Patria Third Quarter 2026 Earnings - PATRIA INVESTMENTS LTD

Financial Performance:

• Q3 2026 Fee-related earnings (FRE) reached $52.8 million (up 16% YoY on a per-share basis to $1.01/share); Year-to-date FRE totaled $160.4 million.
• Distributable earnings were $46.9 million in Q3 ($0.30/share) and $139.9 million YTD ($0.88/share, up 14% YoY).
• Total fee revenues were $98.3 million in Q3 (up 16% YoY), driven by 24% net organic AUM growth; management fee rate remained stable at ~84 basis points.
• FRE margin was 53.7% in Q3; expected to improve in Q4 due to seasonal incentive fees, structuring fees, and cost discipline.
• Stock-based compensation was $10.1 million in Q3 (11.3% of fee revenues, in line with guidance).
• Transaction costs declined to $8.7 million; expected to remain similar in Q4 and decrease further in 2027 as M&A activity slows.
• Revenue exposure to Brazilian Real (BRL) is ~20%, with minimal FRE sensitivity (approx. 2% impact from a 10% FX move); ~90% of fee-earning AUM lacks unlimited redemption rights.

Guidance and Future Outlook:

• FY 2026 FRE guidance narrowed to $225–$235 million ($1.42–$1.48/share), representing 11–15% YoY per-share growth; range adjusted for potential market volatility impacts on incentive fees.
• FY 2027 FRE guidance confirmed at $260–$290 million ($1.50–$1.80/share), implying 10–15% YoY growth.
• EPS growth in 2027 is expected to exceed FRE growth due to reduced transaction costs and deferred payments from acquisitions, with lower tax burdens.
• Full-year 2026 fundraising target of $7.0 billion achieved YTD at $6.9 billion, with a healthy pipeline to exceed the $8.0 billion 2027 target.
• Management expects a meaningful sequential revenue uptick in Q4 driven by structuring fees and seasonal incentive fees.
• Long-term strategy focuses on scaling GPMS and credit platforms, with efficiency gains expected to restore FRE margins to the 58–60% range in 2027.

Business Segments and Product Lines:

• Credit and GPMS led fundraising YTD, comprising 62% of the total ($40% and 22% respectively).
• Infrastructure and Multi-Asset SMAs (announced Q2 2026) accounted for 23% of fundraising, with significant allocation to infrastructure and data centers.
• Stollis (acquired Brazilian CLO manager) raised ~$945 million YTD, focusing on senior CLO tranches for institutional investors.
• Over 85% of fee-earning AUM (excluding SMAs and third-party managed funds) is outperforming benchmarks since inception.
• More than $15 billion in AUM now carries performance fee potential across 30+ products/SNAs.
• Pending fee-earning AUM deployment of ~$0.7 billion (down from $1.0B in Q2 2025) is active in infrastructure and data centers.

Market and Competitive Landscape:

• Latin American political environment remains constructive; new administrations in Colombia, Peru, and Chile viewed positively.
• Brazilian election outcome (Lula's victory) priced in; markets stable post-election, with no material expected impact on fundraising or FRE.
• Private equity Fund 5 is in divestment mode, expected to reduce fee-earning AUM by <5% in 2027, partially offset by co-invest inflows (e.g., Banmedica).
• Global clients increasingly utilize mandates, FMAs, and liquidity solutions; nearly $2 billion raised YTD for these bespoke structures.
• Platform diversification has shifted exposure away from Brazil (now ~35% of fee-earning AUM invested in Brazil vs. 85-90% at IPO).

Risks and Challenges:

• Market volatility in Brazil exposed securities could delay near-term private equity and growth equity exits, potentially impacting 2027 performance fee realizations.
• No performance fees expected in 2026 or 2027 from private equity exits due to current market conditions.
• Revenue sensitivity to Brazilian Real and soft currency devaluation is limited to ~2% of FRE.
• Real estate funds are subject to interest rate sensitivity, though viewed as long-duration permanent capital vehicles with low redemption risk.
• Incentive fee realization in Q4 2026 is subject to relative performance of dollar-denominated credit funds against benchmarks amidst volatility.

Management Commentary and Tone:

• Management expressed high confidence and a constructive tone, emphasizing business resilience, strategic diversification, and execution.
• CEO Alex Saig highlighted that the business is "intentionally built for resilience" with a well-articulated plan executed over five years.
• CFO Rafael Benadai and CEO confirmed that margin compression post-acquisition is temporary, expecting recovery to 58-60% in 2027.
• Management remains cautious but realistic regarding Brazil, noting a shift toward credit products (CLOs) that perform well in higher interest rate environments.
• Confidence is high on delivering 2026 and 2027 guidance, with EPS growth expected to outpace FRE growth in 2027 due to cost efficiencies.

Analyst Questions and Answers:

• Bank of America: Asked about Brazil's financial services outlook under Lula. Management expects continuity with fiscal discipline, noting low FRE sensitivity and a strategic shift to credit/products less exposed to Brazil. Confirmed guidance despite election volatility.
• Bank of America (Follow-up): Inquired on data center deployment. Management confirmed ~$0.7B of pending fee-earning AUM remains, with significant deployment into data centers and other infrastructure.
• BTG Pactual: Asked about PE realizations and compensation trends. Management expects <5% AUM reduction from PE (Fund 5) in 2027, offset by co-invests. Q3 compensation decline attributed to adjusted bonus accruals aligned with YTD performance.
• Itaú BBA: Questioned fundraising beat and 2027 pipeline. Attributes success to credit platform (CLOs) and GPMS mandates; pipeline supports $8B 2027 target.
• J.P. Morgan: Asked about management fee rate inflection. Management stated fee pressure has largely eased; growth will be driven by organic AUM expansion and longer-duration mandates, with no specific guidance on fee rates.
• Goldman Sachs: Asked about margin trajectory. Guidance remains 58-60% for 2027, driven by acquisition integration and scalability of high-performing segments like GPMS.
• BNPP: Inquired on incentive fee sensitivity to Brazil and NAV-based fees. Management noted conservative narrowing of guidance ($10M) due to Brazilian security volatility but expects potential upside if outperformance continues. Real estate funds trading at 5-15% discount to book value; election outcome had negligible impact on budget.

Other Key Points:

• Investor Day scheduled for December 7 in New York to present the 2030 strategic plan and updated growth expectations.
• The company maintains a stable share count of ~160 million, supporting per-share earnings growth.
• Effective tax rate in Q3 was 3.3% (Q3 2025 was an outlier); no significant impact from Pillar 2 minimum tax changes expected in 2027.
• Revenue mix has evolved: ~20% BRL-denominated, with majority in USD structures (SMAs/Perpetual vehicles) reducing currency risk.
• Strategic pivot towards bespoke mandates (SNAs) provides longer duration (10+ years) and diversified fee streams beyond traditional management fees.