Patria Investments Ltd

NASDAQ:PAX

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by and welcome to the Patria Investments Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference call is being recorded.

I'd now like to turn the conference over to your host for 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 second quarter 2022 earnings call. Joining today are Chief Executive Officer, Alex Saigh; and our Chief Financial Officer, Marco D'Ippolito. Earlier this morning, we issued a press release and earnings presentation detailing our second quarter 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 solicitation of an offer to purchase an interest in any Patria fund. As a foreign private issuer, Patria report financial results using International Financial Reporting Standards or IFRS as opposed to US 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 calculated in accordance with IFRS are included in our earnings presentation. On headline metrics, Patria generated fee related earnings of $31.1 million and distributable earnings of $29.2 million, or $0.20 per share for second quarter of 2022. We declared a quarterly dividend of $0.1609 per share payable on September 16, to shareholders of record as of September 02.

With that, I'll now turn the call over to our Chief Executive Officer, Alex Saigh. Alex?

[Alex Saigh, CEO and Director]

Thank you, Josh. Good morning, everyone and we appreciate you joining us this morning. In the second quarter, Patria continued to execute on both 2022 financial targets as well as long-term strategic growth plan despite the difficult backdrop across global financial markets. We remain on track for our 2022 full year fee-related earnings guidance of 50% year-over-year growth, having delivered $63 million of fee-related earnings in the first half of the year.

After generating $0.44 of distributable earnings per share and cumulative dividends of $0.37 per share through the second quarter, we are delivering an analyzed yield of more than 5% in 2022, based on recent share price, We had $764 million of new capital inflows across the platform, putting us over $2.2 billion for the first half and more than halfway of our $4 billion fundraising target for the year across a diverse range of products in each of our verticals.

We deployed about $650 million in our draw down funds to drive continued fee revenue growth. Our total assets under management and fee earning AUM are up 66% and 126% respectively, compared to one year ago, illustrating the expansion and diversification of our platform in the short time, since our IPO.

We're also focused on building our base of permanent capital, having grown to more than $1 billion or 6% of total fee earning AUM in a priority of new initiatives in real estate and infrastructure with a significant opportunity to scale and consolidate. Over 20% of new capital coming into the platform so far this year is permanent GAAP.

Turning now to highlights across our strategies. Our biggest story of the quarter was the announcement of our acquisition of VBI to anchor our real estate platform in Brazil and we recently closed on the first trench of the transaction for 50% ownership. This transaction is crucial step as we look to build out the real estate vertical, bringing an experience and proven leadership team and over R$5 billion or more than $1 billion in a very high quality AUM, where more than 70% is of permanent capital.

In a Brazilian REIT market that has grown at more than 20% over the last five years and is still under penetrated VBI has grown even faster to become one of the largest independent players in an asset class, that is the key gateway to alternatives for many local investors. With VBI as a core, we believe we are now well positioned to grow our real estate business in Brazil in a meaningful way, and potentially replicate a strategy in other Latin American countries.

In private equity, we made our first deployment for our next vintage fund, allocating $450 million to launch the first thesis in that fund. We are highly focused on our fundraising efforts with additional closings expected in the back half of 2022, and then finishing in 2023 and we continue to feel good about our targets. We also expect to hold the first closing of our new growth equity fund here in August at a time when market dislocations represent great opportunity in the space.

Since our funds are largely denominated in US dollars, the strengthening of the dollar relatively to global currencies contributed mostly to the valuation impact in the quarter. While we of course see some impact from public company holdings and comps in our quarterly evaluations, our overall portfolio comfortably outperform Brazilian and Latin America public equity markets in the quarter and we continue to lean forward with confidence on the quality of the portfolio.

Private equity funds five and six, continue to deliver strong net IIRs at 24% and 16% respectively in US dollars. Year-to-date portfolio company is growing at a healthy 18% organically and 36% including M&A and we do not see deterioration in our overall business plan and target exit values. We remain very active within the portfolio having now signed 18 M&A transactions so far this year with at least as many targeted for the second half.

In infrastructure, we continue to accelerate towards the lounge of Infrastructure Fund V as Fund IV, nears the end of its investing cycle. In the second quarter, the acquisition of nine hydropower assets drove incremental deployment of approximately $200 million from Fund IV.

Just recently, we announced fundraising of nearly R$200 million for our second core infrastructure fund, which adds more permanent capital AUM and we will jointly invest in these hydro assets. This fund continues to build on our income focused core offering and provides better access for local investors in Brazil.

Given the acceleration we have seen in the flagship fund timeline, we now expect a dedicated, renewable spool of capital to be raised as a side car with Infrastructure Fund V as it would not make sense to raise a separate fund concurrently. We continue to see demand to scale the combined size by 50% relatively to Infrastructure Fund IV, given the extensive and attractive pipeline to address in the region.

