Patria Investments Limited (PAX) Earnings Call Transcript & Summary

Hi, everyone. I'm Rob Lee. I'm the Head of Shareholder Relations at Patria, and thank you very much for joining us on our first PAX Talks event. And we're really happy to have with us in our first event, this interactive investor conversation with our Chief Economist, Luis Fernando Lopes and the 2 investors who have agreed to participate in this fireside live chat include Dan Carroll from the Inherent Group; and Ryan Simes from InterCapital. I will let them introduce themselves in a little bit. This is interactive in that if you do have questions you would like to submit, you will see there's a private message section on your broadcast that you should submit questions through there, and we'll have a Q&A period towards the end of the fireside chat. To get started, I do have to read a disclaimer. So bear with me a little bit. So Patria Group may have had, may currently hold or may build up market positions in the securities or financial instruments mentioned during this webcast. Although information has been obtained from and is based upon sources, Patria believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Patria's judgment as of the date of the webcast and are subject to change without notice. This webcast is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any decision to purchase securities or instruments must consider existing public information on such asset or registered prospectus. The securities and financial instruments possibly mentioned in this webcast may not be suitable for all investors who must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and objectives. Okay. So with that out of the way, why don't I turn it over? And first, I'll let Dan and then Ryan introduce themselves and then Luis. Dan, thank you for joining us.

Thanks, Rob. Good morning, everyone. I'm Dan Carroll with Inherent Group. We're a private investment firm, investing internal capital in both the public and private markets. We invest globally and opportunistically. We integrate ESG and sustainability into everything we do. We're value focused, and we are a shareholder of Patria. I may have met some of you at the Investor Day last year and very grateful to have Patria's invitation to talk to Luis today.

Thank you. Ryan?

Good morning, everyone. I'm Ryan Simes, I'm the Founder and Managing Partner of Endure Capital Management, a firm focused on compounding in public markets over decades. Previously, I spent close to 10 years at Apollo Global Management, investing in public credit and public equities during which Apollo's credit assets expanded from $90 billion to over $500 billion. Endure is a proud Patria shareholder. It was great to meet all of you at the Investor Day recently, and I look forward to our conversation today.

Thank you.

Thank you, Rob. Thank you, Dan. Thank you, Ryan. I think we're going to have a very interesting conversation. I'm Luis Fernando Lopez, Head Economist and Partner for Patria. I'm doing this for 28 years already. Patria started back then. We were basically in a story of investing in Brazil, and then we start to -- our Compass began to include Latin America as well because we think we developed a kind of successful investment strategy. We are also doing a little bit now of Europe and U.S. because we acquired the private equity arm of Aberdeen, which is a U.K. asset manager. So what is this successful investment strategy? We are a middle market player. So Patria is about investing both in the fund side and the kind of checks that we write is the middle market story. We have a lot of consolidation and some creation of assets, if need to be. But especially, we are focused on 6 investment industries or businesses. So we do a lot when I think we develop an expertise on agribusiness, food and beverage is #2. There is power generation, especially renewable. Number four is transportation and logistics. Five, we do a lot of health and health-related businesses. And then six, there is data and tech services. We think that has been successful. We did our IPO in 2021. At that time, we had fee-paying AUM less than USD 8 billion. Now we increased more than fourfold. We are managing $34 billion of fee-paying AUM. And of course, as a result, for example, the fee-related earnings increased more than threefold. And if you add the performance-related fees, the earnings are much more than that. So interesting times, we're going to discuss this today and very happy to have this conversation today.

Thanks, Luis. Thank you, everyone. Thanks, Dan. Thanks, Ryan. So I think maybe to kick it off, I'm going to send it back to Luis. He is going to help set the macro framework, if you will, for the region for a couple of minutes. So we have, again, a framework and then open it up to Dan and Ryan and the audience to ask questions. So Luis, the floor is yours.

