Patria Investments Ltd ($PAX) - LatAm Alternative Asset Management

[kettunen]

I have been looking for a new suitable investment target with a focus on Latin and South America. Funds or ETFs would have been an easy option, but now we’re not taking the easy way out – in my familiar style

I started exploring an asset management company that focuses on alternative investments, real estate, credit, and infrastructure. Patria Investments Ltd is not related to our domestic defense industry namesake in any way, but rather follows in the footsteps of Blackstone, which serves as a major global comparable for its operating model. The target market is just slightly different.

Fortunately, @Verneri_Pulkkinen had already made a suitable summary of Patria, which is well-suited for starting this thread.

I’m boldly quoting the message here as is:

This is indeed a fast-growing asset manager registered in the Cayman Islands, focusing its investments on Latin America. The core team has been working together since the 80s. The company was listed on the stock exchange in 2021. Companies in the Cayman Islands have their own quirky features, such as the total powerlessness of shareholders, a criminally low tax rate, and numbingly long SEC reports. The company has two share classes, so it’s completely pointless for a retail investor to complain to management about anything.

The market capitalization is a good couple of billion. Quickly judged, it seems highly unlikely that this particular company would be among the world’s largest asset managers with a market capitalization of 200 billion. Could this be a 20-billion company someday if strong growth continues? Perhaps.

The company focuses particularly on private equity (entire companies are bought into a fund and developed until they are sold or listed), infrastructure (e.g., hydropower plants are bought), and credit (money is lent to companies).

The company claims to be one of the leading Latin America-focused alternative asset managers, but I’m so numb to the word “leading” that it doesn’t really mean anything.

Asset managers make money by collecting money from investors, charging a percentage of assets under management, and performance fees, simplified. The larger the assets under management (AUM), the better.

The company’s AUM has grown impressively both organically and through acquisitions, although I haven’t had time or necessarily the skill to assess how profitable the acquisitions have been.

Since investments focus on South America, the continent’s economy plays some kind of role in PAX’s attractiveness. The continent is large and growing, although politically unstable in places. PAX has succeeded in achieving excellent returns there, even when measured in dollars (local currencies are “soft” currencies), but these are no guarantee of future performance.

Source: 100-baggerit 10 vuodessa, matalalla riskillä - #7 käyttäjältä Verneri_Pulkkinen - Osakkeet - Inderes forum

The business model is capital-light when managing others’ assets. Dividend payout ratio 85% of earnings, paid quarterly. Varies significantly, but the upward trend over a few years is pleasing.

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Growth is also sought through inorganic means

A significant real estate portfolio was just acquired in Colombia in July -24
https://ir.patria.com/news-releases/news-release-details/patria-investments-completes-acquisition-nexus-capital-further

PE solutions and management from Aberdeen in April -24
https://ir.patria.com/news-releases/news-release-details/patria-investments-completes-acquisition-private-equity

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Figures

Q1/2024 investor presentation
https://ir.patria.com/static-files/2e74dc99-329c-4dfe-b3d4-542a0f4a2bb0
and results
https://ir.patria.com/news-releases/news-release-details/patria-reports-first-quarter-2024-earnings-results

And last year’s 2023 results
https://ir.patria.com/news-releases/news-release-details/patria-reports-fourth-quarter-full-year-2023-earnings-results

At least @Nurre and @VasynytKonsulentti seem to have found the company earlier. Welcome to share your views

[kettunen]

Jussi Askola, especially well-known to REIT investors, has invested in Patria and explains the background in the video

And with the material:
https://seekingalpha.com/marketplace/1268-high-yield-landlord/analysis/6045653-a-new-top-pick

And some more background reading
https://seekingalpha.com/article/4671380-patria-high-yield-high-growth-strong-track-record

[Alppivuohi]

I actually just made a post three days ago regarding the company’s dividends in the Coffee Room. So, because the company is located in the Cayman Islands, the withholding tax is 0%. Based on my understanding, this fits perfectly in an equity savings account for dividend stock diversification (correct me if I’m wrong).

[VasynytKonsulentti]

I think this is an excellent opening summary, thanks @kettunen. All the essential information and investment theses were already well presented by Verneri and Jussi Askola. In my own portfolio allocation, these alternative asset managers play a relatively large role, and I have tried to split that pot between large, well-known players (the Brookfields, Blackstone, EQT, etc.) and also look for smaller (or more recently listed) firms to seek more growth and accept a higher risk level. PAX is exactly such an example of the latter case.

