Hi everyone. I'm Rob Lee. I'm the Head of Shareholder Relations at Patria, and thank you very much for joining us on our first PAX Talks event, and we're really happy to have with us in our first event this interactive investor conversation with our Chief Economist, Luiz Fernando Lopes, and the two investors who have agreed to participate in this fireside live chat include Dan Carroll from the Inherent Group and Ryan Simes from Endure Capital.
I will let them introduce themselves in a little bit. This is interactive in that if you do have questions you would like to submit, you will see there's a private message section on your broadcast that you should submit questions through there, and we will have a Q&A period towards the end of the fireside chat. To get started, I do have to read a disclaimer, so bear with me a little bit.
Patria Group may have had, may currently hold, or may build up market positions in the securities or financial instruments mentioned during this webcast. Although information has been obtained from and is based upon sources Patria believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute Patria's judgment as of the date of the webcast and are subject to change without notice. This webcast is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any decision to purchase securities or instruments must consider existing public information on such asset or registered prospectus. The securities and financial instruments possibly mentioned in this webcast may not be suitable for all investors.
They must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and objectives. Okay. So with that out of the way, why don't I turn it over? And first, I'll let Dan and then Ryan introduce themselves, and then Luiz. Dan, thank you for joining us.
Thanks, Rob. Good morning, everyone. I'm Dan Carroll with Inherent Group. We're a private investment firm investing institutional capital in both the public and private markets. We invest globally and opportunistically. We integrate ESG and sustainability into everything we do. We're value-focused, and we are a shareholder of Patria. I may have met some of you at the Investor Day last year, and very grateful to have this invitation to talk to Luiz today.
Thank you.
Good morning, everyone. I'm Ryan Simes. I'm the founder and managing partner of Endure Capital Management, a firm focused on compounding in public markets over decades. Previously, I spent close to 10 years at Apollo Global Management investing in public credit and public equities, during which Apollo's credit assets expanded from $90 billion to over $500 billion. Endure is a proud Patria shareholder. It was great to meet a lot of you at the Investor Day recently, and I look forward to our conversation today.
Thank you. Luiz.
Thank you, Rob. Thank you, Dan. Thank you, Ryan. I think we're going to have a very interesting conversation. I'm Luiz Fernando Lopes, head economist and partner for Patria. I'm doing this for 28 years already. Patria started back then. We were basically in a story of investing in Brazil, and then we started our compass. I began to include Latin America as well, and because we think we developed a kind of successful investment strategy, we are also doing a little bit now of Europe and the U.S. because we acquired the private equity arm of Aberdeen, which is the U.K. asset manager. So what is this successful investment strategy? We are a middle market player. So Patria is about investing both in the fund size and the kind of checks that we write is the middle market story.
A lot of consolidation and some creation of assets if need be. But specifically, we are focused on six investment industries or businesses. So we do a lot when I think we develop an expertise on agribusiness. Food and beverage is number two. There is power generation, especially renewable. Number four is transportation and logistics. Five, we do a lot of health and health-related businesses. And then six, there is data and tech services. And we think that has been successful. We did our IPO in 2021. At that time, we had fee-paying AUM less than $8 billion. Now we increased more than fourfold. We are managing $34 billion of fee-paying AUM. And of course, as a result, for example, the fee-related earnings increased more than threefold. And if you add the performance-related fees, the earnings are much more than that. So interesting times.
We're going to discuss this today. I'm very happy to have this conversation today.
Thanks, Luiz. Thank you, everyone. Thanks, Dan. Thanks, Ryan. I think maybe to kick it off, I'm going to send it back to Luiz. It's going to help set the macro framework, if you will, for the region for a couple of minutes. We have, again, a framework, and then open it up to Dan and Ryan and the audience to ask questions. Luiz, the floor is yours.
Okay. So how we do this, usually my job actually at Patria is to connect this macroeconomic story. There is a lot of geopolitical thing also into our investment strategy. So what is this global backdrop that you're talking about here? So let me do a sharing. Okay. So what we have here basically is slide two charts. Left-hand side is our global macro backdrop. So the first story that we'd like to tell and explore today is a secular slowdown. So we take the global growth since the 1990s by decade, and then we identify an acceleration period from the 1990s until the 2000s. That was the heyday of globalization. And then since then, world growth, emerging markets growth, advanced economies growth, everything has been slowing despite all these spectacular stories about artificial intelligence, quantum computing, everything.
Also, of course, it's true, but has not been enough to cause the global growth to speed up. So what is going on here in our view? First, there is a very long-term trend. Unfortunately, demographics is working against growth. People are aging. The working-age force has peaked and is already trending lower in major economies like the U.S. and China. The world doesn't hold the same story. And there is this other story is basically you could say deglobalization. The term we prefer is fractured globalization. So the economies are not getting more integrated. We have less trading, less foreign direct investment, et cetera. So you combine the two things, you have this inverted U-curve that you see on the left-hand side.