Okay. So how we do this? Usually, the job -- my job actually at Patria is to connect this macroeconomic story. There is a lot of geopolitical thing also into our investment strategy. So what is this global backdrop that we are talking about here. So let me do a sharing. Okay. So what we have here basically a slide 2 charts. Left-hand side is our global macro backdrop. So the first story that we'd like to tell -- explore today is a secular slowdown. So we take the global growth since the 1990s by decade, and then we identify an acceleration period from the 1990s and the 2000s. That was the hey days of globalization. And then since then, world growth, emerging markets growth, advanced economies growth, everything has been slowing despite all these spectacular stories about artificial intelligence, quantum computing, everything also, of course, it's true, but has not been enough to cause the global growth to speed up. So what is going on here in our view? First, there is a very long-term trend. Unfortunately, demographics is working against growth. People are aging, the working aging force has peaked and is already trending lower in major economies like the U.S. and China. The world as a whole the same story. And there is this other story is basically, you could say deglobalization, you prefer -- the term we prefer is [ factor ] globalization. So the economies are not getting more integrated. We have less trading, less foreign direct investment, et cetera. So you combine the 2 things, you have this inverted U-curve that you see on the left-hand side. However, if you go to the chart on the right-hand side, when you break down this global story, and then you see what's happening in Latin America, what's happening in China, what's happening in Europe? Then the other important story that will be #2 here is that the factor globalization also speaks of geographies that are less synchronized. So is it possible that the global growth takes place, whereas some regions are speeding up? And the answer is yes. So here, the data on the right-hand side is basically the international monetary fund data, basically very much close to our own forecast. So what you are seeing here is that Latin America is actually not going to grow slower. It's actually going to grow faster. And why this is so? First, because one of the secular trends we mentioned is not there. Demographics is a bonus in Latin America. It's not a big tractor of growth. But the other thing that's happening also in terms of the globalization, the region is getting more globalized. So Brazil, Colombia, Argentina, they are pursuing more trade agreements. They are trying to diversify their investor relationship with Asia, with Europe, Middle East, et cetera. There are some countries that are facing a little bit more challenges. We are going to probably discuss this in our Q&A session, which is, for example, Mexico. But apart from this, what we are seeing is actually in a world that is becoming more [ factored ] and the globalization is trending lower and Latin America is going to grow a little bit faster. So this will be our first message today, and this sets the global and geopolitical outlook for the foreseeable future in our opinion.

Great. Thank you, Luis. So with that, let's open it up to questions. So I think to kick it off, I think we were going to start with Dan, if you want to get started and ask away.

Great. Thanks, Rob. And thanks for that overview, Luis. So you guys allocate capital across Latin America, kind of help us dig into that one bar graph. There's multiple countries, each one has a distinct economy and many times a unique political context. What are you looking for to indicate to you to advise your team at Patria, this specific country is a buy or a sell at any given time?

Okay. We're starting with a very good one. We have to start with the first -- the very basics, right? So the fiscal accounts are okay. The external accounts make sense, risk of a currency crisis. Of course, we see rule of law as well, institutions. If they are strong enough, for example, we may have a litigation thing. So if we go to courts, the judicial system is functional, so on and so forth. And then especially, we go into those 6 key investment verticals that I listed, and they see if there is a story there. And then an important point here then and starting to make the difference among countries. You can pass the test in terms of having the macroeconomics, right, or the basic geopolitical institutional stuff, it's okay. But then for us, the next step is, is this basically a growth story that we know. And then in Latin America, actually, you have basically one typical story, which is Latin America countries is a combination of mostly a domestic market story. So it's about growth generated by local businesses and a good chunk of them are actually services. We're talking about services like health, education, financial intermediation, transportation, et cetera. On the top of that, you connect an export business, which is basically this export business is about exporting commodities. Could be minerals, could be grains, could be oil and gas. But clearly, the other is first domestic and then the commodity exporting. This is Brazil, this is Argentina, Colombia is the same story, Chile, et cetera. Mexico is the second largest economy in the region. And Mexico is a different animal. And then you have to be more careful when you're doing business in Mexico because Mexico is actually the other way around. It's a very impressive manufacturing platform that exports mostly to one country, which is the U.S. So 75% of Mexican exports go to the U.S., actually 77% according to the latest data. And then you have to understand because it's not about basically domestic services and commodity exports. It is basically manufacture exports to one single country and then everything after the domestic market follows through. So depending on the Mexico for us is a little bit more difficult to find the right angle, whereas we can extend our business model quite easily to the good economies or economies that make sense in Latin America, again, apart from Brazil, which is the biggest one, easy to do this in Mexico, Colombia, Chile, even in smaller economies that are fast-grow economies like Peru, you can do that as well.

Luis, you mentioned, the strength of key institutions being a focus point when investing across jurisdictions. In Brazil, how significant was the December 2021 Central Bank independence legislation that appeared to be modeled after the U.S. Federal Reserve. And are there more institutional guardrails to ensure Brazil and others in the region have a sustainable fiscal policy?

Okay. Thank you for that one as well, Ryan. Actually, if you take the basic institutional story, looking from the economic angle, you mentioned independent central banks. Actually, Brazil had de facto independent central bank for a while. What we passed in 2021 was a comprehensive legislation and say, okay, what do we mean exactly buying independent central banks. But before Brazil, Mexico has had and has an independent central bank, the same story for Chile, Colombia, Peru, et cetera. So Brazil is joining a group of countries. And if you need to go to smaller countries like Uruguay or Costa Rica, they also have independent central banks. In the case of Brazil, the important thing is basically to make it clear that the Central Bank has a dual mandate. It resembles the U.S., the Federal Reserve. Although in the U.S., you probably have the 2 key goals, which is basically maximize economic growth and keep inflation under control or keep price stability. In the case of Brazil, if you read the law and then the way the independence -- the Central Bank is enacted, it's basically to produce the maximum economic growth compatible with the minimum inflation rate. So it's a little bit different. So there's 2 things that is still the same to make this more operational thing. And then, of course, if things go wrong in one way or another, in the case of Brazil, the first priority should be, okay, I have my mandate here, I have to deliver right now a 3% consumer inflation headline. If this starts to affect growth too much, then I will see if I have to change course, et cetera. And then a little bit from the United States, you have the tolerance band because going probably to discuss this, currency is very volatile in Brazil and the rest of Latin America. Interest rate swings and swings in consumer price are also more substantial. So there is a tolerance band. So you are pursuing your target and then sometimes there is a shock, and intense shock when the currency depreciates in Brazil and Latin America, it doesn't depreciate by 1% or 2%. It goes down or up 10%, 12%. So you may miss your target for a little bit. So there is a need for the tolerance. But apart from this, it's another block that was added in Brazil, the Central Bank independence in addition to fiscal responsibility law, in addition to a very robust legislation, for example, public concessions of public services has been there for 20 years. Probably the most important factor to explain why Brazil consistently receives $60 billion, $70 billion, $80 billion net foreign direct investment per year is basically because you have very good institutions specifically with granting rights to foreign investors and of course, to local investors as well. So the Central Bank independence is actually another block in this building.

