Ladies and gentlemen, thank you for standing by, and welcome to the Patria Investments Investor Call. At this time, all participants are on a listen only mode. I would now like to turn the call over to your host, Josh Wood, Head of Shareholder Relations. You may begin.
Hello, everyone. Thank you for joining us on short notice today to hear more on our transaction with VBI. With me on the call are Patria's Chief Executive Officer, Alex Saigh, Chief Financial Officer, Marco D'Ippolito, and our Head of Brazil Strategies, Daniel Sorrentino. Alex will first give some prepared remarks, and then we'll open up for Q&A. We have issued a press release and presentation, 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.
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 or VBI fund. I'll now turn the call over to Alex.
Thank you, Josh, and good morning, everyone. As we approach the middle of 2022, I just wanted to start by reiterating the momentum across our business. We are on course raising our flagship Private Equity fund, which had a first closing in Q1. We are also active in several areas that are diversifying the platform. We are marketing our growth equity fund, renewable energy and infra credit, as well as Moneda's suite of credit and equity products. Our flagship private equity and infrastructure funds continue to perform very well and have accrued more than $500 million of net performance fees at the end of Q1. We also see a solid exit pipeline coming into view in the more mature funds like Private Equity Fund V and Infrastructure Fund III.
In short, we believe we are executing across the investment cycle, and are in good position to achieve our goals in 2022. As you saw with our press release, we are announcing an agreement to acquire VBI, one of the top independent alternative real estate asset managers in Brazil, in a two-stage transaction. VBI manages BRL 5 billion or approximately $1 billion in AUM across development and core real estate strategies, with about 75% of that in attractive permanent capital structures. This will increase Patria's real estate AUM more than threefold from roughly $400 million to nearly $1.5 billion. It will roughly double the AUM in our Brazil-focused strategies, which will now total roughly $2 billion, with permanent capital vehicles accounting for about 60% of the Brazil strategies and more than 5% of Patria's fee-earning AUM.
VBI also brings a seasoned and proven leadership team with a solid track record, and they are well-positioned to become the core of Patria's real estate strategy in Brazil looking forward. Since our IPO, we have been clear about our ambition to build a truly comprehensive alternative investment platform in Latin America, serving as a conduit for global capital to the region and also making alternatives more accessible for local investors. We have also been clear on our intentions to expand through M&A when it provides the best routes to acquire key strategic elements of that journey, and we have been executing on that front. In the latter part of 2021, we announced and closed our transaction with Moneda, a major first step which aligned Patria with a regional leader in credit and public equities.
More recently, we closed the first tranche of our transaction with Kamaroopin, which launches our growth equity strategy in partnership with a very talented team. Since announcing those deals, we told you that we remain busy analyzing a number of interesting opportunities, and the real estate vertical remain a major growth opportunity. We view this asset class as an important component in our product offering, and particularly for expanding our reach with local investors as an entry-level product in alternatives. The addition of VBI is a major step in building our real estate platform of the future, as well as our permanent capital AUM, and we are excited to join forces. Let me spend a few minutes giving you an overview of VBI's businesses, how they fit into our overall strategy, and a summary of the transaction. Of course, we'll be happy to take your questions.
Founded in 2006, VBI has built an impressive track record over 15 years, which has allowed them to become one of the top and most respected players in Brazil. Their progress over the last few years has been particularly strong, growing AUM at a 38% CAGR from 2018 to 2021, as they have executed well to capture strong growth in Brazil's REIT market. The market is quite fragmented, with VBI being a top player with a market share of just 2%, highlighting the opportunity for growth and consolidation. VBI's platform brings very high quality AUM, with BRL 3.7 billion out of BRL 5 billion of assets under management in REIT structures, or FIIs, as they are known in Brazil, which are publicly traded permanent capital vehicles that generate a consistent and valuable management fee stream.
The remaining AUM is in drawdown fund structures where capital is likewise locked up and loan dated. We believe that VBI's investment portfolio is also positioned well with high quality assets concentrated in some of the most relevant sectors of Brazil's market. More than 60% of AUM is in REITs focused in the three largest market sectors, logistics, credit, and office. As you always hear me say, performance is always the root of success in our industry, and that remains true for VBI as well. In these three key sectors, for example, VBI's REITs are outperforming the market average by 450 basis points or more over the last 12 months. Their performance over the last several years is what has enabled them to grow faster than the market over that time period.
