Patria Investments Ltd

NASDAQ:PAX

Earnings Call Transcript 2022-Q3

[Operator]

Hello. Thank you for standing by and welcome to the Patria’s Third Quarter 2022 Earnings 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 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 third quarter 2022 earnings call. Joining today are our Chief Executive Officer, Alex Saigh; our current Chief Financial Officer, Marco D’Ippolito as well as our incoming Chief Financial Officer Ana Russo. Earlier this morning, we issued a press release and earnings presentation detailing our results for the third 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 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. On headline metrics, Patria generated fee-related earnings of $31.7 million and distributable earnings of $29.7 million or $0.20 per share for 3Q ‘22. We declared a quarterly dividend of $0.171 per share payable on December 7 to shareholders of record as of November 15.

Before I turn the call over to Alex, I want to highlight that last week, we announced Patria’s first Investor Day event to be held on Monday, December 5, in New York. We look forward to seeing many of you there in person to engage with our leadership team, and the event will also be webcast live with registration available on our IR website. Since we’ll be giving you a comprehensive update on our multiyear outlook at this event, please note that we will defer most commentary on forward-looking topics beyond 2022 to the Investor Day.

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

[Alex Saigh, Chief Executive Officer]

Thank you, Josh, and good morning, everyone. Patria continues to perform very well through a year where the world has faced significant uncertainty. We delivered $0.20 of distributable earnings per share in the third quarter, bringing us to $0.64 per share for the year-to-date, all driven by steady and predictable fee-related earnings. FRE per share is up 54% year-to-date in 2022.

And given our 85% payout ratio, a shareholder buying around the current share price could expect an annualized dividend yield north of 5% from fee-related earnings alone, an attractive proposition in just about any market environment. Our fundraising progress continued in the third quarter with more than $500 million of new capital inflows across multiple products, bringing us to more than 2.7 billion raised for the year-to-date. Valuations were generally up in the third quarter, taking our net accrued performance fee balance up to $428 million and driving nearly $450 million in positive impact to AUS.

Lastly, we added some great talent to our team, welcoming Ana Russo to the firm as our incoming CFO, and we are excited for the perspective and value she brings to Patria. She will also introduce herself to you shortly here on the call. Before expanding on our platform, I want to first touch on the broader Latin America macro landscape and a highly differentiated economic backdrop emerging in our part of the world. It pays to diversify. And right now, Latin America is making a solid case to attract allocations.

A busy political cycle is coming to an end as the region’s largest economy, Brazil has just gone through general elections. In early October, the composition of the new Brazilian Congress came to light and both the health of representatives and the Federal Senate now have the most conservative and business trend spend since the return of democracy in the 1980s. State governors also elected last month, have the same profile, along with an independent judiciary branch, a free press and solid market foundations that speaks of a functional liberal market democracy.

By the way, that is the prevalent situation in most of Latin America. As for the presidential contest, there were no unknowns. The runoff had former President Lula facing the incumbent President Bolsonaro. Lula won an outcome that was largely anticipated by markets since he has led the polls over the past months. Patria’s successful business model and investment strategies are not predicated on the particularities of the campaign program of any country leader in any specific geography.

But that being said, there are rational grounds to assert that President Lula is likely to implement the same effective policies and reforms that yielded him a job approval rating of over 80% when he stepped down on January 1, 2011, after serving two, four-year terms. Lula managed to reduce object property in the country by 51%, whereas Brazil’s GDP in U.S. dollars climbed to $2.2 trillion from $510 billion. Public indebtedness fell to 62% of GDP from 76% whereas international reserves soared to $289 billion from $38 billion.

Admittedly, we’ll have benefited a lot from the unfolding commodity super cycle, but it is worth noting that over the past couple of years, the relative prices of primary products has increased significantly as well. Lula leads a broad center-left coalition that we will try to enact an ambitious agenda with a focus on sustainable development and inclusive growth while preserving fiscal and monetary discipline, thus updating the script followed in his past administrations.

Zoom also take the broader Latin American perspective, we see evidence from recent election cycles in Colombia and Chile, for instance, that strongly suggests that Latin American societies may not change, but they are constantly redressing extreme departures from the existing status quo. Very importantly, there has been no compromising of prudent economic policies, neither of the friendly stance towards private investments. Lastly, it is worth remembering that there are no geopolitical conflicts in the region, no nuclear weapons, no religious or ethnical classes while natural resources are plenty.

As the reference alternative asset manager focused on the region, we believe these factors should continue accruing to the benefit of Patria. In our portfolio performance, our ability to attract new custom to our products and our capacity to successfully divest from assets, indeed, the year-to-date performance of Latin American assets and market seems to corroborate to this assessment.

