $245.6 million for the full year 2023, up 11% compared to '22. This growth was supported by our latest flagship private equity and infrastructure funds as well as the expansion of our real estate platform. Total operating expenses, including personnel and administrative expenses, totaled $18.9 million in Q4 '23, down $5 million compared to Q4 '22. The decrease is driven mainly by the further implementation and expansion of our equity compensation plan at the executive bonus level already mentioned last quarter, integration synergies, and some outsourcing, partially offset by M&A expenses and other increases, inflation, and appreciation of the curve. Full year 2023 total operating expenses were $91 million, almost flat compared to the prior year and following the same general driver of the quarterly comparison. Looking specifically at the personnel expenses, the quarterly average during 2023 was approximately $15 million, with the last 2 quarters of the year impacted by the catch-up accrual effect of implementing our equity compensation program. The 2023 quarterly average, as opposed to the Q4 '23 results, is a more reasonable run rate to consider as we enter 2024. Fee-related earnings were $46.7 million in the quarter, up from $35.3 million in Q4 '22. The full year 2023 FRE reached $147.7 million with a margin of 60%, up 14% year-over-year with a 2.4 percentage point increase in margin. The M&A transactions closed in 2023 contributed effectively about $2 million of FRE in the year, which was mainly from Camaren, Igar, and 2 months of Bancolombia, with the remainder of the growth being organic. We finalized a stronger year with 1% to 2% of our FIA guidance, keeping us on track to deliver at least $170 million FRE in 2024 as well as our 2025 FRE target of at least $200 million. We've consistently generated performance throughout the last several quarters. During Q4 '23, we generated $26.6 million of performance-related earnings, driven by a combination of additional net proceeds for Infrastructure Fund III and a contribution from one of the VBI drawdown funds. With our Investor Day, we have crystallized $66 million out of our $180 million target throughout 2025. Net accrued performance fees were up 15% from the prior quarter to reach $541 million, even after considering the performance fee realization in the fourth quarter, with the additional accrual coming mostly from private equity funds, appreciation, and positive currency impact. This current accrual now represents more than $3.6 per share of performance fee inventory. On taxes, our corporate income tax expense in 2023 was $3.1 million compared to 2022, with a slightly higher effective tax rate driven by a higher mix of performance subject to local tax rates. So again, highlighting the bottom line, this all led us to distributable earnings of $187.8 million in 2023, which is an increase of almost 30% compared to the prior year. A few notable comments on our GAAP to medical reconciliation. As we closed our transaction with Bancolombia and signed another 2 acquisitions agreements in the fourth quarter, we included more M&A-related costs, which you can also see in the transaction cost line. In regards to the equity-based and long-term compensation line, Patria implemented this year a tariff compensation bonus cost mentioned before on the FRE explanation, which gives our executives the opportunity to convert 50% of their cash bonus into equity shares, receiving a matching component to be vested in 3 to 5 years. This was very well received by our senior-level personnel, showcasing the high long-term commitment and engagement of the team. The majority of the impact of this P&L line comes from this new program and from previous long-term programs of Patria and acquired Compass, as well as equity-based compensation of partners. Finally, an important clarification on Patria's dividend payout. In the announcement of our agreement to acquire the Brazilian new state Beeson Credit Suisse back in November, we noted that Patria will give careful consideration to our optimal capital structure as we look into 2024 and beyond. We view the combination of cash, debt, and equity to fund our M&A initiatives. Beginning in Q1 2024, we may elect to retain more than 15% of our performance-related earnings and realized gains from the energy trading platform, net of a proportional share of corporate taxes, rather than distribute a full 85% as we aim to do with the rest of our distributable earnings streams. We expect to exercise this incremental retention up to an additional $100 million to fund M&A obligations and pay down debt, after which point we will evaluate the appropriate distribution approach for these earnings going forward. To be very clear, we plan to continue to distribute 85% of our stable and recurrent fee-related earnings streams, maintaining our commitment to deliver an attractive payout for our shareholders. I will now turn back to Alex for closing remarks.

Thank you, Ana. As we turn to your questions, I will just reiterate how pleased I am with our performance in 2023 and over the last 3 years and with the tireless contributions from the entire Patria team to make it happen. From approximately $8 billion of fee earning AUM at the IPO to more than $34 billion, I think that this is a remarkable achievement. This is a people business, and we truly have a fantastic group of talented people pushing this company forward. As Ana noted, 2024 will be a transition year to our multiyear growth targets for 2025. We are comfortable getting the fee-related earnings to at least $170 million in 2024 on the path to more than $200 million in 2025. Considering the growth embedded in our pending transactions and our organic initiatives, I am confident that we will reach both the financial and AUM targets for 2025. We thank you for your time to listen today, and now I’m happy to take your questions.

