Patria Investments Ltd

NASDAQ:PAX

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Patria First 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 your speaker today, Josh Wood, Head of Shareholder Relations. Please go ahead.

[Josh Wood, Head of Shareholder Relations]

Thank you. Good morning, everyone, and welcome to Patria's First Quarter 2023 Earnings Call. Joining today are our Chief Executive Officer, Alex Saigh; our Chief Financial Officer, Ana Russo; and our Chief Corporate Development Officer, Marco D'Ippolito.

This morning, we issued a press release and earnings presentation detailing our results for the first quarter 2023, which you can find posted on our Investor Relations website at ir.patria.com or on Form 6-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 fund. 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.

Patria generated distributable earnings of $39.1 million or $0.27 per share for 1Q '23. We declared a quarterly dividend of $0.226 per share payable on June 8 to shareholders of record as of May 17.

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

[Alex Saigh, Chief Executive Officer]

Thank you, Josh, and good morning to everyone. Patria delivered solid results in the first quarter of 2023, delivering $0.27 of distributable earnings per share as we make progress in some key areas and march towards our targets for the year. Post tax distributable earnings were $39 million in the quarter, which included $31 million of fee-related earnings and also $10 million of performance-related earnings.

Fundraising in Q1 totaled $390 million, anchored by strong momentum in our Brazil focused products, including contributions from the Brazil feeder for our latest vintage flagship private equity fund, our credit 365 fund, which brings private investments opportunities to individual Brazilian investors and REITs managed by VBI, our real estate platform in Brazil. And importantly, we are making good progress towards significantly larger fundraising results in the next few quarters.

Already in Q2, we have secured approximately $370 million of additional inflows, including a follow-on in our core infrastructure fund and additional inflows from VBI, bringing our year-to-date fundraising through April to more than $750 million. That is capital primarily raised outside of our flagship funds, which we expect to contribute more significantly by the close of Q2, including the first closing for our next flagship infrastructure fund.

On the people front, we also just announced Marcelo Fedak to serve as our Head of Real Estate, further strengthening the leadership structure across our asset class verticals. Overall, we're happy with the performance in the quarter and continue to feel good about our fundraising target of $5 billion to $6 billion and fee-related earnings guidance of $150 million for the full year 2023.

How is that we are able to maintain confidence in our trajectory in spite of volatile market conditions? It's because of the resilience of our business model. We are dependent on deposit-based funding. Much of the capital base is locked up for multiple years and even products that offer more frequent liquidity have shown considerable stickiness because of their solid track record. We also run a light balance sheet, meaning we don't require significant capital at the firm level to deliver our earnings stream for shareholders. And likewise, don't have significant mark-to-market exposure that impacts our balance sheet assets.

While we, of course, aren't immune to the macro environment, we believe we have a model that allows us to deliver consistent and growing fee-related earnings, with the upside from performance fees as we deliver returns to our clients over the cycle.

On the macro front, our business continue to thrive despite fresh challenges in the West and Western Europe, brought by the high-profile bank failures and rescues. One of PAX's investment tenants is the low correlation between Latin America and other geographies. Investors in the region have indeed begun to price in near-term interest rate cuts in major Latin American economies because of the sharp reduction in consumer inflation, a consequence of preemptive monetary policies implemented by vigilant central banks. In that context, Chile seems to be the best candidate to start the cycle of monetary easing.

Consumer inflation peaked in 2022, the government budget has already turned into surplus and the country is posting significant progress in the institutional area. In Brazil, consumer inflation peaked in April 2022, and they are now convincing signs of fiscal consolidation by the new administration.

Despite sometimes closely rhetoric, the executive and logistic branches have agreed on the basics of new fiscal framework to secure a breakeven next year and primary surplus afterwards. Also, there is political consensus to pass the comprehensive tax reform, which would be gradually enacted from 2024 onwards. Constructive domestic developments in major Latin American economies are taking place amid favorable terms of trade and robust foreign direct investment flows. Latin America is increasingly perceived as being in a sweet geopolitical spot and an attractive destination for near or friendly shoring CapEx. This outlook has led to currency appreciation against the U.S. dollar year-to-date and thus proving further evidence of the region's low correlation with the rest of the world.

Now turning to some details across our platform. In private equity, we generated the $10 million of performance-related earnings in Q1 through an agreement with fund investors to crystallize a portion of the performance fees related to Lavoro, a leading Latin American agricultural inputs retailer, which completed an IPO at NASDAQ in Q1. This crystallization was made possible outside of our standard waterfall structure, which Ana will cover in more detail.

The focus on divestment for Fund V continues, and we do expect to make meaningful progress this year. In Q1, we sold an initial small tranche of our investment in SmartFit, the leading fitness market company in Latin America by membership, and we are in advanced stages of the exit process for multiple additional portfolio companies.

While the fundraising environment for private acuity remains challenging, we are advancing on our next closing for the next fund vintage, and we believe divestment and return on capital in the older vintage funds will be a strong catalyst for that fundraising process.