We always stress that asset management is a people business, and cultural fit is a critical component for long-term success as well. VBI is led by a talented leadership team of five senior partners who have an average of 20 years of industry experience. Through our discussions and diligence process, we have gained high confidence on both sides that our ambitions are aligned, and we are eager to move this partnership forward together. Zooming out to the bigger picture growth strategy in LatAm local markets, real estate is a critical asset class. REITs are often the most approachable entry-level products for high net worth and retail investors, and for a good reason. They provide the liquidity those investors desire, being tradable on the public market. They are extremely tax efficient in the Brazilian market, as income is not taxable in most situations at the individual level.
Real estate investments also provide what we believe to be better protection against inflation than most asset classes. We continue to believe the financial deepening story is well intact in Latin America, with a growing middle class and an increasing willingness from individual investors to embrace alternatives. To harness that secular trend, we not only need investors, but of course, the right product sets to offer them. Partnering with VBI gives Patria an important foothold in the Brazilian market on which we can continue to build both organically and inorganically. Brazil also serves as a model that we believe is replicable through M&A in other Latin American countries with well-established REIT markets, such as Mexico. Brazil and Mexico are the largest two REIT markets, with Chile and Colombia also relevant.
If Patria can expand to capture just a small portion of that combined regional market, we can build a portfolio of real estate permanent capital comparable in size to other major verticals of private equity, infrastructure, and credit. While that won't happen overnight, we believe it is a very achievable goal for Patria over time. On the transaction, while specific financial terms are not being disclosed, it will be structured in two stages. The first stage is expected to close within 60 days and entails acquisition of 50% of VBI for cash consideration, plus the addition of Patria's two existing Brazilian REIT vehicles. During stage one, Patria's real estate team will join forces with VBI, and VBI will effectively manage Patria's real estate platform in Brazil.
Cash payments for stage one are scheduled in two installments to be paid in 2022 and 2023, plus one additional payment conditional on VBI's fee earning AUM growth to be paid from 2024 up to 2027. When closed, the second stage will lead to full ownership and integration of VBI's platform by Patria, and that is expected to commence within 24 to 36 months. Stage two payment will be divided into two annual installments to be paid in a combination of cash and PAX Class A shares, with the equity portion being capped at 50% of the total value of the stage two payment. In terms of immediate financial impact, we expect it to be relatively small in 2022.
VBI's blended effective management fee rate on their AUM is 80-90 basis points, and we expect their FRE margin to be over 50%. That will lead you to a gross estimate of $4 million-$5 million on an annualized basis for 100% of VBI's business. Now, to wrap up, I want to reiterate that as we pursue growth through M&A, we have high awareness of the importance of getting it right. Each transaction is focused not simply on adding AUM today, but on finding the right strategic pieces of the puzzle for our longer journey. We have great confidence that VBI is the right partner to move our Brazil real estate platform forward, and both sides are very excited for what we can accomplish together. We're now happy to take your questions. Thank you.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Craig Siegenthaler with Bank of America.
Hey, good morning, Alex, Marco. Hope you're both doing well, and congrats on your third transaction since the IPO.
Good morning, Craig. Thank you.
Hi, Craig. How are you?
I am good. Good to hear from you guys. First question on the strategic merits of VBI. Do you have the ability to repackage your real estate product now and cross-sell to your international limited partners? I'm especially thinking in markets like Japan, where rates are very low. Is the focus mainly gonna be local in Brazil and probably the retail channel?
Hi, Craig. This is Alex here. I think the main focus will be distributing or selling, fundraising these REITs to Brazilian investors. Brazilians, I think, have not only the yields, but it's tax advantage on that yields. When they receive that yields or that rent income, they don't pay any taxes on that. That actually when you makes the yield on a gross up basis very, very attractive compared to other fixed income kind of products. We have a tax issue with foreign investors investing in these kind of products in Brazil, that they have to pay a 25% withholding tax, which kind of, you know, goes on the opposite way of what I just said about Brazilian investors investing in these kind of instruments.