Thanks, Luis. I'd love to go back to some of those sectors that you talked about as being areas of focus for Patria and something we've talked about in the past is a focus on areas where Latin America has competitive advantage. So you can explain what you mean by that and how you drill down into some of these sectors that are a key focus for Patria and then maybe your outlook on 1 or 2 of those that are interesting and topical right now.

More than happy, Dan. I need -- being an economist -- sorry, I'm addicted to PowerPoint. So I need to show you something. Bear me 1 minute. So let's do the share. And it is -- let me maximize this one. This one we showed. That is basically to start our conversation, this is data on listed companies in Latin America. So we invest in listed company, but also in non-listed company, but the data is easier to grab in terms of listed companies. So it's a sharp story. So we are talking about excess return versus volatility. And then what we are doing here, the horizontal axis from left to right gives our beta -- estimated beta or a calculated beta, which is how is the volatility of that industry compared to the overall GDP of Latin America. So you see here, there is a line at 1. One beta, as we know, it basically tells you that the volatility is the same of GDP. If the beta is higher than 1, 1.5, 2, this means that this industry grows twice as fast or goes into a slump twice as much as the GDP. So if we move further to the right, it's not exactly a very good story. But then if you move to the left, 0.50 means that the volatility of this industry is smaller than the overall GDP. And then the excess return we measure on the vertical axis, so it's top down, 0 means that you don't have any excess return, real revenues, earnings, whatever is the metric, it is similar to the GDP. If you are trending lower, actually, the growth story in this industry is not as spectacular as the GDP. And of course, if you are 1%, 2%, 3%, real term, that's important, guys. If you're investing in Latin America, we are used to live with inflation. So everything that you see on the vertical axis is on the top of inflation. So for example, during the pandemic, we had 10%, 12% inflation. So 2% here means actually 14%. So it's 2% real above inflation. So everything here is real. And then the size of the bubbles gives you the size of the industries in Latin America. Of course, bigger bubbles, bigger market capitalization, the smaller bubbles tend to be a smaller industry. And then in bold letters, the 6 sectors we mentioned. So again, it's agribusiness, food and beverage, power generation, logistics and transportation and health, data and tech services. So the best quadrant to be is in the upper left-hand side, right? So you have less volatility than GDP and you have excess return. The worst one to be is basically on the lower right-hand side because you have -- the volatility is worse, it's much -- it is pronounced, but -- you don't have excess return. So if you are doing business in Latin America, and this is going back to -- the data go back for the first quarter of 2008 until the third quarter of 2024, we had actually data for the last quarter, but not all the industries have reported the information. So what you see here is basically including the global financial crisis, pandemic, the recoveries, et cetera, Latin America has this competitive advantage on those sectors. And we are not by accident, those are the sectors that we tend to invest on. And most interestingly, when you start doing something in Europe as well because of the acquisition of the private arm of Aberdeen, we realized that keeping the focus on the same 6 sectors still generate excess returns. So there was no need to change our investment strategy, and we could leverage on the knowledge and the business and investment strategy that we developed in Latin America because it's pretty much the same story. A little bit more, for example, of course, software and tech services, we are closer to the frontier in Europe than you are in Latin America. Latin America is more a receiver end, but the 6 vertical and the competitive advantage that you have the story here for Latin America still holds.

Thank you for that, Luis. I wanted to touch on a few Latin American macro topics. First, you previously mentioned interest rate swings. Real interest rates have surged across many parts of Latin America since 2021. How might a normalization in real yields free up private investment previously crowded out by the public sector to invest in growth capital for the private sector?

