Patria Investments Ltd (PAX) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Patria Second Quarter 2023 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Josh Wood, Head of Shareholder Relations.

Thank you. Good morning, everyone, and welcome to Patria's Second Quarter 2023 Earnings Call. Speaking today on the call are our Chief Executive Officer, Alex Saigh; our Chief Financial Officer, Ana Russo; and our Chief Corporate Development Officer, Marco D’Ippolito; and we are also joined by our Chief Economist, Luis Fernando Lopes, for the Q&A session.

This morning, we issued a press release and earnings presentation detailing our results for the second quarter 2023, which you can find posted on our Investor Relations website or on Form 10-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.

Such statements are based on current management expectations and involve inherent risks, including those discussed in the Risk Factors section of our latest Form 20-F annual report.

Also note that no statements on this call constitute an offer to sell or a solicitation of an offer to purchase an interest in any Patria form. As a foreign private issuer, Patria reports financial results using International Financial Reporting Standards, or IFRS, as opposed to U.S. GAAP. Additionally, we will report and refer to certain non-GAAP industry measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with IFRS. Reconciliations of these measures to the most comparable IFRS measures are included in our earnings presentation.

On headline metrics, Patria generated distributable earnings of $43.6 million or $0.295 per share for 2Q '23, including fee-related earnings of $33.8 million and performance-related earnings of $10.7 million. We declared a quarterly dividend of $0.251 per share payable on September 8 to shareholders of record as of August 16.

With that, I'll now turn the call over to Alex.

Thank you, Josh, and good morning, everyone. In the second quarter, Patria delivered excellent financial results for our shareholders, and we are also seeing accelerating momentum in key drivers of our business. Second quarter distributable earnings of $43.6 million or nearly $0.30 per share was driven by the predictable and growing base of fee-related earnings and again, the positive contribution of performance fees from Infrastructure Fund III.

With fee-related earnings of $65 million year-to-date, we continue to see the outlook on track to reach our target of $150 million in 2023, with more growth coming in the back half of the year. Performance fees have been a more regular contributor to earnings recently. And while we have not them every quarter, the $11 million generated in Q2 and $40 million over the last 3 quarters demonstrates the early stages of a performance fee realization cycle that can be a powerful driver of shareholder value over the coming years.

Capital formation continues to accelerate with $1.9 billion in organic inflows through the end of the second quarter and more than $2.2 billion secured through Q3. If we include pending new AUM from the recently announced joint venture with Banco Colombia expected to close in Q3, total capital formation will reach approximately $3.4 billion year-to-date and nearing a cumulative $8 billion since the beginning of 2022, tracking towards the 4-year cycle target of $20 billion by the end of 2025.

While the fundraising environment remains very challenging in some areas, this is where platform diversification shines with more than 30 products and counting Patria enjoys many vectors for growth as we still see the path to reach our target of $5 billion to $6 billion of organic inflows in 2023 across all products. Looking specifically at our drawdown funds, we also still believe we can achieve the previously noted $6 billion to $7 billion in fundraising over this vintage cycle through a diversified product offering, including our flagship private equity and infrastructure funds as well as newer strategies like growth equity, venture capital, infrastructure credit and private credit.

We also continue to diversify our sources of capital, hard as seeing the financial deepening in Latin America to raise more money locally. We have been successful in Brazil focused products with AUM growing more than threefold since our IPO and in Chile with the addition of Moneda's platform. We are now seeing the joint venture with Banco Colombia to provide a new anchor in Colombia. We are carefully moving forward with our strategy for our presence in Mexico.

Notably, we expect that $2 billion to $3 billion out of the $5 billion to $6 billion inflows target for 2023 could come from Latin American base investors. Fee earning AUM growth of 8% since last quarter and 15% over the last year is also a testament to asset class diversity with permanent capital real estate and liquid public equity strategies leading the way. Put simply, this doesn't mean our strategy is changing. It means it is working. We're also seeing traction on divestments with a transaction for delis and block sales of SmartFit in private equity fund fire during Q2.

Over the last 12 months, our flagship funds have secured proceeds of approximately $2.2 billion for fund investors, delivering a multiple of 2.7x invested capital on these investments in U.S. dollars. And finally, in late June, Patria was added to Russell 2000 and 3000 indices, an important step in our journey as a public company, which expands our exposure across the investment community, positive catalysts for our investment profile moving forward.

So overall, a great quarter for the business, but importantly, we also see positive sentiment building around the regional macro story, a result of structural factors as well as timely economic policy actions. Latin America has long enjoyed the benefits of low geographical risk and richness of natural resources. Now with war in Eastern Europe and growing U.S.-China tensions, the region is benefiting from its new strategy and stability within emerging markets and trends of nearshoring and friendly shoring are certainly constructive.

The comparatively lower indebtedness of individuals and companies in the region allowed governments to preemptively tighten monetary and fiscal policies to combat inflation starting in 2021, which also helped mitigate adverse shocks from abroad. Sharp disinflation for several months have now paved the way for cuts in short-term interest rates and countries such as Chile, Uruguay and Costa Rica have already embarked on cycles of monetary easing. Brazil is expected to follow them in the third quarter. A scenario of stronger fiscal positions, decreasing inflation and comparatively higher interest rates led to substantial carry gains in Latin America with several region currencies being global top performers versus the U.S. dollar in 2023.

