Patria Investments Limited (PAX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Patria Investments Limited Investor Call. [Operator Instructions]. I would now like to turn the call over to Josh Wood, Head of Shareholder Relations. You may begin.

Good morning, everyone. Thank you for joining us to discuss the launch of Patria's Growth Equity platform and the announcement of our partnership with Kamaroopin, a venture capital and growth equity affiliate of Tarpon Investments. With me on the call are Patria's Chief Executive Officer, Alex Saigh; Chief Financial Officer, Marco D'Ippolito; and Kamaroopin's Founding Partner, Pedro Faria. Alex will give some prepared remarks on our Growth Equity Strategy and the Transaction, and then we'll open up for Q&A. We've issued a press release and presentation on the transaction, which you can find posted on our Investor Relations website at ir.patria.com or on Form 6-K 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. Patria assumes no obligation and does not intend to update any such forward-looking statements. While specific financial terms are not being disclosed, the partnership agreement entails 2 phases. The first tranche involves the acquisition of a 40% minority stake in Kamaroopin's existing business for cash consideration and is expected to close in early 2022. The second tranche will give the opportunity for the acquisition of the remaining 60% of Kamaroopin for an equity consideration, which will be triggered by the achievement of certain fundraising objectives for a new Growth Equity fund, which Patria and Kamaroopin will raise in a joint effort and the satisfaction of certain other conditions. The triggers for the second tranche are expected to be reached over the span of approximately 18 months from the first tranche closing. And should they not be reached, Patria and Kamaroopin would have the optionality to unwind the transaction. The P&L impact to Patria is expected to be immaterial during 2022 as the existing business currently operates at a profit, but near breakeven at its current scale of approximately $175 million of assets under management. Any impact during Phase 1 will be recognized as investment income and not fee-related earnings given the minority position. After completion of Phase 2, the resulting combination of the businesses would lead to the consolidation of the full P&L, the fee-related earnings and performance-related earnings recognized in the same manner as Patria's flagship strategies. I'll now turn the call over to Alex to take you through some details.

