Patria Third Quarter 2026 Earnings - PATRIA INVESTMENTS LTD

Financial Performance:

• Fee-related earnings (FRE) reached $52.8 million in Q3 2026 ($1.01/share), up 16% YoY, with $160.4 million year-to-date; full-year 2026 FRE guidance narrowed to $225–$235 million ($1.42–$1.48/share), implying 11–15% YoY growth.
• Distributable earnings (DE) totaled $46.9 million in Q3 ($0.30/share) and $139.9 million YTD ($0.88/share, +14% YoY); 2027 DE growth target remains 10–15% YoY.
• Total fee revenues were $98.3 million in Q3 (+16% YoY) and up 22% YTD, driven by 24% growth in fee-earning AUM (FEAUM) via organic inflows, performance, and acquisitions.
• FRE margin stood at 53.7% in Q3; expected to expand in Q4 due to higher-margin incentive and structuring fees, with full-year 2027 margin guidance maintained at 58–60%.
• Stock-based compensation (SBC) was $10.1 million in Q3 ($33.7M YTD), representing ~11.3% of total fee revenues, expected to stabilize around 11–12% of net revenues.
• Transaction costs declined to $8.7 million in Q3; projected to decrease further in 2027 as M&A activity slows and deferred payments are normalized.
• Cash flow and balance sheet remain robust with disciplined leverage and liquidity management; ~90% of FEAUM has no unlimited redemption rights, insulating cash flows.
• FX sensitivity is minimal: a 10% hard currency devaluation impacts FRE by only ~2%; ~20% of revenues are real-denominated, while ~40% of FEAUM is invested in Brazil (60% local, 40% global non-redeemable USD structures).

Guidance and Future Outlook:

• 2026 FRE guidance confirmed at $225–$235 million; 2027 FRE guidance confirmed at $260–$290 million ($1.50–$1.80/share), reflecting 10–15% YoY growth.
• Fundraising momentum ahead of schedule: $6.9 billion YTD 2026, effectively hitting the $7 billion full-year target; 2026 total fundraising expected to exceed 2025's $7.7 billion record.
• 2027 fundraising guidance set at $8 billion, supported by a strong pipeline including infrastructure core funds, SMA mandates, and GPMS; expected to surpass guidance if current trends hold.
• Long-term strategy targets sustainable growth up to 2030; EPS growth expected to outpace FRE growth in 2027 due to reduced transaction costs, lower SBC volatility, and fewer large acquisitions.
• Q4 2026 revenue expected to see a sequential uptick driven by seasonal incentive fees and structuring fees from bespoke mandates, though some performance fee realization may be delayed by market volatility.
• Investor Day scheduled for December 7, 2026, in New York to present updated 2027–2030 growth expectations and strategic initiatives.

Business Segments and Product Lines:

• Fundraising mix (YTD 2026): Credit (40%), GPMS (22%), and Infrastructure/Multi-asset SMA (23%); these three categories comprise ~85% of new capital.
• Stollis (Brazilian CLO manager acquired earlier in 2026) raised ~$945 million YTD; focuses on institutional mandates for senior CLO tranches with multi-year, diversified structures.
• GPMS (Global Private Markets Solutions) continues to drive growth via bespoke mandates, liquidity solutions, and co-invests, with significant scalability in primary, secondary, and co-invest strategies.
• Infrastructure pipeline includes data center initiatives; ~$700 million of the previously noted $1 billion pending infrastructure FEAUM has been deployed, with continued deployment expected in 2027.
• Private Equity Fund 5 is in divestment mode; expected to see <5% impact on FEAUM in 2027, offset by co-invest inflows (e.g., Banmedica deal in Chile/Colombia). Funds P6 and P7 show stable asset bases with minimal divestment risk.
• Real estate funds are predominantly non-redeemable, permanent capital vehicles; despite recent FX volatility, valuation discounts to book value (5–15%) have stabilized post-election.
• Over 85% of fee-earning AUM (excluding SMAs/third-party) has outperformed benchmarks since inception; InCredit's 12 main strategies (comprising $11B FEAUM) have outperformed year-to-date, 1-year, and since inception.

Market and Competitive Landscape:

• Latin American election outcomes (Brazil, Colombia, Peru, Chile) broadly well-received; Brazil's continuity under Lula aligns with prior expectations, and markets have stabilized.
• Investor sentiment in Andean region (Colombia, Peru, Chile) has improved following political transitions; ~30% of fee-earning AUM is in these markets, with business performing better than late-2024 forecasts.
• Global demand for Latin America exposure remains strong; ~$2 billion raised YTD in mandates/FMAs/liquidity solutions targeting Latin American allocations via credit, PE, real estate, and GPMS.
• Competitive advantage stems from diversified platform, tailored local/global solutions, and strong investment performance; 40% of fee-earning AUM is now non-Brazilian, reducing concentration risk.
• Infrastructure and credit sectors are primary growth drivers in a rising-rate environment, with CLO structures providing resilience via senior tranche buffers.