Operating metrics at underlying portfolio companies continue to look good with EBITDA growing at approximately 15% year-over-year based on available data for the quarter. We did reflect a downward impact on our net accrued performance fees in Fund V in Q1, mainly driven by the volatility in the share price of Lavoro, immediately following its IPO, which is not uncommon in a de-SPACing process. We continue to feel great about the company, which recently reported impressive results for the most recent semester with adjusted EBITDA up 88% compared to the prior year. We expect to see the valuation improve considerably based on fundamentals and similar industry comps. Moreover, we feel great about the full portfolio and the value we can deliver to shareholders over the next few years.

In infrastructure, we are approaching our first closing of the next-generation flagship fund, which we expect to commence here in Q2. Strong realizations from Infrastructure Fund III in 2022 were led by the sale of ODATA, our data center platform and partial exit of Entrevias, one of our toll roads in Brazil. These and prior divestments account for more than $2 billion in proceeds to limited partners and with a 13% net IRR in U.S. dollars. We are now in the performance fee realization phase of the fund with a high-performing portfolio still remaining. These are likewise great supporting factors for fundraising and should allow us to deliver a sizable first close on the new flagship fund.

Just after the end of the quarter, we also announced a follow-on offer for our non-listed infrastructure core vehicle, which we call [PEER]. The offering closed in the first week of April, making a Q2 fundraising result, but it attracted BRL215 million of new permanent capital AUM and was even larger than the initial offering that we completed last year. It is a great example of how we are expanding our product menu in this asset class to reach new client channels and facilitate the expansion of alternative allocations for local investors in the region.

Our credit strategies continue to perform well with both Pan-LATAM and local Chilean strategies, delivering a strong result in the quarter. The largest fund LATAM High-Yield Corporate Credit outperformed its benchmark by 180 basis points in the first quarter and 130 basis points over the past year, which was a very challenging period for the asset class.

We also expect to complete the first closing of our infrastructure credit fund in Q2, which already has anchor commitments in place from 3 multilateral agencies, as we have noted. Leveraging our long-tenured experience in LATAM infrastructure development as well as transaction diligence through existing pipelines, this product will provide a new angle for Patria to serve clients across the capital stack in infrastructure.

In Public Access, our Chilean equity strategies again were a highlight, with the main fund, Pionero outperforming by 180 basis points in Q1. For LATAM equities more generally, we see an attractive setup looking forward in the second half of 2023 and 2024. Valuations remain at their lowest point since 2008 with a broad LATAM index trading at approximately 7x earnings. And we are also seeing a historically large gap between local interest rates and following inflation. This backdrop is generating some early traction in our investor base, and we think this is constructive for both performance and flows in the coming quarters.

In real estate, we further strengthened our leadership team with Marcelo Fedak joining Patria as a new partner to serve as our Head of Real Estate across the region. Marcelo has built a successful 14-plus year track record managing over $4 billion of real estate-focused AUM for large financial institutions, and we are very excited for his arrival at Patria to lead our growth in this asset class.

VBI, our platform in Brazil is performing very well and continues to grow with nearly $50 million of inflows in Q1, mostly into an office-focused REIT. Just in early April and therefore, yester reflect in our metrics, VBI has secured nearly $250 million of additional inflows by gaining market share with Brazilian institutional investors and consolidated management of smaller or single asset REITs. Marcelo will partner with VBI's superb leadership team to continue our momentum in Brazil and also look broadly to how we can replicate that model in other regional markets.

Advisory and distribution is an area we don't typically highlight as often, but has quietly been growing nicely with AUM up 13% over the last year and $156 million of inflows in Q1. Here, we are currently doing a few things: traditional wealth management services, feed the funds for global alternatives and even direct fund raising through global partnerships. On the last point, for example, we raised more than $50 million in Q1 for direct third parties, which does not reflect in our AUM, but does earn incremental placement fee revenue. While this part of our business is still relatively small as an earnings driver, it represents the strategic ambition to be a trusted knowledge partner and conduit for LATAM investors to access alternatives more broadly across the globe. That can take a number of different forms, which we are exploring, and we believe there is potential as a meaningful vector of growth in the coming years.

So again, overall, I'm pleased with a solid quarter, and we are on track for our 2023 targets of $5 billion to $6 billion of organic inflows and fee-related earnings of $150 million. We are making great progress behind the scenes, which we believe will drive results to be seen in the next few quarters.

Let me now turn things over to Ana to cover the numbers in a little more detail, and then Marco will add some comments on our corporate development efforts. Ana?

[Ana Russo, Chief Financial Officer]

Thank you, Alex, and good morning. Patria's first quarter 2023 results were in line with our guidance of the last call regarding fee-related earnings, and we are able to generate performance-related earnings, which added some upside to the distributable earnings and the dividends.

Our fee-related earnings were $31.2 million in first quarter '23 at similar levels to our first quarter '22 of $31.9 million. This result is consistent with our comments that first quarter FRE was likely to be more in line with the 2022 run rate with growth coming in the later quarters of the year. Total fee revenues were $57.1 million in Q1 '23, up 4% from $55 million in Q1 '22 with the positive impact of capital deployment in our drawdown funds and the addition of VBI. This was partially offset by the impact of outflows in open-end credit and public equity funds and the contractual end of the fee terms of another vintage infrastructure fund.