The Latin America’s MSCI index of listed equity in U.S. dollars is up 12% in 2022, while the global index is down 24%. The A basket of Latin American currencies adjusted for each country’s GDP size shows an appreciation of 2% against the U.S. dollar, while other global currencies like the euro and the Japanese yen are posting double-digit depreciation. M&A activity in the region has grown by 43%, while in the rest of the world, it has stagnated or is decreasing sharply. These distinctions are important.

There’s a clear view that while our industry clearly benefits from the powerful long-term trends in asset allocation, it may face some macro headwinds in the short term, and we are certainly seeing that reflected in sector valuations. As you think about Patria, it’s important to consider the backdrop in which we operate. And right now, we think Latin America looks quite compelling compared to most parts of the globe.

Turning back to our business. I’ll go a little deeper on fundraising and then add some color from our asset class verticals. Fundraising in the quarter included a notable closing of Brazil-based capital of our newest private equity fund. We talked a lot about diversifying our platform and product offering, but this is a great example of our efforts to diversify our distribution channels and further democratize alternatives in the region. Disclosing of BRL1 billion focused on the high net worth and qualified retail channel and included more than 7,000 investors with check sizes ranging from more than BRL1 million all the way down to BRL10,000.

It is a prime example of how we believe we can harness the financial deeply in the region to drive AUM and earnings growth. We targeted $4 billion of fundraising in 2022 across a diverse range of products, and each piece of that target is now well within our sites. While our targeted closing date should get us there in Q4, it is possible that, that piece could slip past the end of the year into early 2023.

Over 2022 and 2023 together, we are targeting $6 billion to $7 billion in long-dated closed-end drawdown fund structures. This is coming not just from our two flagship funds, but also from a growing offering of complementary products targeted at both the international and local investor universe, including strategies like growth equity, infrastructure credit and private credit.

And that $6 billion to $7 billion doesn’t include fundraising in our more perpetual strategies that can constantly fundraise, where we have already seen inflows of more than $1.4 billion so far this year. It also doesn’t include our permanent capital strategy, where we now have more than $1 billion in AUM across REITs, real estate investment trusts and core infrastructure products and expect to add another $1 billion next year through organic fundraising and additional M&A.

Now looking at some highlights across the platform. For private equity, in addition to the fund closing, we announced the agreement for Lavoro, a leading agricultural input retailer in Latin America and the largest in Brazil to become a U.S.-listed public company. This is an important step forward in the divestment process for Fund V and a great case study of our success in the agribusiness sector and the execution of a pan-regional consolidation strategy with more than 20 M&A transactions completed to build the Company we see today.

In infrastructure, we continue to see an accelerating fundraising cycle as we target the first closing of our next flagship fund in the coming months, more than one year ahead of what we anticipated back at the time of our IPO. We also closed our second infrastructure core vehicle targeted to local Brazilian investors in Q3. The divestment process continues to move along with some key assets with an expectation to deliver significant realizations to our limited partners in the next few quarters.

Credit continued to show strong relative performance despite historically challenging market conditions in the asset class. The high-yield strategy is outperforming its benchmark by an impressive 660 basis points year-to-date, with about 90% at outperformance attributable to asset selectivity with a yield to maturity of more than 13% at the end of Q3. The local currency strategy is also outperforming its benchmark with a yield to maturity of more than 15%.

On a broader basis, these two products are both performing 1,500 to 2,000 basis points better than the world’s Aggregate Bond Index, which is down 20% year-to-date. Our public equities platform delivered solid performance in Q3 as LatAm equity markets were a clear bright spot relatively to the U.S. and most of the world markets.

The Chilean small-cap strategy, for example, returned 12% in Q3 and outperformed its benchmark by 370 basis points. And in real estate, BBI raised more than BRL100 million to allowance, a new REIT, real estate investment trust vehicle focused on credit assets. This continues to be an area where we remain active on the M&A front and believe there is a very replicable permanent capital strategy to be pursued in other key Latin American countries.

Let me now turn things over to Marcus to give some more details on the numbers. Marco?

[Marco D’Ippolito, Chief Financial Officer]

Thank you, Alex, and good morning, everyone. Looking first at the P&L results, we generated fee-related earnings of $31.7 million in third Q ‘22 and $94.6 million year-to-date, up 46% and 57%, respectively, from the comparable prior year periods. FRE was in line compared to the second quarter, following a similar pattern in the fee revenues and fee-earning AUM. A few known factors coincided to limit the uplift that we will typically see moving into the second semester of the year, and our trajectory remains on track for our full-year guidance.

Our second infrastructure fund reached the contractual end of its fund term in June. And the lack of that fee stream offsets the additional revenue generated by infrastructure deployment in the first half of the year. Also, as noted last quarter, there is a fee holiday on the first closing of our latest private equity fund, meaning the private equity deployment in the first half, while still fee-earning AUM in nature is not effectively generating management fees yet.

And finally, the outflows from credit in the middle of the year, which have low and we believe turned the corner, have resulted in credit fee earnings AN being lower than we hoped at the beginning of the year. Despite these offsetting factors for management fee growth during the year, fee revenues has remained very stable, demonstrating the stability that make our fee earnings predictable.