The existing infrastructure portfolio continues to perform very well with the latest two vintages delivering 28% and 12% net IRS in the US dollars. Second quarter valuations were up to $135 million excluding currency impact driven by investments in the renewable energy data centers.

Turning into credit, despite the tough quarter for the asset class across the globe, the Mon high yield credit strategy, outperformance benchmark by more than 400 basis points in the second quarter and now 700 basis points year to date 600 basis points of that outperformance is attributable to selectivity or the team's ability to pick the best performing assets with the remaining a hundred basis points attributable to actively shorting the duration of the fund.

Both high yield and investment grade credit yields in Latin America are among the highest in the world with one those high yield fund currently delivering an impressive 12.3% yields at the end of July. Our in-house bottom up credit analysis shows that Latin American corporates face low refinancing risks with very reasonable liquidity and falling leverage demonstrating that even at this yield levels, there is no expectation of credit defaults compared to other emerging markets with highly active management. Our team can swiftly react to the environment, to the opportunistic and take advantage of mispricing relative to the fundamentals.

We also saw the recent announcement of a key 500 million eyes anchor commitment for our new in credit fund. As we seek to ramp efforts on that fund in the back half of the year, this fund will have a closed end draw down structure like our flagship funds, and we'll seek to capitalize on the credit size of the sizeable infrastructure opportunity that I referenced just a moment ago in public equities.

Although macro certainly impacted absolute returns in the quarter, there is also clear demonstration of portfolio quality with our more constructivist Chilean small cap strategy outperforming in benchmark by 1400 basis points in the second quarter.

Now zooming back out the first half of 2022 brought challenging conditions to every corner of the investment world, driven by a combination of persistent inflation, rising interest rates and disruption of trade. It comes as no surprise that global equity and credit markets had a tough quarter. RI and our peers are not immune to some of the short term impacts of this environment, but importantly, it does not define our success as fundamentally long term investors.

We are confident the alternative asset management industry. We continue to be a model of resilience, secular growth and access returns. Our business model is built to be patient and opportunistic and not just to weather these storms, but to do some of our best work in times on this location within our industry. We also believe Patrick differentiate states itself in some very interesting and attractive ways in the current environment.

And I want to spend just a few minutes reinforcing some of those points. First, the default assumption about rising interest rates is that returns in private active portfolios will be squeezed by the higher cost of leverage. Put simply mattress. Private active business is not running the traditional LBA model and does not depend on leverage for drive transactions or target returns.

It has simply never been practical operating LBOs in our region of the world in developed markets, private equity, net debt 3D ratios, average near five times at the time of acquisition compared to just 0.4 times historically prop our strategy generates alpha through consolidation, organic growth and operational improvement, and eventually multiple expansion as we de-risk and institutionalized businesses to create market leaders in our infrastructure business leverages typically in the form of project finance with a debt fixed and structure alongside long term revenue contracts and in credit, our exposure to predominantly floating rate debt, minimizes risk, and even allows us to benefit from rising rates.

Second, focusing in Latin America factory has operated and grown its platform amid high interest rates and inflation since our inception and the environmental today does not feel like an exception to us. Our investment strategy has been forged over the years of experience now entering our seventh vintage for private equity and fifth for infrastructure with many lessons learned, the result is an investment portfolio focus in core basic needs factors that we can weather persistent inflation and GDP volatility, thus outperforming through economic cycles.

Third, we think Latin America continues to look well positioned as a destination for global capital in the current backdrop, and especially within allocations to emerging markets. The region is a net exporter of commodities that are in high demand, and we believe the resulting gains in terms of trade will continue to be an economic tailwind. Latin America has historically demonstrated both low geopolitical risk and a comparatively low correlation with the US and developed markets. And right now the region is likely near the peak of its monetary tightening cycle compared to the US and Europe.

Therefore it is no surprise that the expected economic growth is being revised upward in Latin America and downward in developed countries. Finally, there are significant benefits of scale in our industry and these apply at the regional level as well, Latin America and emerging markets present distinct challenges relative to developed markets. And we believe P has a real home field advantage.

We offer a compelling combination of proper scale and localized industry expertise with the scale, allowing us to pursue complex projects that smaller local competitors cannot. And the boots on the ground, providing a competitive advantage that large global PA players would find hard or inconvenience to replicate. We are able to deliver on our regional consolidation strategy with three M and a transactions now to date in large part because of our people, the strength of our brand and our public exe currency as a firm, we believe Patrick is uniquely positioned to thrive as a dominant alternatives manager focused in Latin America and our story is only in its early chapters. Let now turn things over to Marco to cover the results in more detail. Marco, over to you.

[Marco D'Ippolito, CFO and Managing Partner]

Thank you, Alex and good morning, everyone. Patria's financial results for the second quarter reflect our continued track toward our 2022 guidance. Fee-related earnings were $31.1 million in second quarter '22, up 76% compared to second quarter '21, driven by organic growth in private equity and infrastructure as well as the addition of Moneda.