Thank you. Our first question comes from Craig Siegenthaler with Bank of America.

This is Rodrigo Ferrer on the line for Craig. For Private Equity Fund VII and Infrastructure V, can you walk us through the size and timing of those raises? You've already closed on about $1.2 billion for P IV and about $1 billion for IFV. Do you expect consistent fundraising throughout 2024 or a few large closes? And when should we expect the final close for each of them?

Hi Rodrigo, this is Alex here. Thanks for your call and thanks for participating. Can you hear me well?

Yes.

Okay. Great. Well, Private Equity Fund VI, we are on the way to raise $2 billion to $2.5 billion. We are currently halfway there, halfway to the $2.5. We are a bit behind schedule, so I think the latest number is around Navy or something like that. We didn't have any closings at the beginning of this year. We have another process open in Brazil. As you know, fundraising in Brazil can be a very locked-in process. We expect another $50 million to $100 million coming in from there and then we will follow on fundraising this on the $2 billion to $2.5 billion, which is the guidance that we provided late last year. We're also aiming to push for Latin America, where we should close in addition to fundraising. From $1.5 billion to $2 billion, we have seen inflows from the second quarter to the last quarter, which we feel confident about. We also mentioned extended the fundraising period for this fund to the end of this year. The fundraising period was going to end in the second quarter; we extended it until the end of '24, as revenues are taking more time than usual for most funds, with Private Equity Fund VI being one of them. Also, we should push for close to $5 billion in addition to fundraising. Running from $1.5 billion to $2 billion with a strong campaign ahead of us. Regarding Infrastructure Fund IV, Fund V, we are over $1 billion as of the beginning of January. We have some commitments that were approved in the investment committees of some LPs late last year. A significant commitment was signed at the beginning of this year, so it pushes us to over $1 billion. The process for Infrastructure Fund V will mostly mirror what I described for Private Equity Fund VII, with significant fundraising to be done in Brazil, Chile, and Colombia this year, especially in the first half. We continue fundraising with existing investors and feel very positive that we can reach the $2 billion to $2.5 billion target, bringing the 2 funds together to around $4.5 billion to $5 billion, with the expectation of being closer to the upper end.

That was super helpful. For my follow-up, you had guided before that you expected $2 billion to $2.5 billion of realizations in I think 2024 and the beginning of 2025. Do you expect this to be concentrated towards a certain part of the calendar year? Can you remind us which funds should be accounting for most of these realizations?

Yes. Unfortunately, it’s very hard for me to give you an exact quarter for realizations. I joke with my team that M&A should not be mergers and acquisitions; sometimes it should be called misery and anguish. Selling a company might happen a quarter here, a quarter there, and on the buy side and the sell side, right? On the sell side specifically, regarding realizations that you asked about, we will continue to have a very strong divestment agenda. As you can see since the IPO in early 2021, we have been delivering first through Private Equity III, which provided significant performance fees for 2021 that contributed to our distributable earnings, then came Private Equity Fund V at the beginning of 2022, and lastly Infrastructure Fund III, which has contributed to that narrative. Today, as of now, Infrastructure Fund III has some significant assets to be sold, and we are in the process of selling them. We're also in the process of selling assets of Infrastructure Fund IV. There are some great assets ready to go, including a solar panel farm that is now fully operational and a thermal power plant that also became operational at the end of last year. All of these assets that are operational can go up for sale. Also, when we manage toll roads, the first 2 to 4 years of the concession involve major capital investments; afterwards, we transition into a more maintenance-focused CapEx phase. We have some toll roads that are already 3 to 5 years into the concession that are also ready to be sold. This is a generalization, but it shows the consideration of the timing. Currently, there are over 15 assets being sold from these funds, and it’s quite a busy agenda for us. Though I can't give a precise quarter for any realization, I'm confident we can hit the $180 million target that we discussed back at the end of ‘22. We have already delivered on 66 of that, so we need to deliver another $110 million, which we are confident we can achieve between this year and next.

Our next question comes from the line of Ricardo Buchpiguel with BTG Pactual.

I have two questions here on my side. First, I wanted to get an update from your perspective in terms of net inflows in liquid strategies. I wanted to, particularly, if you get a sense regarding the interest from Chilean investors, particularly in equities and credit already during the beginning of the year. If you guys have seen more demand given the insight and should progressively improve throughout the following quarters? For my second question, I wanted to get a sense of how close Private Equity Fund IV and V are from the hurdle rate, and after it hits the hurdle, when do we start paying performance fees?