I (too) am very excited about the company, and I believe it has very good return potential through both valuation rerating and cash flow. Those who invested in the IPO are certainly disappointed with the return history so far, but jumping on board at these price levels is a completely different situation than just over three years ago. I see the biggest risk as the “Latam discount” becoming more permanent (because of the continent’s risks, and especially since many US investors seem to avoid smaller foreign players). Even as a pure cash flow investment, I see this play as quite decent, but of course, the expectation is that through the growing dividend yield (even the current level is quite good), the share price will also correct significantly upward eventually. This might take a couple of years, but no harm in waiting.

[VasynytKonsulentti]

@Alppivuohi

I actually also just posted a message three days ago regarding the company’s dividends in the coffee room. So because the company is located in the Cayman Islands, the withholding tax is 0%. Based on my understanding, this is a great fit for an equity savings account for dividend stock diversification (correct me if I’m wrong).

There has been discussion about these PAX dividends previously over here:

https://keskustelut.inderes.fi/t/inderesin-kahvihuone-osa-8/44338/6767?u=vasynytkonsulentti

The withholding tax is likely the same 0% regardless of whether the shares are in a book-entry account (AOT) or an equity savings account (OST), but the main thing to consider is whether you want the dividends to be taxed as earned income (if the shares are in an AOT) or as capital income (if they are in an OST and you withdraw them).

[Zemi]

I came across Patria myself through Jussi and it seems like a very interesting option.

I’ve been trying to figure out which account to buy this in, but I haven’t really found a good solution.

On a book-entry account (AOT), the dividend tax rate becomes too high for an employed person, and on an equity savings account (OST), the currency exchange costs are almost four times higher due to the lack of manual exchange.

[Kimmo1]

I hold it in an Equity Savings Account (OST) for exactly that reason: a large part of the profit is paid out as dividends, and taxation as foreign earned income at a marginal tax rate of around 60% isn’t necessarily attractive. If I were independently wealthy or a retiree, I would hold it directly in a book-entry account.

When those accrued performance fees are realized at some point, large dividends are likely to follow. During Q1, there appeared to be $3.40 per share in accrued fees. Can someone more familiar with the company say if that 3.40 is the so-called portion belonging to the company, where the portfolio managers’ performance bonus (which I think was 50% of the fee) has already been accounted for?

[Alppivuohi]

Q2 out, premarket -2.5%

https://ir.patria.com/financials-filings/quarterly-results

[Zemi]

That -6.5% is quite a sharp reaction, but it looks like a red market day anyway.

I got a bit lucky, as I had to postpone my purchases until tomorrow because of settlement days from sales. I’ll get a bit more for the same amount.

[Karhumarkkina]

The company has also been on my watchlist for a while now. Today, I was very close to making my first purchase. However, there are some concerning signs regarding the company. Excluding acquisitions, capital is flowing out of both public and private funds. This information can be found on pages 13–14 of the presentation the company just released.

The dividend cut for the remainder of the year, which they tried to compensate for with an insignificant share buyback program (~1.2% of shares), does not increase confidence in management’s actions. The dividend could have even been put on hold entirely to pay off the debt from acquisitions more quickly.

[kettunen]

@Karhumarkkina

The dividend cut for the remainder of the year, which they attempted to offset with an insignificant share buyback program (~1.2% of shares), does not increase confidence in management’s actions.

Actually, I see this the opposite way. Shares should be repurchased when the valuation is low, which not only creates significant added value for shareholders but also supports the stock price. An 1.8% stake is in the magnitude of more than the current quarterly dividend, which is quite a significant amount. Also, a $0.15 dividend is coming up for payment in September, with the same distribution for the rest of the year. These are, in accordance with the strategy, around ~85% of earnings.

Picked from the call:

And since we paid 17.5 cents per share or $0.175 per share in the first quarter, we declared a quarterly dividend of $0.15 per share, which will be fixed at this level for the next three quarters.