Thank you, Josh, and welcome to all who could join this morning to hear more about this exciting new initiative for Patria. Since our IPO, we talked frequently about M&A as a key pillar of our growth strategy in the region. And just last week, we closed on our first major transaction with Moneda Asset Management. After Moneda, we said that we remain active on the M&A front. And today, we're happy to announce our agreement to partner with Kamaroopin and build a leading Growth Equity strategy on Patria's platform. This transaction is quite different in size and structure compared to Moneda, but similar in strategic relevance, in that it allows us to fill an important space in our platform and expand the product sets we can offer to our global investor base. So why Growth Equity? And why does this make sense for Patria now? First and foremost, Growth Equity is highly complementary to our flagship private equity strategy, and we believe there is a distinct and compelling opportunity in this earlier stage of the investment spectrum. Venture capital and Growth Equity strategies in Latin America are in high demand from investors, with a market size that has grown to more than $15 billion and most recently dedicated funds ranging in size from $50 million to $400 million in commitments. Venture capital transaction volume just in Brazil, for example, has grown at a 40% plus percentage, compounded annual growth rates over the last decade reaching $6.6 billion in transaction value in 2021. So where does Patria fit in? And why is Kamaroopin the right partner for us to enter in this space? We believe Patria and Kamaroopin both excel in one critical characteristic that will truly differentiate us in the region. We are not just investors. We both pride ourselves on being company builders. Across 6 vintages of flagship Private Equity funds, Patria has built market-leading companies through consolidation in fragmented industries and hands-on operational improvements. Kamaroopin has built an initial portfolio of 3 growth stage companies with solid early returns of 2.7x as of June 2021 valuations, where they partner with great entrepreneurs and investor operators to drive growth through single-minded, consumer-focused and tech-enabled business models. They are also aligned with Patria's sector-driven investment approach, having developed significant investment thesis around secular consumer trends in pet care and health care industries. Their most notable portfolio company, Petlove, is one of the leading e-commerce providers of pet-related products and services in Brazil, where revenue has grown at a compounded annual growth rate of about 50% over the last 5 years. The initial investment tranche in Petlove from 2019 is currently valued at more than 7x invested capital. On the team, Kamaroopin is led by Pedro Faria, who was a founding partner of Tarpon and helped launch their private equity practice 15 years ago. He also has a strong relationship with Patria, having worked earlier in his career for Banco Patrimonio, Patria's predecessor company, and Patria's Private Equity team for 6 years. Currently, at Kamaroopin, he is supported by a team of 7 professionals with zero turnover since their inception. Pedro and his team's excellent track record extends well beyond the current active Kamaroopin investments. Over 19 years, the Kamaroopin leadership has founded, operated and invested more than BRL 7 billion in more than 15 companies and generated a realized nominal internal rate of return in excess of 24%. I would be remiss not to acknowledge that this was subject to some ongoing legal proceedings related to his previous role at another company. As we explore this partnership, business and legal due diligence were a critical part of our process. While we obviously won't comment on specifics, I will say that we have known Pedro personally and professionally for many years and we have high confidence in this leadership. Looking to the future. What are our goals? Upon entering Phase 1 in early 2022, we will work together to raise the new Growth Equity fund with a predetermined fund size as the threshold to trigger Phase 2. This will be a closed-end fund with a 2 and 20 structure, similar to private equity and more of the same kind of sticky, long-term assets under management that supports Patria's high-quality management fee stream today. The fund will target relevant stakes, usually minority stakes with high governance, in earlier growth stage companies compared to our flagship private equity business. We will focus on Patria's core industries, like health care, agribusiness and education, as well as sectors where Kamaroopin has significant expertise, like pet care and FinTech. Furthermore, Patria and Kamaroopin partners, in conjunction with existing lead investors, will commit a relevant portion of the initial fund size. On the Patria side, we have already made a small seed investment for this portfolio in StartSe, a professional education platform focused on innovation and technology, with an emphasis on the development of entrepreneurs and startups. Today, the company has more than 26,000 customers through its education programs and also in 2019, made an interesting minority investment in CapTable, a crowdfunding platform for startups. Think of StartSe as a portfolio company to be folded into the new fund, but also as a platform that can be leveraged by our new Growth Equity strategy more broadly. In terms of financial impact to Patria, Kamaroopin will have minimal impact on the near-term profit and loss, with the exception of an attractive performance fee opportunity on Petlove. As part of the partnership agreement, Patria will be entitled to participate in the crystallization of Petlove's eventual performance fee in a structure that was designed to provide the best alignment of incentives among all parties. Fee-related earnings impact will be relevant during Phase 1 due to the minority stake, as Josh noted. And the business today runs profitably, but near breakeven from a fee-related earnings perspective. Like any private market strategy, achieving scale is the key. And together, we will seek to build that scale with its initial fund by accessing cross-selling opportunities with Patria's global investor base. Ultimately, we view Growth Equity as another building block towards creating a truly comprehensive alternatives platform in Latin America, a one-stop-shop for global investors, who can access to the region through an experienced and disciplined partner. We also believe that Growth Equity has particular appeal among more local institutional investors, and over time can be another product to leverage the financial deepening in Latin America. We are excited to join forces with Pedro and his team, and we look forward to sharing more with you on the strategy as we move the process forward over the next several quarters. We're now happy to take your questions.

[Operator Instructions]. I'm not showing any further questions at this time. I'd like to turn the call over to Alex for any closing remarks.

Thank you, operator, and thank you all to participate in our call today. As mentioned, we're very, very excited with the opportunity to team up with Kamaroopin, Pedro and his team. Pedro is here with me today. And we're all extremely happy that we are able to reach an agreement with him and team. We really look forward in doing several deals with Kamaroopin during 2022, not only fundraising, but using some of the general partners to actually excess cash to invest in such an exciting part of the life cycle of a company. I think all of you have followed how this part of the spectrum has really expanded and grown over the last years, becoming a true interesting and large and scalable investment pieces for us, so complementing our menu of new strategies. I think it's extremely important that we have a presence as strong as the one that we just designed with Kamaroopin. So with that, I would like to thanks again, and I wish you guys all happy holidays. I hope you guys stay well and stay safe. I hope to talk to you soon. If I don't talk to you by the end of this year, it's probably we're going to be -- see each other presentially hopefully sometime early next year. Be well, be safe. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.