However, the government has announced that it might, it's trying at least to eliminate this withholding tax. If that's the case, and this mini tax reform is in Congress right now and the government's trying to push it, if that's the case, then things is about to change from what I just said. We don't count on that. I think we can continue raising a lot of money locally. The REITs market in Brazil alone reached around BRL 230 billion in 2022. That's, you know, over $40 billion, you know, more than, more close to $45 billion. That's huge. Now, we have $1 billion out of $45 billion, so we can still gross a lot within this asset class.
In addition, this asset class is growing at low double digits. It's a real large asset class that attracts Brazilians because of the characteristics and because of the tax break. It's growing at low double digits at a $45 billion asset class. We're very excited on all those fronts. Now we have to as a goal to reach, you know, at least a double-digit market share on this asset class. That would. You can do the math. That means a lot of money for us, and it could be a significant portion of our AUM and gives us predictability, as you know, because of the permanent capital structure and nature of the products.
The product alone is corrected by inflation, the NAV alone, sorry. Just looking at the NAV of this product, it's, you know, it will be moving together with inflation because it's an inflation-adjusted rent income in Brazil, and we charge fees on NAV. It's, you know, a really interesting, attractive. You know, we wanna do more, not only in Brazil, but other assets, but other countries. Today I think is primarily focused to sell these products to Brazilian investors.
Thank you, Alex. Just as my follow-up, you know, you just mentioned there's BRL 230 billion in real estate industry AUM in Brazil. Pro forma, I think your business is about BRL 5 billion. You know, I didn't realize actually it was this large. How, you know, how will your business rank in terms of size versus industry leaders? If you do move your market share sort of double digit, I think that implies 20 billion+. How much of that is from share gains, and how much of that is from the BRL 230 billion just growing over the next five years?
Yeah. The first of all, I think your comment is right there on top of what I just wanted to mention, BRL 230 billion. It's a sizable market within the alternative asset space, right? It's a $45 billion or a little over $45 billion. We, you know, right, as of today, we have one, right? It's a really small market share, and we are one of the top five in managers. That actually sends the message here of how fragmented this market is. You know that we are consolidation player, right? We like to go into these fragmented markets and build market share through organic growth and through also acquisitions.
I, you know, in any way that I see it, I think that Patria deserves a low double-digit market share in this asset class, and we're gonna grow it through acquisitions and organically. You know, of course, we're gonna use these two weapons here to grow our market share. I was referring to, you know, as the market stands today, and the market is growing at low double digits every year. At least it was growing over the past 10 years. This asset class actually, Craig, was in the early nineties, BRL 1 billion, and it grew 230 times over the last 15, 20 years. And it continues to grow. It's, we have to play this market. We have to be here.
We have to expand our market share. I think that the infrastructure investment trusts are gonna go through the same path. They are really very tiny in size compared to the BRL 230 billion of REITs of real estate investment trusts. The infrastructure investment trusts have the same characteristics that I described, you know, fixed income, annuity. Brazilians have the taxes that they generate on the income from the infrastructure investment trusts, et cetera. I think it's in some shape or form an even greater product than real estate because, you know, you don't have any vacancy risks there, right? Because it's already a contracted concession that you won here or there.
I, you know, these two asset classes are great, you know, and it's not only in Brazil, again, I think it's all over Latin America. Of course, when I say Latin America, the four countries that we are primarily focused, right? Mexico, Colombia, Chile and Brazil. I hope I answered the question there.
Yeah. That was great, Alex. Thank you very much.
Our next question comes from Ricardo Buchpiguel with BTG Pactual.
Good morning, everyone, and thank you for the opportunity of making questions. I have two on my side. First, can you talk about the difference from a VBI tax rate and Patria's? And should we expect some efforts to improve tax efficiency to unlock some value here? And also, should we expect more M&As coming from Patria in the near term? And if so, what are the main attributes or types of deal that Patria could be looking for in terms of products or geographies? Thank you.
You mean the difference between VBI and Patria's real estate business?
Tax rate. Sorry.
Tax rates. I'm sorry. Do you wanna take that question, Marco? I think in, you know, in Brazil, it's very, I think, very similar tax rates, right?
