Q2 2023 Patria Investments Limited Earnings Call
Good day and thank you for standing by welcome to the battery of second quarter 2023 earnings call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question answer session.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Josh would head of shareholder relations.
Thank you good morning, everyone and welcome to <unk> second quarter 2023 earnings call.
Today on the call are our Chief Executive Officer, Alex <unk>, Our Chief Financial Officer, Ana Russo and our Chief Corporate Development Officer, Mark Hood about though and we are also joined by our Chief Economist Luis Fernando open for the Q&A session.
This morning, we issued a press release and earnings presentation detailing our results for the second quarter 2023, which you can find posted on our Investor relations website or on form 6K filed with the Securities and Exchange Commission.
Any forward looking statements made on this call are uncertain do not guarantee future performance and undue reliance should not be placed on them.
<unk> assumes no obligation and does not intend to update any such forward looking statements such statements are based on current management expectations and involve inherent risks, including those discussed in the risk factors section of our latest form 20-F annual report.
Also note that no statements on this call constitute an offer to sell or solicitation of an offer to purchase an interest in any patriot THAAD.
As a foreign private issuer Patria reports financial results using international financial reporting standards or <unk> as opposed to U S. GAAP. Additionally, we will report and refer to certain non-GAAP industry measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with IRS.
Conciliation of these measures to the most comparable <unk> measures are included in our earnings presentation.
On headline metrics Patriot generated distributable earnings of $43 6 million or $29 five per share for Q2, 'twenty three including fee related earnings of $33 $8 million and performance related earnings of $10 7 million.
We declared a quarterly dividend of <unk> 25, one cents per share payable on September eight to shareholders of record as of August <unk>.
Thank you, Josh and good morning, everyone.
In the second quarter.
<unk> delivered excellent financial results for our shareholders.
And we are also seeing accelerating momentum in key drivers of our business.
Second quarter distributable earnings of $43 $6 million.
Or nearly 30 per share.
It was driven by the predictable and growing base of fee related earnings.
And again the Pos.
The contribution of performance fees from infrastructure funds III.
With fee related earnings of $65 million year to date.
We continue to see the outlook on track to reach our targets of $150 million in 2023.
With more growth coming in the back half of the year.
Performance fees have been a more regular contributor to earnings recently.
And while we have not.
Them every quarter.
$11 million generated in Q2 and $40 million over the last three quarters.
Eminent right at the early stages of a performance fee realization cycle.
That can be a powerful driver of shareholder value over the coming years.
Capital formation continues to accelerate with $1 9 billion in organic inflows through the end of the second quarter.
And more than $2 2 billion secured through Q3.
If we include pending.
AUM from the recently announced joint venture with Bank of Colombia expected to close in Q3.
Total capital formation and reach approximately $3 4 billion year to date are nearing a commutative 8 billion since the beginning of 2022.
Tracking towards the four year cycle targets of $20 billion by the end of 2025.
While the fund raising environment remains very challenging in some areas.
This is where platform diversification shines.
With more than 30 products and counting.
<unk> enjoys many vectors for growth as we see we still see the path to reach our target of $5 billion to $6 billion of organic inflows in 2023 across all products.
Looking specifically at our drawdown funds.
We also still believe we can achieve the previously noted $6 billion to $7 billion in fund raising over this vintage cycle.
Through our diversified product offering, including our flagship private equity and infrastructure funds.
As well as newer strategies like growth equity.
Venture capital infrastructure credit and private credit.
We also continue to diversify our sources of capital.
Harnessing the financial deepening in Latin America to raise more money locally.
We have been successful in Brazil focused products.
With <unk> growing more than three fold since our IPO.
And in Chile, with the addition of more near those platform.
We are now seeing the joint venture with Bancolombia provide a new anchor in Colombia.
We are carefully moving forward with our strategy for our presence in Mexico.
Notably, we expect that $2 3 billion out of the $5 6 billion inflows target for 2023.
Could come from Latin American based investors.
Fee, earning AUM growth of 8% since last quarter and 15% over the last year is also a testament to asset class diversity with permanent capital real estate and liquid public equity strategies, leading the way.
Put simply this doesn't mean our strategy is changing it means it is working.
We're also seeing traction on divestments.
With a transaction for dailies and block sales of smart fit in private equity fund five during Q2.
And finally in late June Patrick was value added to Russell 2000, 3000 indices.
An important step in our journey as public company, which expands our exposure across the investment community.
Positive catalysts for our investment profile moving forward.
So overall, a great quarter for the business.
But importantly, we also see positive sentiment building around the regional macro story.
A result of structural factors as well as timely economic policy actions.
Latin America has long enjoyed the benefits of low geographical risk.
Enrichment of natural resources.
Now with war in Eastern Europe , and growing U S China tensions.
The region is benefiting from its neutrality and stability within emerging markets.
The comparatively lower indebtedness.
Individuals and companies in the region allows governments to preemptively tightened monetary and fiscal policies to combat inflation starting in 2021.
Sharp this inflation for several months now paved the way for cuts in short term interest rates.
In countries, such as Chile, Uruguay, and Costa Rica have already embarked on cycles of monetary easing.
Our scenario a stronger physical positions.
Decreasing inflation and priority higher interest rates.
Led to substantial carrier gains in Latin America with several region, the currencies being global top performers versus the U S. Dollar in 2023.
An important institutional factor too frequently overlooked is the effectiveness of checks and balances in the region.
Most of recent Latin American elections resulted in left leaning president.