On a year-to-date basis, fee-related earnings of $52.9 million were similarly up 80% from the prior year-to-date period. The FRE margin was 56% in second quarter '22 and the similar 57% year-to-date, tracking in line or slightly above our guidance for the year. Driving the FRE growth fee revenues of $55.6 million in the second quarter '22 are up 73% from second quarter '21 and year-to-date, fee revenues of $110.6 million are up 76% from last year.

On a year-to-date basis, about 25% of that 76% growth is organic and driven by deployment of $2.5 billion from the flagship funds in 2021 and the remaining 51% driven by the acquisition of Moneda. Year-to-date accrued incentive fees, which are accrued in certain credit and public equity funds and mostly realized at year end stood at $4.9 million at June 30 lightly up from $4.2 million at March 31 due to benchmark outperformance despite the challenging quarter.

Personal expenses were $15.7 million in second quarter '22, up 55% from second quarter '21 and $30.8 million year to date, up 51% from the prior year-to-date period driven mostly by the addition of Moneda's team. On an organic basis, year-to-date compensation increased by just 4% compared to the prior year to date period.

Administrative expenses were $7.4 million in the second quarter '22, up from $3.8 million in the second quarter '21 and $13.9 million year-to-date up from $6.2 million in the prior year to date period. While some of these increase is also driven by the addition of Moneda, we did have organic increase in areas like professional services and IT due to new public company related expenses, as well as increase the T&E as teams resume more normalized travel activity as pandemic restriction fade.

Placement costs of $2.9 million year-to-date are up from $1.2 million in the prior year-to-date period due to increased fundraising activity as expected. These costs are generally amortized over the relevant investment period of each fund being raised. Net financial income was a negative $0.8 million in the second quarter '22 driven primarily by unrealized impacts from currency on our balance sheet investments in the quarter.

On a year to date basis, net financial income stands at $4 million. Distributable earning of $29.2 million in the second quarter '22 compares to $74.2 million in the second quarter '21 with the difference attributable to the benefit of performance related earnings of $56.4 million in the second quarter '21. DE per share of $0.20 in the second quarter '22 will generate a dividend of $16.09 per shareholders and year-to-date our DE per share of $0.44 has generated cumulative dividends of $0.37, which would equate to a yield of more than 5% on our recent share price.

The reconciliation of distributable earnings to IFRS net income is fairly consistent with the schedule from less water, with most amounts attributable to acquisition-related costs. The amortization of intangible assets is rising primarily due to the inclusion of impact from [indiscernible]. The notable addition to the reconciliation is cost related to our recent fact listing. These costs are recognized in IFRS and amortize it over 15 months and will be adjusted from the DE in this initial periods, but later recognize it through our DE as offset to the sponsor promote at the point of realization.

Net accrued performance fees stood at $419 million at June 30, compared to $503 million last quarter, but still up 28% from one year ago. The US dollar strengthed significantly against nearly all global currencies in the quarter, driving relative local currency depreciation. These accordingly impact the USD fund valuations in the quarter, along with the general weakness in Latin American equity markets, while the accrual can of course, retrace in volatile quarters like this, we continue to feel very confident in the quality of our portfolio as Alex noted. The current accrual stands at nearly $3 per share, which is significant relative to our current share price.

Turning to AUM; Total AUM was $26.3 billion at June 30 down from $27.6 billion last quarter, due to currency and valuation headwinds in the second quarter, but up 66% from $15.8 billion one year ago, demonstrating the growth in our platform. Total AUM is up 10% year-to-date driven by strong appreciation in the first quarter and the acquisition of VBI. Note that we have closed on the first trench of our transaction with VBI and included in our reported AUM. Economics for our initial 50% stake will be effective for the full third quarter.

Despite macro environment, inflows have been strong in the first half of '22, nearly $2.3 billion of inflows year to date, not including the acquired inflow from VBI puts us halfway to the 4 billion fundraising target for the year. We expect a diverse contribution in the second half of the year led by private equity and credit products, including the pending anchor commitment for info credit, which has not yet been recognized on the upside.

We also have a reasonable chance to be approaching a first close for our next infrastructure fund around the new year. The earning theum of $18.8 billion at June 30 is similar to the prior quarter as deployment for the first half of 2022 only activates for the second half of the year. The earning the AUM is up 126% from $8.3 billion one year ago. And up 5% year today, we deployed about 650 million from our flagship funds in the second quarter '22, which will accrue to fee earning the AUM for the second half of the year 450 million came from the first pieces in our new vintage private equity fund, though.

Atypical fee holiday for first closers will apply additional closing for that fund in the second half of the year. However, we'll have a retroactive catch up to July 1st on this capital that has been invested as Alex noted our 2022 financial guidance for the year remains consistent.