An important institutional factor to frequently overlooked is the effectiveness of checks and balances in the region. Most of recent Latin American elections resulted in less leaning presidents, but without their coalitions holding a congressional majority and with an independent judiciary in place to limit their discretionary powers. Against this backdrop, we have indeed seen the necessity of moderation in proposed new legislation and the tax reform efforts moving forward in Brazil are a good example of that. Progressive administrations are still committed to delivering ambitious social agenda, but they must preserve fiscal and monetary discipline while building an enabling environment for private investments.

Accordingly, markets are upgrading Latin America economic growth forecast for 2023 and beyond, which is driving asset appreciation. That translates to a backdrop that is constructive across each phase of Patria’s investing cycle, one raising deployment, value creation and divestment, although factors can impact asset classes differently. In private equity, making progress on divestment was critical as we enter 2023, and we are indeed seeing results.

So far this year, Private Equity Fund V has completed the NASDAQ listing of Lavoro, a leading agricultural inputs business, completed 2 block sales of SmartFit, the well-known fitness company and also signed the transaction for the sale of Delis, our food distribution platform, where another financial sponsor will partner with Patria Private Equity Fund VII to support this company's next phase of growth. The divestment pipeline continues to be very active, and we think the improving macro drop backdrop can be a solid tailwind in the second half of the year and into 2024.

On the fundraising side, we continue to make progress in private equity with more than $360 million of inflows in Q2 between the newest flagship private equity fund, the first closing in the next vintage venture capital fund led by the team from MIGA and the recognition of (inaudible) legacy growth equity funds following the closing of the second tranche of that transaction and Patria's full acquisition of the platform.

The structural challenges in the private equity space remain, however, particularly in the U.S. market. Although we are seeing upside in other parts of the world like Asia, the Middle East and Latin America, the headwinds will likely impact the size of this flagship vintage. Should we ultimately close this fund under our targets, we expect the diversification into growth equity and venture capital to help compensate in the short term to reach the $6 billion to $7 billion target for this overall drawdown fund vintage. And note, these funds carry a similar structure to the flagship funds.

Looking forward, a solid investment pipeline should also bring us back to the market for the flagship fund sooner than the typical cycle. Turning to infrastructure. As we indicated last quarter, we are completing the initial closings of our newest flagship development fund with approximately $550 million secured as of today with $350 million closed in Q2 and another $200 million secured in early Q3, we continue to be optimistic about the momentum here and expect to reach roughly $1 billion mark by the end of Q3, representing approximately 40% of the funds cover target. The $11 million of performance fee-related earnings in Q2 was generated from Infrastructure Fund III.

And as of quarter end, this fund remains 5 active investments at nearly $130 million in net accrued performance fees. And remember, the realization impact is enhanced in this initial catch-up phase as the majority of commitments are subject to a 100% catch-up which enhances our performance fee impact until we reach our 20% share of the cumulatively investment gains. Out of the current $130 million accrual, the catch-up phase will account for approximately the next $60 million of realizations.

In credit, encouraging trends continued as the redemption pressure we saw during 2022 has faded as debt flows were positive in Q2. Our credit platform achieved scale with the acquisition of Moneda in 2021. And while I usually highlight the flagship high-yield fund and its phenomenal long-term track record, it is important to note the increasing breadth of this vertical. The benefits of diversification across Pan LATAM, Brazilian and Chilean strategies, hard currency and local currency strategies, further expansion of private credit and soon infrastructure credit means multiple vectors of growth and the ability to capitalize when certain strategies are in high demand.

For example, our local LATAM strategies has delivered outstanding absolute returns over the last year, enhanced by currency performance against the dollar. The main LATAM local currencies fund delivered a 12% return just in Q2 and 27% over the last year. Our Chile and fixed income strategy has also seen strong inflows and performance, returning more than 10% over the last year and now seeing its AUM top $500 million. We have launched our locally focused credit 365 product in Brazil and continue to work towards our formal first close of infrastructure credit, which already has backing from multilateral agency as anchor investors.

On public equities, our funds have a phenomenal -- had a phenomenal quarter in terms of both inflows and fundraising as the improving sentiment in the region drove capital to both the large and small cap pan regional products. Inflows were nearly $370 million in Q2, and net of redemption activity, we were up nearly $290 million. Including the strong market appreciation, total and fee earning AUM were both up 23% in Q2 alone, fully recovering from the pressure seen in 2022 to reach a new high mark. And in real estate, our major story was, of course, the announcement of the new joint venture with Banco Colombia, which is expected to close in Q3.

I'll now allow Marco to give more detail on that in a moment. But there were also strong inflows in the quarter of more than $300 million, driven by VBI, our real estate platform as they continue to expand their platform in Brazil. Real estate is an asset class where we really aim to gain scale over the next few years. And indeed, the AUM has grown from $400 million at the end of 2021 to more than $1.8 billion today. With incorporation of the new joint venture with Banco Colombia, AUM will nearly reach $3 billion in the coming months and more to come.

To summarize, Q2 was another solid quarter of results for our shareholders. We are executing our growth plans amid an improving macro backdrop that is positive across our investment cycle and our 2023 targets for fee-related earnings and fundraising remain well in sight.

Let me now turn things over to Marco to talk about our latest corporate development views. And then Ana to walk through the results in more detail.

Thank you, Alex, and good morning, everyone. Expansion of product offering, geographic expertise and distribution capabilities are the 3 pillars of our corporate development strategy and the joint venture with Banco Colombia announced a few weeks ago purchased each aspect. Not only are we bring in $1 billion of permanent capital AUM to the real estate platform, but we are expanding that asset class into the Colombian market. And we are gaining a distribution partner that can help us reach Colombian investors with a broad suite of alternative investment products.

