Patria Investments Limited (PAX) Earnings Call Transcript & Summary

Hello, everyone. I'm Andre Medina, IR Director at Patria, and welcome to the Sixth edition of our Pax Talks. Today to discuss Patria's role in building the data center infrastructure in Latin America. This will be a panel discussion. So you're welcome to submit your questions. We'll try to get through as many as we can. And before we start, I have to read our forward-looking statements. So I would like to remind everyone that today's call may include forward-looking statements, which are uncertain, do not guarantee future performance and undue reliance should not be based on them. Patria assumes no obligation and does not intend to update any such forward-looking statements. Such statements are based on current management expectations and involves risks, including those discussed in the Risk Factors section of our latest Form 20-F annual report. I also note that those statements on this call constitute an offer to sell or a solicitation of an offer to purchase an interest in any Patria fund. Okay. With that cleared, I'm very happy to have with us Christian and Rodrigo Abbud. Christian, who will lead the questions is the founder and CIO of Zeno Equity Partners, a London-based equity investor focused on concentrated, long-term-oriented global equity strategy. Prior to founding Zeno in 2023, Christian was a senior partner in [indiscernible] where he spent 30 years. And on the other side of the table, we have Rodrigo, who is Patria's operating partner for digital infrastructure sector, an electro engineer with Stanford MBA, who has held senior leadership positions in large technology companies in Brazil, LatAm and the U.S. for over 30 years, including the CEO post at two of the largest public telecom operators in Brazil. He is an enthusiast, intent of transforming and creating businesses and is currently focused on developing Patria's business on large AI data centers in LatAm. Well, so as you can see, two heavy openings for today's discussion. And without further ado, I would like to pass the word to Christian to keep the Christian, the floor is yours.

Thank you. Thank you, Andre, and thank you for the opportunity to have this discussion.

Rodrigo, maybe we should start with a little bit of context. Can you give us an overview of Patria's experience and history in this space in Latin America. And so -- where you guys are coming from in this space? And what's the current position? What exactly is the current structure that you guys have in place for the...

Absolutely. Good morning, everybody. Thank you, Andre. Christian, pleasure to be with you. And as you mentioned, Christian, to give a little bit of context of what have we done in data centers and what are we doing today. As you know, Patria had a previous very successful experience in data centers in the data center space. And curiously enough, it was launched right at the time I was at Patria as an adviser back in 2015, 2016. So by that time, the Patria team identified that the cloud trends would really sped up -- sped up in LatAm. And there were no dedicated cloud data centers in LatAm. The data centers were here for a while. They have been here for almost 15 years, but they were still growing in a very small scale. And on the other hand, this was happening everywhere else in the globe with the growth of cloud. So Patria decided to invest in a greenfield thesis by that time. And we created all data. All data was created from scratch. It had a first project, which was a small data center outside Sao Paulo. Well, we say small today, but by that time, it was a 3-megawatt data center, but not a good-sized data center for 2015. It was built in 2016. It was launched at the end of '16, '17, and then the company started. And it was an interesting experience because the company started really as a greenfield with no previous experience in this sector. Just the reputation of Patria, context, obviously, the management team that Patria was able to attract by that time. And the company ended up being very, very successful. We transformed into one of the largest data center platforms in Latin America. We admitted a partner along the way. So we had a partnership with CyrusOne in the middle of the way. And in 2022, after a very successful run, our data had developed 7 data centers throughout LatAm in Brazil, Mexico, Chile and Colombia. Had contracted significant capacity with hyperscalers with offtakers. And at the end of 2022, Patria successfully signs the sale of Data to a U.S.-based company called the data centers. And the story that I used to tell about is interesting because at the end of 2022, when Patria sold the company or signed the selling of the company, the closing occurred in '23, ChatGPT had not been publicly announced yet. ChatGPT was announced publicly a couple of weeks later, literally, a couple of weeks later, we're talking about November 2022. But by that time, all that ahead, around 45 to 50 megawatts of operating capacity and had almost 140 megawatts contracted capacity, contracts that were already in-house and were being developed. So it was a very successful experience. But what happened in 2023, after ChatGPT was launched was that the AI scenario really turn the data center capacity demand on its head because I mean, really -- we're already growing, but they started to grow faster in us -- faster yet. And then during 2023, I started talking to the Patria team and they invited me to come back to the firm to lead this new thesis of, "Hey, what can we do about the AI world and the large-scale data centers now." And so at the beginning of 2024, we started the development of our new thesis. We worked a good part of a year in, I call stealth mode, not really saying what we were doing, but just gathering the thesis, talking to potential off scalers, potential energy partners, developing project. And by the beginning of 2025, we announced the creation of our new platform, which is Omnia data center. So we launched Omnia data centers by the beginning of 2025. I'm the CEO of Omnia. And over -- during 2025 over this period, we really successfully developed, not only a good energy partnership, but also attracted a global hyperscaler to Brazil. And at the end of 2025, we announced Latin America's largest data center project, which is Omnia's first project, which is a 200 megawatts data center for in the northeast of Brazil. It's going to be the first large global data center base installed in Brazil. And so this is where we are right now. We're in the middle of construction. We have a plan of expanding again to all of Latin America, looking at the usual suspects there. Mexico, Colombia, Chile and obviously, Brazil as the key focus for the company. But really from -- we're replicating the story here from zero, we again are at the forefront of what's happening in terms of large-scale data center development in Latin America here.