We expect to grow FRE by at least 50% year over year, we have generated 63 million in FRE throughout the second quarter and considering any growth in the second half of the year, plus the realization of incentive fee. At the end of the year, we feel very confident in achieving our target. It bears repeating the benefits of long term capital and sticky management fees allow us to generate reliable fee related earnings for our shareholders.

Since our IPO, we have doubled the basis of fee earning theum that generates those earnings and that growth is ongoing through the organic scaling of our flagship funds, new fund launches and M and a those fee related earning are generating an annualized yield of approximately 5% on our current share price. And that is just the baseline strong investment performance in our flagship fund has generated a performance fee accrual that is still untapped with the 2014 and 15 vintage fund in particular representing significant earnings website as realizations materialize.

Over the next few years, we continue to execute on our journey as the premier alternative asset management platform in Latin America. And we believe Patrick can deliver premium shareholder value in the coming years. We're now happy to take your questions.

[Operator]

[Operator instructions] Our first question comes from Craig Siegenthaler of Bank of America. Your line is open.

[Craig Siegenthaler, Bank of America]

We wanted to get an update on fundraising. The denominator effect and a crowded private equity backdrop. They are creating some challenges in the US, but partly, I believe is competing within a different sleeve of capital. And in your vertical emerging market private dollars, and now more restricted to two of the biggest economies Russia and China. So what type of impact is all this having on Patria? Just given that Patria as the largest private markets manager in Brazil and LATAM.

[Alex Saigh, CEO and Director]

Hi Greg. This is Alex here and thanks for joining the call and again thanks for your patience here. Well, we continue to be very positive on fundraising. That's a general message here. And we have so many processes going on specifically on I go from the macro and then I'll talk of, kind of product by product asset class by asset class. On the macro side; yes, I think you're correct. What we see from investors is number one as it comes to emerging markets, Latin America is in advantage kind of phase right now, given the low geopolitical risks and the high geopolitical risks, of course, in Europe, Eastern Europe, more specifically, and the more authoritarian regime that we are now seeing in China.

So that puts actually a region of the world in highlighted by investors. In addition, does the nearshoring thesis that favors the region? Also in addition, I think the Latin America was already increasing its market share of the overall allocations within now emerge within the emerging markets.

And if you see the growth of the economies is pretty positive compared to other no developed economies. So all, all in all I think, and last, I think also, I think some the, our central banks in the region have anticipated a bit the monetary tightening. Now we're seeing that, you know, Mo most of the central banks in the regions are already predicting a, a loosening up of the monetary policies. And probably most of discard economy will continue even to grow faster in predicting a, a loosening up of the monetary policies.

And probably most of discard economy will continue even to grow faster in 23 onwards. So in general, that's exactly, what's not on a macro, that's exactly what he said. I think the region has been benefiting from all this plus of course I forgot here cause I forgot here the commodity cycle that was already a big push for the region. And in addition to all of these geopolitical tensions and risks in Ukraine, etcetera, commodity prices, there also drives exports in the region and also benefiting the economies then going for a more micro kind of administrative issues here.

Now, as you mentioned mostly in the US, not other parts of the world, investors have been having to deal with so many funds coming to market, and of course they're overwhelmed and what they're deciding to do most of them generalizing here is basically to focus on re-ups.

And definitely we are on that list of re-ups given our longstanding relationships with several institutional American investors, but the processes is taking a little longer because it's the same amount of people that they have in their teams. I mean, the institutional American investors, and they have to deal with more volume of funds to be analyzed. And we have received, no, I, I wouldn't say zero numbers, but very, very few notes. And that's why I'm positive on our private XC fundraising process. Because investors just saying, Alex is going to take another month or two, I need to go down a due diligence. My the firm that I work for have not allowed full travel plans yet, and the bubble and I have a lot of other funds to analyze. So again, very, very few. I'm not gonna say no because it's no, it's impossible to say zero no's, but very, very few no's is just a a delay in the process.

But as you go through other regions of the world back Greg that's a, that's a different scenario now in the middle east, for example, which is a major part of our fundraising efforts is in the opposite side of what I just said. The region was already underallocated to private markets in general alternatives, emerging markets LATAM. And as you know, now, most of the sovereign funds and pension funds in the regions are generating a lot of cash and receiving new cash because of the whole price of oil, et cetera, and gas, et cetera, going up Asia the same, I think, Asia's investors kind of were other allocated to emerging markets in the region and everything that I said. So Asia investors are also know increasing their, their allocations to the region. And lastly, and more so the local investors, I think we have been able to fundraise quite he healthily in the local markets.

We're now running as we speak two very big processes with high net and ultra-high network distributors in Brazil specifically. And now we have very, you know, positive news coming from that front. So in the end pre positive overall cause the region has been benefiting from all this, political tensions. And now I, I don't, I'm not receiving any know, very, very few node that just process taking a little longer. And we have all of these other regions in the world allocating more through private markets, alternatives, emerging markets and Latin America specifically.

