Yahoo Finance Patria Investments Limited (NASDAQ:PAX) Q4 2023 Earnings Call Transcript
Patria Investments Limited (NASDAQ:PAX) Q4 2023 Earnings Call Transcript February 15, 2024
Patria Investments Limited beats earnings expectations. Reported EPS is $0.47, expectations were $0.34. Patria Investments Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for standing by. Welcome to Patria's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host, Josh Wood, Head of Shareholder Relations. Sir, you may begin.
Josh Wood : 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. And 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 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, constitution 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.
Alex Saigh: 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 and 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. And 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. And 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. Seen in 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, counting 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 4Q '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. And 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 have to always continue to perform to 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 more than $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 gem 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 continue 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 push 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. We believe 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 our migration 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 first Q '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 would also 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. And importantly, through this growth, I believe we have maintained the high standards of investment performance that is 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. Marco, over to you.
Marco D’Ippolito : Thank you, Alex, and good morning, everyone. It was indeed a very active year for Patria on M&A strong. And 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 as a key part of our strategy over the last 3 years. Through Moneda, we acquired scaled credit and public equities platforms, along with the key leadership talent as well as geographic expertise and distribution relationships in Chile. We also added that 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. And recently, in the fourth quarter 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 with 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 on track to close in the first half of the year. We also feel comfortable with the process on 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 at this 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 details.
Ana Russo: Thank you, Marco. Patria delivered a strong quarter and a solid year, with significant growth of our main KPIs, and we remain a consistent path to reach our 2025 targets. Our fourth quarter 23 distributor earnings of $7.5 million were up 32% from Q4 2022. And adding to our year-to-date results will reach a full year 2020 of $187.8 million, up 28% compared to 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 outsourcing mailing partly offset by M&A expenses to other increases, inflation and appreciation of the curve. Full year 2023 total operating expenses were $91 million, almost flat versus prior year and following the same general driver of the quarterly comparison. Looking at 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 impact of implementing our equity compensation coke. Therefore, 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 transaction closed in 2020 contributed effectively about $2 million of FRE in the year, which was mainly 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, and this result continues to keep 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 have ultimately consistently generating 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 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 were $3.1 million compared to 2022 with the slightly higher effective tax rate, driven by a higher mix of performance is subject to local tax rates. So again, highlighting the bottom line. This all led us to a distributor earnings of $187.8 million in 2023, which is an increase of almost 30% versus the prior year.
Now a few notable comments on our GE to medical reconciliation. As we closed our transaction with Bancolombia and signed another 2 acquisitions agreements in the fourth quarter, we include more M&A-related costs, which you can also see in the transaction cost line. In regards to the equity base and long-term compensation line, Patria implemented this year of all tariff compensation bonus cost mentioned before on the FRE explanation, which give us the opportunity to executives to convert 50% of their cash bonus due to equity shares, receiving a matching component to be vested in 3 to 5 years. This was very well received by our senior level people, showing 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 the remaining relates to previous long-term programs on Patria and acquired Compass as well as equity-based compensation of partners.
And finally, an important clarification on Patria 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 as we view the combination of cash, debt, equity to fund our M&A pro. 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 distributor earnings streams. We expect to exercise this incremental retention up to an additional $100 million in order 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.
Alex Saigh: 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, including our pending M&A. 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 in getting the fee-related earnings to at least $170 million in 2024 on the way to more than $200 million in 2025. Considering the growth embedded in our pending transactions, our organic initiatives, I am confident that we will reach both the financial and the AUM targets for 2025. We thank you for your time to listen today and now happy to take your questions.
See also Top 16 Aircraft Manufacturers In The World and 15 Top Performing European Stocks So Far in 2024.
To continue reading the Q&A session, please click here.