Patria will contribute capital into the joint venture over a multiyear period to fund operations and GP commitments to funds, meaning cash consideration is quite minimal upfront. To help you frame the immediate impact, we've disclosed that Patria will have 51% and thus controlling ownership in the JV. Assuming $1 billion of fee earnings AUM earning typical market rates and a similar FRE margin to Patria, you will calculate an annualized fee-related earnings contribution of a few million after adjusting for the JV ownership. While that's certainly a positive, and we believe there are further reconsolidation opportunities in this market, the long-term vision for this partnership is the broader facilitation of alternative products to the local investor base across multiple asset classes.

Banco Colombia is the country's largest bank by assets and shareholders' equity. It has been serving clients in Colombia and Central America for nearly 150 years, giving them a tremendous depth of relationships with companies and investors and the brand power that we view as unmatched in the country. We believe the financial deepening in the region is real and poised to accelerate further with interest rates trending downward. Leveraging Banco Colombia's client base and distribution capabilities and Patria expertise in private markets and alternatives, we can provide access to Patria existing diverse offering of regional products and also design new alternative products tailored for the local market in the local currency.

We're very excited to move this relationship forward following the expected closing of the transaction in Q3 and confident it will be a driver of platform growth and accretive to our shareholders. We've been successful in leveraging the financial deepening in the region in both Brazil and Chile and now Colombia. As we look to the remaining countries in the region, we believe Mexico continues to be the next logical country for geographical expansion, and we remain active in pursuit of deals. On another front, as much as we acknowledge that the financial deepening is generating solid interest for private markets in the region, it also does on a global scale.

In fact, Patria already manages more than $1 billion of Land American capital through theaters to global alternatives, and we are actively pursuing the opportunity to expand our capabilities on this front. We hope to have more to say on this thing soon.

Let me now turn to Ana for further details on the results.

Thank you, Marco. Good morning, everyone, and great to be with you again. Patria delivered distributor earnings of $43.6 million in the second quarter of 2023, equivalent to nearly $0.30 per share and generating a dividend for shareholders of $0.25 per share. Year-to-date, we have now delivered a DE of $82.8 million, which is up nearly 30% from the same period last year. For an investor who bought shares at the beginning of the year, the fourth quarter 22 dividends paid in March, combined with Q1 and Q2 2023 dividends already amount to a yield of well over 5%, with the Q3 dividend is still left to be paid during 2023.

Let's now look at how the des composed. Our consistent management fees were $61.6 million in Q2 '23, up 11% from Q2 '22, driven by both organic and inorganic FAUM growth. As the second half of the year unfolds, we will see a more relevant increase with new deployments of the drop-down funds and inspiration of fee holiday for our latest vintage private equity fund. Note that for the latest vintage flagship funds, we can generally collect retroactive management feedback to the (inaudible) date on additional closings.

On the expense side, personnel expenses were $16.8 million in the second quarter '23, flat compared to the first quarter and up 7% compared to last year. Together with administrative expenses, operating costs were up 9% compared to the second quarter '22, reflecting the acquisitions of BI, IgA and Kamaroopin as well as inflationary pressure on sellers and expenses of around 4%. As a result, our fee-related earnings were $33.8 million in Q2 '23, up 9% from Q2 '22.

Second quarter FRE margin of 56% is in line with prior year and ticked up slightly from the first quarter. Year-to-date fee-related earnings were $65 million, and as we suggested in previous quarters, reaching our FRE target of $150 million for the year implies a stronger growth in the second half of 2023, with margins expected to move higher within our general range of 55% to 60%. We generate $11 million of performance-related earnings in the second quarter 2023, which is effectively an incremental true-up from Infrastructure Fund III based on the final net proceeds realized from the exit of [Vodata] and Entrevias.

Net accrued performance fee rose to $472 million at June 30, which is up 8% from both the prior quarter and the year ago, adding back the $40 million of performance fee realized over the last 12 months, the implied increase in the (inaudible) would be closer to 17%. Note that in the disclosure of the composition of the accrual, we have now added approximately $10 million related Kamaroopin's legacy funds following the closing of the second tranche of the transaction.

Turning to assets under management. Total AUM grew to $28.2 billion, an increase of $0.9 billion versus prior quarter and up 7% from 1 year ago. The quarterly rise in total AUM is driven by new inflows of $1.5 billion and positive valuation mainly driven by share price of publicly traded portfolio companies and foreign currency impact of $1.4 billion, offset by $2.1 billion of outflows. Notably, $1.7 billion out of the $2.1 billion outflow is from divestment in our drop-down funds, which are, of course, a positive aspect of our business cycle.

Fee-earning AUM rose to $21.6 billion, up 8% from the prior quarter and up 15% from 1 year ago, adding nearly $3 billion as it crossed the $20 billion threshold for the first time. The growth from last quarter is driven by nearly $1.2 billion of inflows led by public equities and real estate. Remember that Q2 will not include the normal biannual adjustment for the drawdown funds that we typically see in Q1 and Q3. The growth was enhanced by more than $700 million of positive impact from valuation and currency appreciation. As we look to the second half of the year, I will reiterate that we expect a rise in quarterly fee-related earnings driven by multiple factors, along with a slight increase in the margin in order to achieve our $150 million fee-related earnings target.

As you know, we don't offer short-term guidance of performance without clear line of sight, but I want to echo our Investor Day targets estimated to amount a cumulative $180 million to $300 million through the end of 2025. Given that all the infrastructure Fund III is actively in the realization phase today and private equity fund sits is still working towards that threshold is likely that 2023 realizations will be lower than the next 2 years.