Total operating expenses for first quarter '23 were up 12% from first quarter '22, driven by expenses related to recent acquisitions and also increases in compensation and certain costs driven by inflation and the expansion of our platform. This resulted in a consistent FRE level and an FRE margin of 55% in the first quarter 2023. The margin is down from 58% in first quarter '22, but is still in line with our guidance range, achieving our overall FRE guidance for the year implies that the margin will likely rise slightly in later quarters.

Performance-related earnings for first quarter '23 were $10 million and were generated for Private Equity Fund V. These performance fees were crystallized in conjunction with the IPO of Lavoro. For this specific case, the limited partner of the fund and Patria agree that as a consequence of successful completion of the transaction, part of performance fee was crystallized through Lavoro shares to Patria. Given the opportunities, we are pleased to be able to deliver this value to shareholders here and in the first quarter.

Note that we have adjusted our presentation of net accrued performance fees beginning in first quarter '23 to reflect the balanced growth of related corporate taxes, where it was shown net in all previous report. This change makes sense in order to fully align the performance-related earnings in our P&L with this operating metric, which represents the potential inventory for the line items and exclude an impact which will be reflected below in the corporate tax line item of the P&L.

The net accrued performance fee balance stands at $437 million as of March 31, 2023, down from $478 million at December 31, '22, driven primarily by the quarter-end share price of public holdings in Private Equity Fund V, as Alex noted. This continues to equate to approximately $3 per share of value that can accrue to our shareholders as this portfolio are dissected.

Distributed earnings of $39.1 million in first quarter '23 is up from $35 million in the first quarter '22, primarily driven by the benefit of performance-related earnings in the current quarter. Our d per share of $0.27 will generate a dividend to shareholders of $0.226, which translates to roughly 6% yield on annualized base at recent share price level. Total AUM was $27.3 billion at the end of Q1, roughly flat for both the quarter and trailing years with inflows from fundraising and acquisitions, offset by the impact of the market environment on portfolio company valuation as well as the outflow pressure we have seen in some of our open-end products.

Fee earning AUM of $19.9 billion is up 4% for the quarter and up 5% from 1 year ago, consistent with our increasing fee revenues. Remember that for fee earning AUM, valuation impact is more muted and limited to funds that charge management fee on NAV as opposed to cost base. In fact, valuation was actually a positive driver in the first quarter '23 and prior year bridge. This reinforces the relative stability of our management fee stream when public markets are volatile.

As Alex noted, we are still on track for our 2023 fee-related earnings guidance of $150 million at a margin in the upper 50% range. We believe this growth will be concentrated in the back half of the year.

I will now turn the call to Marco for a few words.

[Marco D’Ippolito, Chief Corporate Development Officer]

Thank you, Ana, and hello, everyone. With my new role focusing time more fully on Patria's corporate development efforts, I can reiterate that we remain highly focused and active on this vector of growth. Our goals through M&A are clear: expanding our product offering, extending our geographic expertise and enhancing our distribution channels and capabilities. Each of the 4 acquisitions we closed in our first 2 years since IPO achieved one or more of those aims.

Moneda brought credit and public equity verticals as well as extensive expertise and client relationships in Chile. Kamaroopin and Igah, both brought talent and track record to expand our private equity vertical into growth, equity and venture capital. And VBI brought us expertise in real estate, along with a significant platform of permanent capital AUM.

Looking forward, we've conveyed our interest in 3 key priorities: 1, geographic expansion into Mexico, where we see significant opportunities stemming from near-shoring trends in coming years; 2, continued expansion of our real estate business, both in and beyond Brazil, which we believe is still subscale relative to its potential in the region; and 3, expanding our ability to serve as a conduit in the region for investing in global alternatives. We're actively exploring opportunities in these areas, and we'll continue to keep you posted on our progress.

Let me now turn it back to Alex to close.

[Alex Saigh, Chief Executive Officer]

Thanks, Marco and Ana. This earnings call marks the first step in a new calendar year, and Patria starts 2023 with clear ambitions for growth as we continue our journey as the gateway for alternative investments in Latin America. We continue to operate in a challenging environment, and we must continue to deliver consistent, attractive returns and second to none service to our clients as we scale and expand the investment platform.

We have assembled a world-class team across asset classes and functional areas to meet those demands, and I believe we are very well positioned to succeed. We shared our goals over the next few years with you at our Investors Day late last year, so the stage is set. Now it's our job to execute. And assuming we do, I believe there is no question that Patria looks very attractive at today's valuation. I'm proud and privileged to lead this group and to serve our clients and our shareholders.

We're now happy to take your questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Tito Labarta from Goldman Sachs.

[Tito Labarta, Goldman Sachs]

I guess my question, just to follow up a little bit more on the FRE outlook for the year. I know you said you're on track and margin is going to improve a bit from here. But just to think about how that will evolve, right? Because I mean, with the $31 million, you probably have to get maybe about $40 million in the second half of the year to deliver that $150 million target. Would that be just increased fee-earning AUM, like should fee revenues be the driver there? Or do you see improvements here on the margins, right, at margins at the low end of the guidance? If you could just help us think about sort of those dynamics from here on out to be able to reach that $150 million? And then a second question just on the performance-related earnings, good performance in the quarter. Is there room to realize more performance fees this year given the realization of Lavoro, and any color you can give on the outlook for the performance fees for the...?