This is Alex again, and my team can complement here my answer. Regarding the public equity and public platform that you asked about, we had net outflows in 2022. As we entered 2023, with a better macroeconomic perspective in the U.S., Latin America, and especially in Chile, we started seeing our redemptions dry out. In the second, third, and fourth quarters of 2023, we saw positive net inflows. As I mentioned during the earnings call, each of these families of strategies, public credit and public equity, saw over $750 million of inflows. So we are extremely pleased with this outcome. Not only did the macro situation improve, but the performance of the funds has been very positive, beating benchmarks in most cases during 2023. Our high-yield Latin fund saw net returns of 14% to 15%, while our small-cap and large-cap public equity strategies yielded returns of between 20% and 30%. Clearly, the improved macro situation contributed to the inflows, as did the strong performance of the funds. We go into 2024 with a similar view as in '23, continuing to see minimal redemptions. These redemptions are programmed, so we have good foresight on them, and we are seeing inflows from both domestic investors and international ones as well. Some of the institutional investors from Colombia and Peru, who were key investors in these 2 strategies, have started to see international investors return, including some of our UK investors who had to redeem money during the UK government bond crisis in 2021 and 2022. We see these international investors returning in '23, leading to good early numbers for the first quarter. As for the second question, regarding hurdles for Private Equity Fund IV and V, we are already in the catch-up phase for Infrastructure Fund III but far from the catch-up phase for Infrastructure Fund IV. As you know, we have a commitment to return all capital plus the hurdle before any performance fees kick in, and we are significantly away from that since we have not begun divesting assets from Infrastructure Fund IV. Private Equity Fund V is more promising; we already sold a significant asset from here, a food distribution company that has positively influenced our DPI (Distributable Paid-In Capital) for Private Equity Fund V. If we sell one or two assets from this fund, we should get close to our required performance level, including entities like the healthcare company or agricultural inputs company. Selling one of these major assets would likely result in us reaching the performance fee level.

This is Marco. Can I add to something, Ricardo? It may help clarify your question. We have about $540 million of net unrealized performance fees. Out of this amount, $234 million is from Private Equity Fund V, $169 million from Private Equity Fund IV, and $110 million from Infrastructure Fund III. If you connect this number to the previous information that Alex gave of $66 million that has already been returned and contrast that with our 3-year target of $180, if you take the $110 million from Infrastructure Fund III alone, that would be enough for us to meet the target set for those 3 years. While we are of course placing significant attention on Private Equity V and VI, rest assured that in terms of Infrastructure III alone and the velocity of realizations, we feel confident in meeting our goals by the established target.

Our next question comes from the line of Tito Labarta with Goldman Sachs.

A question on the management fee evolution in the quarter. You had very strong growth in the fee-earning AUM, although the management fees did not grow as fast. Can you explain if there was any reason why they didn’t grow as fast as the fee-earning AUM in the quarter? Also, incentive fees were lower than they were last year. So it kind of led you to being slightly below your FRE guidance for the year. If you have any downside risks on the guidance that you've given for the $170 million for next year or $200 million in FRE for 2025?

There are sometimes some quarter-to-quarter movements in the numbers. I think it’s better to view this over the whole year. For instance, we did some acquisitions, and while we had synergies in place, these may show up differently across quarters. In one quarter, we may have extra costs running two teams, then we would only have one once we were able to synergize. As for expenses, I am confident about our expenses now looking ahead, and, as to your second question regarding future guidance, I believe we can deliver $170 million of FRE, potentially higher than $200 million for both 2024 and 2025. Additionally, the expenses from this year incorporate some further added synergies coming into 2024, especially after we complete the 2 pending M&As. To give you an idea, some of our businesses, like our real estate investment trust business through VBI or Credit Suisse, were running at 30% to 40% FRE margins, we believe we can push this up as well. That will come over time and does not happen overnight. It's why we call '24 a transition year; we’re unsure when these big deals will close, and the earnings impact may fluctuate between quarters. That said, I feel strongly that we have a solid foundation to reach our target. Ana, would you like to provide more details on the expenses?

As I mentioned earlier, I think we have a good base to consider, particularly since the first quarter of the year is a reasonable benchmark for what we’ve done since Q4 was impacted by some catch-up items from the prior quarter. Our personnel expenses are on average around $15 million, and we are preparing and bringing in synergies. The run rates between Q3 and Q4 are the ones we should consider moving into 2024.