Let me now turn back to Alex for some final remarks.

Thank you, Ana. To close here, we believe that Patria is the premier gateway for alternatives in Latin America. Our business was born in the region, and we have honed our investing strategy for more than 30 years of experience on the ground. We believe Patria is the reference trusted partner for sophisticated global investors who want to allocate capital to alternatives in the region. We also believe we can facilitate the development and adoption for alternative products for local investors in the region and be a conduit for them to access alternative investments globally.

Our growth strategy is built around those pillars, and we communicated ambitious goals at our Investment Day last year. We are now on our way, and I continue to have confidence in our ability to deliver. We thank all of our stakeholders for your support, and we are now happy to take your questions.

(Operator Instructions) And our first question comes from Craig Siegenthaler with Bank of America.

So my question is on fundraising. And I want to come back to some of the comments you made around P Fund VI in the prepared remarks. What do you think are the 2 biggest challenges that you're facing with respect to raising the buyout fund?

Well, I think, first and foremost, the general feeling of -- for end results actually for fundraising for private equity has not been as it was, I think, free this whole inflationary issue in the -- mainly in the U.S. So as mentioned in prior earnings calls, I think we -- for this specific fund, we are underperforming in the U.S. and this -- for this fund, in particular, the U.S. market was an important contributor of around 1/3 of the fund. We are managing to overperform in other markets, as also mentioned in other calls, like and more specifically the Middle East, including Israel, Asia and Latin America, very much surprised with the Latin American interest for this fund.

I think investors see the monetary cycle here easing in Latin America, as mentioned in the macro part of my little short speech there, and they want to actually come into products that have very, very high returns like our private equity Fund VI. So all in all, in order to compensate for the large group of investors, the North American investors, mainly U.S. and Canada, less Mexico, which, again, accounted for 1/3 of prior funds, we have to really overcompensate the other regions. We're doing that but I think as of today, we had, I think, the target of reaching around $2.5 billion, $3 billion for this fund. I think that it's more realistic to see the number 2.5% now. And also, I think we have a composition of other products that kind of eroded some of the demand for that. Growth equity kind of competes with private Active Fund VII, some investors mainly the endowments and some smaller institutional and family offices.

They like the risk return profile of growth equity given that our flagship buyout private fund became more mainstream which is fine is a cannibalization that happens internally. Both funds are 2020, both funds, our drawdown funds, both on a 10-year or 10 years. So it doesn't really matter for us, but we see some communication there also going on. Some of our investors were actually asking for a product like growth equity, because as our flagship fund got bigger and became more mainstream, they wanted to invest in that part of the -- that segment of the private equity market in Latin America.

Our venture capital fund, I don't think really competes with our flagship private 7, but the growth actually fund does and cannibalizes some of that demand. So when I add the underperformance in the U.S. because it's a tough market out there. You read the reports. I'm saying here what I read. I haven't gone out and checked the numbers, but some of the big consultants in the market say that every $3 in the U.S. being chasing money in the U.S., one will be raised. So it's not a pattress specific thing. I think it's a market specific thing. What is the good news about this, we managed to build our Latin America, no local-based distribution capabilities out of the $5 billion, $6 billion being raised this year organically, 2 to 3 -- closer to 3%, actually raised locally from Latin American investors. That's a major number.

Normally, we did -- now if you look at Patria’s past, 80% of our fundraising came from global institutional investors. And of course, the number was a lot smaller than the $5 billion to $6 billion. Now it's half and half. And we're still growing in these countries in LATAM. We still have to increase and strengthen our base in Colombia and also strengthen our base in Mexico. And we have -- this number now $2 billion to $3 billion basically is coming from Brazilian and Chilean investors, 95% from Brazilian Chilean investors.

Some (inaudible) a small part of that, but nothing much from Colombia and Mexico, which are now if I add Colombia, Mexico basically doubles the market there. So I'm very excited about this opportunity, which is then compensating the fact that we are for private active funds VI underperforming in the U.S. But overall, Greg, I don't think we'll get to the EUR 3 billion. I think we'll get more to the 2 million to 2.5 million. I see the upside of the 2.5% still possible. And also, if we add the other products that are being raised within the private active vertical like growth equity and the venture capital fund, which both are doing well, then I'm going to have a -- continue to have a very strong 10-year 3 products, 2 120 private equity vertical there. I hope I answered your question.

For my follow-up, I wanted to hit on the expectation for timing and size for Infra V. And I think in the prepared remarks, I heard that you already raised $550 million to date, although I don't think it had a first close just yet because it's not showing up on Slide 17. But my question is, do you think will be significantly larger than the $1.9 billion of Fund IV at this point, just given results to date with P Fund VI.

Yes and yes. For going straight to the answer here. We did have a first closing for Infrastructure Fund V. I don't think it was well communicated. But yes, that first closing happened already, 330 million in the second quarter, another $200 million in the early third quarter, $550 million. And we have already secured because secured, I mean, when our investors have already gone through all the approvals, we are finalizing negotiations of the PA. But as it is a rep, because it's an investors that have already invested in prior funds, the LPA, the limited partners agreement is very well known for them. So that's why I did say in my earnings call here that we're going to get to the $1 billion first close because (inaudible) investor gives the papers back to us 1 week the investor gives the papers back the other week, whatever. But within this month, we get the $1 billion, which is 40% of $2.5 billion.