[Technical Difficulty] obviously, it's been very centered around the U.S.

Yes.

Why is Latin America a good place to build a hyperscaler data center? What are the attributes that we have in Brazil or in other places that make it a place where, yes, of course, it makes sense to build the data center there?

Well, Christina, there are several factors that ended up developing over this time. And you're right, the U.S. continues to be and will likely remain the key focus for data center investment. If you look at the overall global data center capacity today, covering around 100 gigawatts, give or take. The U.S. concentrates more than half of it, which is incredible. But in the end, several things started to happen, which actually benefits Latin America and call for the need to decentralize a little bit global data center deployment And they were first just a sheer magnitude of growth that's going to happen. We're talking about the most conservative projections -- talk about growing the data center capacity in the next 5 years multiplied by 3 to get to close to 300 gigawatts globally. And it's virtually impossible to grow everything in the U.S. for several reasons. The power required to do so, obviously, every time more is the key component. It always was the key component. But every time more is the key component of this equation because it needs to be installed at high voltage, high capacity developments where you at once, deploy 300 megawatts, 500 megawatts, 1 gigawatt project in terms of power requirements. And this is not easy, nor fast, especially in a country such as the U.S., where the grid is not integrated. So developing these large power projects in the U.S. is very time consuming. They have been growing. They will continue to grow but some projects can take like 5, 7 years. And so projects started to spread across the globe. So there was a global base developed in Southeast Asia and Malaysia, there were projects developed in Ireland. Obviously, the projects in Europe already existed, they continue to expand. But all of the hyperscalers realize that they need to diversify this geographic positioning of new capacity for data centers globally. And then Latin America entered into the map because primarily, the power requirements and power availability that we have. Obviously, coupled with the other requirements, connect TV, fiber connect TV. We are very good connected to the world right now, but Brazil is connected with 18 subsea cables to the rest of the world. Availability of land geopolitical neutrality. But primarily because if you look at LatAm, we have over 200 gigawatts of renewable energy potential development. And not only that, but at very competitive rates. If you look at Brazil today, the price per megawatt offers around $50, give or take, all in. And if you compare this to prices in the U.S., we can talk about the cheapest prices being in the range of $70 to $80. The most expensive ones in the range of $150 to $180. Europe is north of $150. Southeast Asia has already gone over $120. And so Latin America remains a very reliable source of renewable power at very competitive prices. And so people started looking at LatAm as a potential base to expand. And we successfully were able to convince one of the key hyperscalers, global hyperscalers that we're looking to develop -- that was looking to develop a global base to actually come to a lot. And we see this potential actually just starting. Our project is the first large-scale project, and we believe Latin America is going to receive much more projects like that.