But without their coalitions holding a congressional majority.
And with an independent judiciary in place limits their discretionary powers.
Against this backdrop, we have indeed seen the necessity of moderation and proposed new legislation.
And the tax reform efforts moving forward in Brazil.
A good example of that.
Progressive administrations are still committed to delivering ambitious social agendas.
But they must preserve fiscal and monetary discipline, while building, an enabling environment for private investment.
Accordingly markets are upgrading Latin American economic growth forecast for 2023 and beyond.
Is driving asset appreciation.
That translates to a backdrop that is constructive across each phase of factories investing cycle fundraising.
Deployment value creation and divestments.
Although factors can impact asset classes differently.
In private equity, making progress on divestments was critical as we entered 2023.
And we are indeed seeing results.
So far this year private equity fund five is completed that NASDAQ listing of lavoro.
A leading agricultural inputs business.
And also sign the transaction for the sale of Dallas.
Our food distribution platform.
Another financial sponsor will partner with Patras private equity funds seven to support this company's next phase of growth.
The divestment pipeline continues to be very active and we think the improving macro drop.
On the fundraising side, we continue to make progress in private equity with more than $360 million of inflows in Q2.
Between the newest flagship private equity fund.
The first closing.
In the next vintage vintage of venture capital funds.
Led by the team from <unk>.
And the recognition of <unk> legacy growth equity funds. Following the closing of the second tranche of that transaction and Patraeus full acquisition of the platform.
The structural challenges in the private equity space remains however.
Particularly in the U S market.
Although we are seeing upside in other parts of the world like Asia, The Middle East and Latin America.
The headwinds will likely impact the size of this flagship vintage.
Should we ultimately closed this fund other our targets.
We expect the diversification into growth equity and venture capital to help compensate in the short term to reach the six to 7 billion target for this overall drawdown fund vintage.
Through the flagship funds.
Looking forward a solid investment pipeline should also bring us back to the market for the flagship funds sooner than the typical cycle.
As we indicated last quarter, we are completing the initial closings of our newest flagship development fund.
With 350 million closed in Q2, and another 200 million secured in early Q3.
We continue to be optimistic about the momentum here.
We expect to reach roughly 1 billion Mark by the end of Q3, representing approximately 40% of the funds cover target.
The $11 million of performance fee related earnings in Q2 was generated from infrastructure funds III.
And remember the realization impact is enhanced in this initial catch up phase as the majority of commitments are subject subject to a 100% catch up.
Which enhances our performance fee impact until we reach our 20% share of the cumulatively investment gains.
Out of the current 130 million accrue the catch up phase will account for approximately the next $60 million of realizations.
In credits.
Those were positive in Q2.
Our credit platform achieve scale with the acquisition of <unk>, 2020, one and while I, usually highlight the flagship high yield fund and its phenomenal long term track record it.
It is important to note that the increasing breadth of this vertical.
Resilient, Angela and strategies hard currency and local currency strategies further expansion of private credit as soon infrastructure credit.
Means multiple vectors of growth and the ability to capitalize when certain strategies are in high demand.
Our local Latam strategies has delivered outstanding absolute returns over the last year enhanced by currency performance against the dollar.
The main Latam local currency spud.
And 27% over the last year.
Our Chile and fixed income strategy has also seen strong inflows and performance.
Returning more than 10% over the last year and now seeing its AUM topped $500 million.
We have launched our locally focused credit 365 product in Brazil and.
And continue to work towards our formal first close of infrastructure credit.
Which already has backing from multilateral agency as anchor investors.
On public equities.
Our funds have a nominal had a phenomenal quarter in terms of both inflows and fund raising.
As the improving sentiment in the region drove capital to both the large and small cap.
Pan regional products.
Inflows were nearly $370 million in Q2.
And net of redemption activity, we were up nearly $290 million.
Including the strong market appreciation.
Total and fee, earning AUM were both up 23% in Q2 alone.
Fully recovering from the pressure seen in 2022 to reach a new high Mark.
And in real estate, our major story was of course, the announcements of the new joint venture with Bancolombia.
Which is expected to close in the close in Q3.
And I will allow markets to give a more.
More detail on that in a moment.
But there were also strong inflows in the quarter of more than $300 million driven by VPI, our real estate platform.
As they continue to expand our platform in Brazil.
Real estate as an asset class, where we really aim to gain scale over the next few years and indeed, the AUM has grown from $400 million at the end of 2021.
Two more than $1 $8 billion today.
With incorporation of the new joint venture with Bancolombia.
AUM will nearly reached $3 billion in the coming months and more to come.
To summarize Q2 was another solid quarter of results for our shareholders.
We are executing our growth plans amid an improving macro backdrop that is positive across our investment cycle.
And our 2023 targets for fee related earnings.
And fund raising remain well insight.
Let me now turn things over to Mark to talk about our.
And then Ana to walk through the results in more detail.
Thank you Alex and good morning, everyone.
Expansion of product offerings geographic expertise and distribution capabilities are the three pillars of our corporate development strategy and the joint venture with Bancolombia announced a few weeks ago.
Each asset.
Not only are we bring in $1 billion of permanent capital AUM for the real estate platform, but we are expanding that asset class into the Colombian market and we are gaining a distribution partner that can help us reach Colombian investors with a broad suite of alternative investment products.
Powertrain will contribute capital into the joint venture over a multiyear period to fund operation and GP commitments to fund.
Meaning cash consideration is quite minimal upfront.