So the EUR 2.5 billion is the answer to the second part of your question. I can see the 2.5%, which is higher or larger than the 1.9% for private equity -- sorry, Infrastructure Fund IV, 1.9%, Infrastructure Fund V, 2.5. And I see an upside there. Things are going so well for our infrastructure franchise here as one of the consultants' reports that I mentioned a couple of minutes ago, the headline of this private equity and infrastructure fundraising report of one of these consultants as DPI is the new king. And that's what our team has been doing on the infrastructure front, they have really sold so many companies at such great valuations have giving back so much money to the investors, investors of our Infrastructure Fund III. In reals, they are over 2x their money in U.S. dollars over 1.4x their money. And there are other exits that will happen in 2023.

So more money is going to go back to investors of Infrastructure Fund III. I think we'll have good news also in Infrastructure Fund IV. It's not going to reach, of course, the performance fee bracket because we have to deliver all the capital back invested in that fund. But we're beginning also to divest assets from infrastructure fund V. So all of this divestment, that means -- and as this consultant mentioned, DPI, the new King helps on the fundraising plus it is a product that has an inflationary hedge inverted to it, as you know. So all of this contributing to us being optimistic on the 2.5 and now seeing an upside there.

So when I look at the 2.5% from the private city and then I look at the 2.5% with an upside on the infrastructure side, it's $5 billion plus. And then I have all of these other credit products, private credit, infrastructure credit. So that's why I come back and I say that I'm confident in saying that the $6 billion to $7 billion drawdown funds target will be hit because of the numbers that I just gave you. And also on the credit side, we're seeing great momentum on private credit, on infrastructure credit. On private credit, we have a LATAM private credit product on the road. We have a local Brazil private credit fund and 2 on the road being fundraised private credit, the Brazilian private credit fund I delivering extremely good returns with very, very good credit securities, no defaults, an amazing product, really an amazing product, and we're having a lot of re-ups for our Brazilian private credit fund, too. So I'm optimistic on the private credit side.

So if I add the 2.5 million from the private equity side, at 2.5% with an upside from the infrastructure side and all the other private credit products, which are all drawdown funds. That's why I see the $6.7 billion drawdown funds for this vintage being met. I think I answered all of your questions. If not, please help me here.

Our next question comes from Tito Labarta with Goldman Sachs.

I guess, can you give any more color on -- are you able to realize any more performance fees for this year, particularly, I guess, from for Fund III, that court is a little by surprise, positive surprise, obviously. But just to understand how much more you can potentially realize in the short term, both from (inaudible) Fund III and overall? And the second question, good performance, I guess, on the public equities and real estate side, particularly going into a lower interest rate environment. Obviously, valuation benefited, but also we saw good inflows there with limited outflows. Can you give some color on how you see that shaping out for the rest of the year, particularly we saw the Central Bank of Brazil cut rates last night. Are you seeing more interest in those verticals?

Yes, I think on the -- overall on the performance fees, I think we're -- we continue to see the $180 million for the next 3 years, including 2023, which we gave as a guideline during the (inaudible) late last year. So what we see there, I think we -- on private -- for Infrastructure Fund III, there are divestments going on and very interesting valuations that we'll be able to get for these assets. And this -- once we sell these assets, it contributes 100% to our performance fee because we are in the catch-up phase. So I see news coming from that front, which is the more short-term news coming there. On the private ex side, we are also distributing in kind some of our listed products, listed securities there, and that generates a performance fee there. So that's what we're looking into for the second half of this year for -- and that's assets of our private equity Fund V.

Also because of the appreciation of the listed securities in private equity Fund V, mainly SmartFit. So we see a lot of divestments still going on for the second semester, also for infrastructure Fund II, but that is not going to generate any performance fees in the second semester. So in this order, Infrastructure Fund III continues to be the main driver of performance fees in the second half of the year. Divestments going on as we speak. We're selling assets that are still in that fund. We have 5 remaining assets in that fund. Proposals are coming in. We have organized processes, and we're moving ahead, and that's why I'm comfortable that we will continue to deliver on performance fees this year and overall, for the $180 million that I mentioned during our (inaudible).

Second comes private equity Fund V with these distribution in kind. The distribution in kind does generate performance fees, the way that we are structuring it. So that also -- it could be a positive news in the second half of this year or early 2024. And then comes all of these other divestments that we're doing that will not generate performance fees for this year, but it's building in, as you know, we have European carrier is building in the direction of generating performance fees for next year 2024 and 2025.

So it's things around here did change, as you know, it during the first semester. We are kind of in a weird week, right, where the Brazilian government debt gets an upgrade from the rating agencies and the U.S. government that gets a downgrade from the rating agencies. It's kind of a unique week, right, where inflation in Brazil is lower than the U.S., slightly lower than the U.S. in the last 12 months. And interest rates in Brazil and Chile are falling, while the U.S. they're rising. So it's very unique. It's those moments in time when you and I have think have been around for a while, you look back in history and we haven't found a lot of these moments, right?

And so that benefits going to your second question, all of our fundraising activities, right, investors want to position themselves, look at the returns of our funds that I mentioned during my earnings call today, 20-something percent up in our equity funds, LATAM large cap, LATAM small cap, Chile and small cap, Brazilian small cap over 30% of this year. If you add that, the strengthening of the Chilean peso and the strengthening of the real, we're talking 40-something percent returns in the first semester for these funds. And our credit funds, 20-something percent returns in U.S. dollars, it's pretty strong returns.

