Description

Summary

I recommend a long position in Patria Investments Ltd Class A shares (PAX), currently trading at $13.05. Patria Investments has a  $1.9 billion equity market cap and is the largest private markets alternative asset manager in Latin America. It is an owner-operated, asset-light business with a high return on equity and a long runway for growth. The Company IPO’d in January 2021 at $17/share. Management has exceeded the growth plans presented at the time of the IPO. Fee earning AUM has grown from $7.7 billion at year-end 2020 to $23.9 billion at year-end 2023, a 45% cagr, and stood at $34 billion at 1Q24. Nonetheless, The stock has derated. At IPO it traded at 20x forward earnings per share. Today it trades at 11x 2024E eps and 8x 2025E eps. The Company has a net cash position of $222 million and has paid a total of $2.79 per share in dividends in the past three years, equivalent to 21% of its market cap. The company trades at less than half the multiple of the large, global alternative asset managers, which trade at 26x 2024E eps.  I expect Patria to double FRE (fee-related revenues) and earnings per share in the next five years. I expect the dividend to grow in line with earnings. The current dividend yield on the stock is 7%. Even if the PE multiple does not expand, I expect the combination of eps growth and dividends to generate a 20% plus  IRR over the next five years. 

VIC history

PAX was written up in VIC by humkae848 on September 15, 2021, when it traded at $16.85/share. I recommend reading his write-up. The company has exceeded humkae’s expectations for AUM and FRE (fee-related earnings), but the stock recommendation has not worked simply because the stock multiple has derated. The thesis was accurate otherwise. 

Business description 

Patria Investments Limited is the leading Latin American alternative asset manager, with $43 billion of AUM and $34 billion of fee-paying AUM as of 1Q24. The company operates five divisions: private equity, infrastructure, credit, public equities, real estate, and global private market solutions. The company aims to be the gateway for alternative investments in Latin America. Most of the assets are from international (non-Latam) institutional investors. Investment performance, which is the key to the business's long-term success, has been solid.  The charts below illustrate how the company has grown and performed. 

Source: Patria June 2024 Investor Presentation

Source: Patria June 2024 Investor Presentation

Source: Patria June 2024 Investor Presentation

History and ownership 

Source: Patria June 2024 Investor Presentation

Patria originated from Patrimonio Participacoes, a Brazilian M&A advisory boutique created in 1988 as a 50/50 partnership between local Brazilian partners and  Salomon Brothers. In 1991 the advisory business acquired a broker-dealer and eventually evolved into an investment bank. In 1994, the company began its private equity operations with internal capital, and in 1997 Patriomonio raised its first private equity fund with outside LP’s. In 1998, following Travelers acquisition of  Salomon Brothers and subsequent merger with Citibank, the local partners bought back Salomon’s 50% stake. In 1999, the partners sold the banking operation to Chase Manhattan to focus exclusively on private equity operations and developing the asset management business. Blackstone acquired a non-controlling stake in the business, which it sold during and after the IPO.  

As of December 2023, Patria had 430 investment professionals and 36 partners. The table below summarizes the ownership structure. The ticker symbol PAX pertains to the Class A shares. The class B shares, owned by the partners through a vehicle called Patria Holdings, represent 63% economic interest and 94% voting control. The class B shares are privately held and not listed. Despite the skewed voting controls, the Articles of Association provide reasonably good protection for minority shareholders, such as equal treatment in the sale of the business, tag a long rights, and the ability to appoint three independent directors to the board. 

Why can the company double in five years?

• Patria is the largest alternative asset manager in Latam, with a roughly 24% market share. As it expands its offering, it becomes a one-stop shop for investors seeking exposure to Latin America. 

• Performance has been solid, which should enable the company to retain its position as the leading destination for external investment in Latin American private alternative assets.  

• Global LPs are under-allocated to Latin America. Latin America represents 6% of global GDP but only 1% of private equity allocations. Latin American pension plans are growing but are under-allocated to private assets compared to plans globally.

• Management has proven capable of growing the business organically and through accretive tuck-in acquisitions. Management is very invested in the company's future and sees a lot more room for accretive acquisitions.

• The market overestimates the threat of competition from large global players. Patria’s investments in Private Equity and Infrastructure tend to focus on the earlier stage, either consolidating industries or developing infrastructure assets. Global players have historically been the exit vehicle for Patria’s investments.  

Why does the opportunity exist? 

• Brazilian equities have been in a protracted bear market. The MSCI Brazil is down 73% from its all-time high in 2007. All Brazilian IPOs since 2019 that I know are trading below the issue price.

• The fundraising environment has become more difficult for private equity. This applies across global private equity but is also felt in Brazil. The first quarter organic fundraising disappointed. This is more of a short-term issue. The long-term secular dynamics are more powerful. 

• Some investors believe that the smaller asset managers will not be able to compete with the scaled global players. I am not worried about this. First, Patria’s investments across its platforms tend to focus on a scale and a stage that is not interesting to the large global private equity players. The large players have historically provided the exit for Patria. Second, Brazil is relatively small, and the large players are focused elsewhere. Ultimately, if the partners wanted to sell, Patria could be an attractive acquisition for a global player. The partners currently do not seem to have an interest in selling. 

• Investors worry about Brazilian macroeconomic uncertainty, including currency exposure and politics. On the positive side, this uncertainty ensures that the cost of capital remains high, which favors returns for prospective investors.

Risks 

• My biggest concern is that the partners will take advantage of the low valuation and buy out minority shareholders, robbing us of the upside. I think this is unlikely because the company has used its stock as currency to retain partners of the newly acquired businesses. In the event of a takeover, I think minorities will be afforded some protection from the Articles of Association. Still, I would expect minorities to not capture the full economic value. 

• Performance in PE Fund V has been average so far, and the exits environment remains challenging. If historical performance degrades, this could affect the franchise and the company’s ability to grow. I think this will affect many PE funds with similar vintages; therefore, I think they should be okay on a relative basis. I am closely monitoring the performance of the latest vintages because a deterioration in performance could pose a risk to the long term health of the business.  

• Brazil macro risks and sentiment towards Brazil will continue to impact the stock. Brazilian equities are generally undervalued and out of favor, so I am not concerned about the incremental risk. 

Catalyst

• Execution. EPS growth and dividend growth. 
• Change in sentiment. Remember how cheaply US alternative asset managers used to trade 10 years ago.