To help you frame the immediate impact we've disclosed that Patriot will have 51%.
The controlling ownership in the JV.
Assuming 1 billion of fee earnings AUM, earning typical market rate and a similar FRE margins of Patria, you will calculate an annualized fee related earnings contribution of a few million dollars.
After adjusting for the JV ownership.
While that certainly a positive.
And we believe there are further REIT consolidation opportunities in this market. The long term vision for this partnership is the broader facilitation of alternative products to the local investor base across multiple asset classes.
Bancolombia is the country's largest bank by assets and shareholders' equity.
It has been serving clients in Colombia, and Central America for nearly 150 years, given them a tremendous depth of relationship with companies and investors.
That we view as unmatched in the country.
We believe the financial deepening in the region is real and poised to accelerate further with interest rates trending downward.
Leveraging bancolombia <unk> client base and distribution capabilities and partner with expertise in private markets and alternatives. We can provide access to partner with existing diverse offering of regional products and also designed new alternative products tailored for the law.
<unk> market in the local currency.
We're very excited to move this relationship forward following the expected closing of the transaction in Q3.
Im confident it will be a driver of platform growth and accretive to our shareholders.
We've been successful in leveraging the financial deepening in the region in both Brazil, and Chile, and now Colombia as.
As we look to the remaining countries in the region. We believe Mexico continues to be the next logical country for geographical expansion and will remain active in pursuit of deals.
On another front as merchants, we acknowledge that the financial deepening is generating solid interest for private market in the region.
It also does on a global scale.
In fact, <unk> already manages more than $1 billion.
Of Latin American capital through theaters to global alternatives and.
And we are actively pursuing the opportunity to expand our capabilities on this front.
We hope to have more to say on this team soon.
Let me now turn to Anna.
Further details on the results.
Thank you Mark good morning, everyone and great to be with you again.
Hi to deliver distributor earnings of $43 6 million in the second quarter of 2023 equivalent to nearly 30 per share and generating a dividend for our shareholders of 25 cents per share.
Year to date, we have now delivered and be up $82.8 million, which is up nearly 30% from the same period last year.
For an investor who bought back shares at the beginning of the year.
Fourth quarter 2002 dividend paid in March combined with Q1, and Q2 2023 dividend already amount to a yield of well over 5% with a Q3 dividend is still left to be paid during 2023.
Let's now look at how did these components.
Our consistent management fees were $61 $6 million in Q2, 2010 up 11% from Q2, 'twenty Q driven by both organic and inorganic.
AUM growth as the second half of the year unfolds, we will see a more relevant increase with new deployment of the drawdown funds and inspiration of key holidays for our latest vintage private equity fund.
Note that for the latest vintage flagship funds, we can generally collect retroactive management feedback to the seed admission date, an additional closing.
On the expense side personnel expenses were $16 8 million in the second quarter 'twenty, three flat compared to the first quarter and up 7% compared to last year.
Together with administrative expenses operating costs were up 9% compared to the second quarter 2000.
Reflecting the acquisitions of CBI in GAAP income royalty as well as inflationary pressure on salary.
<unk> expenses of around 4%.
<unk> up 9% from Q2 'twenty two.
Second quarter FRE margin of 56% is in line with prior year and ticked up slightly from the first quarter.
Year to date fee related earnings were $65 million and suggested in previous quarters.
Our FY <unk> target of $150 million for the year implies a stronger growth on the second half of 2020.
With margins expected to move higher within our general range of 55% to 60%.
We generated $11 million of performance related earnings in the second quarter, 2023, which is effectively an incremental two upfront infrastructure fund III based on the final net proceeds realized from the assets of data entry.
Net accrued performance fee rose to $472 million at June 30, which is up 8% from both the prior quarter and the year, adding.
Adding back the $40 million of performance fee realized over the last 12 months the implied increase in the net that accrue would be closer to 17%.
Following the closing of the second tranche of the transaction.
Turning to asset under management.
Total AUM grew to $28 $2 billion, an increase of $9 billion versus prior quarter and up 7% from one year ago.
The quarterly rise in total AUM.
It's driven by new inflows of one 5 billion and positive valuation, mainly driven by share price of publicly traded portfolio companies and foreign currency impact of one 4 billion offset by $2 1 billion of outflow.
Notably one seven out of the $2 1 billion outflow from divestment and our job that downtime, which are of course, a positive aspect of our business cycle.
The earning AUM rose to $21 6 billion up 8% from the prior quarter and up 15% from one year ago, adding nearly $3 billion asset crossed the $20 billion threshold for the first time.
The growth from last quarter, and driven by nearly $1 2 billion of inflows led by public equities and real estate.
That growth was enhanced by more than $700 million of positive impacts from valuation and currency appreciation.
As we look to the second half of the year I will reiterate that we expect a rise in quarterly fee related earnings driven by multiple factors along with a slight increase in the margin in order to achieve our $150 million stimulated earnings target.
As you know we don't offer short term guidance of performance fee with a clear line of sight, but I want to echo our investor day targets estimated to amount.
Our cumulative of $180 million to $300 million.
End of 2025.
Given that only infrastructure fund III is actively in the realization phase today and private equity fund side. It is still working towards that threshold is likely that 2023 realizations will be lower than the next two years.
Let me now turn back to Alex for some final remarks.
Thank you Anna.
To close here.
Our business was born in the region and we have honed our investing strategy for more than 30 years of experience on the ground.
We believe Patriot the reference trusted partner for sophisticated global investors.
