We recently expanded our position at Patria Investments (Nasdaq: Pax), an alternative asset manager active in LATAM. The LATAM market is expected to grow significantly faster than North America and Western Europe. Interesting to get exposure. In this article, I will explain why I decided to increase my position at Patria.
Patria Investments or Patria is an alternative asset manager headquartered in the Cayman Islands. Established in 1988 in collaboration with Solomon Brothers. In 2010, he partnered with Blackstone (BX) and subsequently purchased his 40% stake in the company. In 2021 the company will go public on his NYSE and Blackstone has cut its position to 14% of him. Since going public, the company has made three acquisitions to bolster its platform. Acquired Brazilian real estate asset manager VBI, Chilean Moneda Asset Management, a leading credit investment manager, and his venture capital firm, his Kamaroopin. This further strengthened the company and after these acquisitions the company operates in the following segments: Private Equity (including VC), Infrastructure, Real Estate, Credit, Public Equity, and Advisory and Distribution.
Acquisitions combined with the company’s organic growth have resulted in significant growth in assets under management. Compared to last year’s third quarter, the company’s AUM increased by 76%, while Fee Income Under Management (FEAUM) increased by a staggering 101%. Unfortunately, YTD’s earnings dropped by about $20 million as the performance fee dropped from his $89 million to $0. In my opinion, this should not worry investors.
I believe that as the company continues to invest more money, its FEAUM will grow and this will lead to higher administrative costs. As the market eventually stabilizes, the company’s realized performance fees are likely to return to higher levels, which should boost the company’s earnings. From that perspective, a projected CAGR of 20.3% (aggregate based on three analyst estimates) makes sense.
The company’s balance sheet also looks solid. As of the end of Q3 2022, the company’s net debt to his EBITDA ratio was -3.87 and his debt to equity ratio was 2.7%. I prefer companies with relatively low debt ratios. This is because it gives them the ability to increase leverage if they see good opportunities, and also makes the company relatively safer than those with higher leverage.
Before investing in a stock, it’s important to have a general idea of its valuation. Valuations serve as guidelines for when to invest in or sell company stock. I prefer to use multiple methods, including the DCF model based on perpetual growth rate and exit multiples, and multiple analysis.
discounted cash flow
Whenever I use the DCF model, I like to utilize three scenarios: bullish, bearish, and base. We use these scenarios because many assumptions need to be made to create a DCF. Scenarios allow you to see how inputs affect stock prices. I use the earnings growth estimated by the analyst and his COGS based on his COGS over the last three years, adjusted slightly based on my expectations. For Patria, this leads to the following assumptions.
Future cash flows must be discounted to today to get the present value. To do this, we use the Weighted Average Cost of Capital (WACC). It is based on the company’s beta, minimum required rate of return, financial interest rate, company’s cost of equity (based on CAPM), and cost. Debt (based on interest payments and debt value). This gives the following WACC estimate:
The perpetual growth method uses a perpetual growth rate of 3%. The reason is that companies cannot grow faster than GDP in the long term, and GDP growth has averaged 3% over the past decade. We expect LATAM’s economy to grow faster, but to be safe, we take an average of 3%. This brings the price to $12.98, slightly lower than the current price.
For exit multiples, I like to use the company’s average EV/EBITDA. Patria’s exit multiple is 15x, slightly lower than its 18x average since going public. Based on his 10-year average EV/EBITDA for Brookfield Asset Management (BAM) and BlackRock (BLK), I think 15 is a reasonable estimate. This leads to a price target of $16.06.
For multiples, I like to use price/earnings multiples and EV/earnings multiples. As for the price/earnings ratio, the company is very volatile, trading above 30 and below 15. Our average since going public is 23, which I think is a bit too high given our favorable environment. Based on that, I adjusted it down to 20, leading to a price target of $18.00.
Looking at the company’s EV/Revenue, we see that it has averaged around 10 since going public. However, this is also affected by the increase in multiples immediately after listing. Adjusting this to 9 gives a target price of $13.96.
Combining all the above price targets gives us a price target of $15.25. That’s about 11% above the latest closing price.
Having a price target is a good guideline, but you need a reason for the price to move toward your target price. For Patria, we’ve identified two catalysts that could push the stock closer to its target price.
Patria has an active investment management business in Latin America or LATAM, with multiple countries being part of emerging market indices. The EM index comprises countries that have some developed country characteristics but do not fully meet the criteria. Countries included are Argentina, Brazil, and Mexico. Also interesting is that the middle class is expected to grow significantly in these countries. This should ultimately lead to more people investing in stocks and alternative assets. Also advantageous for Patria is that the region is now only 1% of the global private market, compared to his 6% of the world’s GDP. The gap between the two is expected to narrow over time, which is beneficial to the company.
In addition to Patria’s region-specific benefits, we also see an increase in alternative assets. Compared to 2010, institutional investors’ allocation to alternative investments increased from 14% to 19% in 2020.
Low correlation with G7
Another reason to invest in Patria is that investments in LATAM have a low correlation with the G7. The G7 is made up of the largest Western economies, including the United States, Canada, and Germany. These countries have the largest economies, so most people are exposed to them. Patria has a low correlation with these economies, so the benefits of diversification are large and demand may increase in the future.
Latin American government
LATAM is expected to grow faster than most developed countries, but its government is not the most stable. They also tend to suffer from corruption and nepotism. As an example, both Brazil and Argentina ranked 96th out of 180 countries on the Corruption Perceptions Index, while Mexico ranked her 124th. Chile, on the other hand, performed well and was ranked at her No. 27, the same as the United States. Corruption and unstable governments make it harder to do business. Additionally, if things get really bad, the government can decide to seize the company’s assets. This makes it more likely that investors will withdraw money from the region and asset prices will plummet. I think the latter is less likely, but corruption could definitely be a problem for the company.
Another drawback to investing in Patria is investing money in countries with weak currencies. . This can have a significant impact on the company’s return on funds and, therefore, on the commissions it receives, such as success fees.
Patria Investments is an alternative asset manager focused on the Latin American market. Since going public, the company has made several acquisitions to strengthen its platform and raise expectations for growth. At the moment, based on DCF and fold analysis, the company estimates he’s undervalued by just over 10%. Ultimately, I expect my fair value estimates to be revised upwards due to the benefits of growth and diversification in the LATAM market. In terms of risks, investors should consider local government and currency risks. This may increase the time it takes for the stock to reach its estimated fair value.