[Alex Saigh, Chief Executive Officer]

Tito, this is Alex. Thanks for your questions. And going back to the first question here, yes, it's exactly as you said, we see both increases during the year. As we did raise first close of our flagship private equity fund late last year, we're now investing that fund and you know that we charge fees on invested, and not uncommitted on that fund. And also for our flagship infrastructure fund, as we mentioned, we target to have a first close in this quarter in second quarter of 2023. And then we start investing in that fund, and we also charge on invested capital there. So these 2 are big flagship funds, Private Equity Fund VII that I just mentioned and the first close of Infrastructure Fund V coming in the second quarter, it gives us a lot of dry powder or committed capital but not invested. And as we invest along the year, that should drive revenues up. And those revenues come with basically no cost, right, because we already have the teams in place to manage and invest the 2 funds that I just mentioned. In addition, our Brazil driven strategies, as I try to send the message over the call here, they're doing extremely well in managing to raise and overperform in Latin America, as previously also stated in other earnings calls like this one. We are also overperforming in the Middle East. We're overperforming in Asia, compensating a little bit still the underperformance in the U.S. on the fundraising side. So in general, when we add up all the numbers, we still feel comfortable that we will do and reach the $5 billion to $6 billion of organic fundraising for 2023 and $150 million of fee-related earnings for 2023.

In addition, we also see the business scaling a little bit, as you also mentioned, Tito, because revenue is going up, expenses more or less under control. So the margin should notch up a little bit as we move through 2023, reaching then the numbers that you just mentioned on a quarter-by-quarter basis to the whole summing up of $150 million of FRE by the end of the year in total for 2023.

On the performance fee side, yes, I think we've getting now more and more comfortable on that side, I think because of the big divestments that we have for our Infrastructure Fund III in the -- during the year of 2022. As we conveyed and you follow very closely, we did send back to investors for over $1.4 billion just throughout the last year for that specific fund totaling $2 billion in total with previous divestments for that Infrastructure Fund III. That actually generated a small amount of carry for 2022 of approximately $19 million or $18.9 million, whatever, $19 million for 2022 and did put us in the catch-up or bracket there. So everything that we sell from that fund, 100% will come as performance fees. So raising the possibility of us having performance fees from Infrastructure Fund III this year and the performance fees that we had in the first quarter of 2023 came from Private Equity Fund V investments Lavoro, our agricultural input distribution company, not from the Infrastructure Fund III that I just mentioned.

So I'm happy there on the performance fee side, and I think we can do well on that side. Overall, on a 3-year basis, as mentioned in our PAX Day late last year of $180 million for the general partner. I think we're in target. Of course, performances, as you know, they can slip a quarter here, a quarter there, a year here, a year there, but I'm comfortable and getting more comfortable there with that number.

Why is that? And the last point here, just on this catch-up of phase, bracket of Infrastructure Fund III, there's another $100 million performance fees. We already generated $19 million last year with this $10 million. That's $29 million. With this another $100 million, $139 million we say that we guided $180 million for the whole 3 years, 2023, '24, '25. So it gets me to be in a comfort level here on that front. So that's why I come back and say look looking into 2023, I'm comfortable with the $150 million FRE. And also, I think to generate as we move into the year. I hope I answered your questions.

[Operator]

Our next question comes from the line of Craig Siegenthaler of Bank of America.

[Craig Siegenthaler, BofA Securities]

Alex, Mark, good to hear that you're still on track with your targets against a tough backdrop. With the U.S. alt managers in this more difficult backdrop, many of the first closes have come in fine, maybe 50% of the target in a pretty short period of time. This can include raises from long-term clients, so it might be viewed a little easier. But the second through final closes have been a lot tougher, both in terms of time and size. So how should I think about this sort of risk when I'm modeling both Private Equity VII and Infra V?

[Alex Saigh, Chief Executive Officer]

Craig, nice talking to you as well. I hope all is well with you and your family. No, you're right on the dot there. I think the way that we are seeing our flagship fundraising is exactly as you said, we have a big first close, big, I mean, 40%, 50% of the target of the fund and then comes in the second, third close. I think contrary to prior fundraisings, the second, third close coming in smaller amounts and more scattered than one chunky second close that was done more of the norm going back, whatever, several vintages ago.

We're seeing that on our Private Equity Fund VII. So we had a big chunky first close, and then we have several other smaller ones, and we are closing on that fund every 2 weeks, every 3 weeks. And as we group a bunch of investors together, we have another close. In addition to that, Craig, what I can say also from Private Equity Fund VII, as I mentioned, as we are also raising money from other locations of the world, we're overperforming LATAM, Middle East, including Israel, Asia and underperforming U.S. We're also having specific vehicles for those regions. So we have a group of Brazilian investors coming in through the Brazilian feeder and a group of then Colombian investors coming from a Colombian feeder and et cetera. So that's why it's also a little bit more patchy, having these smaller closes. But in the end, I feel comfortable from what I see now in my pipeline that we'll continue to fundraise significantly for Private Equity Fund VII, and that then comes from Infrastructure Fund III now.