This a very contrary to common wisdom, we tend to see Latin America as a follower of economic policies that are enacted in U.S., Europe, et cetera. Specifically monetary policy, it was the other way around. So you rightly mentioned the timing of the monetary tightening in Latin America. Latin America was the first region in the world moving out of the COVID crisis to start to raise interest rates because the economic recovery in the region was faster than anybody anticipated. That was a very peculiar kind of record because the proportional to the GDP to the per capita GDP, the pandemic was worse in the United States and Europe than it was in Latin America. We suffered, but we are relatively poor to the U.S. But then the recovery story began first. And because the recovery -- economic recovery emerged or surfaced first, the inflation pressures also became very robust very early on. So Brazil actually started to raise interest rates in March 2021. So we have a story of -- because we have a story also of relatively high inflation and the central banks are independent. There is this vigilante kind of thing. So the central banks acted very quickly, very swiftly in Brazil, in Colombia, Mexico, Chile, Peru, et cetera. And then they got inflation under control before U.S. and Europe, and they start to cut rates -- interest rates before. What we are seeing more recently actually is -- we still don't know if it's another lead indicator of what's going to happen, for example, in the U.S. or Europe. But there are some economies in the region, starting with Brazil that they saw inflation signals that were not quite good. And then what happened here, interest rate easing, the easing cycle in Brazil, it's gone. The Central Bank is already on hiking mode, so interest rates are rising. And there are some other central banks, for example, in Chile, they are no longer cutting interest rates. In terms of the level of interest rates we are talking here, just to show you again a little bit what we are talking about. We're going to say, okay, high interest rates, how much we are talking here. So the story is -- so we saw this one. Let's show this is our interest rates. Left-hand side, what we are seeing in advanced economies, right-hand side, what we are seeing in Latin America. This is not our forecast. This is the forward rates in advanced markets on the left-hand side, on the forward rates in Latin America. So we are talking about double-digit interest rates in Brazil. In Brazil, there is a little bit more than we may discuss in addition to inflation signs. The economy is growing strongly like the U.S., but we have some fiscal concerns. So that's another way the market has to put pressure on the government to deliver more in terms of fiscal consolidation. But then you see that the interest rates were going down, but with less enthusiasm in Mexico and Colombia in the case of Chile, which is the most successful story in terms of fighting inflation, it has pretty much halted at 5%. So we have to live with these interest rates and then as well, CapEx -- private CapEx has been decimated by these interest rates. No. They are very much above international levels, but any entrepreneur in the region, and that's our case, doing business over 30 years there, your business model has to be resilient to face this kind of interest rate hikes. So obvious consequence of this, you cannot leverage your business. It's definitely not a leverage buyout story in Latin America because guess what happens if you leverage and then interest rates goes up 400, 500 basis points, your investment is basically crushed. And in addition to that, you have to play a lot with equity. So what we do is actually inject equity in our business. Sometimes when you move into a firm into a company, we have to deleverage because borrowing in Latin America many times is not accretive to growth in that on the other way around. So we have to deleverage the companies. So different business model, different strategy, but in no shape or form, are we surprised with this kind of interest rate. Just to give you one data point to complete the picture here. When we start doing business, it was basically Brazil. The level of real interest rates above inflation was 15%. It's not the nominal interest rates. Now you talk this chart is nominal interest rates, right, not adjusted for inflation. Back then, the real interest rates were 15% and the nominal interest rates were 25%. And we are still here, right? So there is a way to survive all this and prosper, we believe.

Yes, you mentioned the fight against inflation across the region. I guess, can you kind of walk through some of the current purchasing power parity or PPP valuations of the various Latin American local currencies and how they compare to their historical ranges.

