Patria Investments: Solid LATAM Focused Asset Manager

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Recently, I expanded my presumption successful Patria Investments (NASDAQ:PAX), an alternate plus manager that is progressive successful LATAM. The LATAM marketplace is expected to turn importantly faster than North America and Western Europe, which makes it absorbing to summation exposure. In this article, I volition explicate wherefore I decided to summation my presumption successful Patria.

The Company

Patria Investments oregon Patria is an alternate plus manager headquartered successful the Cayman Islands. The institution was founded successful 1988 successful collaboration with the Salomon Brothers. In 2010, it formed a concern with Blackstone (BX), which subsequently purchased a 40% involvement successful the company. In 2021 the institution went nationalist connected the NYSE and Blackstone decreased its presumption to 14%. Since going public, the institution has made 3 acquisitions to fortify its platform. It acquired Brazilian Real Estate Asset Manager VBI, it acquired Chilean Moneda Asset Management a starring plus manager successful recognition investments, and Kamaroopin, a task superior firm. This has made the institution adjacent stronger and aft these acquisitions, the institution is progressive successful the pursuing segments: Private Equity (incl. VC), Infrastructure, Real Estate, Credit, Public Equities, and advisory and distribution.

The acquisitions successful operation with the company's integrated maturation person led to a important summation successful assets nether management. Compared to Q3 past year, the company's AUM has grown 76%, portion its Fee-earning assets nether absorption (FEAUM) Grew by an astonishing 101%. Unfortunately, YTD revenues went down astir $20 cardinal arsenic show fees dropped from $89 cardinal to $0. In my opinion, this shouldn't interest investors arsenic the stickier absorption fees were up astir $65 million.

Patria Revenue (Q3 Presentation)

As the institution continues to put much money, I deliberation its FEAUM volition turn and this volition pb to higher absorption fees. As the markets yet stabilize, the company's realized show fees volition astir apt besides instrumentality to higher levels, and this should boost the company's revenue. From that perspective, the expected CAGR of 20.3% (aggregate based connected 3 analysts' estimations) makes sense.

Expected Revenue Growth (TIKR.com)

The company's equilibrium expanse besides looks strong. At the extremity of Q3 2022, the institution had a nett debt-to-EBITDA ratio of -3.87, portion the company's debt-to-equity ratio was 2.7%. I similar companies with a comparatively debased indebtedness ratio arsenic it gives them the quality to lever up successful lawsuit they spot bully opportunities, and besides makes the institution comparatively safer than 1 that is highly leveraged.

Valuation

Before investing successful a stock, it is important to person a wide thought astir its valuation. The valuation tin service arsenic a line for erstwhile to put successful oregon divest shares of the company. I similar to usage aggregate methods which see a DCF exemplary based connected a perpetual maturation complaint and an exit multiple, arsenic good arsenic a multiples analysis.

Discounted currency flows

Whenever I usage a DCF exemplary I similar to marque usage of 3 scenarios, a bull, bear, and basal case. I usage these scenarios due to the fact that making a DCF requires a batch of assumptions. By utilizing scenarios, you tin spot however the inputs would impact the stock price. I usage gross maturation arsenic estimated by analysts and COGS based connected the COGS implicit the past 3 years, somewhat adjusted based connected my expectations. For Patria this leads to the pursuing assumptions:

Assumptions DCF (Author)

To get the contiguous value, we request to discount the aboriginal currency flows to today. To bash this, we usage the weighted mean outgo of superior (WACC), which is based connected the company's beta, my minimum required complaint of return, the treasury rate, the company's outgo of equity (based connected the CAPM), and outgo of indebtedness (based connected involvement payments and worth of debt). This leads to the pursuing WACC estimation:

WACC Inputs (Author)

For the perpetuity maturation method, I usage a perpetual maturation complaint of 3%. The crushed for this is that a institution cannot turn faster than GDP successful the agelong run, and implicit the past decade, the GDP maturation complaint has averaged 3%. Do enactment that I expect the LATAM economies to turn faster, but successful bid to err connected the harmless side, we instrumentality the mean of 3%. This leads to a terms of $12.98, somewhat little than the existent price.

For the exit multiple, I similar to usage the mean EV/EBITDA of the company. For Patria, I utilized an exit aggregate of 15, which is somewhat little than its mean of 18 since going public. I deliberation 15 is simply a tenable estimation based connected the mean 10-year EV/EBITDA of Brookfield Asset Management (BAM) and BlackRock (BLK), which had an EV/EBITDA of 16.8 and 13.4 respectively. This leads to a terms people of $16.06.