Infrastructure Fund III, the first close, I think, is even stronger than I was expected. And I think also it has to do a lot with the divestments that I just mentioned -- sorry, Infrastructure Fund V. It has a lot to do with the divestments that I just mentioned for Infrastructure Fund III. And that big VBI number, of course, also drives fundraising. So you will probably see in the first quarter -- in the second quarter, I'm sorry, of this year, a chunky first close. And then over the year, you're going to see other closings for there. But I think we'll reach the number as well. I feel very comfortable with both. Lastly, on the private acuity side, we do see a lot of divestments coming and we are finding several exits for our previous vintages funds that helps, of course, the VBI number of those funds go up and thus drive also a better fundraising in the near future.

So yes, you're right, it's a little different than it was, I think, previous vintages ago. And what I can say is, I think looking back to our strategy of this capillarity in fundraising, have offices all over the world and fundraising from several regions of the world, we're managing them to compensate a region like the U.S. that is still underperforming with overperforming in other regions. And of course, I have to overperform in 2 or 3 other regions to compensate the U.S. because the U.S. is a big region. But as I said, Asia, Middle East, including Israel and LATAM in general, and LATAM very well surprised, to be honest, I think we're fundraising 2x to 3x more than I expected; even Israel, 2x to 3x more than expected, even though the numbers from Israel are smaller than the whole LATAM, but it's 2x to 3x more than what I expected. In the Middle East, I think everybody agrees everybody is fundraising there a lot more than they expected, right, because of the net inflows into that region and the sovereign funds and the pension funds of that region.

And Asia as well, interesting, lastly, again, I said lastly, twice, I'm sorry, but lastly, really the lastly here comes with this phrase. The geopolitical tensions of the world are definitely pushing companies to look into LATAM, from Asia, from the Middle East with different and better eyes on the strategic front and the investment front. So talking to a lot of our Asian clients and prospects that will buy our portfolio of companies. So when an Asian company, a Chinese-based company is thinking about expanding out of China, where should they go first given the geopolitical risks? Should I go into the U.S.? Wow, there's all these concerns. Should I go into Europe? Kind of same concerns on the geopolitical front. Well, I can continue to expand to Asia, Southeast Asia, India and then comes Latin America, which is a very, very much interesting market. And we're seeing this very positive foreign direct investments into the region, a lot of Chinese investments in the region, and that is benefiting us from an LP, limited partners point of view and also from selling companies a strategic interest for our portfolio companies point of view. And that's why we are also outperforming in Asia. It has -- and Middle East, Middle East net inflows, but Asia, in addition, it has this geo political issue that is favoring other parts of the world vis-a-vis the U.S., vis-a-vis Europe. It's clear that we had several Chinese delegations in Brazil, doing diligence in our funds, doing diligence in some of our portfolio companies, which is kind of different than several years ago. The volume increased tremendously. I hope I answered your question as well.

[Craig Siegenthaler, BofA Securities]

I just had one follow-up on Moneda. What new product does Moneda launched since the acquisition? Or said a different way, what existing funds that they had before the merger are now sold to a new client segment? I'm just looking for an update on the specific synergies of where Moneda is leveraging Patria and Patria's client distribution network?

[Alex Saigh, Chief Executive Officer]

Yes, thanks for your question. On the credit side, I mentioned I think during the call, I should have said it more clearly, I'm sorry, that we are doing a good job fundraising for a product called Credit 365. 365 means that this fund has a 1-year liquidity gate. That's why the 365 attached to the name. And that was a Moneda product, designed products by Moneda's credit team to Brazilian investors. So no, last year, I think we had a lot of the Moneda team understanding the Brazilian market and trying to tailor-made their credit expertise in this example that I'm using to the Brazilian client needs. So we identified several of our client needs in Brazil mid-last year. We started working with these clients, and we already launched one product under this new synergic team that I just mentioned. And that's -- I think that's one of the main reasons that we did associate ourselves with Moneda to use their credit intelligence. I'll talk about public equities but user credit and intelligence to do then develop products for the Brazilian clients. And we see that as a great potential. Of course, as you know, in Brazil, given the high interest rates, credit is a soft after product, right? So I think that's why the credit product is also doing very well. But of course, you have the whole Moneda intelligence behind it.

Second, as we raised our Private Credit Fund II in Brazil as well, we already had Private Credit I in Patria. The Moneta credit team did help us a lot and actually expand the addressable market of that product and, therefore, expand the potential size of our Private Credit Fund II. So -- and we are identifying a lot of needs from our Brazilian clients also on the public equity side, and we are doing the same. We haven't launched any projects yet, using the public active intelligence of Moneda. But definitely, so it's on the other there. We are making new solutions for our clients.