And that, of course, drives fundraising and stops redemption. We saw redemptions for our public equity funds and our credit funds in 2022 and redemptions for June 30 for our products went to 0. And we know because redemptions come in for the next quarters. And on the -- for our credit funds, they're basically 0. And inflows coming in, redemption 0 or close to 0. That means more money for us and that -- and for these products, you know that as now when they hit our bank accounts, there are few earnings AUM, right? And then when we look into the second quarter, I think there's still a lot of space for valuations to go up.

So cautiously optimistic on that side, which is the second part of your question. So yes, we -- that's why I go back to you guys and say, "Look, we see as good news here that we're going to get to the $5 billion to $6 billion organic inflows for this year coming from these products that I just mentioned. Also, I think we're seeing a good momentum for our mainly Chile institutional clients willing to invest in hard currency alternative assets that we also have that business, which is an advisory business, which is pretty interesting for us as well. So they will change. They will change over the last 2 quarters. And I think Marco wants to add something here.

And just one question to the other the performance and the performance fees and the environment. The recent currency appreciation plays in our favor, it was already present in the second quarter and even more so in the beginning of the quarter because as you know, our business on the FRE is mostly dollar-denominated on the PRE currency plays a role both on the performance and on the performance fee. So things moving to the right direction and the region benefiting from this economical cycle, we also have a benefit not only by the organic growth of our funds, the natural IRR, but also the currency, which accelerates the hurdle rates, accelerate the catch-up phase accelerates the carry to be received on the funds that are eligible to pay carry.

Our next question comes from Ricardo Buchpiguel with BTG Pactual.

I have a couple of questions here. First, can you please give us an update and more details of the levels of inflows in the liquid strategies that we should expect in the following quarters going by each product and what product should benefit the most with the impact in the Chilean interest rate cut? And also, for my second question, do you believe that right now is a good moment to accelerate the consolidation of the LATAM asset management industry. And you mentioned Mexico should be an interesting region to take. If you could also comment what product will make sense to add to your platform would also be helpful.

And well, we have -- I think we're cautiously optimistic on the fundraising for our liquid strategies. We saw good fundraising momentum in the second quarter for our public equity strategies. We have large cap LATAM, small cap LATAM. Small cap LATAM, we're actually reaching a point that we might even close the fund for a while because we were managing a max amount of dollars there, $150 million to $100 million. We've reached $500 million in basically 60 days, the last 60 days of the second quarter. So no, good momentum on the inflows there and on the large cap LATAM, the same. And then the Chilean strategies, we have large cap Chile, we have small cap Chile, and we have pipe in Brazil. All of the performances have been, as I mentioned a couple of minutes earlier, 20% plus in local currencies, then you add the strengthening of the Chilean peso and the Brazilian real, it's really impressive. And of course, that drives the fundraising momentum.

So I see that momentum continuing in the second half of the year. Yes, it's hard to say exactly a number. But overall, I think the $5 billion to $6 billion number that I mentioned earlier in the call for organic fundraising for the year should be met between the drawdown funds. We have fundraising for our flagship drawdown funds going on. Infrastructure Fund V and Private Etity Fund VI mainly, but also growth equity and venture capital and also the private credit funds like infrastructure credit and the Brazilian private credit fund.

So if we add everything, the $5 billion to $6 billion, I can go, I think, with you, I think it's more effective and productive to go offline. We sit down with you and we go product by product, given that we have 30 products. I don't want to really take your time here and the other part of the audience today, but we more than gladly can do that with you right after this call. But the momentum looks good, Ricardo. And on your second question here, yes, I think we had this contrarian view, and you guys -- I can only thank you guys for supporting us. When we did go public later when we were thinking about going publicly 2020, we went public early '21. That was a contrarian view, Ricardo, actually us speeding up the consolidation by raising money.

We do not sell anything, as you know, in a primary issuance of shares and consolidating this market while Latin America was going through this the world with Latin America specifically through this kind of a hard phase of high interest rates, high inflation, high interest rates, left is government, you know the whole story. And we've been around for a while since 1988 when one of the founding partners, it's been 35 years in September. We saw this film so many times. It's like watching Godfather 3. I know what the actors are going to stay, right? And I know look, let's position ourselves here, and we have to consolidate this market as soon as possible.

I think we moved into Chile in the-- an amazing right moment. We moved into Colombia, I think, in the right moment. Colombia is a little bit behind the curve on handling inflation and handling interest rates there and also the issues that is going there with Patria. But I see, we see the selling economic fundamentals of North Chile, specifically, Brazil. And I think we're now beginning to see that -- the benefit of that -- of the execution of the strategy. So we're head on and continue to do exactly that. We need to build a big business in Colombia and even bigger in Mexico. I think we managed to join ourselves with the largest and the most successful distributor in Colombia, Banco Colombia, as you know, is the Federal Bank 146-year-old was privatized 5, 6 years ago.

80% of Colombians do have a bank account with Banco Colombia, and they have a 60% market share on all transactions, including distribution, private banking and whatever. And we are now very happy with this JV that can really speed up our fundraising for local Colombian pesos products for local Colombian investors as we did in Chile very successfully. Our Moneda partners did an amazing job. They are the establishment in Chile. I think we're doing this in Brazil. We tripled our AUM in Brazil of Brazilian reais for Brazilian clients. We're going to do the same thing in Colombia, I think speeding up this because of the JV with Banco Colombia, and we have to do it in Mexico.