Okay. So again, we have to show you a chart, but let me give you the numbers, and then we'll illustrate the numbers with the chart. So currencies in Latin America are very volatile. Part of the reason is because, remember, with the exception of Mexico, most of the exports of the region are commodities and commodity prices are very volatile. And in addition to that, we have -- in some economies like Brazil, the capital market is more regulated than it should be given the size of the economy. So what you have this, you have this effect that because the channel of -- that connects the FX channel, the foreign exchange channel that connects the economy with the rest of the world is narrower than it should be. When there is an inflow of capital, the currencies tend to appreciate a lot. But when there is capital outflows, the depreciation is substantial. At this stage, we are in a situation, right, in which probably no currency in the region is fairly valued. Fair valuation, what we do, we do a purchase power parity calculation. So everything that affects currency compared interest rate differentials, fiscal accounts, terms of trade because most of Latin America for commodities, anything that affected currencies, we calculate and the model gives you what would be a fair exchange rate in theoretical terms. And then we compare this fair exchange rate with the market exchange rate. If the 2 rates coincide or very close to each other, say, the currency is not overvalued or undervalued, fair valuation. If the market is trading higher than the PPP, the purchase power parity, and estimated currency, you see that the currency is probably overvalued. And because there is mean reversion, we are going to show the chart, next significant shift or significant move is going to be this overvalued currency will depreciate -- on the other way around, if the market FX is trading below the purchase power parity estimated value, this currency is undervalued and then most likely move is going to be appreciation towards a fair valuation. The problem is the purchase power parity. It's very good in the long-term and it doesn't give you the precise timing when the adjustment is going to take place. So having said all that, again, perhaps the last slide, we are here -- everybody has seen the FX chart, right? So what here, fair valuation, 0 remember, the currencies are trading at fair value. Let's start actually use a non-LatAm currency, which is the U.S. dollar. This is the blue-ish blue. It's not the light blue, not the dark line. I think there is a reasonable consensus around the globe that the U.S. currency is trading more expensive than it should be. So you can see here, U.S. fluctuates around long-term equilibrium, purchase power parity. But because it's the reference currency in the world, for example, any time that there is an adverse global shock, there are capital flows to U.S., safe haven, et cetera. So the traditional thing, something goes wrong in the world and then the U.S. currency appreciates. That's something that we are seeing recently. The euro, a little bit less so. But then the black line or the very dark blue is the combination of several Latin American currencies. This is Brazil because it's the largest currency. This is Mexico, Colombia, Chile and Peru. At this stage, the most depreciated undervalued currency is Brazilian real. So we are talking about 22% undervaluation according to our latest estimate. The Mexican peso, the second largest economy, it was overvalued until Claudia Sheinbaum was elected. And then the adjustment started to take place. So the currency was overvalued, start to move into fair valuation. Of course, there was a currency depreciation taking place. And then when President Trump was elected, Mexico moved into undervaluation territory, something close to 10% undervaluation according to our view. The other currencies in the region, Colombian peso, the Peruvian Sol, the Chilean peso, they are also undervalued, but not as much as the Brazilian real. They are something similar to the Mexican peso, a little bit less. So if you are getting exposure to Latin America, as we speak, for example, the one risk that you don't have is that, oh, I'm investing in a region that the currency is too expensive, probably the next significant move is going to be a correction of this. Currencies because there are -- remember, the volatility, you can see here the ups and downs. There is room for another round of depreciation, yes. But the starting point at this stage is significantly already undervalued, not as bad as we were in 2020 during the COVID crisis nor in the early 2000. But for those who are getting exposure to Latin America right now, interesting thing. And last but not least, how we Patria, we cope with this kind of thing. So let me stop the sharing here. Because we have lived all these cycles, ups and downs in the currency, our investment strategy that we mentioned before, one of the tenets of it is very simple. We target a return that is probably around or the best number that we should give you is at around 20% net dollar return to our investors in our funds. But then we have to take into account that there is a gross to net differential or gross to gross to net gap, so another 5 percentage points. So we should target 25% gross dollar returns. But then we are investing mostly in local currency, right? There is -- there are ways to invest in dollar contracts. There are dollar revenues in Latin America, but it's not as usual. But then if you're investing mostly in local currencies that are very volatile, we price in and we have -- we assume that there will be 5% currency depreciation every year forever in the region, even if the starting point is an undervalued currency. So what's happening here is, we are actually targeting 30%, around 30%-ish returns in local currencies because we're assuming that every year, currency depreciation will shave 5 percentage points of this return. So the best way to navigate these fluctuations is not to hedge the currency throughout the cycle. It's very expensive. So you add the volatility we just showed in the previous chart, plus an interest rate differential that is huge. Always interest rates in Latin America is much higher than in the U.S. and Europe. So they charge you, the banks that provide a hedge, they charge you for an interest rate differential. So it's very difficult to hedge long-term. So what we do assume that the currency will depreciate forever 5% if the business case stands, it's a go. If it's not there, there are some issues here, so we don't do the investment. So that's the way we see -- how we state -- we assess the currency situation and how we do investments in the region because of this currency volatility.

Great. Thanks, Luis. I feel like it's become all of our jobs over the past month or so to try to digest the changes in U.S. trade policy. You pointed out earlier, there's acute impacts on Mexico, broader continent, the more kind of domestic economies. But if you think about Latin America's kind of 2 major global trade partners, the U.S. and China as the U.S. becomes more America first in its policy, what does that mean for the relationship between the broader Latin American economy in the U.S.? And then as a corollary to that, what does it mean to their relationship with China as if they step into that void to a certain extent?