Understood. [indiscernible] is clearly super important. Two-part question. Can you take us through what you guys think is the size of the opportunity to put it to 200 gigawatts in potential of renewable energy developments in Brazil. But what do you think, realistically, when we think about a 5- to 10-year time frame, what's the potential in terms of gigawatts of installed capacity for data centers in Latin America, maybe more specifically in Brazil? And the second part is, what would a typical project look like time to develop main components of the CapEx, how you fund it, the commercial strategy, how do you think about levered and unlevered returns. So if you could first talk about the size of the opportunity and then go into the details of what the economics look like. That will be super helpful.

Absolutely. And you're right. I mean, first, the opportunity, you're correct. We have 200 gigawatts of potential development -- renewable developments here. But it's obvious that we're not going to capture the majority of the share that's going to occur in data centers. This is most likely going to the U.S. But what are we used to discuss here with the sector and with the players is that if we just catch up to our proportional participation in the global economy in terms of moving up from roughly 1% of the data center capacity globally that LatAm has today. to something around 5%, 6%, which should be where we could have the economic representation of the economy at large, we could certainly think about having in LatAm over the next 3 to 4 years, a multiplication of 4 to 5 of the current installed capacity. And this is -- this means bringing the 1 gigawatt of data center capacity that LatAm has today. and bring it up to 5 gigawatts just as a bare minimum. This by itself in terms of infrastructure investment, represents an opportunity of roughly USD 40 million to USD 50 billion in infrastructure alone. I'm not talking about the hyperscaler investment, which comes on top of that, which is significant. But just on the infrastructure alone USD 40 billion to USD 50 billion in infrastructure opportunities. If we are successful and capture even a slightly unfair share to the best part of it in terms of growth, we -- there's no reason why we could not think about LatAm having 10 gigawatts in the next 5 years. There's no reason why not. Obviously, we still have to do our homework to gets the fair share of getting to 5 -- 4, 5 gigawatts. But that's the size of the opportunity here. In terms of a project, if you think about the typical project, there is a metric that hovers around USD 10 million per megawatt. So a typical project for AI starts in the range of 100 to 200 megawatts IT capacity, which means 1.3 to 1.5x this power capacity, through power gross of capacity. But what we're talking about projects that normally start at the 200 megawatts mark. But they have a characteristic in common, which is all of the hyperscalers when they set up a 100- to 200-megawatt facility, they want to see expansion capacity. So in our case, for instance, our first project is 200 megawatts, but by tens when it announced the project late 2025, they said that they expect this project eventually to grow to 1 gigawatts. So this is the size, typical size of projects. How long does it take to develop those projects? And this is a complex development. I mean, we should not underestimate the requirements because we're talking about developing the whole power licensing, which depending on the country can be a very lengthy process, I mean, taking 9 years -- 9 months to a year of developing just the power licenses. We're talking about environmental permits, which are significant. We're talking about the big enterprises here. Talking about obviously, construction itself. There's different