I want to allocate capital to alternatives in the region.
We also believe we can facilitate the development and adoption for alternative products for local investors in the region.
And be a conduit for them to access alternative investments globally.
Our growth strategy is built around those pillars.
We are now on our way and I continue to have confidence in our ability to deliver.
We thank all of our stakeholders for your support.
And we are now happy to take your questions.
Thank you.
We will now conduct a question and answer session.
Please stand by while we compile the Q&A roster.
And our first question comes from Craig Siegenthaler with Bank of America.
Good morning, Alex Marco Hope, you're both doing well.
Okay.
Hi, Craig.
Hi, guys. Thanks, Thanks for participating in the call I'm here with Marc Winona ol here. Thank you.
My question is on fund raising and I wanted to come back to some of the comments you made around P Fund seven.
The prepared remarks, what do you think are the two biggest challenges that you're facing with respect to raising the buyout fund.
Okay.
Thanks, Craig this is Alex here.
First and foremost.
The general feeling of four and results actually for fundraising for private equity has not been as it was I think pre this whole an inflationary issue in the mainly in the U S.
So as mentioned in prior earnings calls I think we.
For this specific fund we are underperforming in the U S and this.
For this fund in particular.
The U S market was an important contributor of around a third of the fund.
We are managing to over perform in other markets.
Also mentioned in other calls.
Like.
<unk> Israel.
And Latin America very.
Very much surprised with the Latin American interest for this fund I think investors see.
Monetary cycle here easing in Latin Americas as mentioned in the macro part of my of my Little short speech, there and they want to actually come into products that have very very high returns like ours private equity funds.
So all in all in order to compensate for the large.
Group of investors, the North American vessels, mainly U S.
In Canada, Mexico.
Which again accounted for a third of prior funds.
Two really overcompensate the other regions.
We're doing that but.
But I think as of today.
We had I think the target of reaching around $2 5 billion for this fund.
I think that it's more realistic to see the number two and a half now.
And also I think we have a composition of other products that kind of eroded some of the demand for that in our growth equity kind of compete with private equity fund seven.
Some investors are mainly the endowments and some smaller.
Institutional and family offices.
They like the risk return profile of growth equity.
Given that our flagship buyout private equity fund became more mainstream.
So which is fine.
Cannibalization that happens internally both funds are to <unk> funds, our drawdown funds both on a 10 year tenures.
So it doesn't really matter for us, but now we see some cannibalization there.
Also going on.
Some of our investors, we're actually asking for a product like growth equity because as our flagship fund got bigger and became more mainstream they wanted to to invest in that part of that segment of the private equity market in Latin America.
Our venture capital Fund I don't think re competes with our flagship private equity seven but a growth equity fund does it cannibalize some of that demand so when I add.
The underperformance in the U S. Because it's a tough market out there.
You know you read the reports.
Im.
No im saying here, what I read I haven't gone out and check the numbers, but.
Some of the big consultants in the bank and say that every.
$3 and USD chasing money in the U S. One will be raised.
So it's not there's not a battery specific thing I think it's a market specific the specific thing.
What is the good news about this we managed to build our.
No Latin America local base that distribution capabilities out of the $5 6 billion being raised this year organically.
Two to three is now closer to three actually raise raised.
Locally from Latin American investors.
That's a major numbers.
Normally we didn't know if you look at Patras path.
80% of our fund raising.
Came from global institutional investors and of course, the number was a lot smaller than the 5% to 6 billion now it's half and half.
And we're still growing.
These countries in Latam, we still have two.
Increase and strengthen our base in Colombia, and also strengthen our base in Mexico.
This number it's two to 3 billion basically coming from Brazilian and Chilean investors, 95% from Brazilian Chilean investors.
Some proven vessels with a small part of that but nothing much from Colombia, and Mexico, which are now if I add Colombia, Mexico basically doubles the market there. So I'm very excited about this.
Opportunity.
Then.
Compensating. The fact that we are for private equity funds seven underperforming in the us, but overall Gregg I don't think we will get to the $3 billion I think we will get more to the tune of two and a half I see the upside of the two and a half.
Still possible and also no if we add the other products that are being raised within the private equity vertical like growth equity and.
And the venture capital fund, which both are doing well then I'm going to have a <unk>.
To have a very strong 10 year fee products to 120.
Private equity vertical there I hope I answered your question.
Yes.
Thank you Alex very thorough.
For my follow up I wanted to hit on the expectation.
For timing and size for them for five and I think in the prepared remarks I heard that you already raised.
550 million to date, although I don't think it had a first close gesture because it's not showing up on slide 17, but.
My question is do you think and for five will be significantly larger than the $1 9 billion of them fund for at this point just given results to date with P Fund seven.
Yes, yes, yes, and yes.
Going straight to the straight true in Europe .
The answer here.
We did.
Have a first closing for infrastructure fund five I don't think it was well communicated but yes that first closing happened already.
$30 million in the second quarter, another $200 million in the early third quarter $550 million and we have.
<unk> already secured because secured I mean win.
Our investor have already gone through all the approvals we are finalizing negotiations of the opa, but as it is a re up because its an investors that have already invested in prior funds.
The limited partners agreement is very well known for them. So that's why I did say in my in my earnings call here.
Now, we're going to get to the $1 billion now.
First close because normally the first goes.
One investor.
The papers back to us when we get to invest it gives the papers back together the other week whatever but within this month.
Get to the $1 billion, which is 40% of $2 5 billion. So the $2 5 billion is the answer to the second part of your question.
