PATRIA INVESTMENTS LTD PAX
September 15, 2021 - 11:26am EST by
humkae848
2021 2022
Price: 16.85 EPS 1.01 1.37
Shares Out. (in M): 136 P/E 16.7 12.3
Market Cap (in $M): 2,294 P/FCF 17.0 13.0
Net Debt (in $M): -311 EBIT 148 217
TEV ($): 1,983 TEV/EBIT 13.4 9.1

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Description

Patria Investments Ltd (“PAX”) is an alternative asset manager operating in Latin America. The company has $16b in assets under management and capabilities spanning private equity, infrastructure, real estate, credit, and other investments. Patria’s core business is private equity, which accounts for 60% of AUM, and the company maintains 24% PE market share in the region. Patria’s main exposure is Brazil, and the company’s portfolio is weighted toward basic needs sectors such as consumer staples, which are less economically sensitive. Patria has a strong investment track record, having generated a 14% IRR in USD terms over the last 25 years and has grown its AUM at a 17% CAGR since 2010. Patria has enjoyed a fruitful partnership with Blackstone, who owns 14% of the company, and has a strong base of institutional investors from which to raise capital. Latin America is an under-penetrated market, with PE in the region representing only 1% of the total PE AUM globally.

  We believe as a mid-cap, Latin America focused, busted IPO, a significant opportunity exists for a number of temporal reasons – masking what we believe to be a strong underlying story.  Since going public, the stock has fallen due to worries over the economy in Latin America, potential for rising interest rates, and we believe a mis-understanding of the company’s earnings power by the market.  Because of this, Patria trades at a large valuation discount to global alternative asset manager peers despite being a high quality business. Currently, the vast majority of Patria’s earnings are management fee related, which is a steady and predictable earnings stream. However, Patria has only begun recognizing performance fee related earnings in Q2 2021 after not recognizing any in 2020. At current prices, the stock is trading at around 19x our 2022 estimated fee-related earnings only, implying no value for future performance fees. We believe the net present value of Patria’s future performance fees may be worth close to $1.65b, and this value isn’t reflected in the share price. Over the coming quarters, as the company continues to execute and recognize performance fees from its major PE funds the stock should begin to incorporate this value.

  Additionally, on September 3rd, Patria announced that it would enter into a business combination with Moneda Asset Management, a leading asset manager headquartered in Chile.  The pro forma business will create “an unrivaled investment platform in Latin America, with $25.9 billion in assets under management and a leader in Private Equity, Infrastructure and Credit investments in the region.”  Simply put, the Moneda acquisition combines Patria’s leading position in private equity and infrastructure with the largest credit investment platform in Latin America.  When speaking to management (and as stated publicly on several conference calls), it is clear that management believes the appetite for a diversified, “one-stop shop” for alternative asset management from Latin American asset allocators and pension funds vastly outweighs the amount of products available in the region.  We believe Patria, through its robust distribution network and thoughtful management team, is well positioned to become the Blackstone of Latin America. Moneda is an accretive acquisition and a solid strategic fit for the company which diversifies their product offering into high yield credit and equities, which are complementary to the core business. The two companies have limited overlap in their investor bases, leading to a cross-selling opportunity for both. Patria is strengthening its position as a leader in alternative investments in Latam, with limited competition and #1 share in private equity, infrastructure, and credit.

To give investors a sense of how robust demand for alternatives are in Brazil, historically, each time Patria’s main private equity funds have raised assets, newly raised funds have been 50% larger than their predecessors. Patria will begin raising capital for their flagship PE funds later this year, which we believe will lead to a large increase in the company’s AUM. In addition to that, the company has close to $3b in existing AUM which has not been deployed and will be invested over the coming year. The pace of deployment has meaningfully exceeded expectations expressed at the IPO, and therefore has pulled forward the timeline for raising Patria’s next private equity fund.  Indications of interest from existing investors lead us to believe the company will have no issues replicating its previous fundraising successes (50% larger than the previous fund.) 

The company has a clean balance sheet with no debt and significant insider ownership, with the original founders owning a large stake in the company. As the company’s earnings grow, we believe they will generate a significant amount of cash which they can use to create value through share repurchases, bolt-on acquisitions, and dividend increases. The company demonstrated this through their recent acquisition of Moneda.  Furthermore, Patria paid a 46c dividend in the most recent quarter.  While performance fees will be bumpy until larger funds mature, the 46c quarterly dividend, which annualizes to a yield of 11%, gives us a glimpse into the future earnings power of the business once Patria reaches scale. The major risk to the stock is macro and currency related, if there is a major downturn or currency depreciation in the region. However, the company has operated successfully through various crises for over 25 years, and we think the risk is appropriately priced with the stock trading at 12x our 2022 distributable earnings/share.

At 20x our estimated 2022 fee-related earnings including Moneda, and an NPV of performance fee potential, we believe the stock is worth $29.60, 76% upside from current levels. To arrive at our NPV of performance fees, we assume that the company will realize about 20% of its AUM per year, earn performance fees in-line with its historical average on realizations, and discount back to present using a 12% discount rate. To sanity check this, Patria has $325m in net accrued performance fees which they haven’t realized yet. If this is realized over the next 3 years, this implies about $108m per year of performance fees, similar to our estimates. Our base case price target excludes the potential for further acquisitions or cross-sell revenue opportunities, both of which we believe to be very likely.  As the business continues to perform and investors get more familiar with the story, we believe the stock will approach our price target over time.  Should the company continue to diversify its business and lengthen its advantage relative to Latin American peers, we also believe Patria will stand out as an acquisition opportunity for other globally-diversified competitors.

 

 




 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-       Closing Moneda acquisition; which they anticipate will happen before end of year

-          First closing on next private equity fund (50% larger than previous) within the next 6-12 months

-          More consistent payment of performance fees as funds mature

-          Demonstration of consistent execution post-IPO

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