In the fourth quarter, we expect to deliver similar management fee revenue with the addition of the year-end incentive de-crystallization adding to the FRE results. This should allow us to deliver our financial guidance of 50% FRE growth, which we first conveyed exactly one year ago, through an environment where maintaining guidance has proved difficult for many companies.

The FRE margin was 57% for both the quarter and year-to-date period, continuing to run on the higher side of our mid-50s guidance as both personal and administrative expenses have remained relatively consistent with first-half levels. Net accrued performance fees rose to $428 million, up from $49 million last quarter and up 23% since the beginning of the year.

The quality of our private equity and infrastructure portfolios continues to support significant embedded value for shareholders, and exit processes continue to move forward for several portfolio companies. As we look to the fourth quarter, there remains a possibility of a performance fee realization event with the outcome now being more binary. It’s safer to assume an event that crystallizes in 2023, though we would expect to have clarity by the time we announce our Q4 earnings.

Turning to AUM. Total AUM was $26.5 billion at September 30, up slightly from the prior quarter with the inflows in private equity offset by outflows in credit and positive valuation impact offset by currency impact. Total AUM is up 76% from one year ago, reflecting the expansion with Moneda and up 11% year-to-date. Fee earning AUM was $18.6 billion at September 30 compared to $18.8 million at June 30, with a quarterly change generally driven by the same factors affecting fee revenue that I mentioned a moment ago.

The contractual fee turn-off of infrastructure to is the largest driver. And while we also saw some additional net redemptions in credit for the quarter, driven largely by Chilean clients, we are seeing the macro headwinds for those flows at as we enter Q4, following the strong rejection of the proposed new constitution in Chile. I will close with a quick reminder of my upcoming transition to focus my time more fully on Patria’s growth strategy in the coming years as Chief Corporate Development Officer.

It has been a privilege to serve as a CFO in these recent years, and I want to assure you that I will continue to be a regular pace to Patria shareholders from the senior leadership team, bringing Ana Russo to our management team adds a distinctive set of skills that will take our finance and accounting team to the next level as a public company. In turn, it is going to allow me to best leverage my strength to achieve our future vision for the growth of the platform. You’ll hear a lot more from Ana in the coming quarters.

But for now, I will turn to her for just a few quick words. Ana?

[Ana Russo, Incoming Chief Financial Officer]

Thank you, Marco, and Good morning, everyone. It is a pleasure to be here with you on the call today and look forward to meet soon in person. I plan to spend this fourth quarter working closely with Marco and the team getting up to speed, and we are off to a great start since my arrival at the beginning of the month. Marco has built a wonderful team, and I’m excited and honored to have the opportunity to step into this leadership role. Obviously, I would defer any business-related questions to Alex and Marco this time.

I will turn it back to Alex for the closing words.

[Alex Saigh, Chief Executive Officer]

Great, and wonderful to have you on board, we are adding important talent to our leadership team for our growth as a public company and positioning our team to really maximize their strengths to drive Patria forward.

I want to reiterate thanks to Marco for the incredible job he’s done leading Patria this chapter in a very wide-ranging CFO role, and it begs that I pause a reflect on what we have accomplished in the seven quarters since the IPO. We expanded our platform organically and inorganically with total AUM up 84% and fee earning AUM up 141% since the end of 2020.

Our IPO capital has driven three strategic M&A transactions, giving us a substantial credit vertical, a new public equities and pipe expertise, a talented growth equity team and an anchor for real estate in Brazil. Our fundraising cycle continues to run ahead and our expectations at the IPO, even given the difficult environment here in 2022. Our drawdown funds have deployed $3.2 billion to new investments to drive organic fee-earning AUM growth of 27%.

Our portfolio is performing very well with two most recent vintages of both private equity and infrastructure funds, all accruing performance fees today. And an overall performance fee accrual is up 55% since the end of 2020 or up 76% when accounting for the interim realizations. We have also committed to giving you some guidance on our fee-related earnings where we delivered in 2021 and now re-alternate we expect to deliver again in 2022 on 50% growth.

On that note, I’ll close by again encouraging you to attend or tune in with the Investor Day event we have coming on December 5. It’s a great timing for us to provide a clear vision on what we want to accomplish over the next several years, and we are planning on an engaging program that will showcase our platform with presentations from across our leadership team. I think you will leave with renewed view on what we are today, what we want to become and the value we can deliver to you as shareholders along the way.

We’ll now be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America. You may proceed.

[Craig Siegenthaler, Bank of America]

So far, the Brazilian stock market and the Hall have reacted pretty positively to Lula’s win. And so like that’s a positive for the valuation of your portfolio companies, the return translation, USD and also the realization outlook. But I want to think on this a little deeper. So besides the market impact, do you see any other potential positives or negatives from a Lula administration, especially on the domestic fundraising front? And I’m also wondering if infrastructure spending could also be an important catalyst for Patria.