On the other side of the equation, we are, of course, raising money with Chile and institutional investors. And what we did, first, Craig, is to focus on our Private Equity Fund VII and now Infrastructure Fund V, which is our already 2 products. So let's focus on these 2 products and use the Moneda distribution channel to raise money for our 2 flagship funds before actually introducing other products through that channel. So because of the size and the importance of the flagship funds and because there are already 2 products. And we did the same in Colombia. Moneda has an interesting distribution capability in Colombia. We're doing the same, focusing first on the 2 Patria's flagship products. So we have not designed any products yet to the Chilean institutions, the Colombian institutions. The main reason there is because we want, again, to focus the fundraising on the 2 flagship funds. But we are cooking here several new ideas. And we had the whole management team of Patria in Colombia last week. We do our quarterly management committees in different offices. Last week was Bogota. We spent a whole week there. And there's so many exciting things going on. We're talking to distributors on the real estate investment trust front, on the infrastructure investment trust funds, very, very interesting, also given the high interest rates in Colombia, the credit-related products. So we're waiting to finalize the fundraising for the 2 flagship funds in order to start introducing a new level of products to the Colombian clients and the Chilean clients. I hope I answered your question.

[Operator]

Our next question comes from the line of William Barranjard of Itau BBA.

[William Barranjard, Itau BBA]

My question here is regarding the capital market conditions in Brazil. Since the beginning of the year, it has tightened in credit and equity as well. So it would be interesting to understand how this environment is impacting you, be it in terms of opportunities for investments at our overvaluations or an extra care for current invested names that are having maybe a harder time due to tighter credit markets here?

[Alex Saigh, Chief Executive Officer]

Yes, of course. William, thanks for the question. Yes, interesting that in Brazil, I think the credit markets tightened more because of one specific case that frightened the market in general. As you know, the retailer named Americanas, then Silicon Valley and the First Republic, et cetera. And I think one thing may be added with the other. But I think if I would say, which is reason #1, I think the reason none is more the whole Americanas issue than external issues for the local credit market, as you probably know. Well, let me break down into different verticals here. I'm starting with private equity, our companies are not really leveraged. We have today around 1.3x EBITDA of leverage without considering sellers financing. We have this consolidation strategy, and we do buy some companies using sellers finance, but a big chunk of that sellers finance is linked to escrows and guarantees to contingencies that we pay out year #5, year #6 after closing. So of course, it is sellers financing, we owe that money to the sellers, but we have a very long-term tenure, and it's linked to all these things that I said, contingencies that can potentially become liabilities, guarantees for escrow, et cetera.

So it's a very accretive way of leveraging, to be honest. And the average cost that we have on our seller financing is inflation plus 2% in Brazil. So as you know, inflation running around 5-ish plus 2% is around 7%. So it's actually way below even the CDI rate in Brazil. So it's a low cost of -- it's a low leverage as a multiple of EBITDA, and the cost of leverage for that seller financing is also low. And of course, the bank debt are market turns, but we don't have a lot of bank debt in our balance sheet.

So yes, of course, in general, the credit tightness affects us because we do manage 42 companies in Brazil and LATAM, but nothing really in particular here or there. If you're rolling one of that 1.3x in net EBITDA debt, of course, you're going to face a credit tightness. But given that, I think, the solidity of the balance sheets of our companies and also because we have dry powder as well in most of our funds, I think we're fine there. I'm generalizing, of course, there might be 1 case here, 1 case there, but in general we don't see a big issue even though we feel the credit tightening.

On the infrastructure side, it's all project finance-related debt, right? So we don't do any investments that we first commit ourselves and then we go running out and looking for debt. When we go into a concession bid, we have everything already locked in, right, all the costs for constructing that specific asset and of course, all the debt already secured for that concession. And then if we do win the bid, everything is already locked in and the debt is project finance like debt, which is then definitely relates with the assets and the projection -- the cash flow projections of that asset and, of course, the same currency.

In addition, what we do, we do raise money in inflation plus on our project finance debt in infrastructure. Why? Because our revenues are adjusted corrected by inflation. So in the end of the day, basically the spread. And again, the spread is locked in in day 1 because we go into those concessions with everything already signed and your institution is always a major partner of ours in several of these projects. And so that's on the infrastructure side.

Then if you go to the credit side is the opposite right now, we're benefiting from that credit tightening because, as you know, 99% of the debt in the region is variable. It's -- we have a very, very small portion of the debt in the region that is fixed rate. So we do, of course, we did came in with the right strategy of very short duration before the interest rate hikes. And that's why today, our funds are performing so well, as mentioned during the call, our credit funds. Our high yield, for example, LATAM credit funds have a new maturity day of 17% in U.S. dollars. So it's extremely interesting time for you to invest in the fund and invite all of you here in the call to become, if you're not, one of our clients. But it's a very interesting opportunity and a very interesting yield to maturity because of the right strategy of getting into this tightening phase 2 years ago with a very short duration portfolio.

So we're -- again, we feel, we see it, but it's not really affecting us. Taking on new debt, the cost of debt did not raise significantly in Brazil, to be honest, for good projects on the infrastructure side. So we'll continue managing to close on these consortiums of construction companies and financial partners for new concessions. The spread for the projects that we are looking into have not changed much from today versus 6 months, a year ago. I hope I answered your question.

[Operator]

Our next question comes from the line of Domingos Falavina of JPMorgan.