Risks and Challenges:

• Market volatility in Brazilian securities could delay incentive fee recognition in Q4 2026; conservative guidance accounts for potential underperformance of dollar-denominated credit funds exposed to local benchmarks.
• Private equity exits may be delayed due to market conditions, though 2026/2027 performance fee expectations already factored in limited private equity carry (none projected for 2026/2027).
• Political uncertainty in Latin America (e.g., Brazil's debt levels) remains a macro risk, but business model resilience (low FX sensitivity, diversified investor base) mitigates material impact.
• Real estate NAV volatility linked to Brazilian election outcomes caused temporary 5–15% discount swings, but fundamentals remain unchanged with limited impact on long-term valuations.
• Future margin pressure from new acquisitions (e.g., Solace, WP, GPMS) expected to be temporary; integration costs and lower initial margins will normalize within 2–3 quarters post-acquisition.

Management Commentary and Tone:

• Management expressed high confidence in execution, emphasizing strategic resilience, diversified revenue streams, and strong fundraising momentum ahead of schedule.
• Tone was constructive and forward-looking; highlighted "intentional" business design for resilience across political and market cycles, with no material changes to long-term guidance despite short-term volatility.
• CEO Alex Saig and CFO Rafael Benadai emphasized disciplined capital allocation, reduced M&A pace, and focus on organic growth to drive EPS expansion in 2027.
• Management reiterated that fee rates are no longer under significant downward pressure; growth is now driven by scalable FEAUM accumulation and operational efficiency.
• Acknowledged temporary compensation adjustments in Q3 due to bonus accrual realignments, with normalization expected in Q4 and beyond.

Analyst Questions and Answers:

• Brazil Election Impact (Bank of America): Confirmed Lula's continuity aligns with prior expectations; business model insulated with 90% non-redeemable AUM, 2% FX sensitivity, and shift to credit/CLO products less affected by rate hikes; guidance unchanged.
• Data Center Deployment (Bank of America): ~$700M of $1B pending infrastructure FEAUM deployed as of Q2 2026, with substantial portion allocated to data centers; healthy deployment pipeline expected to continue.
• Private Equity Realizations (BTG Pactual): Fund 5 divestments will cause <5% FEAUM decline in 2027, partially offset by co-invest inflows (e.g., Banmedica); P6/P7 asset bases stable; net revenue impact minimal.
• Expense Management (BTG Pactual): Q3 compensation decline driven by bonus provision adjustments to align with YTD performance; expected to normalize in Q4 with margin expansion from higher-margin fees.
• Fundraising Beat Drivers (Itaú BBA): Driven by strong credit platform (CLOs), GPMS mandates, and infrastructure/SMA closings; 2027 $8B target considered achievable with robust pipeline.
• Fee Rate Outlook (JP Morgan): Average fee rates stabilizing post-IPO compression; growth now driven by organic FEAUM expansion and longer-duration SMAs; no significant fee pressure expected.
• Margin Trajectory (Goldman Sachs): 2027 FRE margin guidance of 58–60% maintained; key drivers are acquisition integration (Solace, WP, GPMS) and scaling of high-margin businesses (GPMS); SBC expected to stabilize at ~11–12% of revenue.
• Incentive Fee Volatility (BNP Paribas): ~$10–12M Q4 2025 incentive fees were conservative given Brazil volatility; ~1/3 of credit portfolio exposed to Brazilian benchmarks, but outperformance maintained; NAV-based real estate funds reverted to 5–15% discount post-election, no material budget impact.

Other Key Points:

• Investor Day: December 7, 2026, in New York (NASDAQ building) to present 2030 strategic plan and updated growth targets.
• Share Count: Targeted at ~160 million shares to support per-share earnings growth without dilution.
• Tax Outlook: No expected impact from Pillar 2 minimum tax changes on effective tax rate; 2027 tax rate projected to remain consistent.
• Strategic Shift: Reduced reliance on large M&A; focus shifted to organic fundraising, selective accretive acquisitions, and scaling existing high-growth platforms (Credit, GPMS, Infrastructure).
• Performance Fee Eligibility: >$15B of performance fee-eligible AUM across 30+ products, with 40% undeployed or invested <4 years, offering long-term carry potential.