However, what also plays in our favor here is that we have other products also that are flagships in our menu offering that are coming to market in a very positive note. Marco mentioned info credit, for example. So the whole credit story here is very positive given now where interest rates are.

And because interest rates are also higher in the region, not only globally and investors are looking to protect themselves from I and, and actually take advantage of the higher interest rates. So we did receive a very positive confirmation from a anchor investors of a hundred million dollars for our info credit fund, which is not in the number that we gave you because they have not signed the sub yet, but it has already been published in their websites that they approved because it's a public institution.

We also have another public institution that already approved and officially they have now they just have to sign the papers. They are another $150 million for the same info credit fund. So very positive news on that front two anchor investors, one, an international public institution and a local Brazilian public institution, actually sponsoring, anchoring this thing for credit fund.

Also Mark also mentioned in more detail, but we are anticipating our infrastructure flagship fund number five fundraising process because investors not only, they want to invest more in LA time, as I just mentioned, but they want to invest in products, our inflation kind of protected. And that's the case of our infrastructure, flagship development fund number five. And what we are looking into now is to have a first close within this year, closer to December versus actually one year from now.

Now we were expecting to fundraise infrastructure fund five as of September 23, 2023. And we are looking into have a first close in 2022, late 2022, but within 2022. So having all of these, no different, no products to offer as now, private actually goes through this that I just mentioned. We have infrastructure coming back very healthly and we having reverse inquiries for our infrastructure of flagship fund number five, which is not very common to have reverse inquiries.

Now, investors calling, and to say, when are you going to go out to the market? Because we're interested in your fund. And also the info credit that I mentioned, which is also a closed end fund which gives us this long dated kind of fees to our FRE expectation.

So I'm, again, of course, everything that is going on, of course, that you know, it's you have to deal with the whole geopolitical situation that is sad in a global basis, but in our region we are benefiting from this and of course we didn't want to benefit from the war, but we are benefiting from the geopolitical sanctions around the world. And you can see in our numbers $2.3 billion raise up to now with the $4 billion target. So it look looked, no, we're pretty confident in that. We're going to reach target here. Thank you,

[Marco D'Ippolito, CFO and Managing Partner]

Alex, if I can just ask one, I'm sorry, if I could just, if I can just ask one follow up relating to fund seven private equity fund seven it looks like you raised about 900 million to date. I was wondering if you could help us in terms of timeline for the, the next set of closes and the final close and your expectations on how big that fund will be relative to the 2.7 billion for private equity fund sex.

Yes we are about now. We, were going to have a second close, I think late, late July, the second quarter, but we, we were running these the processes that I just mentioned here, the with two big Brazilian ultra-high nets and high net distributors would now and again, given where we were in the process.

So we went into August to grab, they were, and it's good news, cause they were pretty confident that they could raise, more money. So actually we're going to have a closing that we are expecting in the late second quarter, in the third quarter as we speak in August September and plus institutional money coming in in this we in this closing, so we, we got some of the institutional money that we already had in the second quarter that with the SubD signed, we know we're putting everything in this one quarter.

Administratively is easier to have just one, one closing on the legal side and legal cost. So we just waited a little bit with all these SubD docs that we had signed in the second quarter to join this effort that I just mentioned, that we were doing, that we are doing it in Brazil with auto high net worth individuals. As far as expectations, I think we our fund does say in the cover $3.5 billion, and I think we're confident that we'll get there. And which is known a larger than the $2.7 billion and normally how these funds goes.

I don't think, I can say this, but whatever it's I have to say that it's 3.5 billion, but normally no looking into the past. I think I can say that looking into the past, normally our, our, our funds did not only reach, but exceed the cover. So I think that's what I can say up to now. But the cover is C 0.5. Greg,

[Operator]

Thank you. Our next question comes from Marcelo Telles of Credit Suisse. Your line is open

[Marcelo Telles, Credit Suisse]

Thank thanks for the opportunity. My question is with regards to the to the VBI acquisition you know, you mentioned, you know, there's very opportunities to, to leverage on that structure. So I was wondering, you know, this is a $1 billion you know asset business how do you see that scaling up, over time and what, you know, how big you think that business can be. And given that the high rate environment that we are, you know, the Brazil is going through right now do you think this, it can you know, be a, you know, an obstacle for you to, you know, to scale that, you know, in a, in a timely manner?

[Alex Saigh, CEO and Director]

No. Thank you. I think it's first of all, hi Marcelo and nice to see you. And as, you know, hope we're going to see each in person next week. So hopeful looking forward to that and thank you for seeing me next week in person. Well in, I think taking it one step back, the whole permanent capital business for us is very important. It's already 6% of our fee AUM as mentioned by Marco here, and we were basically zero, if you go two years ago. And at the time of the IPO, we were one or 2%.