methodologies that are evolving today in terms of construction just a precast -- steel structure and most recently, modular structures where you pre-integrate components in factory and then just installed, I mean, containers in a precast structure on site. But we can talk about development times that the range for the full project, 2 to 2.5 years, construction alone 12 to 18 months, 12 to 24 months, depending on the size of the project. And the key components are virtually to and one is construction, just basic construction and just putting the buildings together, and this is traditional construction methods such as precast concrete or steel structures. And it's a large construction. And just to give you an idea of the project we're building right now, we're talking about 150,000 square meters of just construction roof capacity. And then, obviously, you have the key components of technology in the CapEx, which make this not an ordinary traditional civil construction project. We're talking about -- these are generators for backup of batteries, cooling systems, water systems, security, temperature and environmental control, access control, all of the very sophisticated infrastructure that goes on these projects. And this roughly represents, I would say, 60% to 70% of the cost of the project. So the CapEx, the roughly $10 million per megawatt of CapEx go primarily to equipment and construction at the 30% to 40%, 60% to 70% proportion give or take. And how do we fund that? We're funding that based on the most traditional proportions that we see in large data center projects. This is starting to come to LatAm as well. We are being initially slightly more conservative, but those projects can actually go all the way up to 80% leverage. So 80% debt, 20% equity. There is a proportion that starts at goes all the way up to 80%. In aggressive cases, there are even projects that go all the way to 85% debt. But we're being on the more conservative side. So talking about roughly 70-30 here in terms of equity debt. And obviously, the funding strategy comes from our own infrastructure funds. So Patria fund is the key investor controlling the project on our end. We just closed a significant project syndicate with the large global banks to fund the debt part. And it's true project financing. That's one difference as well that's starting to happen. We're talking about true project financing, nonrecourse parent company guarantees involved, I mean, all of that that is expected for a large true project financing project. And those projects, as you may imagine, they all are born with the offtake already contracted. There's no sensing developing as in the past, just developing speculative building. And where you just sell a portion of the enterprise and then go after other customers or other tenants to make up for it. So in this case, when we're talking about an investment of $2 billion. It only starts construction when it's fully contracted. And we're talking about long-term contracts. DPA is involved. Normally USD-denominated, very, very rare not to have USD denominated in this case. And with returns, that are compatible with the risk that we're taking here, normally buying hold returns, I would say, in yields in the low teens. It's going to depend on the complexity of the project and obviously, the region. But working with the exit multiples here, very conservative act multiples, we can see that levered returns can go all the way up to north of 20%. Because -- if you look at just the exit multiples that we're seeing, the average exit multiples for the sector globally actually are above 20%. If you look at LatAm, it hovers around this as well, maybe slightly lower, but not very far from that. So the leverage returns can go all the way up to 20 plus without a question.