So there's still highways and vectors of growth for Patria because we haven't even started in Colombia. We just signed a JV. We have to close the JV and then probably in 24, we're going to start fundraising there. And Mexico is a huge market with now the friendly shoring and near shoring and I'm optimistic there. You probably know the numbers. Now if you are just pension fund money in the region, it's around $800 million, and they're all growing at double-digit rates because the contributions have been raised by these governments and projections that in 5 to 7 years, this number should increase by 1.5x, so from now $800 billion to $1 billion to $1.4 trillion, depending on the projection on the analysts.

That when you have clients with a net inflow of money, which is what I just described, that's even better because clients are then open to new ideas like alternative products. And when you have with that, lowering your interest rates, clients are even more open to try new ideas because they have to, right? And you know that the federal bond here in Brazil, the famous B is now at 5 and something percent, 6% down from 7, 7 something. That's the number -- the magic number that the pension funds start thinking on diversifying their investments in any DNB because they have to, right, because of their factorial liabilities costs. So I think it's -- again, if things continue to play that way as it did in the first semester, I'm cautiously optimistic. And yes, we have to continue to consolidate this market. This is why we went public.

I was just addressing Ricardo, your questions on what products to add and timing about the M&A. Maybe this is a good opportunity to use the Banco Colombia deal to respond a little bit to give a little bit of visibility on how we think about our expansion. And we've been saying that since the IPO, the priorities that we set on our inorganic program are set to expand our channels, our geographies and our products and a partnership like the one we announced with Banco Colombia addresses the 3 of them. We already had a presence in Colombia since 2014 and with over $2 billion on the ground and successful cases there. And with the partnership with Banco Colombia that is a player that has nearly 50% of market share with over 25 million clients on the ground.

It's definitely a good way to get the boots on the ground in a different strata of the market, not only on the client side but also on the business community side. So definitely, that gives us in-depth both on the ground in terms of geography and in terms of channel because it gives access to the type of clients and the distribution power that we wouldn't have otherwise.

In terms of product, what we're doing and the first product that we announced with the joint venture with Banco Colombia is a local real estate local REIT, which is permanent capital. It adds $1 billion of permanent capital, which is in sync to what we have been saying about where our priorities are. I think you can take this as definitely a priority. The permanent capital, real estate in other countries in Latin America and Brazil. And we're going to continue to foster this type of strategies that may result in acquisitions and mergers or in joint ventures like the case here in Banco Colombia to really take us to become present in every geography, in every aspect of the alternatives in the region.

I think we spoke about Mexico being a priority. Chile continues to be a priority as well. And in terms of timing, motivation, why counterparts partner with us are generally and very much centered on the fact that we have a fundraising -- a powerful fundraising capability. And by joining forces with us is just catering for new money into the system. These are normally parties that want to continue to work with us, want to become part of a bigger platform, benefit from a platform. So those are motivations that stick very well in the conversation where you're aiming to invite all the partners to be consolidators in the region.

And of course, there will be the local markets that we spoke a little bit about the local market and how the local markets are evolving and how things are improving here. That has not fully reflected. I think it's -- there's still a way to go there. But that definitely will bring some impact to the strategy, and we will navigate accordingly. So I hope I answered your question.

Just a quick follow-up here. How much of your liquid funds you charge based on NAV. And then the fee earnings should benefit from all these positive mark-to-market that we have been discussing.

I'm guessing here, I'm going to have Marco answer the question in more detail and Ana. It's not 100%, all of our -- most of our funds, liquid strategies charge on NAV. We're checking that information, but if not 100%, Ricardo. Is it 100% Marco.

So I think the best reference you have, Ricardo is on Page 14 on your presentation, where we provide an overview by asset class, and you can take the line with ESA public equities. And the piece where you credit open evergreen funds, that is on the fee modality that you just described on NAV. And then the others will be the drawdown modality.

Our next question comes from Yuri Fernandes with JPMorgan.

I have a first question regarding your performance in fees this quarter. I guess, Marco mentioned effects benefiting a little bit. And I think Alex and the presentation mentioned of that and (inaudible) sales. So my question here is on interviews. I guess you had about 45% stake on the company. So just checking if you sold this additional stake now or anything not if you didn't sell it, when you plan to sell this interview stake? And how much do you believe this can help you on further performance fees? That's the first one, and I can have another question after you answer this one.

Thanks again for your coverage there. No, I did read your report. And let me -- yes, why did we have performance fee from deals that were already announced, right? And we did not sell an additional portion of (inaudible) or an additional portion of any other assets from Infrastructure Fund III. What happened here was that we conservatively projected some of the accounts that you actually do close just at closing dates, and I'll give you an example here. So now we sell the company for X. And there are some slight adjustments like working capital, the actual debt because then it depends on how much cash the company generated between signing and closing. So there are minor adjustments that we do at closing.

We normally -- what we do, we are conservative on those assumptions in order to lower the price sold, the equity value because, of course, we have our projections. We are confident that things are going to go our way on working capital and cash flow generation, but we are conservative. So the performance fee that we announced on the sale of data trivia did take into account conservative assumptions for working capital and the indebtedness of these companies at closing.

When things came to closing, we were right. We had a little upside on what we needed to leave on the table there for working capital needs of those specific companies. We were also on the upside there. The debt was a little lower than what we expected because the company generated a little bit more cash between signing and closing. And all that, of course, contributes to the price is the same, of course, but it raises the equity because it has less debt, so more equity. And that actually contributed to more performance fees. So the actual price of the company basically is the same but we had a little less debt, a little bit more equity, and that actually went into -- straight into our Infrastructure Fund III.