So we've been growing that business it's and has been growing in general as mentioned. So have it grow more than the, the other asset classes to become? Today's 6% of the, of the total EUM, not only real estate, but of we, we also launched the infrastructure investment trusts that also add to the, to the permanent capital 6% of the specifically with VBI.

Now, we're pretty, pretty and very positive about it because within the capital structures of our real estate listed assets in Brazil, you have several different themes and strategies. And one of them have been growing very significantly is the death related thesis or the CS, the crease as we call them in Brazil. And VBI did the lounge. It was in the second quarter already a CRI fund and they already had one, but they did a follow one for the fund of the C fund, which is no real estate debt also under the permanent capital structure and, and did very well and did raise good amount of money and they want to raise more.

So if the high interest rates do affect corporate offices kind of strategy, you have the know real estate debt strategies that are, are growing very healthy. And when interest rates come down as I know you see that the, you know, the yield curve in Brazil is already inverted investors are looking into a decrease in interest rates in the next, whatever 12 months that's as you can see from the waiver yield curve, then the other kind of themes within real estate will also benefit from that falling yield curve. But in general, I think VBI has a now very strong name at very expert in seasoned group of people.

And, we are very positive about that. In addition, we're also looking to other permanent capital structures to increase inorganically or through know mergers and acquisitions like the association with VBI, not only in Brazil, but in other parts of Latin America. So really targeting for that billion, something us dollars to, to reach a significant part of our AUM.

Now, when I look at my peers in more of a, in a global basis, I see that 20 to 30% of their fee AUM comes from these permanent structures. And that's a number that I would like to hit of course, over time. And of course using our cash to do acquisitions, to get there faster. But that's the number that I think we can go from six to 20 to 30% of AUM in in the future.

And just add my fellow, I think we, when we release the notice on DDI, we, we try to emphasize the market is it's very big and about $4 billion, the have been growing 28%, and it's a still small relative to any other development economy. And the rate business is what we call an entry level alternative asset. And as we continue to believe on the financial deepening, we think that this market still has a lot of potential to grow the market, not to mention the capacity to consolidate and to replicate this strategy in, in other geographies, like recently, the central bank indicated that the modified timing should be arriving to possibly it's and we start to see some indications of even indications of deflation.

So there's also, there is a positive scenario looking forward, and we believe that as the market as the interest rates reduced, we, we believe that this will pick up from nevertheless, I think is important to mention VDI closed recently often on a, on an important and raising a hundred million hay ice, which is not added to the CPME one base because it was closed just the beginning of this third quarter. So we continue to see positive trends coming from the risk business.

[Operator]

Thank you. Our next question comes from your [indiscernible] of JPMorgan. Your line is open.

[Unidentified Analyst]

Good morning, Alex, Marco, Josh, thank you for presenting the, the earnings. Our question here for the quarter is actually on specifically on the credit performance on the credit vertical we saw an outflow of close to $350 million in the quarter in the, in the segment to us was a little bit surprising. We would imagine that this would be a fourth code that would perform better under the environment we are. But when we add up hearing inflows and outflows, we actually had a, a net outflow in the quarter. So the question is just to, to explain a little bit what happened if this is recurring or not. And, and what was the driver behind this outlook? Thank you.

[Alex Saigh, CEO and Director]

Well, on the numbers specifically, do you want on the number specific, do you want to respond to that Marco on the withdraw I can, and then I can talk more general about it.

[Marco D'Ippolito, CFO and Managing Partner]

Yes, absolutely. So what we see specifically on page you, our presentation is a year to date inflows of $392, and now for $497, let's remember that on the outflows, you have to add to that also the divestment and the dividend payment. And so this is not only no reduction of AUM resulting from withdrawals, what we see here what I can mention about the credit business specifically in Chile that has been centered over related to the local investors. We've also seen strong demand from new funds.

So we we've seen some investors moving around from one fund to another and that it very well explained on the line of inflow here today. You see that we have about $2.2 billion of inflows in AUM over the year and that's that just is a sign of the capacity of the platform to leverage on the fundraising of this vertical Alex.

[Josh Wood, Head of Shareholder Relations]

Yeah. And I would just, this is Josh just add of the $345 outflows in the quarter de Marco's point on dividends being included in that about $61 million of that was dividends just to put a number to it for you.

[Alex Saigh, CEO and Director]

Yeah, I think that my point was exactly that I think investors do shift some time of strategy. So we had a, a very, in my view, positive cash being invested into the funds of $2.2 billion that's a very, very strong number. Sometimes you see investors coming outta one fund and joining the other fund, and because they see a, a better moment that they like specific strategy of sub strategy of the credit product in general. So they probably, they saw already a what happened with the dollar denominated securities in LA.

Now they see now the pickup of interest rates in local Chile, and they want to shift to a local Chilean credit funds. So, but I think you have to look more of the general picture when you add all of these numbers. There's a very positive net inflow of, of cash into the Mon funds. So again be careful not to not to pick up, I think, one strategy specifically, and if you have the money moving to other strategies, but the net general inflows were, were positive for the quarter in the semester. Thank you.