And then the best way perhaps to answer your question is to state that actually for Latin America as a whole, Brazil, all the major economies, the trade story and the investment story is a trio story. So it's a play with United States, Asia, mostly China and Europe. So what happens here? If you go to the obvious targets, so Mexico. Mexico is in a more delicate situation because, as we mentioned before, 75% of exports, 77% goes to one country, which is the United States. So less room to maneuver to diversify, et cetera. So life is going to be tougher for Mexico. But we are cautiously optimistic that President Claudia Sheinbaum's approach toward has been effective. So concessions, yes, some noise between the first reaction of the Mexican government vis-a-vis the U.S., but then noise goes down. So the story probably is not going to be fabulous for Mexico. But then perhaps one important thing to add is that if you take long-term growth, past 10 years, Mexico has been growing on average 1.4%. And then if you take, for example, the latest estimate coming from the Independent Central Bank of Mexico, they are forecasting 0.6% growth 2025 near future. So the impact is there. If you go to the other countries, however, in the region, I think most of Central America, which are in smaller economies, they tend to be closer to the Mexican story. If you are moving further south, so again, we are talking about South America, this is Brazil, Chile, Colombia, Peru, et cetera. Then actually, for example, if you take Brazil, trade partner, U.S. is #2 to 3. Actually, China is more important. There is this U.S. and Europe very close by. Same story for Chile, same story for Colombia, Peru, et cetera. So what's happening here, the trade risk is increasing, American first. So it's up to President. It's his prerogative to implement the platform that he promised or he said that he would deliver during the campaign. So it's fair enough. But then the other countries are with much more room to maneuver than Mexico, they are speeding up the trade agreement. For example, in between President Trump being elected and the first trade restrictions being announced. There is this free trade zone, so to speak, in the southern cone of South America, which is basically Brazil, Argentina, Uruguay and Paraguay, it's called Mercosur. They were negotiating a free trade agreement with the European Union for 25 years, so 1/4 of a century. And then overnight announced, let's move on, let's do it, et cetera. So what's happening here in terms of trade diversification, the country is already moving. And there is another player that is gravitating toward the region, and we are seeing the trade missions are here. The governments are exchanging investment protocols, et cetera, the Middle East. The Middle East can provide some interesting commodities, for example, oil and gas. but they want to attract investment from Latin America. And for example, Latin America has this competitive advantage in agribusiness, even in regions in which the weather is not benign. So the kind of thing that can be transferred technology can be transferred to Middle East. So even the Middle East, which is used not to be a very important trade partner or investment partner, it's -- they are moving -- getting closer to South America, especially. So we are seeing already the effects of American First as a response of the region to what's going on in the U.S.

Great. Thank you, Luis. I think maybe now we'll open it up to some of the Q&A from the audience. So we do have a question here for you, Luis, on the pension reform. So the question is with pension reform discussions underway in countries like Brazil and Colombia, which could channel more capital into alternatives. Can you share an update on that progress? What key steps are needed for this to take effect? Talk a little bit about what recently took place in Chile and what you think the potential impact is for Patria's asset growth?

Yes. This is part of the story, Rob, of the question. Part of the narrative related to Ryan's question about institutions. So we discussed about Central Bank independence, rule of law, et cetera. But there are what we call second and third generation reforms the pension industry is clearly a target of this. So we had recent pension reforms in Brazil, new round of fiscal reform in Colombia, Chile, et cetera. So what's the nature of the reform? A little bit of it, it's to complement the shift away from a defined benefit system into a defined contribution system, which was not very clear in some geographies. So we know that the obvious impact of this in the defined benefit system, especially if it's a pay-as-you-go, it's basically you take contributions of the working force, the people that are still working and then pay for the retirement benefits of those who are already retired. When you move into the defined contribution system and especially individual capitalization, it's a completely -- it's a brand-new game. So we start to create these massive amounts of savings grow over time. Of course, the fund managers, they have to do something with this money. The short-term, maybe they have some investments in government bonds, et cetera. But looking over -- because you are talking about the duration of these investments should be 15, 20-year plus, they have to invest in alternative assets in the region, especially they like a lot, infrastructure investment, real estate investment, significant gaps there. And then the latest round of reforms, what they discovered, those countries that moved first into the individual capitalization system, they discovered first that the contribution from employers and employees was probably not the best -- the optimal one. They were contributing 8% of their labor earnings or on the payroll or 10%. And this number is being moved up 12%, 15%. So you need to increase the contribution to the system in order to generate more savings. And then over the long-term, you can retire with something closer to your compensation when you are working, et cetera. So the sheer effect or the simple impact of having much higher contributions, it's a major plus for the industry. We are already seeing this. We are talking to institutional investors in all the countries, even in Mexico, the same story. But because we have in the region, mostly governments that are more liberal or they are towards the left side of the political spectrum, one very important component for them is to cater more for the low income. For example, if you're making -- if your labor earnings and the unit we use here in Latin America, a lot is the minimum wage. If you are earning 1 minimum wage, 2 minimum wage, when you retire, even with increasing contribution, probably your pension is not going to be close or going to be 70% of your minimum wage, which is too low. So in all the recent reform, there is what they call the social pillar in which part of the contributions, especially from the wealthier individuals, they go to compensate or pay for higher retirement benefits for the very low-income people. So there is a little bit of social wellness here, some transfer within the system. But even if you discount this, that part of the store is not actually to benefit one and everybody is just basically for the lower income people. We did a calculation past 12 months in U.S. dollars, remember, the currency very volatile in Latin America, even countering -- taking into consideration the currency depreciation, you are talking about AUM for the pension industry in Latin America going up 15% to 16%, 12 months trailing. So if you annualize this, you're talking about a lot of money. And you are already seeing the pension managers. They don't -- part of the allocation, they do them themselves, but there is also another round of reform. They are becoming more professional. This is basically they hire or they get into deals with private managers in order to get them the best allocations in private equity, infrastructure, real estate, et cetera. So very interesting thing. And again, it's all -- everything is happening with interest rates as high as they are.