[Marco D’Ippolito, Chief Financial Officer]

Yes. I think the answer is yes. I think we see that as a catalyst to be honest. First and foremost, I think the -- if I go back 20 months ago, 24 months ago, to be honest, Craig, Bolsonaro as the President, and we were in the middle of COVID and I think he was trying to do a good job, but he was very criticized by civilians and the international community and how he handled COVID, et cetera. And I think in the end, I think you did a good job in the vaccination programs. We’re up the now over 90%, et cetera.

But I think the country was going through this general criticism around the world of how Mr. Bolsonaro was handling things. Now we turn to 24 months after that to today, I think investors are a lot more positive about Brazil and because also on a relative basis, from then 24 months ago to today, I think Mr. Bolsonaro came back and had a more positive stance on COVID, the economy is open again and comes the war and with the Ukraine and the region doesn’t have any geopolitical risks, et cetera, everything that we said over the call, and you did see how the markets reacted to all of this very positively.

Finally, I think some of our investors were waiting for the election. I think that Mr. Bolsonaro has one, we would also be in a positive expense. I think there were more concern in this handover, pass over, and I think we talked about that over our dinner in London a couple of weeks ago or a month ago. And now I think what we listened from our investors is like, okay, the page is turned, let’s move forward. And in addition, and I think with the international community, I think Mr. Lula does stand as a positive outcome.

And I think that Mr. Lula will play to the international community audience, where he’s going to focus on two, three things which will be very, very well accepted on the environmental front, number one, on the civil rights, number two, and maintaining fiscal and monetary discipline number three.

So on the first two, here, they’re already there in acting and inviting to be the Environmental Minister of person that is very, very engaged with international community. And the international audience, which today is center left, left is already applauding. Now, Mr. Biden in the U.S. already congratulated, Mr. Lula said, we can do so many things together. You have the Norwegians coming back and already saying that the funds for the Amazon Forest recuperation is already back on $2.5 billion. They had hosted that flow of money to Brazil because of Mr. Bolsonaro stands on the environment.

You have Mr. Macron. You have a central left government in Germany, also applauding Mr. Lula. And we have China, which I was very impressed with the Congrats Letter that Mr. Lula received from the leadership in China, again, you are the person that we expect to really deepen the relationships with Brazil. And of course, China being left center left and whatever, they have the same. So the audience, international audience is pretty much aligned with Mr. Lula’s speech.

So yes, and I think that investors now, I think, of course, liquid securities comes first because they react immediately to a positive stance. But I think that our fundraising locally and internationally will definitely benefit from that. On the local front, notably, we did raise a record high for a private equity fund in Brazil in the month of October prior to the election, even with interest rates at 13.75%.

So that also shows a positive sign how investors are willing to invest more in alternatives and of course with Patria. So now, we’re positive here and I think the Mr. Lula will do the right thing he’s everything, but not pragmatic. He’s a very pragmatic person. And he will definitely play for the international community crowd and audience, and I think he’s already been well accepted, and I think he will continue to be. And that plays very well with our investors.

[Craig Siegenthaler, Bank of America]

Got it. I think the U.S. Vice President will be attending as inauguration too. Alex, my follow-up is on Moneda. Credit AUM declined sequentially. That was a mix of negative flows, depreciation a little I know something is going on in Chile with the pension plans. There is some pent-up redemption demand by something that played out, I think, a year or so ago. Can you just help us with what’s going on with Chile and also help us with the timing and the size of these redemptions if they’re going to continue?

[Alex Saigh, Chief Executive Officer]

Yes, of course. We saw on September 4, the Chilean society civilian voting against the new constitution. As of that moment, the redemptions had halted to diminish significantly. So we saw definitely a positive move on that front, Greg. I think Chileans were worried about this new constitution that was being proposed by the current President, Mr. Boric. As you know, over 60% of the Chilean civilians and voters voted against the new constitution. And we saw the redemptions basically hold.

And now I think if we continue as we go into 2023 with the same amount of inflows that we had in ‘22 or even more, and we don’t have those redemptions, and I think we come into 2023, very optimistic. And in addition, we’re already seeing some of that money that came out being reinvested in the fund. And why did more than just that the investors were worried about the new constitution, the way that the pension funds in Chile works, they have to balance their assets accordingly to an index, which is an average of all of the other pension funds together.

So for example, a very, very simple example, we have 60% equity and 40% fixed income. And the average of the pension funds is 58% equities and 42% fixed income. You know the pension fund is out of this now 58%, 42%. You have to then redeem from equity funds and invest in fixed-income funds and vice versa. You have to follow the average because your performance is compared with the benchmark, which is the benchmark of the average of the industry. So they were actually worried that this could actually affect their performance.