Tax rate-wise, I think, you know, the regulation in Brazil that exempts investors from the investments in REITs, and as Alex mentioned before, provides with a zero withholding tax for locals on the income.
Marco, sorry to interrupt you here, but I think the question was on our tax rates as a company when we have the income from these REITs, the management fee versus VBI. Is that correct?
Yes. Like, I understand that part of the synergy is that it has Moneda, for instance, is improving tax efficiency, as Patria's tax rate is very low. I wonder if that's something that is planned as well for VBI.
Okay. Thank you, and sorry for the misunderstanding on the tax rate. VBI businesses that's operating in Brazil pay higher tax rate brackets than Patria as of today. We don't expect to have a significant amount of tax synergy coming from this transaction. As for the second question about M&A, what we have indicated during our IPO and continues to be true, is that we will be pursuing M&A opportunities that will add product, distribution, and geographical capabilities. The answer to your question is, yes, we continue to be active. We think that there are a lot of opportunities in different geographies in Latin America.
That will complement our existing product offer, and that can be very synergetic to our client base.
Thank you. Very, very clear.
Our next question comes from Pedro Leduc with Itaú BBA.
Good morning, everybody. Thank you so much for hosting the call and taking the questions. Of course, the real estate market very large. You guys growing, working. It had been cooler, let's say, in the last few months. You guys, you know, this move, of course I would like to understand if we should be seeing it as a sign that market is reopening, and I'm sure you guys have been working on a pipeline all this time. Essentially it should be just the first or one more and maybe the market reopen a little faster. Is this kind of greater activity that you guys are picking up from the demand side from the partners? Thank you.
Yes. Thank you very much. Hi again here, Pedro. This is Alex here. The answer is yes. I think what we saw last year, interest rates picking up in the region, as you know, and as you probably also know now, the value of these companies is that's actually basically focused on permanent capital nature vehicles that generate, you know, yields kind of real estate assets. You know, the present value is smaller when interest rates rise, right? The value of the company. In general, you know, the value of the companies are smaller when interest rates rise. But even more specifically here, basically because it's a rent income, rent is corrected by inflation, et cetera, right?
Last year I think we kind of shied from moving aggressively in this sector because interest rates were low and valuations were higher, right? 2020 and 2021. As interest rates rose and we saw valuations cooling down, I think that's the right moment for us to enter this market. As we look into the future, we see interest rates coming down again, and then we can grow this business even more aggressively. At least in Brazil, we can see yield curves already pointing down. We had some good news on inflation coming yesterday on the Brazil side. You know, inflation, you know, 10 basis points, 15 basis points lower than analyst expectations.
We already now beginning to listen from one or another economist, not all of them, of course. It's not consensus yet, but interest rates might even start heading down in Brazil early next year. That actually, you know, will contributes for this asset class, as you know. I think this is, if, you know, in order to position ourselves in the asset class through acquisitions, I think this is the right time to do it. We've, you know, and I think looking into the future as I think it's the right time to grow it as of the end of this year, next year.
As you know, this year, because of the interest rate hikes, follow-ons of funds like this, the ones that we're talking about have cooled off, right? I hope I answered your question. It was more we had this broader view that we want to go into the asset class, but on a micromanagement, tactical positioning, we wanted to position ourselves this year versus 2020, 2019.
Great. Thank you so much.
Thank you.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. Our next question is a follow-up question from Craig Siegenthaler with Bank of America.
Hey, guys. Thanks for taking the follow-up. I had a question on how you view excess capital and deal capacity post-closing. Also when you're considering the two future installments. I'm not sure if they're contingent payments determined by revenue or if they're sort of fixed. Then maybe just share with us how you think about your financial leverage and excess capital targets post the transaction.
I can take that one.
Yes, Marco.
Craig. Yeah. We are, I think that in a nutshell, we're running in a comfortable cash position. We've done three acquisitions so far, including VBI. The way we structured our transactions entails payments. We're doing sellers financing because we're paying acquisition installments. In addition to that, we have optionality in most of the cases to issue shares. It all depends on the price of our shares and on, of course, the timing. We have, I feel very comfortable in our excess cash capacity and our firepower to continue to execute acquisitions for the upcoming future.