Great. Thank you. We also have another question from the audience here. So -- how is the region impacted by the shift to foreign direct investment away from China? And more broadly, what role does foreign direct investment play in regional development?

The overall impact is the following. If you take -- let's zoom out a little bit and then take the global foreign direct investment. Global foreign direct investment has been trending lower since the global financial crisis in 2008 and '09 and over the past couple of years with 2 to 3 years with COVID, et cetera, even worse. Latin America is taking an increasing share of this pie that has been trading. So the data that I have here, foreign direct investment to Latin America -- we were around 6% to 7% of total FDI 10, 15 years ago, and we are getting to 15% of the total. So what is happening here? Part of this FDI, foreign direct investment is actually going to the question, long-term investment that was flowing to China and now it's flowing to Latin America. A lot of it has to do with commodities. So for example, investing in minerals in China became a more challenging proposition. Does Latin America have minerals that were produced by China before? Yes. Can we replace China? Answer is also yes. We are still -- you still have to see there is another round of investment that is taking place right now on prospection, and it has to do with the rare minerals, the critical minerals that the industry, the AI industry needs so much. So it's not massive yet, but we are seeing the prospectors arriving from other regions, okay, I need lithium, I need copper, I need manganese, everything. And these things -- Brazil has it, Chile has it, Peru has it. So probably you're going to see more foreign direct investment, a good bit, a good chunk out of China. But then there is other things that probably are not related to China. For example, we mentioned the Middle East. The Middle East are investing increasingly in Latin America. And it was not a previous investment. As far as we know, it's not a previous investment in China. So what we are seeing is basically Middle Eastern countries, they want to -- for example, an issue very important for them is food security. So they want to secure not only minerals, but also food, which is basically grains and animal proteins, steak, poultry, pork, et cetera. So we are receiving this increased amount of investment. That has to also help to explain the first part of our conversation, which we try to show you that Latin America is actually not slowing down. So the story in terms of global growth is less spectacular, but Latin America has been speeding up from a lower base or we are growing less than -- it was not a spectacular story. But part of this thing, why Latin America has been able to speed up growth is the FDI. The FDI is not trending lower. It's fairly resilient. But then remember, the total FDI is going down. So we are becoming an increasingly important share of this FDI story.

Great. I do have another question. More and more of Patria's fundraising is coming from local investors within the region. I mean, how do you see local capital flows into private markets evolving in the next few years, both from an institutional and individual investor perspective? And what do you see driving that?

When we do our fundraising or if we were having this conversation 10, 12 years ago, a vast majority, 2/3, 3/4 of the fundraising will take place in United States or Europe or Asia, in which the investors or the LPs were more used to alternative assets such as private equity, infrastructure, so on and so forth. This picture has been changing. So the local investors could be institutional investors, pension plans, insurance company, but even high net wealth individuals with their family offices, we do have quite a number of billionaires in Latin America. They are becoming more used to this kind of investments. So increasingly, fundraising became local. It's not the majority, but it's growing significantly. And then there are actually 2 ways to address this market that is gaining momentum. For those investors in Latin America, they are getting their first contact with alternative assets, basically, what we provide them is do like infrastructure, okay, these are the assets that we are developing in Latin America. We like private equity, okay, these are the assets which we are developing in Latin America. So it's presenting alternative assets, which are based in Latin America or developed in Latin America to these investors. And the story has been very, very successful. But then there's another thing. Some of those investors are already passed the first stage or they are more familiar with investors, and they want to get a little bit of more diversification away from Latin America. And then one of the reasons of the deal we did with Aberdeen and then getting the private equity arm, we can provide them with, again, remember, middle market, 6 investment verticals, et cetera, in Europe and Latin America, we also can provide that. So a part of this fundraising also is our catering to these investors in the LPs in Latin America, but then the underlying fund is not a fund in Latin America. The guys actually investing something in Europe or even in the U.S. But we are controlling this distribution channel, which is important. So it was not a very important pillar of fundraising in the past, but it has been growing significantly. And then because of the reform that we're experiencing, for example, in the pension plans, they are going to manage much more money than they were before, probably the fundraising in this region is going to grow as fast as it is growing right now or perhaps even faster.

Great. Thank you. Why don't -- as we approach the hour, why don't I open it up back to Ryan and Dan just to see if you have any final questions you'd like to ask.

Thank you, Rob. I think 1 other topic, Luis, I like to touch on is politics. So over the decades, Latin American governments have at times trended in policy waves. To what extent could Milei of Argentina's rise mark a broader regional movement toward more free market policies.