And I can see the $2, five which is higher or lower.
Larger than the $1 nine four private equity source, our infrastructure fund for $1 nine infrastructure fund five to five and I see an upside there.
Things are doing so well for our infrastructure.
Sure franchise here.
No.
One of these the consultants reports that I mentioned.
A couple of minutes ago.
The headline of this private equity fund and infrastructure fund raising reported of one of these consultant says.
DPI is the new King.
That's what our team has been doing on the infrastructure funds they have.
Really.
Sold so many companies that such great valuations.
Now, giving back so much.
So the investors on vessels of our infrastructure fund III.
In <unk> there are no over two times our money.
In U S dollars over 1514 times their money and there are other ex exits that will happen.
In 2023, so more money is going to go back to investors of infrastructure Fund III.
I think we will have good news also an infrastructure fund four is not going to reach of course.
The performance fee bracket, because we have to deliver all the capital back investment in that fund, but we're beginning also to divest assets from this from infrastructure funds for so all of this divestment that means DPI and asset consultant mentioned DPI as the new King helps on the fund raising plus it is a product that has.
An inflationary hedge embedded to it as.
As Youll know so all of this contributed to us being optimistic on the two five in north Sea and upside there. So when I look at the two five from the private equity.
And then I look at the $2 five with an upside on the infrastructure side, It's 5 billion plus.
I have all of these other.
Credit products private credit infrastructure credit.
So thats why.
I come back and I say that.
Sure.
Confidence in saying that the 6% to $7 billion.
The drawdown funds target will be hit.
Because of the numbers that I just gave you.
And also on the credit side, we're seeing great momentum.
On private credit on infrastructure credit on private credit, we have a latam private credit product on the road.
Have a local Brazil private credit funds and two on the roads the funds raised.
Private credit the Brazilian private credit fund one the.
Delivering extremely good returns.
With very very good no credit credit.
As a securities no defaults in amazing product and really an amazing product and we're having a lot of re ups for our Brazilian private credit fund two so I'm optimistic on the private credit side. So if I add the two 5% from the private equity side, the $2 five with an upside from the infrastructure side and all the other.
<unk> private credit products.
Which are our drawdown funds that's why.
I see the $6 7 billion drawdown funds.
For this vintage being.
Being met.
I think I think I answered all of your questions. If not please please help me here.
No that was great. Thank you Alex.
Thank you.
Okay.
Yes.
Yeah.
Operator should we go to the next question. Please.
Our next question comes from Tito Labonte with Goldman Sachs.
Hi, Good morning, Alex Mark Okay, no. Thanks for the call taking my question.
Couple of questions I guess.
Can you give any more color on are you able to realize any more performance fees.
For this year, particularly I guess from infrequent three quarters, a little by surprise positive surprise, obviously, but just to understand.
How much more you can potentially realize in the short term both from ink for fund III and overall.
And then second question your good performance I guess on the public equities and real estate side, particularly going into a lower interest rate environment.
Obviously valuation benefited but also we saw good inflows there with limited outflows can.
Can you give some color on how you see that shaping up.
For the rest of the year, particularly we saw that.
Central Bank in Brazil cut rates last night.
Are you seeing more interest in those verticals. Thank you.
Yes, Hi, Tito thanks for thanks for the question Thanks for participating.
Yes, I think on the.
Overall in the performance fees I think we are.
We continue to see the $180 million for the next.
Three years, including 2023, which we gave.
<unk> as a.
<unk> during the facts the late last year.
So what we see there I think we.
On a full private equity for infrastructure fund III divestments going on and.
Very interesting valuations that we'd be able to to get for these assets and these once we sell these assets.
It contributes 100% to our performance fee because we are in the catch up phase.
So I see no news coming from that front.
The more short term news coming there.
On the private equity side.
We're also.
Distributing in kind.
Some of our listed products listed.
Securities there and that generates a performance fee there so.
So that's that's what we're looking into for the second half of this year.
For assets.
Assets of our.
Private equity fund five.
Also because of the appreciation of the.
Listed securities in private equity fund five.
Mainly smart fit so we see a lot of divestments still going on for the second semester.
It's not going to generate performance fees in the second semester. So in this order.
Infrastructure Fund III continues to be the main driver of performance fees in the second half of the year.
Divestments going on as we speak.
Selling assets still.
And in that fund, we have five remaining assets in that fund.
Proposals are coming in we have organized processes and we're moving ahead and Thats why I am still comfortable.
We will continue to deliver on performance fees this year and overall for the $180 million that I mentioned during our proxy.
<unk> private equity fund five with these distribution and coins.
The distribution and kind does generate performance fees the way that we are structuring it.
So that also.
It could be a positive news in the second half of this year or early 2024.
And then comes all of these other divestments that we're doing that will not generate performance fees for this year, but it's building in.
As you know we have European carrier is building in the direction of generating performance fees for next year 2024 and 2025.
So it's.
Things.
Around here the change is you'll notice that during the first semester.
We are kind of weird weak right, where the Brazilian government that gets an upgrade.
From the rating agencies in the U S government debt.
Thats, a downgrade from the rating agencies as kind of a unique weak right.
Where inflation in Brazil is lower.
Then the U S slightly lower than the U S. Our last 12 months and interest rates in Brazil, and Chile are falling while the U S. There.
Those moments in time, when you and I think we've been around for a while.
Look back in history, and we haven't found a lot of these moments right and so that benefit is going to your second question.