Simultaneously, we are announcing a share repurchase program of up to 1.8 million shares over the next 12 months reflecting our focus on creating long-term shareholder value. In our view, the price of our stock does not come close to reflecting our robust long-term outlook and the Board believes that resetting the dividend and focusing incremental cash flow on share repurchase and/or reducing the level of debt are among the highest and best uses of returning capital to shareholders

Transcript
https://seekingalpha.com/article/4709518-patria-investments-limited-pax-q2-2024-earnings-call-transcript

Investor presentation
https://ir.patria.com/static-files/9142db4c-4961-493d-9cb8-249e8e7daf4f

@Karhumarkkina

Without acquisitions, capital is flowing out of both public and private funds. This information can be found on pages 13-14 of the company’s recently published presentation.

Outflow depends on the reasons behind the distributions. Are funds being liquidated or are clients withdrawing capital for other reasons? PE III (2007) still contains capital at least partially, even though it is marked “Divested”. Overall, there is growth in assets under management (AUM), so the direction is right. But it needs to be monitored.

[kinomoto]

@kettunen

And a $0.15 dividend is also coming for payment in September, with the same distribution for the rest of the year. These are in line with the strategy, at roughly ~85% of earnings.

Many were disappointed by this locking of the dividend at $0.15, especially since there was no indication of how the dividend situation will continue next year.

I also started considering an Equity Savings Account (OST) for these, but I’m hesitant because even the rules for the OST can change at any time…

[VasynytKonsulentti]

@Kimmo1

When those accrued performance fees are realized at some point, big dividends are likely to be expected from them. During Q1, there seemed to be 3.40 USD per share in accrued fees. Can someone more familiar with the company tell if that 3.40 is the so-called part belonging to the company, where the portfolio managers’ performance bonus (which was supposedly 50% of the fee) has already been taken into account?

The company has spoken before in a way that suggests they seem to prefer debt repayment and investments; in the latest quarterly report, this became more concrete. At this stage, I completely agree, as long as they can show in the future that the money has been “put to work” and that there will be returns for us regular folks too.

And yes, in my opinion, the portfolio management fee has already been deducted from that. According to their own definition (in the quarterly reports, definitions are on their own slide):

Net Accrued Performance Fees represent an accrued balance of performance fees, which if each eligible investment vehicle were liquidated on the reporting date at current valuations,
would be recognized as Performance Related Earnings.

And

Performance Related Earnings (PRE) refer to realized performance fees (net of related taxes) less realized performance fee compensation allocated to our investment professionals. We
earn performance fees from certain of our drawdown funds, representing a specified allocation of profits generated on eligible third-party capital, and on which the general partner
receives a special residual allocation of income from limited partners in the event that specified return hurdles are achieved by the fund.

So as I understand it, Net Accrued Performance Fees are calculated as if they were (realized) Performance Related Earnings, from which the fees have already been deducted.

[kettunen]

There is relatively little information coming across regarding Patria. However, here is a recent review on Seeking Alpha:

https://seekingalpha.com/article/4726546-patria-investments-stock-robust-business-model-market-position-latin-america

Compared to FY2025 guidance of $1.34, it is a multiple of 8.2. For a company that is growing by 21% CAGR since its IPO and is able to distribute a high percentage of its earnings to investors, this to me, is an absolute bargain
…
Peers such as KKR, Apollo and Blackstone all trade well over 20 times their yearly FRE. They are bigger and focus more on mature markets, but that gap seems too big to ignore.

I agree regarding the dividend and share buybacks, as mentioned earlier. Of course, those who value steady cash flow will disagree with this.

From my perspective, management made a good call to lower it and to use some of the cash flow to buy back up to 1.8 million shares instead. Given the current price, this seems to offer better value than simply distributing the cash.

One thing that deserves to be highlighted in this context is currencies. It’s nothing new as such if you’ve familiarized yourself with the materials, but considering the target markets, the majority of the capital still moves in more stable currencies.

Because FX movements could then devastate performance in USD. Patria’s management is well aware of this and focuses on hard currencies. With around 70% of the fee earning AUM in hard currencies, the risk of FX movements is greatly reduced

[kirkland]

@kettunen

One thing that deserves to be highlighted in this context is currencies. Nothing new per se if you have studied the materials, but considering the target markets, the majority of capital still moves in more stable currencies.

In some South American countries, the USD plays a major role; in Ecuador, it is even the only official currency. And in Peru, for example, rental agreements may be made in dollars; I don’t know how much it is used in business-to-business contracts, but I wouldn’t be surprised.

[kettunen]

Q3/2024 is out - not great, not terrible

Revenue was slightly above and EPS a tad below consensus, which in turn sees the valuation as currently too low. Stock price targets are 12-23 USD according to Nordnet/Factset charts.

