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Bolt it On

Patria Investments, a portfolio company that I’ve written about in the past, announced that it added on a real estate platform via acquisition. Previously the CEO had hinted at such an action:

We already have 3 funds as I mentioned, down there in Brazil, in the Brazil Stock Exchange. And we also look for buying these — kind of these permanent capital structure funds through acquisitions through M&A. And if we do pursue M&A opportunities in the real estate arena, within real estate, there is several permanent capital structure funds in the region that were listed in the main stock exchanges in the region, Mexico, Colombia, Chile and Brazil, so we can also add these kinds of funds, not only organically, as I mentioned, but also through M&A.

PAX Q4-2021 Earnings Transcript

Today they described the acquisition:

Patria Investments (“Patria”) (NASDAQ: PAX), a global alternative asset manager, announced today an agreement to acquire VBI Real Estate (“VBI”), one of the top independent alternative real estate asset managers in Brazil, with approximately R$ 5 billion in assets under management across both development and core real estate vehicles. The transaction is structured in two stages, the first of which entails the acquisition of 50% of VBI by Patria. The second stage, when closed, will lead to full ownership and integration of VBI to Patria’s platform.

PAX Press Release

VBI has roughly 60% of its AUM via permanent capital structures (publicly traded REITs on the B3) and the rest via drawdown vehicles.

Overall, Patria has bolted on a real estate platform, credit platform, and growth equity platform to its existing PE and infrastructure flagships in a very short amount of time post IPO. Only time will tell if they are able to successfully increase distribution, cross-sell, and as well as maintain investment performance across these platforms. Time will tell.

Disclosure: We own shares of PAX, this is not investment advice. Do your own work.

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Patria Rising

There’s a lot of dispersion in global equity markets:

Brazil has been a bright spot through Q4-2021 and Q1-2022. However macro aside, Patria, a LatAm focused alternatives firm, reported a great set of Q1-2022 numbers:

Metric (Year over Year)Result
Fee Related Earnings / Share+84%
Distributable Earnings / Share+90%
Dividend / Share+90%
Fee Paying AUM+136%
Organic FPAUM+28%
Accrued Carry Balance+99%
PE Fund V Net IRR ($USD)32% (3.1x)
PE Fund VI Net IRR ($USD)27%(1.5x)
Infra Fund III Net IRR ($USD)13% (2.0x)
Infra Fund IV Net IRR ($USD)37% (1.7x)
LatAm High Yield Relative Annual Performance+403bps (22 yrs)
  • While the earnings numbers seem large due to the acquisition of Moneda, their new credit platform, organic growth of fee paying AUM just under 30% is all one can ask for.
  • Furthermore, the company indicated that it is tracking at ~48% 2022 growth in per-share fee earnings, which will accelerate as deployment happens during the remainder of the year.
  • Tangibly, their flagship PE fund held a first close which is on target for a 50% larger vintage, their growth equity platform is out in market right now for its first fund, and Moneda / Patria are kicking off joint fundraising / cross-selling

In a world in which there is plenty of uncertainty and surprises, it was good to see a solid set of earnings and positive outlook. However, the Brazilian presidential election is coming up and may setup for a nasty surprise.

Disclosure: We own shares of Patria Investments, this is not investment advice. Do your own work.

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Rumblings

Yesterday, despite murmurs of a potential workable deal being discussed regarding the Ukraine war, markets displayed a step down in confidence. Stocks traded as though people were throwing their hands up and liquidating, particularly in high multiple SaaS land. Gitlab, a company I follow, was down over 15% and is now trading at $35. It IPO’d not that long ago for $77, traded up to $137 at its high.

Broad indices were down 3-4%. And for the record, the S&P is only ~13% off its high, hardly a bear market. Versus Covid, I feel different during a drawdown this time around. Our portfolio is consolidated around companies that tend to do their best work during difficult times. We have a material debt allocation this time around. We have battle tested real estate. And to boot, we have a material cash position for the massive downside scenario, to either allow us to continue sleeping well at night or to deploy into deeply discounted businesses.

As an example of a business we own, Patria Investments describes their business model as it relates to difficult times:

Listen to our commentary over the course of the year, you have heard us to talk a lot about the inherent resiliency of the business model, and how it allows us to thrive in times of volatility, especially investing in a region like Latin America.

These results and metrics for 2021 are a perfect representation of that. The ability to grow our revenue earnings at a high rate over the last year underscores an important point, which is true for our entire sector. Asset managers with long-term capital can do some of their best work in times of market dislocation. We believe these are good times to deploy capital, and for Patria, deployment translates directly to management fee growth.

If the environment is slipped to the other end of the spectrum, and it is a better time to sell than to buy, you may see deployment pace slow but portfolio realizations should then also likely rise, generating more realizations for our LPs and higher realized performance fees for our shareholders. That structural balance in our revenue streams allow us to create value for our shareholders through the peaks and troughs of economic cycles and everywhere in between.

