VINP - Patria Investments Adds AUM As Challenging Conditions Persist

2023-11-13 15:03:45 ET

Summary

• Patria Investments Limited reported Q3 2023 financial results with distributable earnings of $0.23 per share and organic fund inflows of $1.3 billion.
• The company provides access to alternative investment opportunities in Latin America and has a wide range of limited partners.
• Despite positive performance, I remain neutral on Patria Investments Limited due to uncertainty about portfolio valuations in the near term.

A Quick Take On Patria Investments

Patria Investments Limited ( PAX ) reported its Q3 2023 financial results on November 7, 2023, delivering distributable earnings of $0.23 per share and featuring organic fund inflows of $1.3 billion.

The firm enables investors to have access to alternative investment opportunities throughout the Latin American region.

I previously wrote about Patria with a Hold outlook.

While Patria Investments Limited may be performing well on the fundraising side and increasing its AUM, my base case for its near-term financial results leaves no great conviction for material upside.

So, I remain Neutral [Hold] on PAX at this time.

Patria Investments Overview And Market

Grand Cayman, Cayman Islands-based Patria provides investors with access to institutional equity investments in private companies in the greater Latin America region.

The firm is led by CEO Alex Saigh, who was previously the CEO and CFO of Drogasil, a drugstore chain in Brazil.

Patria seeks investment inflow from a wide range of limited partner types, including sovereign wealth funds, pension funds, insurance companies, funds of funds, financial institutions, endowments, foundations and family offices worldwide.

The company aims to place its funds with private, growth-oriented companies to either invest in through minority interest purchases or via outright acquisition.

Management says that a large percentage of its current limited partners have been investing in the firm for over a decade.

Major competitive or other industry participants include:

• Advent International

• Kinea Investimentos

• Perfin

• XP

• KKR

• Blackstone

• Others.

Patria’s Recent Financial Trends

Total revenue by quarter (blue columns) has risen year-over-year; Operating income by quarter (red line) has declined sequentially:

Gross profit margin by quarter (green line) has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have also moved higher more recently:

Earnings per share (Diluted) have fallen sequentially, as shown in the chart below:

(All data in the above charts is GAAP.)

In the past 12 months, PAX’s stock price has risen 1.32 % vs. the Vinci Partners Investments ( VINP ) fall of 1.67%, so other than an early 2023 divergence, the two stock return profiles have recently converged:

For balance sheet results, the firm ended the quarter with $223.0 million in cash, equivalents and short-term investments and no debt.

Valuation And Other Metrics For Patria

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Vinci Partners:

(Source - Seeking Alpha.)

The table above indicates that the market is valuing Vinci at lower multiples despite its higher trailing twelve-month net income margin.

Commentary On Patria

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted organic inflows of funds of $1.3 billion and $480 million after the end of the quarter.

The company also announced a joint venture with Bancolombia, "which will add about $1.2 billion of additional AUM," and recently announced a deal to acquire a private equity solutions platform that "manages another $9 billion of AUM."

As a result, total assets under management, or AUM, and fee-earning AUM are expected to rise to $38 billion and $31 billion, respectively, and management says it expects to reach its goals for 2023.

In the earnings call, I tracked the frequency of various keywords, as shown in the chart below:

The chart indicates the firm is continuing to experience challenging conditions for organic growth amid a volatile macroeconomic environment.

Analysts asked management about its fundraising and return results and general financial questions.

Management replied that fundraising is on track for its private equity and infrastructure funds, and divestment activity remains strong with a focus on corporate exits.

However, internally, personnel expenses rose during the quarter due to a new executive bonus program and business integrations.

Total revenue for Q3 2023 rose 11.4% year-over-year, and gross profit margin increased by 3.8%.

Selling and G&A expenses as a percentage of revenue rose by 3.9% YoY, and operating income fell by 2.3%.

The company's financial position is solid, with ample liquidity and no debt.

Looking ahead, consensus full-year 2023 revenue is expected to rise by 19.5% over 2022’s results.

If achieved, this would represent nearly double in revenue growth rate versus 2022’s growth rate of 9.95% over 2021.

So, it appears management is making moves to increase the firm’s AUM despite what it admits is a challenging environment for its various operations.

Perhaps leadership is positioning the firm for better days ahead, with the potential for a lower cost of capital environment.

However, if global growth continues to slow, valuations for its M&A candidates may remain flat or suffer even after reductions in the cost of capital.

As the Conference Board indicates here , inflation may be here to stay, with resulting higher-for-longer rates slowing economic activity to only 2.5% growth in 2024 per its forecast.

While Patria Investments Limited may be performing well on the fundraising side and increasing its AUM, my base case for its near-term financial results leaves no great conviction for material upside.

So, I remain Neutral [Hold] on PAX at this time.

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