And in addition, they wanted to have a cash position if they have to come and have to more withdraws coming forward, with the rejection of the new constitution on September 4, everything got reverted. They want to have to be more exposed to Chile. They want to be more exposed to our alternative products. They don’t have this issue of keeping cash anymore. So not only the redemptions halted, but we see that -- we already saw investors coming back and reinvest in our funds and not only the institutional channel, but the family offices chat. So it’s pretty nice pre-positive on that front. And I think we see that trend continue in ‘23.

[Operator]

Thank you. One moment for questions. Our next question comes from Ricardo Buchpiguel with BTG Pactual. You may proceed.

[Ricardo Buchpiguel, BTG Pactual]

I have three on my side. First, can you please talk about when the next closing of PE Fund VII and Infra Fund are expected to happen? For my second question, can you please explain what happened with the deployment levels to be flattish quarter-over-quarter when you look at Q3, and what we should expect in the following quarters? And finally, can you please give more color what drove the loss in financial result this quarter?

[Alex Saigh, Chief Executive Officer]

Thank you very much, and nice to talk to you, and thanks for participating in our call, so three questions. Number one, next closing is on private equity fund VI and infra fund V. private equity fund VI, we did a couple of closings, I think two or three closings during the third quarter with Brazilian clients, Latin clients and outside of Latin America clients, mainly U.S. So we are going ahead. I think we’re having this multiple closings every month, every six weeks.

As soon as we I think that’s how the industry works. I’m not saying anything that is not an industry standard. As soon as we have enough volume, around $100 million $100-something million of investors, we then have a closing, which is a very simple process, to be honest. And so we keep some of the subscription documents in escrow. And then we know we’ve joined 100-something million because there are legal costs associated with to closing, and then we then get all these sub-docs already signed and do an official closing.

And that’s what we did during the third quarter. I think with Latin investors, as I said, with U.S.-based investors and with Brazilian investors. The Brazilian fundraising, which is very interesting as well as we had a record high fundraising for private equity fund in Brazil with XP being the distributor. Interesting here is different than what I just described in Brazil when you fundraise for private equity fund or an alternative asset fund like ours, it’s like an IPO.

You have the beginning and end. So you have 20, 25 -- it’s basically 25 days, which is around 20 working days, then you have to fundraise like an IPO. You start day one and two working days data, we have to stop fundraising. And we are -- with XP, we put on the cover that we’re going to raise around BRL800 and something million. There was a $1.3 billion demand. So we managed to do the hot issue, which is 20% more and reach BRL1 billion.

And so we had another BRL300 million that we couldn’t supply so an excess demand. So we’re very, very excited. But we could not take on those BRL300 million of addition. And we stopped, I think, on day 15, we stopped even doing meetings because we were already at BRL1.3 billion, and we knew that we couldn’t cope with the excess demand, and investors do get, of course [Technical Difficulty] because by the Brazilian regulation as well as first come for serve. So, the guys that came in later would not be served. So at the end for 20 working days, we had 15 working days of fundraising with other five, we just canceled the meeting.

After X amount of months, which is -- if I’m not mistaken, around four months, I can do another issuance going through the process that I just described. And we’re very excited that maybe sometime early next year, we’re going to do another one. And I think we can do another one. And because there’s now after everything that I just answered here to Craig’s question with Lula already there and things going on in the right direction, and the interest rates in Brazil showing that they’re going to go down in the second semester of next year. That’s what the yield curve actually shows us the Brazilian yield curve shows us, I think we can do other of these issuances.

So I’m very, very excited about this. So that’s on private equity VII. On the infrastructure fund V, we haven’t started and now we’re talking to investors. We haven’t had the first closing yet in private equity fund VII. We had the first closing I think it was March of this year. We’re planning to have a first closing sometime this year or early next year. It depends more on bureaucratic issues, and it’s very interesting.

We’re having a reverse increase when we’re going to get out with infrastructure fund V. And here, it’s interesting as well as a general comment. I know you didn’t ask this, but just as a general comment here, an additional comment. Private equity fund VII and fund V and from the previous funds, 1/3 of the fund was being raised, 1/3 to 40% of the funds were raised with North American clients, the U.S. and Canadians.

And as you know, the U.S. market, in particular, is a crowded market, and we’re waiting for it now for a better moment to raise in the U.S. So I think we’re going to get there to the targets in private equity fund VII, but the U.S. underperforming and we are over performing in other regions of the world, the Middle East, Israel, Asia, Latin America to compensate for this. If the U.S. comes back in ‘23, which I think it should then I think we will do even better.

On the infrastructure side, we never really raised a lot of money from U.S. Canadian investors to our infrastructure fund. Infrastructure is a real asset, but it’s not really an asset class that U.S. pension funds invest in. They’re beginning to come into the asset for this asset class. So infrastructure fund V around close to 10% of infrastructure fund IV, III or even less than that comes from U.S. Canadian investors. U.S. investors because what I just said and Canadians, they like to invest in infrastructure more directly, Canadian pension funds.