Thank you, Marco. I had one follow-up on slide nine. At the very bottom, you highlight performance since inception of the three products that you're acquiring. I wonder, those are, I think, gross fees or sorry, gross performance. I'm wondering if you have performance of net assets, how much different that would be?
The fee base, the average fee base that you can think of for this business is about 80 basis points. What you see here are the returns since inception. Of course, each of the fund has a starting point, a different starting point. The 80 basis points would be the best element to calculate the net numbers.
No, I think the specific performance here, Craig, of the funds, they are net, okay? They are net of fees here. They it includes dividends, but they are net of fees. They are not gross because this is the performance of the share price of the REITs that and includes dividends. It is actual net.
Of course, I'm not counting on the specific tax situation of the buyer of this, of the REIT shares. Now, it can be a pension fund in Brazil, don't pay any tax. It can be an individual. You don't pay any tax in this case as well, but whatever. I'm not talking about the individual that actually bought this share. But this is, these are net of fees. It's already net.
Got it. I guess I'm a little surprised the 80 basis points. It looks a little low because in the U.S., all managers are raising private REITs or private BDCs, kind of similar vehicles, at something like 1.25 and 12.5% performance fee. I guess this product has no performance fee, and it's just a straight management fee at 80, right?
Yeah, yeah. That's a very good point, actually. I wanted to stress that, yes. The answer is yes to your question. It's 80 basis points, no performance fees. There's a distinction here which is important. I think this product that we're talking about, they're more oriented to retail, mass affluence, high net worth, and even some institutional investors that wanna position themselves here and see liquidity as something important, et cetera, because it trades daily and certain volume with nice interesting volumes at the Brazilian Stock Exchange, B3.
However, there's also other products that's being launched around and when, and when when we say that around 30% of the AUM of VBI are development funds or closed-end funds, draw down funds, is exactly the the kind of funds that you just mentioned, Craig. Because other investors say, "Look, you know, I would like to do some, not development, but give you guys some time to invest the capital and have a different strategy, et cetera." We go into a closed-end fund, which investors like because they can see a higher return, a couple of notches up in return. They also agree to pay us higher fees. Normally, the fees, as you said, are higher, and they have a closed-end fund kind of structure.
That's exactly what VBI does for the other 30% of the AUM. It's different investors. Of course, one investor is willing to take some illiquidity in a closed-end fund, but he know he's looking for a higher return within the real estate market. The other one wants the daily liquidity and et cetera. Yes, I think the mix of both, and then we wanna do more private closed-end funds, and also to do more of the permanent capital. Both of them are pretty niche. We didn't mention the other 30%, but the other 30% of the AUM from VBI are closed-end funds, draw down funds like the ones that we have in our flagship private equity and infrastructure. Those are extremely good assets as well that come from this acquisition.
They are seven years and three years to invest, blah, blah, blah, like the closed-end funds. You're absolutely right, and we have both, and VBI has both, and we want to develop both and continue to grow both.
Thank you very much.
Thank you.
I'm not showing any further questions at this time. I'd like to turn the call back over to Alex Saigh for any closing remarks.
Guys, thank you very much, and I'm very excited here and, it's small but exciting. Why is that? Because it's a directional move. Having, you know, 5% of our fee-paying AUM in permanent capital vehicles and growing that to a bigger number gives more predictability, more visibility of our earnings. On top of the permanent capital comes, of course, the long-dated closed-end funds, flagship private equity that we're raising, flagship infrastructure fund we're gonna begin to raise end of this year, plus the infra credit, plus the private credit number two, plus the renewable. We have a lot going on also on the closed-end long-dated funds. That gives us, again, predictability in our earnings.
I'm very excited here, and again, it's a small move, but and the market is huge. As I mentioned, BRL 230 billion, around $45 billion. We just have BRL 1 billion down there. There's so much that we can do, and we love consolidating sectors, as I mentioned, organically and inorganically. Thank you very much for your patience and time here today. We're open for more questions and offline here, of course, always available to see you guys, meet you guys, and talk to you guys. Thanks a lot for everything here.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.