Very good. Very good. Obviously, we're talking about Brazil and Latin America. And as we say in Brazil, Brazil is not for the weak, right? So -- let's talk a little bit about risks, execution risks, power availability, the regulatory environment. There's an ongoing discussion right now about import tariffs on equipment. So if you could talk a little bit about how -- what are -- how do you think about the risk matrix and what are the main ones that you're concerned with -- that would be great.

Yes. We could talk about very, very quickly four key components. You mentioned three of them, I would add a fourth one, which is just construction and availability of good quality workforce general contractors and just the sheer construction process, which is not minor. But all four, in terms of construction, just starting for the last one I mentioned, we have experience working with large GCs and LatAm as a whole has been having more experience with GCs being specialized in data center construction. So there will always be, in particular, the scheduled pressure on the project. So it's not a matter of, hey, we will be able to build this project or not. I always will be able to build it. The problem is we will be able to build it exactly in the time line and schedule that is required because this is what actually can hurt significantly the returns of our projects. The penalties and contracts with the large global hyperscalers are very strict because obviously they have to follow a global schedule of online capacity. And so if you delay delivery of projects just by a month, a couple of months, you can hurt your returns already. And obviously, if you delay more, then it can be very, very dramatic. So the key risk here is timing. But gladly, we have been able to work with competent capable GCs. We have good experience as well managing those large complex projects, and this is a risk that we can mitigate. On the power side, our availability per se has not been such an issue because Brazil and LatAm as a whole -- Brazil, in particular, have accident power capacity. So we have surplus energy at this point. So -- and as we have an integrated grid, this is another interesting thing. If you're connected to the grid, and there's no large KAI project, which is not connected to the business very, very rare globally, I'm talking about, to have a project that is not connected to the grid, power will always be available. And so the key components here is do you have the right PPA? And do you have a trustable and -- with financial capacity partner for the PPA because obviously, the PPA is going to have to be settled by this partner if it is not able to generate the energy required for the project. But the grid will always be there. So power availability will always be there, and this is critical. On the regulatory front, yes, there are several licenses and permits that are required. Probably across LatAm, this is a micro topic in terms of the scale, but it's very important because it impacts directly the schedules that we discussed. So having track of all of the licensing and permits that are required towards such projects, it's key. Obviously, because of the very strict time lines and pressure for delivery that we face in those projects, there's normally some risk that you incur at the beginning where you don't have eventually 100% of the licenses and already have the commitments, but we have been able to match that to a good extent. It will be good to see some of those processes improving in some countries. And we know that, for instance, Chile is revamping their whole permit regulation right now. It was too cumbersome, very complex to obtain licenses in Chile. Brazil has done some work in our case. We have worked with the state government in to really speed up streamline many of the processes which have actually benefited next projects that will occur there. So this is obviously something that we have to track. Where hyperscalers, the regulatory requirements, I would say that are relatively benign. LatAm and Brazil, in particular, have been known for being kind of in the middle between the U.S. as a completely regulation-friendly environment in Europe, which is more strict into the regulation. We're normally in the middle of the But we're very balanced in our application of regulation. So we heard of no real wishes stemming out of regulation in our case. And finally, tax and tariffs, obviously, this is the key critical point in particular for Brazil. One of the key deterrents for large projects to come to Brazil in the past was exactly the high import tariffs. And high tech chain as a whole, not just the import tariffs, which could add a 50%, 60% surplus on top of the CapEx investments. Brazil has been addressing that in several ways. One of them is through specific regulation for data centers, tax regulation for data centers. It started 2 years ago. It's taken a lot longer than it could, but it's been resumed as we speak, this week, we had news about it, so the government expects to pass this regulation of having a special regime for data center investments called by the end of the year. And this is going to help tremendously to speed up the number of projects that have been kind of waiting for this regulation. In our case, we also resorted to something that already exists in many countries and in Brazil as well, but we were the first ones to benefit from it, which are the special economic zones. So in our case, we're using a free trade zone called a special export processing zone, where as our project is targeted to a local base -- to a global base, not a local base, we have a full tax exemption there because it's an export operation. So this doesn't depend on specific regulations. It's already a law that has been deployed in Brazil several years ago, and is an existing special economic zone. It's not a new special economic zone. And this already exists as well. In Colombia, for instance, Columbus has several free trade zones. Mexico obviously has the proximity to the U.S. and doesn't have this issue. And Chile has lower taxes in multiple cases to actually attract the investment as well. So we believe this is a risk. But some of the measures that the region is taking are providing a long-term stability. The ZPE in our case, the free trade zone that we're using has a 20-year time frame for the stability of the benefit in the extensions that are issued. Same thing, in Argentina. We know that Argentina been receiving more attention recently, they instituted Radian a special incentive programs. Colombia, same thing. So -- there are several things going on that we believe address this issue of taxes and tariffs. And the key thing here is long-term stability, long-term visibility.

In terms of incentivizing -- long-term investment, it's good to know that Reata is back on track. Changing a little bit the scope. Obviously, everybody is aware of the deal that NVIDIA recently announced, the new funding structure, along with some of Patria's peers in the U.S. This comes in the context of an ongoing debate about circular financing and returns. Do you have any thoughts on this and whether this funding mechanism is something that could eventually play a part in how you guys are developing the infrastructure in Brazil?