I mentioned during my my earnings call today.
20, something percent up in an.
In our equity funds Latam large cap Latam small cap GLA in small cap Brazilian small cap of over 30% up this year.
You add that.
The strengthening of the Chilean peso and the strengthening of the real we're talking 40, 70% returns in the first in the first semester.
For this month and our credit funds, 2017% returns in U S dollars.
We saw redemptions for our public equity funds in our credit funds in 2022.
Redemptions for June 34.
For our products went to zero.
And we know because redemptions come in for the next quarters.
For our credit funds they are basically zero.
And inflows coming in redemption zero or close to zero that means no more money for us and that then for these products as and when they hit our our bank accounts. They are fee earnings AUM right.
And then when we look into the second quarter I think there is still a lot of space for valuations to go up.
So no.
Cautiously optimistic on that side, which is the second part of your question. So yes, we are.
That's why I go back to you guys and say look.
We see as good news here that we're going to get to the 5% to 6 billion.
Organic inflows for this year.
Coming from these projects that I just mentioned.
Also.
I think we're seeing a good a good momentum for our mainly Chile institutional clients willing to invest in hard currency alternative assets.
But we also have that business, which is an advisory this is pretty interesting for us as well.
So the <unk> change the mood changed over the last two quarters and I think Michael wants to add something here and just one question to the other and other performance and the performance fees and the <unk>.
Environment.
The recent.
Currency appreciation.
In our favor.
Rarely present in the second quarter and even more so in the beginning of the new quarter.
Because as you know our business on the on the FRE is mostly dollar denominated and on the <unk>.
Currency plays a role on both on the performance and on the and.
And on the performance fee.
No.
No things moving to the right direction in that region.
Benefiting from this economic cycle, we also have a benefit not only by the organic.
Growth of our funds the natural IRR, but also the currency, which.
Which accelerates the hurdle rates accelerates the catch up phase accelerates the carrier to be received on.
The funds that are eligible to pay carry.
Okay, that's great and I hope we answered your questions is yes.
Yeah, no very helpful very good color and hopefully it's a good time for Brazil, and Latam to given they were a bit ahead of the curve here. So let's see how it goes thank you.
Thank you thanks, thanks for participating.
Sure.
One moment for our next question.
Okay.
Our next question comes from Ricardo <unk> with BTG Pactual.
Good morning, and congrats on the solid results I have a couple of questions here.
First can you please give us an update in March details of the levels of inflows in the legal strategy that we should expect in the following quarters going by each product has a lot less.
<unk> products should benefit the most with.
In fact in the Chilean interest rates debt.
And also for my second question.
Do you believe that right now.
Sure accelerated consolidation of deluxe cannot manage in the industry and you mentioned, Mexico. It should be an interesting region shoot you tackle if you could also comment what product would make sense to actually a broad platform will also be helpful. Thank you.
Of course, thank you very much he has a nice a nice talking to you.
<unk>.
While we have.
I think we're cautiously optimistic on the fund raising for our liquid strategies.
And we saw good fund raising momentum in the second quarter for our.
Public equity strategies, we have large capital item.
Small cap small cap Latam, we're actually reaching a point that we.
We might even close the fund for a while.
We're managing.
X amount of dollars that are $150 million to $100 million, we reached $500 million and basically.
60 days, the last 60 days of the second quarter.
So good momentum on the inflows there.
On the law of large cap Latam the same and then the Chilean strategies, we have large cap, Chile, we have small caps, Chile, and we have pipe and.
In Brazil.
All of the performances have been as I mentioned, a couple of minutes earlier.
20% plus in local currencies and then you add the strengthening of the Chilean peso and the Brazilian real.
It's really impressive and of course that drives the fundraising momentum so I see that momentum continue.
Continuing in this in the second half of the year, yes.
It's hard to say exactly.
But overall I think we know the $5 billion to $6 billion number.
<unk> mentioned earlier in the call.
For fund organic fund raising for the year should should be met.
<unk> the drawdown funds.
Fundraising for our flagship drawdown funds going on.
Infrastructure from five and private equity funds seven mainly but also growth equity and venture capital and also the private credit funds like infrastructure credit in the Brazilian private credit funds. So if we add everything the $5 to $6 billion can go I think with you.
It is more effective and productive to go offline, we sit down with you and we'll go product by product given that we have now 30 products I don't want to really.
Take your time here and the other.
But part of the audience today.
We will more than gladly can do that with you.
After this call.
But the momentum looks good he gathering and on your second question here.
Yes, I think we.
We had this contrarian view new guys.
Can only thank you guys for supporting US when we did go public late.
When we're thinking about going public late 2020, and we went public early 'twenty one that was a contrarian view he cargos actually us speed.
Speeding up the consolidation by raising money.
We do not sell anything as you know in a primary issuance of shares.
And consolidating this market, while Latin America was going through this the world with Latin America. Specifically. So this is kind of a hard phase of high interest rates and high inflation and high interest rates leftist governments, you'll know the whole story.
And we know we've been around for a while since 1980 891 of the founding partners. It has been.
35 years in September we saw this film so many times like now watching godfather, three I know what one.
The actors are going to stay right.
And I know they said look let's position ourselves here.
We have to consolidate market as soon as possible I think.
We moved into Chile.
Amazing right moments, we moved into Colombia, I think in the right moment.
Colombia is a little bit behind the curve.
Handling installation and handling.
