Patria Investments Limited

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Patria Investments Limited (PAX) is a leading alternative investment firm in Latin America with diversified investment strategies. The company operates various funds across private equity, credit, infrastructure, and real estate.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Patria Investments Limited (PAX) operates as an alternative investment manager focused on Latin America. The company manages a diverse range of funds across multiple asset classes:

  • Private Equity: Invests in established and high-growth companies, often through buyouts, growth capital, and venture capital.
  • Infrastructure: Invests in real infrastructure assets such as toll roads, airports, and energy infrastructure.
  • Credit: Invests in debt instruments, including corporate loans and structured credit.
  • Real Estate: Invests in real estate assets across Latin America.

The company’s business model revolves around raising capital from institutional investors (pension funds, sovereign wealth funds, insurance companies, and high-net-worth individuals), deploying this capital across its various funds, and generating revenue through management and performance fees.

  • Revenues:
    • Management Fees: These are relatively stable and recurring, based on a percentage of the assets under management.
    • Performance Fees: Also known as carried interest, are based on the performance of the funds, paid once funds exceed a minimum return for their investors. These are more variable.
    • Other Income: Includes financial income and fee income from providing advisory services to its portfolio.
  • Geographic Focus: Primarily Latin America, targeting countries with strong growth prospects and favorable business environments. This includes Brazil, Chile, Colombia, Mexico, Peru, and others.
  • Competitive Landscape: The alternative investment space in Latin America is competitive with both local and international players. Competitors include other alternative investment firms, private equity firms, and some large local financial institutions.

Industry Trends:

  • Increasing Allocation to Alternatives: Institutional investors are increasingly allocating capital to alternative investments, as they seek higher returns.
  • Growth in Emerging Markets: The overall growth in Latin American economies as well as the demand for infrastructure and credit support the company’s business in the region.
  • Demand for Local Expertise: Local knowledge and networks, which Patria benefits from, offer investors an advantage in emerging economies.

What Makes Patria Different?

  • Local Expertise: The company has a well-established on-the-ground presence in Latin America. The company has a strong local brand and network that are hard to reproduce. This enables them to identify, negotiate, and manage deals effectively.
  • Long-Term Track Record: Patria’s operational history includes having raised more than USD15 billion from over 100 global investors since its 2007 creation. They have deep connections and credibility across the region.
  • Diverse Investment Strategies: This diversification allows the firm to attract capital from a broader range of investors, and deploy capital across different asset classes based on market opportunities. This also results in diversification benefits.
  • Strong Relationships: The firm emphasizes having strong relationships with its investment managers and their partners to ensure strategic alignment.

Financial Analysis:

Recent financial results from the company’s 6-K filings and earnings calls show mixed performance with some challenges, as well as several positive aspects of their business.

  • Q4 2022 Earnings Call:
  • AUM remained stable year-over-year, but significant currency devaluations had a negative impact on total AUM when translated to USD. However, there was an increase in total AUM in local currency.
  • Capital raising in the last year was primarily for infrastructure projects in Brazil and Chile, and credit products in Mexico and Brazil. The company noted that investor allocations continue to show a preference for credit strategies.
  • Fee-Related Earnings (FRE) is under pressure on a year-over-year basis and for the full year 2022, which the company mainly attributes to the decline in fees for its public equities. However, the FRE margin was quite strong, particularly in Private Equity, Credit, Infrastructure and Real Estate.
  • Management noted an increase in deployment activity, and they were deploying to higher-return assets.

  • The firm’s strategic plan to focus on growth in areas where it sees strong potential for returns was discussed.

  • Q3 2022 Earnings Call:
    • Patria Investments reported a successful raise of a real estate development fund. However, this was offset by some declines in other areas.
    • Their growth strategy is primarily focused on private assets, and their private credit platform. The company is also focusing on investments related to renewable energy.
    • The company reported that the fee-paying assets increased by 14% y-o-y.
  • 2022 Full Year Results:
    • Total assets under management (AUM) were $27.3 billion.
    • Net Income was $208 million.
    • The company saw an increase in fundraising for public equities and private equities funds.
    • The company emphasized its expansion across various Latin American markets.
    • They have seen a strong increase in demand for credit, energy and infrastructure.
**Income Statement:**

 *  Revenue: Primarily driven by management fees and incentive fees.
 *  Cost of Revenue: Primarily compensation expenses.
 *  Profitability: Can be highly variable due to performance-based fees. Operating expenses are relatively stable.