Okay. Right. This is a controversial one, but I like that. You are right. We tend to move. It's not perfectly synchronized. But clearly, if you look at the election cycles in Latin America, you can identify whether the region, the pendulum is moving towards the left, the more progressive administration or to the right, the more conservative administration. So what we are seeing right now, definitely the pendulum moving from liberal left wing administration into more conservative. So Argentina was probably the first major economy in the region that came actually was actually not a conservative -- the guy, Mr. President Milei is a libertarian. He had to deal with a very complicated inheritance, social welfare state in Argentina, sorry, that became too big, unmanageable, huge fiscal deficit, et cetera. But even before Milei in Argentina, the pendulum had already moved in smaller economies like El Salvador or Ecuador. Right now, we are going to have elections towards the end of this year in Chile. The incumbent ruling coalition probably is going to be defeated. The opinion policy strongly suggest that you are going to have not a libertarian in Chile, but center right politician. In Colombia, the President Petro left wing controversial. Probably his ruling coalition is going to be defeated as well. In Colombia, it's not quite clear whether the pendulum will shift toward the center right or there will be a Libertarian candidate more like Milei. And even in Brazil, right now, the election is a little bit far away. So President Lula is halfway through his third term. So election is going to be in the end of 2026. But if you take the approval, disapproval rating, we have 40% approval for Lula, 50%, 55% disapproval rating. And all the candidates that are faring well or are tracking well in the opinion polls, they are center right, some of them a little bit more with the libertarian stuff. So what we are going to see probably in this cycle is moving away from more progressive administrations and moving into more market-friendly administration, which speaks probably -- an important point here, it's not that when you move from progressive administration to more conservative, you are going to dismantle the social programs, you are going to become less friendly to the environment. It's not the way it works in Latin America. Typically, the move to the center right is to preserve social products. They are not going to be increased, but they are going to be preserved. And then the move -- the basic changes is, well, we live in a more challenging world, trade frictions, investments. So we have to play a more sophisticated game in terms of trade investments, another round of perhaps third round or fourth round of reforms in the pension system, more fiscal consolidation. So typically in the region, the more conservative governments, they produce the economic reforms that generate the growth and then the liberal left wing, they came back again to better redistribute the income, address income and equality. That's the way it works. But we are in the very middle of this transition right now.

I'll ask since we only have a minute left, just to piggyback on that. Do you think Milei will be successful in slowing the devaluation and removing the currency controls and reaccelerating foreign investment in Argentina?

To be completely candid here Dan, when he took over, we could see -- it could happen, yes. It was a protest vote clearly. And then he said, we like his economic program. We discussed it with his economic team. A lot of them we work with. We have a previous life in the banking industry, et cetera. So we know several of these economic aids. But then he said the major challenge for Milei is that he won the presidency landslide victory hands down, but he doesn't have a functional ruling coalition in Congress and the President cannot governed by decree. So the executive decree that, for example, President Trump has in the U.S., it's not something -- it doesn't work like this in Argentina, same thing in Brazil. So we have to do something in the Congress. But to our surprise, his success in bringing inflation down, restoring growth, combating or fighting corruption, et cetera, was so spectacular that every attempt of the Congress still dominated by the opposition parties, more state interventionist, et cetera, they failed in all attempts to shut down Milei's policies. Now we have midterm elections in Argentina, November this year. The opinion policy strongly suggest that if Milei doesn't get full majority has been very, very close to that. So what happens here, he has been given the room of maneuver to create all the necessary economic thing that he needs in order to do the final step. Actually, he did what was crucial to restore some credibility to the currency and start thinking about removing currency control, which was fiscal. Argentina is generating robust, sustainable fiscal surplus before interest payment and after interest payment as well. And according to the economic team, we visit Argentina, we talk to them, there were several layers of currency controls. They were removing one by one. But of course, they cannot remove everything I said, it's a free trading Argentinian peso. No, they cannot do that. But for example, past midterm elections, if there is a better -- now a functional working -- rolling coalition in the Congress, Milei can deliver the last batch of reform that he needs to finally remove, if not all, most of the currency controls. The one thing you have to pay attention to be a little bit careful about Argentina, remember the currency volatility thing. Last year, the currency devaluation was the story in most of Latin America, true for Brazil, true for Colombia, true for Chile, true for other economies, but not for Argentina. The currency in Argentina appreciated by 44%, so currency appreciation may become an issue in Argentina because if the market gets enthusiastic about Milei and the removal of the currency controls, et cetera, Argentina may move in the situation into the currency was massively undervalued. Now it's less undervalued, we're moving to overvaluation. Remember, the currencies are very, very volatile in the region. So be aware of where the currency is if more Milei is successful and everybody is looking at this midterm election.

Great. Thank you, Luis. We are out of time. So look, Dan, Ryan and Luis, thank you so much for doing this and participating in it, everyone who registered and signed in. Thank you very much for your participation. We will be posting this on our website in probably in a couple of days for anyone who wants to follow up. I do see that there was 1 or 2 questions that came in towards the end. We'll be happy to try to address your questions off-line. So we'll follow up with you. But again, thank you, everyone, for participating in this first PAX Talks. We hope you found it helpful. Welcome any suggestions or feedback Ryan, Dan and Luis, thanks again, and everyone have a wonderful rest of the day. Thank you.

Thank you, Rob.

Thank you all guys.

Thank you.