Interest rates, then and also the issues that is going there with petrol, but I see we see the sound economic fundamentals of North City, specifically, Brazil, and I think we are now beginning to see that the benefit of the execution of the strategy. So we're head on and continue to do.
<unk> that we need to build a big business in Colombia, and even bigger in Mexico.
Join ourselves with the largest.
The most successful distributor in Colombia Bancolombia as you know is the federal bank of 146 year old was privatized five six years ago.
They have a 60% market shares on all transactions, including distribution private banking and whatever.
Colombian business products for local Colombian investors as we did in Chile very successfully our Manila partners know did an amazing job. They are the establishment in Chile, I think we're doing this in Brazil with tripled our AUM in Brazil of Brazilian Reais for Brazilian clients, we can do the same thing.
Because of the JV with Bancolombia.
The federal bonds here in Brazil, the famous <unk> is now at five point something percent.
<unk> down down from 707, something that's that's the number the magic number that pension funds start thinking on diversifying.
They're investments in anything any bid because they have two rate because of their acto factorial.
Our liabilities cost so.
So I think it's again, if things continue to play that way.
As it did in the first semester.
Cautiously optimistic in the US we have to continue to.
Consolidate this market. This is this is why we went public thank.
Thank you Scott.
Alright, okay.
Yes, I was just addressing your questions on.
What products to add in timing about the M&A.
And maybe maybe this is a good opportunity to use the bancolombia deal.
To respond a little bit.
To give a little bit of visibility on how we think about our expansion.
We've been saying that since the IPO price.
Our priorities that we set on our inorganic program are set to <unk>.
Expand our channels, our geographies and our products now.
A partnership like the one we announced with Bancolombia addresses the three of them.
We already had a presence in Colombia since 2014.
With over 2 billion underground and successful cases there.
And with the partnership with Bancolombia that theirs is a player that has nearly 50% of market share with.
With over 25 million clients on the ground, it's definitely a good way to get the boots on the ground.
In a different dropped out of the market not only on the client side, but also on the business community.
Okay.
So definitely that get that gives us a in depth boots on the ground in terms of geography and in terms of channel because it gives access to.
Type of clients and a distribution power that we wouldn't have otherwise in terms of product, what we're doing and but the first product that we announced with the with you would be joint venture with Bancolombia as a local real estate local REIT, which is permanent capital you would add the $1 billion of permanent capital.
Which is in sync to what we have been saying about where our priorities are and I think you can take this is definitely a priority the permanent capital for real estate in other countries in Latin America and Brazil.
And we're going to continue to.
Foster desktop type of strategies that may.
Result in acquisitions and mergers or in joint ventures like the case here in Bancolombia to really take us to become.
Present.
In every geography in every aspect of the the alternatives in the region.
We spoke about Mexico being a priority Chile continues to be a priority as well.
And and in terms of timing.
<unk> Y Counterparties partner with us are generally and very much centered on the fact that.
We have a fund raising powerful fundraising capability and by joining forces with us.
Is it just that catering for new money into the system.
Our normally parties that want to continue to work with us want to become part of a bigger platform benefit from.
From a platform so those arent motivations that speak very well in a conversation where.
Where youre aiming to invite.
Other partners too to be consolidators in the region.
And of course, there will be.
The the local markets that we spoke a little bit about the local markets and how the local markets are evolving and.
And how things are improving here.
That has not fully reflected I think it's still a way to go there.
But if that definitely.
We'll bring some.
Some impact.
The strategy and we will navigate accordingly so.
Hope I answered your question.
So very clear just a quick follow up here, how much LCR liquid thing do you charge based on any Z and then <unk> should benefit from all this positive mark to market that would have been interesting.
I'm guessing here I'm going to have Mark will answer that.
The question in more detail.
It's not 100%.
All of our most of our funds liquid strategies charge offs on energy.
We're checking that information.
<unk>.
It's not 100% Chicago.
Is it a 100% mark so I think the best reference you have cargo is on page 14 on your presentation, where we provide an overview by asset class.
And you can take the line, which says <unk>.
<unk> equities.
And.
The piece, where you where you read credit open evergreen funds that is on that is on the modality that you've just described on NAV and then the others.
Others will be draw down funds modality.
Okay.
Very clear thank you.
No. Thank you.
One moment for our next question.
And our next question comes from Yuri Fernandes with JP Morgan.
Good morning, Alexandra and Josh Marshall I have a first question regarding our performance this.
This quarter, I guess, Mark mentioned effects benefiting a little beaten and I think Alex in the presentation mentioned adaptor and nature of Es sales. So so my question here is only interest yes.
You had about 45% stake on the company. So just checking if you sold.
No stake now or and if not if you didn't sell it when you plan to sell decent reviews has taken how much do you believe this can help you on further performance. This is the first one and then I can I can have another question. After you answer.
<unk>.
How are you.
Thanks again for your for your coverage there.
I did I did read your report.
Yes.
Why did we have performance fee from from deals that were already announced right in.
We did not sell.
An additional portion of <unk> or an additional portion of any other assets from infrastructure Fund III.
Conservatively.
Projected some of the.
Accounts that you actually do.
Clothes, just at closing dates and I'll give you an example here.
The actual debt because then it depends on how much cash the company generated between signing and closing so they are minor adjustments that we do at closing.
We normally what we do we are conservative on those assumptions in order to lower.
The price sold the equity value.
Because you know of course, we have our projections. We are confident that things are going to go our way on on working capital and cash flow generation, but we are conservative so the performance fee that we announced.