High-margin FRE is growing and assets under management are increasing according to the published target.

0.15 USD dividend as expected, payable on Dec 9.

Edit: adding the earnings call transcript:
https://patria.gcs-web.com/static-files/7e610c84-ab2f-4137-b449-536a598d0aef

[kettunen]

Transcript with analyst questions:

https://seekingalpha.com/article/4733468-patria-investments-limited-pax-q3-2024-earnings-call-transcript

On lower FRE margins:

of course, you saw the margins for this quarter a little lower than previous quarters because we did absorb 100% of the abrdn GPMS business and the real estate not only VBI, but the Credit Suisse.
…
And I mentioned during the announcement of these three deals that GPMS abrdn carve-out was running a 30% FRE margin as the real estate businesses, right? And we do run an upper 50s FRE margin, right?
…
I see margins going up to the high upper 50s in 2025 as we move to integrate the businesses. And I can show you what we have done in the past. I think when we did absorb the Moneda business, the Chilean asset management business that we acquired late 2021, at that time, we announced that Moneda was running a 40% FRE margin business.
…
During 2022, you saw margins coming down also to the mid-50s, lower 50s range. And then we pushed margins up again to 60% FRE by the end of 2022. And then comes 2023, we did other acquisitions there. And I think and it comes 2024 the same effect. So, we know how to do this. I’m confident that we’re going to push the margins up again back to the upper 50s.

[kettunen]

PAX Day December 2024 - i.e., Investor Day

Materials would be 128 pages

https://ir.patria.com/static-files/c790b9bb-117b-4a6a-b32d-e6344c1fb4fb

Webcast today, Dec 9th, from 8 PM →
https://edge.media-server.com/mmc/p/o9udvsk3/

The goals for 2025 from the equivalent PAX Day in 2022 have already either been met or are being met - most of them a year ahead of schedule (!).

[kettunen]

Quiet in the thread, so here’s some news from PAX funds.

An interesting move from the perspective of transferring ownership from an older fund to a newer one. Of course, according to the announcement, other parties are involved, but still
Infra fund III was established in 2013, so its liquidation might be near. There’s an even older one there, though.

From Q2/24 material:

GRAND CAYMAN, Cayman Islands, Jan. 31, 2025 (GLOBE NEWSWIRE) – Patria Investments Limited (“Patria”) (NASDAQ: PAX), a global alternative asset manager, announced that Patria Infrastructure Fund III (“IS Fund III”) has substantially met the conditions precedent necessary for the sale of Aguas Pacifico, a multi-client water desalination project under construction in Chile, to Patria Infrastructure Fund V (“IS Fund V”) and other investors. The agreement for the transaction was signed in December 2024.

The sale of this asset is expected to be completed in 1Q25 and will be supported by a number of global investors, including sovereign wealth funds and institutional investors, in addition to IS Fund V, highlighting the long-term attractiveness of this platform.

The transaction reflects Patria’s long-term commitment to investing across infrastructure sectors in Latin America that address structural bottlenecks and generate positive impact on local economies and populations. Aguas Pacifico is located in Chile’s central region and is positioned for additional growth considering the strong demand and severe water scarcity in the region. It also illustrates the power of Patria’s strategic approach to infrastructure investment in the region, demonstrating our ability to develop and de-risk high-quality assets, partner with global investors, and generate attractive investment returns.

[kettunen]

Q4/2024 out, with quite pleasant figures

IFRS results included $56.8 million of net income attributable to Patria in Q4 2024 and $73.4 million for the full year. Patria generated Fee Related Earnings of $54.8 million in Q4 2024, up 18% from $46.7 million in Q4 2023, with an FRE margin of 59%. For the full year 2024, Patria generated Fee Related Earnings of $170.1 million, up 15% from $147.7 million in 2023, with an FRE margin of 57%. Distributable Earnings were $89.1 million for Q4 2024, or $0.58 per share, and $189.2 million for the full year, or $1.24 per share.

Dividends

Patria declared a quarterly dividend of $0.15 per share to record holders of common stock at the close of business on February 28th, 2025. This dividend will be paid on March 17th, 2024.

Investor Presentation
https://ir.patria.com/static-files/bfaa45ed-6942-4cf4-b79e-b6f4d2c0068c

Consolidated Explanations
https://ir.patria.com/static-files/95e1a8e4-bd58-4e62-834c-224907c9daf1