So that effect that I just mentioned, the overcrowded market in the U.S. does not really affect our infrastructure fund in that sense because we don’t raise a lot of money from the U.S. market, Canadian market. In addition, it’s a sought-after product today because of the inflationary hedge, et cetera, et cetera. So, I’m pretty positive on the infrastructure fundraising process as we go along. [Dan], going to your -- any additional comment there? Can I go to your second question?

[Ricardo Buchpiguel, BTG Pactual]

No, very clear on the first question.

[Alex Saigh, Chief Executive Officer]

Okay. So now we go to deployment. What did we do here? And of course, there’s the strategy and then there’s a tactical part of the execution, right. We want to deploy -- last year, we deployed around $2.5 billion. And it was a very favorable moment for us to deploy because we saw more of a tactical approach to deployment, an overshooting of our devaluation of our currency, BRL560 on, BRL580 to the dollar. As I mentioned answering Craig’s question, I think it was a general pessimism exaggerated pessimism with Brazil and Bolsonaro because of what he know he stands on COVID and et cetera.

And we said, look, I think this is a very interesting moment for us to deploy. Now valuations were depressed because interest rates would come in, we’re going up, et cetera, et cetera. So we had a very good year of deployment. As we approach into 2022, we actually saw that things were going to get it better than they did and the whole uncertainty about the election, be it Mr. Bolsonaro, be it Mr. Lula would be over as it did as well. And so look, I think this is a very interesting moment for us to divest.

So we’re trying to divest a lot. And I think as we do the divestments in the fourth quarter, mainly from our infrastructure funds and our private equity funds, I think we’re hitting a very good exchange rates to take the money out and give back U.S. dollars to our investors at BRL5.20, BRL5.14. And it’s interesting that our private fund VI, which is our latest private equity fund and an infrastructure fund IV, which is our latest infrastructure fund. The return in dollars is actually better than reals, which is not very usual because of what I just said.

We put money in at BRL5.60, BRL5.70. So, the dollars are now the real is trading around BRL5.20. So, we were also waiting in this quarter, to be honest, on what was going on with the election and what was going to happen. After the election, Mr. Bolsonaro stands on passing the baton, et cetera. So we -- to be honest, I think we delayed a little bit the signings of deals that we had in the pipeline. We turned papers a little slower than we could in order to get -- to understand what’s going to happen.

And now everything I think is fine. In our view, as I did answer to Craig, I think we are then coming back to the table to sign the deal that we had on the table. So we tactically we did delay things a little bit over the third quarter. So very -- the strategy remains the same -- over the last 12 months, we have deployed committed BRL1.4 billion. We should finish the year with BRL1.5 billion, 12 months, 2022, BRL1.5 billion, right on target with where we gave you the expectation that we would commit $1.5 billion from our long-tailed close and funds, private equity and infrastructure.

So we’re fine there. But tactically speaking, micro-management, third quarter, we did slow down the pace. We pushed the papers along a little slower. We turned the papers a little slower because of the election. And the third question is that fine for the second question? Can I turn to your third question?

[Ricardo Buchpiguel, BTG Pactual]

Just a quick follow-up on your -- the second question. We saw that there was the impact from the end of the fee agreement in the infrastructure segment. Should we expect anything similar happening in Q4? Or that would impact the resin or not?

[Alex Saigh, Chief Executive Officer]

No, we don’t expect anything in Q4. What we have in ‘23, and we go over -- we’ll go over that in more detail in our Paxs Day, December 5, that we have a private equity fund IV finishing in June 23, private equity fund IV, finishing June 20. Again, a lot of micromanagement here, we can give you more details off-line, but just answering your question very, very precisely, but no effect in the fourth quarter of ‘22. Now I’ll turn to Marco to answer your third question.

[Marco D’Ippolito, Chief Financial Officer]

Ricardo, hope everything is well with you. So regarding the financial results, I’ll split my answer in two. The first piece on the non-GAAP measures on Page 8 of your presentation, you’re going to see that on the quarter, it’s going -- financial expenses is actually increasing by $100,000. And this is very much a reflection of the variance of the assets underneath part that are substantially driven by GP commitments. So the mark-to-market of the assets will drive some of that variance. If your question is it relates to the IFRS, then -- and that’s on the Page 22 of your presentation, you will see that most of those expenses are driven by the M&A activity and our non-cash expenses.

I will call the attention particularly to the one that its newer to this because we have some of that expenses accruing as a result of the acquisition of Moneda, some of them accruing further as a result of the acquisition of VBI. And then, there is one particular line that stands for the spec, which is the market value of the warrants. Again, these are all non-cash expenses. Very clear and we saw there was an increase in the non-cash expenses looking at this quarter versus the previous one. Is it mainly to do with the VBI acquisition in respect that you mentioned? Or is there another effect that you should take into account?