[Operator]

[Operator instructions] Our next question comes from William Barnard [ph]. Your line is open,

[Unidentified Analyst]

Thanks for hosting the call. So my question is a follow up actually of Craig's question regarding demand in the current environment. So among your range of products which products do you see a higher demand now? Is it mostly the infrastructure products, as you said before, and then more broadly, how do you see the evolution of your total AUM for the next quarters? Thank you.

[Alex Saigh, CEO and Director]

Yeah, I think more in, more in general now for no inflation protected and credit products are more in Vogue in, in, in general. However, I think that things are shifting over the last quarter to equities as PayPals investors are beginning to realize that we might have, hit the bottom as far as know, these public equities valuations are concerned.

But yes, if you look into our manual of products I think we, we continue raising continue to be pause about our private equity now for seven our growth equity, private equity growth. We know we're having a first close as we speak in the month of now, August 30 September. So it continues to do well. It continues to, and it continues to show very positive sign that we will hit.

Now the numbers that I mentioned answering Craig's question of the $3.5 billion cover for private equity fund seven we're raising $200 million and we know we should have a first close, which is already around 40% of that, which is tax case for our growth fund as we speak. So that on the equity side, on the infrastructure side, even more so we're getting reverse inquiries.

When are we going to know, come back to the market? And again, we were thinking about raising or beginning to raise infrastructure fund five, which is one of our flagship funds in September of 2023. We're looking into have a first close within 2022, late 20, 22. So it's like kind of a year in advance because inflation hedge, the infrastructure products are now really in demand by investors.

And with now with the major investors, the main investors of our, that support us in our infrastructure efforts we talk to them and again, why don't we then with them do a no first close as of this year also on the, on the credit side, I mentioned infrastructure credit also gaining a lot of momentum.

We didn't, we didn't add to the numbers because the sub docs are not signed yet, but we have two important anchor commitments to this fund, a local public institution for a hundred million dollars. It's already in its website, but a sub docs are not signed and an international, also public institution of 150 million. So that's already 250 million for this fund. In, for credit, we want to raise no approximately 800 to a billion dollars for the fund and having two anchor investors already, no 25% of the fund or more is very, very positive.

So that's for credit also on, if you look at the no Mon credit products in general. So when you look at all of the Mon credit products, know a lot of money coming in because of the situation that I just explained. So we had this target that we established to ourselves all the way back in the IPO early 21 to raise around $4 billion organically this year in 2022. And, and when we did actually start this target, it was late 2020, because we did go public in very early now, January of 21. So late 2020, we said, look, this is our three year plan. And know, and we plan to raise organically $4 billion in 2022. And we planned to do acquisitions like the DBI, which add a billion.

We didn't have a specific number for the acquisitions, but we said that we were going to do acquisitions and getting into 2022 and, being able to have already in the first semester, 2.3 billion already raised. So it looks like we are going to be able to hit the target of $4 billion for the year, because we are over the 50% and we're half the year.

And I see the year continue to go very strongly plus the anticipation of infrastructure fund five, our flagship infrastructure fund, having a first close late this year makes me feel extremely happy and confident because they, so many things happened and so many moving parts. And from late 2020, when we defined this to being able to hit the targets in 22, with all of these moving parts and the war in Ukraine and this and that, and higher interest rates and…

So look, we will know not only bids beats, but hit, but beats the targets $4 billion organic fundraising for 2022, again, established all the way late in 2020. I'm very happy about and again, just remembering that we started a year with 19 18.8, whatever $19 billion of fee earnings theum. So 4 billion is 20% of increasing fee earnings theum for the, the year plus the acquisitions we know of a $1 billion right now, it can be no 5 billion, which is 25% increase in fee paying AUM.

So very, very strong plus we have known, as we grow, we have synergies. You can see that our no free margins have been growing even after the, the acquisitions of integrating Monita, our fear earning AUM has increased and shows that we are continuing to be able to generate synergies from scale. So all of that makes me pretty comfortable. Of course. You might have, no, we have so many products, one product here, one product there, but in the, in the overall scheme of things I feel very comfortable with, with fundraising for 2022. Thank you.

[Operator]

Thank you. Our next question comes from Tito Labarta of Goldman Sachs. Your line is open.

[Tito Labarta, Goldman Sachs]

For taking my question. My question is around net financial results, which were a negative $0.8 million this quarter especially comparing to last quarter. One was a PO positive 4.8. You mentioned during the call that this was related to unrealized impact from currency and in the balance sheet, but could you give us a little bit more color around why that is? And is there any, anything else that impacts this line?

And a second question, if I may is a more broader one around dive investments and equity exit strategies what are you thinking in terms of dive investments for the year do you think that the macro environment and Latin America impacts dive investments at all? If you could talk a little bit about that. That would be great. Thank you.