[Domingos Falavina, JPMorgan]

I had a question regarding the net accrued performance specifically on P5. You recognize the performance on the Lavoro deal, which was $10 million contribution to the [15, 16] performance and to the earnings. But you had a markdown of $44 million. I'm curious to know how much of the $44 million is linked to the Lavoro deal?

[Alex Saigh, Chief Executive Officer]

There are different things -- well, first of all, Domingos, thanks for your question. I'm sorry, I started already answering your question.

[Domingos Falavina, JPMorgan]

It's efficient.

[Alex Saigh, Chief Executive Officer]

Sorry about that. So we have a huge stock, right, inventory of Lavoro. If you -- the Fund V has approximately $800 million to $1 billion of Lavoro stock. And that inventory to the $40-something million that you mentioned, it's over this $1 billion. So that's why it looks like a big absolute number, but as a percentage of what Fund V has of stock in Lavoro is a small percentage for $40-something million of $1 billion --

[Domingos Falavina, JPMorgan]

Just so that I understand the math here, is it like you had valued it at $800 million more and then you mark down $800 million and then the performance is 20% on that ballpark, $800 million, so --

[Alex Saigh, Chief Executive Officer]

Yes, exactly.

[Domingos Falavina, JPMorgan]

I'm sorry, $200 million, right? $200 million, it was overvalued at -- $200 million, 20%, $44 million adjustment.

[Alex Saigh, Chief Executive Officer]

Yes, yes, that's exactly. Yes, let's say, $1 billion. And the numbers are not really different from that, to be honest. Coincidentally, we had $1 billion worth of stock. Fund V had $1 billion worth of stock of Lavoro. And then as -- when we IPO-ed the company, as of the IPO, when we did the IPO in the end of the quarter of the first quarter, from that point onwards, you have to mark the company using the price of the shares. And after the IPO, the prices of the shares traded down and traded down by -- in your example, there by 20% from $1 billion to $800 billion is $200 million less, 20% of that, which is our performance fees, the $40 million. That's exactly right, the example that you're using and the numbers were more or less similar to what you just said.

So again, after an IPO, we don't mark the company using our discounted cash flow model. We use the price of the stock. In these de-SPACings, the volatility of the stock is pretty high. The company posted incredible 2022 numbers over 80% increase in EBITDA, 80%. But nevertheless, the stock do trade up and down tremendously during the -- after the IPO. Actually, after the IPO, the stock went up 30% from the IPO price and then went down 20% and then went up 15% or down 10%, but we just have to get the average of the last 10 days, and that's the number that we use for marketing purposes, and that's exactly what you said Domingos.

[Domingos Falavina, JPMorgan]

Super clear. And just so that we have an idea, what else -- like given this is already collecting performance, what other big assets or at least doing in the V, like in terms of notional -- $800 million from Lavoro and what else?

[Alex Saigh, Chief Executive Officer]

Well, the fund, if we go to the mark of this fund is yielding a 2.2x MOIC, multiple of invested capital net of fees. It's a $1.8 billion fund. So $1.8 billion, 2x to be easy here, $3.6 billion, then $3.6 billion minus the $1.8 billion of cost is 1.8x 20%. So this is a very, very interesting fund for us in that front. It's a large, sizable, scalable front fund and Lavoro is the first company that actually is looking to an exit through this IPO. In addition, we did take one of the companies of Fund V public early '22, which was SmartFit. I think that was -- I think it was already in '22, if I'm not wrong. And SmartFit is, as you -- as a public company, but I can say because the public information is performing extremely well, recovered completely from COVID. You probably know that during COVID, we had to close all the clubs, but we're back to 2019 and better. And so we started selling some of SmartFit shares through block trades. We did sell a small amount in the first quarter around $15 million. We tested the market there. And it did work very well. So these 2 companies are listed and these 2 companies where we do then see follow-on offerings and block trades that will contribute to the liquidity and the DPI, distributable paying capital for Fund V.

Then we are in advanced negotiations to sell other assets of Fund V, namely 2: one in the food distribution sector and the other one in the health care sector. So Fund V is a real successful fund for us, Domingos, and we're very happy with it and very happy with the potential performance fee generation of this fund.

[Domingos Falavina, JPMorgan]

Yes. No, I'm sorry, I didn't mean to ask any kind of pipeline. I meant more like just in V. So you have SmartFit, Lavoro, health care, right, and then something in food, those are the main assets?

[Alex Saigh, Chief Executive Officer]

Yes. We have -- in health care, we have two very important assets in this fund. I'm sorry, Domingos, Athena, which is this integrated health plan with hospitals chain, as you know. And we have also a company called Opti, which is the market leader in optical surgical centers. It's a network of several surgical centers around Brazil. So that's also a very, very important company for Fund V, a very profitable company. So one agribusiness-related company, Lavoro that we mentioned, that went public; 3 health care wellness-related companies, SmartFit that went public, our network of gyms; Athena, the network of hospitals integrated with health plans; and Opti, a network of optical surgical centers. And then last but not least because it's a very important portfolio companies of Fund V, that is, which is a food distribution company. So we -- basically, we buy products from the main food consumer-driven companies, and we sell to restaurants, hotels and small retail shops. So these are the main assets of Private Equity Fund V.