  • Balance Sheet:

    • Cash and cash equivalents: Significant cash holdings to ensure liquidity and flexibility.
    • Debt: Utilizes debt for leverage, but within manageable limits.
    • Equity: A mix of invested capital, retained earnings, and other comprehensive income.

Moat Rating: 2 / 5 Patria’s moat is narrow rather than wide. Here’s why:

  • Local Expertise and Relationships: The company’s deep local knowledge and existing relationships do create a notable barrier to entry for new competitors, especially international firms without established connections in Latin America, however, these advantages are not insurmountable and can be copied over a longer period of time.
  • Brand Reputation: Patria’s long-standing operations and brand recognition give it a slight advantage in attracting investors. However, brand strength alone doesn’t create an incredibly difficult barrier for competition.
  • Switching Costs: While there may be some costs associated with switching from a fund to another, the industry is not characterized by high switching costs. Investors are generally able to move between funds rather quickly.
  • Scalability: Although the firm has grown rapidly over the last decade, there is no real evidence that they can scale rapidly or reach the dominance they need to have an edge over other peers.
  • Network Effects: Some businesses, such as tech platforms, benefit significantly from network effects. However, companies like Patria do not have a similar dynamic that strongly reinforces itself as more investors and capital is brought in.

Risks to the Moat & Business Resilience:

While Patria is a well-positioned company, several factors may present challenges:

  • Economic Downturn: A significant economic downturn in Latin America could reduce fundraising for the company, thus lowering their performance and management fees.
  • Political Instability: The political climate of Latin America can sometimes be unpredictable and may negatively impact financial conditions, investor sentiment, or regulation.
  • Currency Fluctuations: Currency fluctuations can negatively affect revenue when they are reported in USD terms, even if the company is generating increasing profits in local currency.
  • Competition: As the alternative investment market grows in popularity, new entrants could challenge existing players like Patria.
  • Regulatory Risk: New and changing regulations could significantly impact their operations.

Business Resilience

  • Diversified Investment Strategies: Patria’s portfolio is composed of diverse businesses across different asset classes that partially offset the risk from some negative impacts in any one area.
  • Strong Client Base: Their long-term client relationships may offer a degree of resilience during market downturns.
  • Stable Management Fees: A larger portion of their revenues come from management fees, which tend to be stable during various market conditions. This provides the firm with some level of downside protection.
  • Experience: The company has seen many market booms and busts and has probably learned how to navigate different periods, providing them a solid foundation for resilience.
  • Focus on Private Assets: With the expected increase in investments into alternative private assets, Patria is well positioned to benefit from tailwinds that favour its strategy.

Understandability: 4 / 5 The business model is relatively straightforward: a company that manages multiple funds and charges management and performance fees. However, there are a few factors that make it slightly complex. These are:

  • Complex Fee Structures: The various types of fee arrangements may be difficult for investors to fully understand, making the business difficult to fully grasp.
  • Diverse Asset Classes: Understanding the economics and risks of Private Equity, Infrastructure, Credit, and Real Estate all at once can be challenging.
  • Global Factors: It is difficult to understand the impact of exchange rates and overall financial markets and economic conditions on the company’s financials.
  • The company has a “private equity” feel to it, even though it is publicly traded. It might not be an easy company to fully understand at first glance.

Balance Sheet Health: 4 / 5 Patria exhibits solid financial health overall.

  • Liquidity: There is a notable level of cash and cash equivalents and other financial assets on hand that helps them operate the business comfortably, and meet their short-term liabilities.
  • Leverage: The company employs moderate amounts of debt to leverage its capital, but debt levels are manageable and do not imply any sort of default risk.
  • Equity: Equity levels are sound, providing a cushion against any market downturn. They have demonstrated growth over time.
  • Profitability: The company has been consistently profitable for the past several years. The overall profitability has been satisfactory.
  • Cash Flow: A large percentage of the income generated by the company is cash that they are able to freely use to reinvest in operations. Their free cash flow is in a favorable condition.
  • Overall: Patria exhibits strong solvency metrics.

This combination of solid fundamentals, a diverse portfolio and strong client relationships implies that they have solid financial health.