[Alex Saigh, CEO and Director]

And then, hi. Yeah, I'm sorry, Marco. That's why I was going to say, I was just going to say hi trees, and I think Marco, if you want to answer the first part of the question, I'll take the second. Thank you.

[Marco D'Ippolito, CFO and Managing Partner]

Sure. Hi. So when you look at the net financial income, what you're going to see there is unrealized results from our investment to clear, closer attention to our presentation on page 22, you see the, the there's a line of investment that is about $24 million for the, the number is basically a function of the currency impact over our investments, and also the valuation impact on our investments. What are these investments? These are mostly GP commitment and the minority stake in our recent acquisitions. So we, at the time of the IPO, this number was very small and it's not meant to be very significant into our financials.

[Alex Saigh, CEO and Director]

Okay. I can talk about investments and we're pretty fast with the dive. We have been as mentioned, I think with a lot of our companies, the portfolio companies actually for sale, we did sell a couple of them already during the quarter from, from our infrastructure efforts and from our private efforts. And we have been receiving no non-binding offers at valuations that we expected.

And now we are receiving binding offers that evaluation that we expected, even with a plus a slightly notch up here VIG where we expected or our marks. So everything going in my view was planned. I think during the, the, the second half of the year, I think we will continue to be able to deliver on that.

And that actually is the, the, the, the main engine, the main driver to push performance fees and the way that we see it, I think private, active fund five continues to, to do well on that front, on the divestment front, no building in D DPI or, or disable paid in capital to get into the performance C zone. And I think we see the same thing for infrastructure front three, which again, to our surprise we're not expecting to get in close to the performance fee zone this year.

We were expecting more to get into the performance fee zone in 23, 24, but because of some investments that we are pursuing in our infrastructure fund three we see that we are moving in that direction. I don't see actually generating a performance fee from infrastructure from three this year.

There's a chance that we can, but we were not expecting that. So it's we were expecting in 23, 20 23, 20 24, but we are anticipating some of those investments. And again, the non-binding offers are now some of the binding offers are in line with our expectations with a slightly notch up from what we expected. What we see here, I think is a question of having known the good assets in the portfolio. And I think that's consequences of the quality of our assets.

We, for example, in, in our private equity efforts we're selling leaders in code logistics, distribution. We are selling a leader in agricultural inputs distribution, and those are sectors very sought by investors. Also we are looking at some of to sell some of our healthcare related assets and no, no logistic code logistics, frozen logistics, agricultural inputs distribution, healthcare related assets are very well in demand, very well sought by investors are in demand.

So that being in the right sector with the right asset, all of them leaders in their respective segments of the healthcare industry, agri industry or logistics industry I think is the reason why we're getting the strong bids from all of them from strategic investors. So most of them from strategic investors on the infrastructure, the same and even more so, because we are selling a couple of our, or more than a couple actually of our renewable energy assets and we're having great demand for those assets. Some of them in Brazil, some of them are outside of Brazil.

And again, the same, the same kind of few that we are getting the, the process is running as expected or with a, a slight launch positive from our expectations. So we should, we should deliver good news on that front, in the second semester of 2022 the three

[Operator]

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Alex Saigh, CEO for any closing remarks.

[Alex Saigh, CEO and Director]

All right. Thank you very much for your patience and thanks for participating in our, in our second quarter, that 2022 earnings call again in our view very, very positive we are now very much in line to deliver the guidance for fee related earnings 50% growth versus last year.

We are in line to deliver our $4 billion organic growth in a, in, in fundraising. We also, I in line with what we expect to do in inorganic growth or M&As with the acquisition of F VBI already public and already announced and looking at the, you know, a good pipeline for acquisitions in the second half of the year. In addition, I think I see that we are entering in a good divestment cycle and base, I think with the, everything that I just mentioned here answering question so very positive about that as well, that actually then pushes us to the performance fee zone generating performance fee related earnings.

So fee related earnings, right on track to hit the 50% growth, good chances on the, on the performance fee related earnings. If we do these investments, we move into the performance fee zone. Of course, as you guys know it know it might slip a month here a month there, quarter here, quarter there, but the general direction and the, and the prices and valuations that we are getting from the non-binding and the binding process are pretty much in line with what we expect with a notch up. And if we move into that direction, we get into performance fee zone. Even though, again, it might step a quarter here, but the direction is the right direction. We didn't, we didn't get any negative impact on our valuations or processes that we are divesting.

So that actually then pushes us to a very strong distributable earnings growth for the year. And hopefully now, again, as we, as we move into 2022, we'll give you more good news on that front. I'm already know, looking into given that our business so predictable looking also already into 2023. So thank you very much for participating and I hope to see you guys in person over the next couple of months in different meetings and conferences and with that, I'll close the call here, if there's no other further comments from Marco or Josh. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.