Well, this question is interesting because it prompts to another question that I believe everybody has, but nobody really likes to touch upon it, which is -- are we living a bubble? And is there a possibility of this bubble bursting? And I responded to this question many times, and I'd like to say, in a sense, yes, because obviously, if you see the projections that go far beyond the next 3, 4 years, they continue to be really try to go out and sometimes. But what I'd like to say is that definitely from many cases in the past, even if this bubble bursts, what's underneath it it's already really, really, really big and much bigger than what we have today because capacity is in short supply. It's different in the case of previous infrastructure investment cycles where people say build it and it will come, demand will come. In our case, demand is already here and is not satisfied. So you mentioned NVIDIA. NVIDIA just published the results, as you know. And the key deterrent for NVIDIA's revenue growth was supply. It was not demand. If they have produced like 50% more than what they sold in the last quarter, they would have sold at everything. And this is because capacity is in short supply today. If we have globally another 10, 20, 30 gigawatts of capacity, it would already be consumed. The problem is there is no capacity. Capacity is being built as we speak. So -- if you look at just the fundamentals of how capacity is going to grow, our capacity requirements, demand is going to grow. It's obvious to see that there's no way other than up. Eventually, it may taper down and grow slightly slower than what we're seeing today, yes. But remember that probably today, we're at the peak of growth last year, just the 5 hyperscalers -- U.S. hyperscalers alone invested $250 billion, which was an all-time record and a very, very healthy investment number for the global infrastructure economy. This year, they're expected to invest $750 billion. It's 3x as much as last year. So do we need years of $750 billion every year to sustain this growth? No, we don't. I mean if we go back to just $200 billion, $300 billion a year, which was the steady state that probably '24, '25 showed. The infrastructure sector would have a significant opportunity still for the next 5, 10 years. And we can see this happen. So -- we see this as something that's normally associated with the demands of the IT investments as well, not only in infrastructure investments. And as a race here, there's also this component. We know that eventually, this will stabilize. We have winners, we will have a But the thing is that the applications are so new that honestly, I don't believe nobody, and I mean nobody has yet a clear view of what can be done with the technology we developed. And I believe that we haven't seen even the start of it. If you think about, for instance, agents that we're talking about personal agents, a single agent can occupy the training capacity required for an entire model. And we're talking about multiplying the capacity that we're using to train models today by millions, millions. And so demand will be there. Obviously, it has to make sense economically. We've seen the growth of revenues, for instance, for Entropic in all of the last 24 months, and it's nothing short of incredible. We're talking about adding $10 billion, $15 billion of revenue a month, a month. So the economic, the fundamentals will be there. Eventually, they will not grow to the sky, there's a saying, let's say the trades grow to the sky, right, but they're continuing. And so there's still a cycle that is not at its end yet. We still see a cycle that will continue for some time to come. But obviously, we should not expect that this is going to grow forever or grow in the proportions that we have been seen. I mean, eventually, it's going to start to slow down and starting to a more regular growth trajectory. That's what I expect.

That makes a lot of sense. I have one final question. Obviously, as everything else, this is going to be a competitive race, 2 gigawatts and to commercialize them. Why did I think that Patria has a right to win in this market? And who else you're competing with that you see in Latin America is trying to do what you guys are doing?

Sure. No, that's a great question. And one thing we have to have in mind is that when you look at the type of investments that we're seeing and needing in infrastructure, digital infrastructure projects today, business can be changing. Additional infrastructure used to be a sector where there were all sorts of projects, small projects, very small projects and local players. But when we're talking about 200-megawatt plus data centers, we're talking about serious commitments of equity and debt. And so naturally, the number of players have already reduced because you have to have the financial backing, the financial capacity, the musculature to actually take care of that. And not only that, you have to have the reputation, the means of actually fulfilling very complex construction contracts and the development projects. And so naturally, the number of players gets reduced. Globally, what we're seeing is that the role of infrastructure funds and large private equity funds have is virtually 100%. I mean, there's almost not a single project where you don't have infrastructure development funds involved. And in our case, we're obviously the largest development fund in LatAm. We obviously have a good experience in developing greenfield investments. We have the financial backing, the financial expertise and the track record in the segment. But in addition to that, I will mention that Patria has I believe some of the core competencies to develop those kinds of projects, which start in the financial capabilities, obviously, but then it quickly moves towards the engineering space where we do have a hands-on approach. Patria has its own team of engineers of technical experts, and that's what we use, for instance, to start up Omnia. We brought the Patria engineering team to help and to work alongside us in making sure we were developing the right projects with the GCs and with the suppliers and having a very, very hand-on technical approach. We also have a power expertise, which is really required for those large projects. We have the capability of developing power partnerships. We do have our own power operations. We do have power trading. So we understand power and have the power skills inside internally. And finally, Patria also has a very developed real estate capability across LatAm. And if you think about data centers, large-scale data centers, we're talking about a combination of power, real estate, construction and project development and financial capabilities. I mean this is exactly the sweet spot of where Patria has in terms of supporting capabilities, founding capabilities here. And we're using that to the full extent. Obviously, we're complete global funds. Normally the large players in the space, and we're talking about a handful of players here. We're not talking about 20 players. We're talking about 5, 6 different players, large-scale players. They all have financial backing from global funds. And we believe that Patria is now a global fund and we have our right to play.

Got it. It's so interesting that we finally found a way to export power in Latin America and in Brazil. We've always had this. Lasting of having more power than what we consume. But we can never do anything with it. Now we're exporting it through bids. It's super interesting.