On the sale of our data and <unk> did take into account conservative assumptions for working capital and indebtedness of these companies at closing one.
When things came to closing.
We were rights we had.
Leave on the table, therefore, working capital needs of those specific companies. We were also on the upside there.
Because it has less debt more equity and debt that actually contributed to more performance fees. So the actual price of the company's basically is the same but we had a little less debt a little bit more equity and that actually went into.
Straight into our infrastructure funds III and as we are in the catch up phase now 100% of what comes into infrastructure currently is now.
To the general partner, we did then.
What I mentioned I think when.
We are.
Selling other assets.
Our infrastructure fund III.
No I am cautiously optimistic that we will manage to.
Signed the sale of these assets in the second half of 2023 contributing then for performance fees for the general partner for box.
I Hope I answered your question and ready for the next one here.
Perfect guys. Thanks, Thanks for the clarification I have a second one regarding bancolombia.
Over here.
We've put in the press release information, sometimes about Central America Operation I guess did you say the smaller portion of the pie, but just checking if the $1 billion.
<unk> annual benefit.
I know, it's not the same company, but usually it's also an important distribution channel for sure.
As you pointed outbound Columbia, it's a dominant player in Central America, and Panama, and Guatemala, and El Salvador, we have not touched those geographies. So far it's open to explore in terms of distribution, but the REIT business debt that comes along with Bancolombia is exclusively a columbia.
Dedicated vehicle.
But we have no limitations to expand the relationship into a central American and in fact as part of the discussion.
Okay and a soda.
We are not contemplating in the existing business plan.
Distribution through sooner, but there is also no limitations that we go into that direction.
Perfect. Thank you Super clear, Thank you guys and congrats on the quarter.
Thanks Julie.
One moment for our next question.
Okay.
And our next question comes from William Bird yard with Tau BBA.
Good morning, Alex Mark a quick one here so regarding that FRE target of $150 million.
Just targeting place the company should show a good performance in the second half of the quarter around 30% growth and Thats far east.
Over in the first half so if you could go through it we would like to understand what are the levers for that improvement.
Yes.
Sure.
Yes, Hi, William Thanks, Thanks for your question and thanks for participating yes, I think the way the way that these drawdown funds works.
<unk>.
Is that you do the first close of the fund.
And then as you raise money.
After the first close the fees are retroactive.
So contrary to the liquid strategies.
As we talked here with Ricardo now.
When when the somewhat nominal.
<unk> subscribes quarters for a liquid fund strategy the day that it hits.
As of the day, we start charging fees in the case of the liquid funds, which is a major.
Fundraising effort of this year the flagship infrastructure from five projected from seven level.
Yes.
We did project.
First close closing last year, we did our infrastructure fund five closing.
In the second quarter in the June .
So for example, if I raise $100 million in September of 2023.
I do not charge fees only four from September to December I charge fees from June late June to December .
So if I raise a $1 billion.
I have the whole six months of fees.
Not really.
Yes.
As of the date that we raise the money so that.
That's a major contributor.
For that.
Because and I'll give an example here if I have $1 billion.
William.
Fundraising for the drawdown funds by using 1 billion just as the illustrative accept.
2% of $1 billion is $20 million.
I don't if I raise that during the quarter.
I might have less.
And then the $10 million for the semester, but no as I go all the way back.
For private equity funds seven to January of this year. So it's a full year so.
So in my example have $10 million of fees, which is 50% of 'twenty.
So it's pretty powerful when you do that right.
In sum.
Differently, but this is a case of our of our funds. In addition of course, we do see a momentum as we've talked over the call here today for the liquid strategies.
And then we saw the redemptions coming down significantly close close to zero that I also mentioned here, we saw fundraising for the liquid strategies going up and that also we didn't see that in the first quarter of this year, we saw mostly in the second quarter of this year.
So if we also project a cautiously optimistic on the second half. This good Latin American momentum will continue so for the liquid strategies, we will raise more money in the second semester than in the first semester. So thats also a contributor.
Mark.
I think.
I'm not sure if it was clear most of the growth is already contracted.
It's a matter of fee base.
The fee base is.
The fee paying AUM that we have indicated allows you to.
Two.
Two two.
To build up this numbers for example, private equity seven is coming out of a fee holiday period.
And thats already contracted and that kicks in to the second half of the year.
All the commitments that has been made during the first half of the year.
So the fee paying AUM for the second half of the year.
So that composes.
The fee base for the second half of the year.
On a new asset class by asset class basis, but in general.
As for the.
Illiquid illiquid drawdown funds is the fact that I mentioned of the.
Close the funds you have the first closing of the fund and then we win when you raise money after that first closing the fees are retroactive number one number two we are more optimistic.
In the second half of 'twenty three versus the first half of 'twenty three on fund raising for the liquid strategies because of the Latin American backdrop, and we began seeing that in the second quarter more money coming in for our liquid strategies that the two macro factors and then I think we can go with you offline and explain.
In more detail.
Thank you, that's that's really clear Alex and Michael.
Over an hour with us year that of course, it's a huge pleasure that we have you guys with us here today.
We are honored that you guys are covering us. Thanks, a lot for your all of your efforts.
Sure that will continue to do our best year or two.
To deliver on our promises on our tax day on fee related earnings of $150 million et cetera, and I hope to see you guys in person and I think we have no meetings with most of you in the <unk>.
Weeks and months, so that would be a pleasure again to see you in person and thanks a lot. Thanks for your presence and talk to you soon.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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