[Alex Saigh, Chief Executive Officer]

Precisely that, yes, precisely that.

[Operator]

[Operator Instructions] Our next question comes from Tito Labarta with Goldman Sachs. You may proceed.

[Tito Labarta, Goldman Sachs]

Alex, and Marco, a couple of questions also. First, on the performance fees, you mentioned you probably have some more visibility in the coming quarters to be able to realize those and maybe more in 2023. But just understand anything in particular that you would be waiting for, is it just more stability in markets? Is there any particular event that you’re waiting to be able to realize some of these performance fees? And I imagine primarily would be from private equity fund VI and infrastructure III. Just any color so we can think about the timing and how much you could potentially realize that you can give would be helpful? And then second question, a follow-up actually on Chile. Just looking at the pension reform that was announced last night, they call for a public option to compete with the private fund managers. Just wondering, if you have any more color on that, if that can create any potential impact for you there?

[Alex Saigh, Chief Executive Officer]

Okay. Thanks, Tito. Thanks for participating in our call. Thanks for the question for the questions. On performance fee, I think we’re doing as planned, to be honest. I think we’re getting in both funds that you mentioned, private equity fund V and infrastructure fund III. We see good realizations coming up. We are in the process of selling several assets, a couple of them, to be honest, are very close to signing or very close to closing, first signing and closing. But at the valuations that we expected, that pushes us very close into the performance fee arena. So sometimes, it could happen sometime till this year.

If I look into where we are in some of the sales processes of these assets, of course, it might slip into beginning of next year, maybe bureaucratically an approval of the potential buyer that falls into January or whatever. But I don’t see any hiccups in the process. The process continues to actually go through what we expect in non-binding and then the bindings and for some of these assets that I mentioned, we already got the binding. So now we are negotiating SPAs and et cetera. So going through -- going down the process all the way to choosing the final bidder, the final winner that will buy these assets and then sign the SPA, the sales and purchase agreement. So I’m happy with the process.

And again, I’m happy with the valuations and I’m happy with the exchange rate. One of the -- two of the assets actually they have no dollar-denominated revenues, but whatever. Still, I’m happy with the whole atmosphere and going all the way back to Craig’s first question, I think, of course, the election in Brazil because these assets, one of the as very LatAm. The other asset is more Brazil-focused and the other asset is also more Brazil-focused I think having the election results and having this Bolsonaro pass on the baton peacely Mr. Lula, I think, also helps. I think there was nothing that would actually interfere, but definitely going all the way up to the investment committees of these potential buyers, I think it helps that everything is well and be so in Brazil.

For your second question, I think I think it’s a positive move, I think, from the Chilean government actually increasing the contributions from 10% to around 16% to the pension fund. So in general, by the amount of money that these pension funds will manage will be bigger and bigger is better than smaller. Like in Mexico, that went from 6% to 12%. So it’s bigger amounts these pension funds are our clients. But we don’t have a lot of detail. I’ll pass on to Marco here. We don’t have a lot of details of what might go on. And of course, this proposal will have to be negotiated with Congress. And Mr. Boric has not been going through right now a very high popularity rates.

And as you probably know that this new constitutional amendment was rejected by the population by over 60%, and Mr. Boric face is a very conservative Congress and Senate, which then I think this -- this proposal will be so much negotiated, which is hard for us to say now between what he proposed and what will be accepted by Congress can be something totally different from what is there. But in general, I think what I see that everybody likes on both sides of the aisle, as they say here in the U.S. is a bigger pension fund system, more inclusive, et cetera, more competitive, they’re all good things. Marco?

[Marco D’Ippolito, Chief Financial Officer]

And this is really no news from what Boric laid out in his campaign and his narrative about his intentions to do with the pension system. It came out last night, and we are over it and we’ll study and before having a reaction to it. I think the first note is, as Alex mentioned, we called the attention that the system is going to get bigger. Part of it is being paid by the employer. Part of it has been played by the employee. And it will be very inclusive. So it’s going to be very populous-driven proposal.

So I’m not going to get into a lot of details on the outcomes on the economy because that also has another side, which is increasing the cost of employment to the region. But as a first look for the asset management business is increasing the flight, still to be determined how much of this is going to be driven by the public initiative and by the private initiative, that the proposal is not completely clear on that. And before even getting to further reaction, we will be paying a lot of attention on how the lower and upper house will react because there’s been a number of radical proposals that in the region and in the country that has been simply rejected by the population and by the governors.

[Operator]

[Operator Instructions] Our next question comes from William Barranjard with Itaú BBA. You may proceed.

[William Barranjard, Itaú BBA]

Alex and Marco, thanks for hosting the call. I have a question here regarding the public equities and the credit operations, so basically Moneda operation here. So we would like to understand how you see the AUM evolution going forward if you see the mood improving, especially for equities. And then if you see any performance fees for these operations for the next few quarters?