Yes, Tito, this is Josh. Just one other quick point on your observation about fee-earning AUM growing quicker than management fees. There's a timing impact to that in some cases. For instance, the partnership we closed with Bancolombia near the end of the quarter had a new real estate vehicle come in, bringing about $1.3 billion of fee-earning AUM, but we didn’t get a full quarter's worth of revenue impact for that. You'll see that as we go into 2024. This situation can lead to a timing impact based on how fee-earning AUM flows in, compared to the revenue not being fully realized until the next quarter.

And just on the incentive fees, they were also lower than they were last year. Any color you can provide on that?

Well, that relates to the benchmarks. As I mentioned last year, the benchmarks also performed well. While we beat the benchmarks in many cases, we still had many SMAs and managed accounts where performance this year did not result in as many incentive fees as a result. Although we had very strong performance this year, it is also a competitive comparison given that we had a better benchmark year last year. Additionally, if I could have missed anything important, Ana, please interject.

I want to highlight that this year, our incentive fees were primarily concentrated in our credit vertical, just to make that clear.

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

The first question, you briefly mentioned the possibility of reaching the $35 billion AUM a year earlier, specifically by the end of 2024. I would like to ask about the expected management fee rate. Do you expect any changes, or should it remain at the 1.2% that we currently see? My second question is regarding expenses. Can you go through the dynamics of personnel expenses in the new share-based compensation program in this quarter? I guess I would like to understand how much of the $12 million in equity compensation would be translated into personnel expenses if this program were not in place. I mentioned during the call that 60% of cash bonuses could be converted into shares. Is this the only adjustment, or are there other dynamics here?

On the management fee rates, as you have seen in one of the pages of the presentation, we have the number at 1.2%. As we close the 2 pending M&As, they have lower effective management fees than 1.2%. The blended fees will likely land between 1.0% and 1.1%. Ana, could you correct me if that number is off?

Yes, Alex, this is Josh. If you do the math, our current blended rate and the implied blended rates for the upcoming acquisitions show that the projection falls between 1.0% and 1.1%.

That sounds accurate. When considering your model, remember that the new acquisitions are providing permanent capital as fee-paying AUM that is charged on NAV. This provides a higher quality, visibility, and resilience in terms of our projections.

We have a follow-up question from the line of Craig Siegenthaler with Bank of America.

So my follow-up question is on M&A. You've been very active over the last couple of years with expansions in different geographies and products; Moneda JV with BancoColumbia, VBI. How do you view your existing capacity on the balance sheet and how your currency, the stock today, can support doing more deals? I think you've been eyeing Mexico for a while—perhaps you can update us on your thoughts regarding expanding into Mexico.

Remember what we always say when we think about acquisitions; we’re buying products, channel, and distribution. This is crucial to our strategy. I am proud of our 6 acquisitions and the addition of credit and real estate. Mexico continues to be a priority target for us. Unfortunately, we have not yet found the right assets at the right time. Nonetheless, we are excited about the opportunities there, especially given the current climate. Regarding how we will fund our acquisitions, we've primarily utilized a mix of cash and equity while retaining flexibility on our end. Most of our acquisitions have been structured with seller financing, granting us time to generate the necessary cash. We can choose to pay in cash or equity as necessary, allowing us the flexibility to adjust our strategy per our needs. In the previous quarter, we did announce our method to fund acquisitions through retaining part of our performance fees. To clarify, we are not impacting our FRE; rather, we may selectively retain performance fees to cover short-term cash needs. We intend to remain active in acquisitions this year, particularly as 2024 is predicted to be vital for consolidation given the 2 large pending M&As. This is not the end; we will be looking to actively pursue more opportunities when they arise.

If I could add, Marco, we have observed the consolidation trend since 2019 and 2020, and part of our rationale for pursuing the IPO in 2020 was to position ourselves effectively. We've been early movers along with a few peers while witnessing others follow our model. Many major players are currently buying as they realize this consolidation is necessary. I believe we are poised for success with an impressive range of over 30 products that provide us valuable opportunities to continue expanding our healthy growth. We've become a preferred partner for general partners looking to participate in our growth trajectory as they understand what we bring to the table with fundraising, our stock as a listed tool for attracting talent, and providing liquidity for senior executives. It's rewarding to see that our approach is now yielding interest from others who seek to join forces with us.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Alex for closing remarks.

Well, again, thank you very much for your patience here. It's the end of the year call, so it’s a little longer than usual. We truly appreciate your participation. We’re pleased with our performance and eager to address any further questions. We hope to see everyone in your conferences soon, and we look forward to sharing more good news in 2024. Thank you once again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.