It's a very -- again, it's a really, really good fund and they're very excited. All the companies are doing well to very well. And we can go into also private Equity Fund VI, it's a newer fund, but also the companies there doing also very well as well. These are the 2 funds that we're focusing on divesting, Private Equity Fund V coming first because it's an older fund and then coming Private Equity Fund VI.

[Operator]

Our next question comes from the line of Mike Brown of KBW.

[Michael Brown, Keefe, Bruyette, & Woods, Inc.]

Okay. Great. Apologies if this has already been asked, Alex, I joined the call a little bit late, but maybe just one for me on infrastructure. So clearly, that's been a very attractive asset class here, particularly in a high inflation environment that we've all been living in globally. As inflationary pressure starts to wane in many markets and perhaps you actually enter into a rate cutting cycle, how do you anticipate LP interest for this asset class to progress? And does it impact your ability to deploy over time? Just interested to hear your thoughts as we move throughout '23 and into '24.

[Alex Saigh, Chief Executive Officer]

Yes, I think this is -- this infrastructure fund that we're mentioning again, sorry, Mike, how are you and again start answering your question without saying hi. I'm very sorry about that.

[Michael Brown, Keefe, Bruyette, & Woods, Inc.]

I'm doing well.

[Alex Saigh, Chief Executive Officer]

And as far as this strategy, the Infrastructure Development Fund, it's a private active approach to infrastructure. So we take on development risk on this fund. So we do win a concession, for example, we then construct the asset and then asset is operational, we sell it. So it does have this private equity component, and that's why it actually does deliver higher returns versus a yield fund. So this mixture of having the downside protection with contracted revenues because you're part of a concession and revenues that are corrected by inflation that you can leverage very accretively because the leverage is of project finance type leverage with the same kind of index that you are correcting your revenue, so you really hedge there. And in addition, you're taking that compression benefits because you're constructing something. So it's -- you have the whole ability to construct something that generates a higher interest rate because of, of course, the challenges associated to constructing something and then the compression ratio because you're selling something that is operational and generates this very healthy cash flow because it's an operational infrastructure asset.

I think that characteristic that I just mentioned -- of course, interest rates do change appetite here or there, but we raised very large funds when interest rates were lower. Our Infrastructure Fund IV is a $2 billion fund, and it was raised 4 years ago when interest rates were really low. And now we're having very good appetite for our Infrastructure Fund V where interest rates are a lot higher than they were 4 years ago because of, I think, of this characteristic. And so -- and given the addressable market of -- in LATAM, addressable market for this fund means no concessions and privatizations and these sorts of projects that are going on in the region, it's really a drop in the ocean just I think. We see over $100 billion worth of concessions going on in the region over the next 18 to 24 months, and we are running a $2 billion fund. So it's really the huge addressable market, there's a scarcity of capital advantage there. Not a lot of players. Actually, we don't see no players at all from a financial sponsor side that play in this market. So we're pretty much alone. I think it's very well-positioned products that we have, given the landscape, the addressable opportunity landscape and given the competitive landscape that we very, very -- one of the very, very few players with scale that can actually play this market. So I continue to be with the infrastructure team, very excited. I think what we do is definitely can be exported to other places in Latin America as we have done or even the world, interesting because the suppliers of the products that we actually then construct the -- the assets are global suppliers. So we're doing a digitalization plant in Chile and it's an Israeli supplier of that technology that is a global supplier of that technology to other digitalization plans around the world. Now when we build a wind farm in Brazil, the supplier of that wind farm is the same, the GEs of the world, the Siemens of the world that supply these equipments for wind farms all over the world. So very interesting because we're dealing with these global suppliers, but locally in Brazil, but they could be wind farms in any place of the world.

So again, excited with the confidence that we have built, excited with the opportunities to continue fundraising for this fund. I see a good appetite to -- a very good appetite for raising our Infrastructure Fund V. So pretty positive, Mike, on the product.

[Michael Brown, Keefe, Bruyette, & Woods, Inc.]

Great. Alex, it sounds like a very robust outlook for the infrastructure here.

[Alex Saigh, Chief Executive Officer]

No, thank you. Thanks, Mike. I agree. And I just want to get back to one of Domingos points here. Just to be clear, the $10 million of performance fee that we accounted for in the first quarter is the general partner stake of the performance fee, right? The performance fee was $15 million in total, 35% of that was approximately $5 million goes to the team and then 65% that goes to the general partner, which is the $10 million, right? So just for clarification purposes here. So when we talk about the $10 million, it means that 65% already. We already netted out the 35% that goes to the team, okay? So just to be clear.

All right. Operator, any more questions, please?

[Operator]

Thank you. We do not have any other questions. I would now like to turn the conference back to Alex Saigh, CEO, for closing remarks.

[Alex Saigh, Chief Executive Officer]

All right. Well, thank you very much for your patience and for the questions on this call. Again, very excited and positive about our first quarter 2023 results. We continue to be positive on the $150 million FRE for the year. And we continue to be positive also in generating more performance fees than we did in the first quarter. So thanks again for your patience. Thanks for your support. I hope to see you guys soon personally. And thanks again. Be well, be safe.

[Operator]

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