Patria Investments: An Underappreciated Asset Manager (NASDAQ:PAX)

Dear readers/followers,

Many of my recent articles have focused on REITs. Today I want to focus on Financials, which is another sector I am bullish on, and I believe you should be too. In particular, I want to look at an alternative asset manager focused on emerging markets, which is not widely covered here on Seeking Alpha. Buying it could be like buying Blackstone back in 2009 when it was trading below $10 a share. The company is called Patria Investments (NASDAQ:PAX).

Why Patria Investments?

Patria Investments is an alternative asset manager with operations located solely in Latin America. The Latin American market makes a good addition to a portfolio for a handful of reasons, in particular:

• a large population of almost 700 million people with a growing middle class (as of 2020 47% of the population was considered middle class, this is expected to increase to 64% by 2050)
• the market is under-penetrated as the region represents 6% of global GDP but only 1% of global private markets, this leaves lots of room for growth
• the market tends to have a low correlation to G7 economies in terms of GDP growth and inflation, making it a good diversification play
• it is far away from geopolitical risk and is one of a few places in the world that generally doesn’t get involved in global conflict (unlike Europe, Middle-east and Asia)

Patria’s operations are very similar to well-known, established asset managers such as Blackstone (BX) or Brookfield (BAM). But Patria’s advantages are its size. Having IPOed just two years ago, the company is still relatively small, with AUM of only $27.2 Billion (compared to nearly a Trillion dollars of BX). This means that the company has much more room to grow, and given its small size, it can do so much faster than its competition. Also, the timing of the IPO was quite unlucky due to the unforeseen macroeconomic shocks that followed in 2022, soon after the company went public. This caused the stock to fall more than some of its more established peers and could potentially make for an attractive valuation.

Experienced management

Patria has a really experienced management team and strong ties to Blackstone (which used to be the largest shareholder of Patria until recently). The company has been around for 30 years, and most of the senior management has been with the company for a large part of their career. In particular, each of the 5 key segments that Patria operates in (PE, Infrastructure, Credit, Equities and RE) is managed by a Head which has been with the company for at least 23 years. Moreover, management’s interests are well aligned with shareholders due to a post-IPO lockup of shares for 5 years. This seems like an experienced and trustworthy management team, and one I’m willing to invest in.

The management already has a history of over-delivering, as they have grown their AUM by 88% (from $14.4 Billion to $27.2 Billion) since the IPO just two years ago. Their ambition is to grow AUM to $50 Billion by 2025, and I actually think they can achieve this. This would represent a CAGR for AUM of 22% and earnings would likely grow by a similar percentage. This is a huge upside, similar to Blackstone’s early days, that investors could capitalize on.

Operations

The company announced its Q4 2022 Earnings today and reported a YoY increase in Fee Earning Assets Under Management (FEAUM) of 7% as FEAUM reached $19.2 Billion. This is much lower than the historical rate of growth, but frankly given how difficult a year 2022 was, I think it’s still phenomenal that they were able to grow their AUM. These assets have earned the company an effective management fee of 1.2%, which is in line with what all big funds charge.

As a result of growing the AUM, the company reported solid Fee Related Earnings (‘FRE’) of $130 Million (51% YoY increase) while maintaining a great margin of 57% and has guided towards a further 15% increase to $150 Million in 2023. The YoY growth in Distributable Earnings (‘DE’) has been much slower at just 4% – the reason being significantly lower realized performance fees compared to 2021. The company has a very friendly dividend policy, similar to Blackstone’s, where it pays out 85% of distributable earnings in dividends. With $1.00 in distributable earnings in 2022, the dividends totalled $0.85, translating into a dividend yield of 5.6%. With earnings expected to grow rapidly (likely at a rate similar to the growth of AUM – double digits per year), this stock could very soon have a yield on cost of 8-10% while maintaining the growth prospect. It is also worth noting that the company has no debt!

At the end of the day, the performance will come down to the management’s ability to grow their AUM to their 2025 target of $50 Billion and beyond – and there is a lot of space to grow into as the five sectors that Patria focuses on easily account for a Trillion dollar market in Latin America. Given the company’s performance so far, their close ties to Blackstone, solid management incentive structure which aligns with shareholder and the fact they have already become a trusted partner for many LPs who prefer a GP that’s local and on the ground I believe they will be able to grow their AUM substantially over the coming years. The decision whether to invest then comes down to valuation.

Valuation

With a market cap of $2.2 Billion, the company trades around 16.9x FRE. This is very low compared to Blackstone’s 25.7x FRE and compared to BAM’s 27.6x FRE. There are two competing aspects to consider here – firstly the more established players deserve a multiple premium as they are likely safer and more proven than PAX, however, taking into account the much higher expected growth prospects and a longer runway for PAX, I think the fair multiple won’t be too far from that of Blackstone. So the pay today seems reasonable and actually gives PAX a lot of room to grow as it matures (at least in terms of multiples).

in ths. USD	PAX	BAM	BX
FRE	130	2 100	4 400
Market cap	2 200	58 000	113 000
P / FRE	16.9	27.6	25.7

Click to enlarge

Let’s assume that Patria can hit their target of doubling their AUM by 2025. That would most likely also double their FRE to $260 Million. If by then the market values the company at say a 22x (conservative relative to peers), that would translate into a price of $39.00 per share in 2025. This would represent an annual return of 37% from price appreciation alone (not even counting the dividend) and I actually think this is very realistic! If that growth continues, the company could 10x over the next decade, making Patria a great investment.

Risks

Of course, this is a speculative investment and the performance is dependent on the company growing its AUM. Ultimately, you have to decide for yourself if you think the company can pull it off. I consider this as an asymmetric risk/reward opportunity, perhaps a little on the riskier side given Patria’s smaller size and the fact that it operates in an emerging market, but it’s well worth it for me.

And although I view this as a diversification play in terms of geopolitical risk, as Latin America is far away from most conflict happening in the world today (Ukraine, Middle-east, China) it is worth noting that there is significant political risk in some Latin American countries where Patria operates. With 30 years of experience in the market, though, I think the company will be able to navigate this better than anyone else.

Investor Takeaway

Patria has the potential to become a great long-term investment. It is positioned in a growing market that’s located far away from global conflict and provides good diversification to G7 economies. It also has an experienced management team with an excellent track record. If the company can deliver on its promise to grow AUM aggressively, then investors can expect a dividend yield that could reach a yield on cost of 8-10% very soon, while holding a stock with a 10x potential over the next decade. This is the definition of an asymmetric risk/reward opportunity and a bet that I’m willing to put some of my money against. Of course, managements plan is very ambitious, but even if they don’t hit their target, you’re buying a solid company that is profitable, and you’re arguably buying it at a discount compared to the more established players in developed markets.

I rate PAX stock as a “Strong Buy” here at $15.00 per share and will add it to my portfolio right after publishing this article. Eventually I plan to make it about 3% of my overall portfolio.