Multiples

For the multiples, I similar to usage the price-to-earnings multiple, arsenic good arsenic the EV/Revenue multiple. In presumption of the price-to-earnings multiple, the institution has been precise volatile, having been supra 30 and beneath 15. The mean since going nationalist is 23, but I deliberation that this is somewhat excessively precocious fixed the favorable situation that we were in. Based connected that, I adjusted it downwards to 20, starring to a terms people of $18.00.

If we instrumentality a look astatine the company's EV/Revenue, we spot that the mean since going nationalist is astir 10. However, this is besides influenced by the elevated aggregate erstwhile it conscionable went public. If we set it to 9, we get a people terms of $13.96.

If we harvester each the terms targets mentioned above, we get a terms people of $15.25, which gives an upside of astir 11%, supra the latest closing price.

Catalysts

Having a terms people is simply a bully guideline, but determination has to beryllium a crushed wherefore a banal moves toward the terms target. For Patria I person identified 2 catalysts that could determination the banal terms person to my terms target:

Growing Market

Patria is progressive successful the plus absorption concern successful Latin America oregon LATAM, and aggregate countries are portion of the emerging markets index. The EM scale consists of countries that person immoderate characteristics of developed countries but does not afloat conscionable its standards. Some countries that are included are Argentina, Brazil, and Mexico. What is besides absorbing is that the mediate people is expected to turn importantly successful these countries. This should yet pb to much radical investing successful stocks and alternate assets. What is besides advantageous for Patria is that the portion is presently lone 1% of planetary backstage markets, portion it is 6% of planetary GDP. I expect that the quality betwixt the 2 volition shrink implicit time, which is beneficial for the company.

LATAM Market Statistics (Patria Q3)

In summation to the region-specific advantages of Patria, we besides spot an summation successful alternate assets. Compared to 2010 the allocation to alternate investments of organization investors has grown from 14% to 19% successful 2020.

Low correlation with G7

An further crushed for investing successful Patria is that its investments successful LATAM person a debased correlation with the G7. The G7 consists of immoderate of the largest economies of the Western world, including the USA, Canada, and Germany. As these countries person immoderate of the largest economies, astir radical person vulnerability to them. As the correlation of Patria to these economies is low, it offers large diversification benefits, which could pb to higher request successful the future.

G7 Correlation (Patria Q3)

Risks

LATAM governments

Although I expect LATAM to turn faster than astir developed countries, their governments aren't the astir stable. They besides thin to endure from corruption and nepotism. As an example, some Brazil and Argentina were ranked 96th retired of 180 countries connected the corruption cognition index, portion Mexico ranked 124th. Chile connected the different manus scored rather good and ranked 27th, the aforesaid fertile arsenic the United States of America. Corruption and unstable governments marque it harder to bash business. Furthermore, if things get truly bad, governments tin determine to prehend assets of the company, which would astir apt pb to investors pulling their wealth retired of the portion and cratering plus prices. Although I bash not expect the second to beryllium likely, corruption could decidedly beryllium a occupation for the company.

FX risks

Another disadvantage of investing successful Patria is that it invests its wealth successful countries with weaker currencies. For example, a important portion of the company's funds is invested successful Brazil, whose currency has cratered implicit the past fewer years. This tin person a important interaction connected the profits of the company's funds and truthful besides connected the fees it receives, specified arsenic show fees.

Data by YCharts

Conclusion

Patria Investments is an alternate plus manager focusing connected the LATAM market. The institution has made a fewer acquisitions since going public, strengthening its level and boosting maturation expectations. At the infinitesimal I estimation that the institution is undervalued by somewhat much than 10% based connected a DCF, and multiples analysis. I expect that the maturation successful the LATAM marketplace and diversification benefits volition yet pb to an upward revision to my estimated just value. In presumption of risks, investors should instrumentality into relationship the governments successful the portion and the FX risks, arsenic this tin widen the clip that it takes the banal to scope the estimated just value.

I chiefly absorption connected stocks that are chartless by the nationalist and REITs. As for me: I americium a BBA postgraduate who is pursuing a Master successful Finance (MSF) astatine Erasmus University (Rotterdam, Netherlands) and enactment a pupil occupation successful the existent property industry. My portfolio chiefly dwell of dividend maturation stocks and REITs. Although I bash person smaller positions successful maturation and worth (non-dividend) stocks. My largest positions are: Enbridge, Abbvie and VICI.