And as we are in the catch-up phase, now 100% of what comes into Infrastructure Fund III is now comes to the general partner. We did then – we managed to have additional performance fees. So we do not sell additional parts of any assets was this between signing and closing adjustments, which were positive adjustments for us. Again, $10 million out of the $1.8 billion that we sold, slight adjustments, but were on the positive side. What I mentioned, I think, when answering one of Craig's questions earlier today was that we are selling other assets of our Infrastructure Fund III. That now I am cautiously also optimistic that we will manage to signed the sale of these assets in the second half of 2023, contributing then for performance fees for the general partner for PAX. I hope I answered your question and ready for the next one here.

I have a second one regarding Banco Colombia is a recovery here. And I guess you put in the press release and you mentioned some time about Central America operation. I guess this is the smaller portion of the pie. But just checking if the EUR 1 billion AUM you benefit, you mentioned this includes also Central America, if you see like you can also leverage in those other countries that Banco Colombia serves. And a second topic here also regarding Banco Colombia is sure, right? I know it's not the same company, but usually, it's also an important distribution channel for like asset management products in the region. So just checking if this is only Banco Colombia or if you have any kind of agreement with [SURA] or not really?

So the deal that we have with Banco Colombia as of today is Colombia and is only Banco Colombia only. As you pointed out, Banco Colombia is the dominant player in Central America, in Panama, Guatemala and El Salvador. We have not touched those geographies so far. It's open to explore in terms of distribution. But the REIT business that comes along with Banco Colombia is exclusively a Colombia dedicated vehicle. But we have no limitations to expand the relationship into Central America and in fact, is part of the discussion, okay? And SURA, we are not contemplating in the existing business plan distribution through SURA. But there's also no limitations that we go into that direction.

And our next question comes from William Barranjard with Itau BBA.

A quick one here. So regarding that FRE target of BRL 150 million, so this target in place that the company should show a good performance in the second half of the quarter, around 30% growth in FRE, okay, over the first half. So if you could go through it, we would like to understand what are the levers for that improvement?

Yes, I think the way that these drawdown funds works is that you do the first close of the fund. And then as you raise money after the first close, the fees are retroactive to the first close. So contrary to the liquid strategies, as we talked here with Ricardo, when someone invests subscribes quotas for a liquid fund strategy, the day that it hits as of that day, we start charging fees. In the case of the liquid funds, which is a major fundraising effort of this year, the flagship infrastructure Fund V, Private Fund VI. We did project first closing last year. We did our Infrastructure Fund V closing late in the second quarter in late June. So for example, if I raise $100 million in September of 2023, I do not charge fees only for -- from September to December. I charge fees from June -- late June to December.

So if I raise $1 billion, I have the whole 6 months of fees, not fees as of the date that we raised the money. So that's a major contributor for that because I given an example here, if I have $1 billion William of fundraising for the drawdown funds by using $1 billion just as an illustrative exempt, 2% of $1 billion is 20 million. I don't -- if I raised that during the quarter, I might have less than the $10 million for the semester. But no, as I go all the way back for private Active Fund VII to January of this year. So it's a full year. So if I raised $1 billion for private equity fund 7, I have $20 million of fees, even if I raised that money in November of 2023. If I raise for Infrastructure Fund V, I have half a year because I have that first closing in June. So in my example, we have $10 million of fees, which is 50% of 20. So it's pretty powerful when you do that, right?

And of course, in some funds, you have differently, but this is a case of our funds. In addition, of course, we do see a momentum, as we talked over the call here today for the liquid strategies, momentum for fundraising for the liquid strategies because of all of the macro backdrop more positive for LATAM. And now we saw the redemptions coming down significantly, close to 0 that I also mentioned here. We saw fundraising for the liquid strategies going up. And that also -- we didn't see that in the first quarter of this year. Now we saw mostly in the second quarter of this year. So if we also project a cautiously optimistic on the second half that this good Latin American momentum will continue. So for the liquid strategies, we will raise more money in the second semester than in the first semester, so that's also a contributor.

I'm not sure if it was clear, most of this growth is already contracted. It's a matter of fee-based. The fee base is the fee-paying AUM that we have indicated allows you to build up these numbers. For example, private equity 7 is coming out of a fee holiday period that's already contracted, and that kicks into the second half of the year. So all the commitment that has been made during the first half of the year will add up to the fee paying AUM for the second half of the year. So that composes the fee base for the second half of the year.

I think what we can do here, William, is to -- again, I think it's more effective here if we go offline and explain to you exactly on an asset class by asset cloud basis. But in general, is for the e-liquid drawdown funds is the fact that I mentioned of the close the fund, you have the first closing of the fund and then when you raise money after that first closing, the fees are retroactive, number one. Number 2, we are more optimistic in the second half of '23 versus the first half of '23 on fundraising for the liquid strategies because of the Latin American backdrop. And we began seeing that in the second quarter, more money coming in for our liquid strategies. That's the 2 macro factors, and then I think we can go with you offline and explain in more detail.

And showing no further questions at this time. I would now like to turn the conference back to Alex Saigh for further comments.

Well, thank you very much for your patience for hanging on for over an hour with us here that, of course, it's a huge pleasure that we have you guys with us here today. And I know we are honored that you guys are covering us. Thanks a lot for all of your efforts. Be sure that we'll continue to do our best year to deliver on our promises, on our PAX (inaudible), on the fee-related earnings of $150 million, et cetera. And I hope to see you guys in person, and I think we have no meetings with most of you in the coming weeks and months. So that would be a pleasure again to see you in person. Thanks a lot. Thanks for your presence and talk to you soon.

And this concludes today's conference call. Thank you for participating. You may now disconnect.