PAX Q4-2021 Earnings Transcript

Disclosure: We own shares of PAX. Do your own due diligence, this is not investment advice.

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Patria Q4 Earnings Thoughts

Patria Investments posted a nice set of numbers to round out 2021 with just over $1 of distributable earnings. The stock currently sells at ~$17, so it isn’t cheap but if one looks past today and into the 5 year future, it is much more interesting. Here are some of the reasons highlighted on the call:

  1. Patria was backed by Blackstone in 2011 and it’s no surprise they are using the BX playbook. They are publicly repeating that their mission is to be the one-stop shop for alternative investments in Latin America and they are by far the largest LatAm origin alt manager by assets (~$25B). It’s also clear that LPs are looking to consolidate their asset manager relationships so building the full LatAm product suite is high value.
  2. In the near term, its flagship PE, renewable, and infrastructure funds are in market for 2022 with 50% larger funds for PE and renewable / infrastructure combined. Patria has guided to a 50% increase in fee related earnings alone within 2022.
  3. Patria is guiding towards the buildout of its perpetual asset management vehicles strategy (which has been the engine of Blackstone’s growth over the past 3 years) in both corporate equity and real estate niches.
  4. Geographic expansion to cover Mexico, Colombia are in the cards with strong Mexico tailwinds due to on-shoring talent and supply chains currently in Asia.
  5. Currency tailwinds – the difference in inflation between Brazil / LatAm and the US has been substantial and the principal cause of relative depreciation of the Brazilian Real over the past decade. In this time Patria has performed admirable in dollar terms. However with US inflation ticking up to high single digits while Brazilian inflation is moderating (as Brazil began rate tightening last year), there may be a currency tailwind in future performance versus headwind.

All in all, Patria is doing a great job from the outside in to lay the groundwork for strong growth in the next decade. All of it hinges on the ability to execute its product and geographic buildout while maintaining high net returns to investors, no small feat. But its track record supports the odds of this happening.

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Patria Investments 2022 Outlook

Yesterday I took a bit of time to review what Patria Investments, a LatAm focused alternative investment manager listed on Nasdaq, guided for 2022 on their Q3-21 earnings call. It made me want to review what my variant views on the business are – or said more simply, why do I own it.

Here are my thoughts:

  • LatAm, especially Brazil, favors local investors / knowledge as multi-nationals have failed repeatedly in these relatively closed economies, which supports longer runway for alpha generation than market believes.
  • Patria has and will continue to lay groundwork to emulate the Blackstone playbook with respect to product buildout across credit <> equity and perpetual core <> opportunistic drawdown spectrums, driving potential TAM expansion and acceleration of growth
  • Patria’s low current wallet share of global mega LPs enables rapid AUM growth as investment capacity increases
  • The alternative asset manager business model (both FRE and Carry) is more durable and predictable than the market believes, and the market offers them up at reasonable prices as a result

Current valuation is not dirt cheap, it trades for ~20x 2022 FRE1. Add in $0.30 / share for carry2 gets me to ~$1.10 / share in DE or ~15x DE.

15x is a fairly reasonable price so long as the company grows in the 15% range, and that does not include the ~$200m sitting on the balance sheet earmarked for M&A (another potential $0.15 / yr3 in DE). It’s cheap if it continues performing at the ~25% FRE growth that it has been performing at in recent past.

Based on the setup I described above, I think the business is well positioned to grow at a reasonable rate over the medium term with little business complexity, no debt, high insider ownership, and well-supported shareholder dividends. It may also offer reasonable shareholder returns as a result.

Disclosure: I own shares of PAX, this isn’t investment advice. Do your own work.

1 – $75M in ’21 FRE, 50% growth for ’22, 140m shares, $16.5 / share

2- Current accrued carry is ~$315m, and if you assume they monetize over 5 years, that’s another ~$41m (35% of carry paid as bonus to employees)

3- $200m invested at 10x DE, based on guidance for future transactions and prior Moneda credit platform transaction (Q3-2021 earnings call)

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Commentary on Brazil

Ted Seides had a podcast with a supposed main actor of Brazilian equities management, Constellation Asset Management.

Broadly speaking, the podcast repeated cliche Warren Buffet-isms but the speaker did say a few things that I found to be interest, albeit slightly obvious in retrospect.

First, Brazil is a relatively large population base in the 200Ms. Second, the population base is young and very tech forward. Third, and perhaps most interesting, Brazil has substantial import/export restrictions.

What the third point results in is local company dominance vs international companies expanding successfully into Brazil. He had one example where there is only one international bank that has penetrated the Brazilian market whereas local incumbents regularly run 20%+ ROEs.

The second point made that I found to be very interesting was that indices don’t do a good job of capturing the best companies in the economy because a select few very large commodity companies dwarf the rest of the pack – so active management or custom indexing is key (with the note that many of the market leaders are private).

I enjoyed these select takeaways amid the muck of run of the mill investment jargon in the interview – as I own full non-core positions in two Brazilian alternative asset managers, and it helps me understand in some small sense how they may drive alpha in this market.