[Alex Saigh, Chief Executive Officer]

Okay. Yes, definitely, I see a better role in general because, again, just having the election cycles over in most of the countries in Latin America, that’s positive because people just turn their pages. Number one, having the rejection of the constitution in Chile; number 2, having the peaceful transition between Mr. Bolsonaro and Lula, number three, and several other factors, I think, play into us being more bullish on fundraising for this year and next year.

In addition to that, a reduction in interest rates in Brazil, that will probably happen in the second semester of next year, if the world situation permits Brazil to do that. From a Brazil standpoint, I think it’s already showing that the Central Bank in Brazil can do that. And you know that the Brazilian Central Bank over the last two meetings did not raise rates maintained rates at the same 13.75. I can add so many other comments here to my answer, which actually favors fundraising.

And you probably know as well that I think in the month of October, we had the highest inflow in equity funds all over the world, I think of $23 billion into listed equity funds. That’s more of a global number. So it’s not just, I think, Brazil, I think, in general, people are not trying to anticipate this comeback of the economies globally. But specifically, I think LatAm will come out first of this situation because it started first, raising rates, et cetera, et cetera. And then the election cycle also being over also helps everything that I’d say. So we’re bullish. And on the other side of the equation, William, is the reduction in the withdrawals.

So as we -- one side is what you mentioned, which is fundraising and new money coming in. And the other side of the equation, which in the end, it’s important for the net inflows is the redemption. And we saw basically the redemptions being halted after the constitution, the new constitution in Chile was rejected by Chile and, of course, which that also helps the net inflows. It helps it positively. So, inflows good, rejections stopping, bullish on fundraising for ‘23, I’ll turn it over to Marco also on more numbers.

[Marco D’Ippolito, Chief Financial Officer]

Yes. I think tying some of those to our presentation and what we laid out here, starting with the flow, what we saw specifically on the credit and equity is a reduction of the outflows by about 50% relative to the previous quarter, that considering that the adjustable which is the rejection of the constitution came out only in the middle of the quarter. And that’s a data point. We cannot call it a trend yet, but it’s an important data point. The important data point is the inflow coming from what you read as advisory distribution that is particularly driven by families, which are normally first movers. So I think we have a couple of data points to be positive on that trend.

And finally, the other important data point is about the relative performance and the absolute performance of these two products. The high yield is performing phenomenally and it’s the flagship fund for the credit. It’s over 10 percentage points over the last year, which is absolutely impressive in a world where credit has been hammered. And also on the equities, if you look at the Chilean equities is performing in excess of 25% net this year, so all that contributes to the flows.

[William Barranjard, Itaú BBA]

Yes, the credit fund means 10% better than peers.

[Marco D’Ippolito, Chief Financial Officer]

Correct. Yes. That’s correct. And relative to your question about the incentive fees and I’m glad that you made that question because I want to drive you through a simple math, it’s quite interesting. If you look on Page 13 of your presentation, you’re going to see that the incentive fee accrued to date is $4.9 million.

So the answer to your question is, yes, we expect to see that kicking in the fourth quarter. And if you go back to Page 18 on your presentation on the earnings for the quarter, the year-to-date FRE is on 94.6%. The market consensus for the year is on 129. So that means that the gap for the year to go is 34.4%. If you look at during the current quarter, three quarter, we deliver on 31.7%.

And as we described earlier in this presentation, we expect this to be very consistent for the upcoming quarter. So if you just count that there is an additional incentive fee to kick in that we’re showing you on Page 13 that it’s accrued today to 4.9% will be ahead of the 50% guidance increase on the FRE for the year.

[Operator]

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Alex Saigh, CEO, for any further remarks.

[Alex Saigh, Chief Executive Officer]

Well, thank you very much for your patience here with us and participating here. And I hope to see you all on December 5 for our Pax Day in New York starting 12:30, Josh.

[Josh Wood, Head of Shareholder Relations]

Correct.

[Alex Saigh, Chief Executive Officer]

So 12:30, December 5, in New York presently better. But if you can’t do presently please tune in online. Very excited. I think we are now having most of the senior members of our team present.

We’re also going to have a chance to sit down and have a cocktail at the end of the day, so you guys can have and talk directly to our senior leaders and have more of an informal meeting by year-end. So, we’re doing best here to deliver on the numbers here. We’re excited that with all this volatility, we’re still up 50% over last year.

Excited with 2023 with everything that just happened in the region and mainly in Brazil with the elections and excited with the performance fees coming up because of the biddings that we’re having for our assets at our marks. So again, I hope to see you on the 5th and hope to talk to you soon and see you in person as well.

Be well and be safe. Thank you very much.

[Josh Wood, Head of Shareholder Relations]

Thank you, and enjoy your day.

[Operator]

Thank you. This concludes meeting. You may now disconnect.