However, if you go to the chart on the right-hand side, when you break down this global story, and then you see what's happening in Latin America, what's happening in China, what's happening in Europe, then the other important story that would be number two here is that this fractured globalization also speaks of geographies that are less synchronized. So is it possible that the global growth takes place whereas some regions are speeding up? And the answer is yes. So here the data on the right-hand side is basically the International Monetary Fund data, basically very much close to our own forecast. So what we are seeing here is that Latin America is actually not going to grow slower. It's actually going to grow faster. And why is this so? First, because one of the secular trends we mentioned is not there. Demographics is a bonus in Latin America.
It's not a detractor of growth. But the other thing that's happening also in terms of the globalization, the region is getting more globalized. So Brazil, Colombia, Argentina, they are pursuing more trade agreements. They are trying to diversify their investment relationship with Asia, with Europe, Middle East, et cetera. There are some countries that are facing a little bit more challenges. We are going to probably discuss this in our Q&A session, which is, for example, Mexico. But apart from this, what we are seeing is actually in a world that is becoming more fractured and the globalization is trending lower, and Latin America is going to grow a little bit faster. So this would be our first message today. And this sets the global and geopolitical outlook for the foreseeable future in our opinion.
Great. Thank you, Luiz. So with that, let's open up to questions. So I think to kick it off, I think we were going to start with Dan, if you want to get started and ask away.
Great. Thanks, Rob. And thanks for that overview, Luiz. So you guys allocate capital across Latin America. Kind of help us dig into that one bar graph. There's multiple countries. Each one has a distinct economy and many times a unique political context. What are you looking for to indicate to you to advise your team at Patria this specific country is a buy or a sell at any given time?
Okay. Starting with a very good one. We have to start with the very basics, right? So the fiscal accounts are okay. The external accounts make sense. Risk of a currency crisis. Of course, we see rule of law as well. Institutions, if they are strong enough, for example, we may have a litigation thing. So if we go to courts, the judicial system is functional, so on and so forth. And then especially we go into those six key investment verticals that are listed and they see if there is a story there. And then an important point here, Dan, and starting to make the difference among countries. You can pass the test in terms of having the macroeconomics, right, or the basic geopolitical institutional stuff. It's okay. But then for us, the next step is, is this basically a growth story that we know?
And then in Latin America, actually, you have basically one typical story, which is Latin America countries is a combination of mostly a domestic market story. So it's about growth generated by local businesses. And a good chunk of them are actually services. We're talking about services like health, education, financial intermediation, transportation, et cetera. On the top of that, you connect an export business, which is basically this export business is about exporting commodities. Could be minerals, could be grains, could be oil and gas. But clearly the order is first domestic and then the commodity exporting. This is Brazil. This is Argentina. Colombia is the same story. Chile, et cetera. Mexico is the second largest economy in the region. And Mexico is a different animal. And then you have to be more careful when you are doing business in Mexico because Mexico is actually the other way around.
It's a very impressive manufacturing platform that exports mostly to one country, which is the U.S. So 75% of Mexican exports go to the U.S., actually 77% according to the latest data. And then you have to understand because it's not about basically domestic services and commodity exports. It's basically manufacturer exports to one single country, and then everything else the domestic market follows through. So depending on Mexico, for us, it's a little bit more difficult to find the right angle. Whereas we can extend our business model quite easily to the good economies or economies that make sense in Latin America. Again, apart from Brazil, which is the biggest one, easy to do this in Mexico, Colombia, Chile. Even in smaller economies that are fast-growing economies like Peru, you can do that as well.
Luiz, you mentioned the strength of key institutions being a focus point when investing across jurisdictions. In Brazil, how significant was the December 2021 central bank independence legislation that appeared to be modeled after the U.S. Federal Reserve? And are there more institutional guardrails to ensure Brazil and others in the region have a sustainable fiscal policy?
Okay. Thank you for that one as well, Ryan. Actually, if you take the basic institutional story looking from the economic angle, you mentioned independent central banks. Actually, Brazil had de facto independent central bank for a while. What we passed in 2021 was a comprehensive legislation saying, okay, what do we mean exactly by independent central banks? But before Brazil, Mexico had and has an independent central bank. The same story for Chile, Colombia, Peru, et cetera. So Brazil is joining a group of countries. And if you go to smaller countries like Uruguay or Costa Rica, they also have independent central banks. In the case of Brazil, the important thing is basically to make it clear that the central bank has a dual mandate. It resembles the U.S., the Federal Reserve.
Although in the U.S., you probably have the two key goals, which is basically maximize economic growth and keep inflation under control or keep price stability. In the case of Brazil, if you read the law and then the way the independence, the central bank independence is enacted, it's basically to produce the maximum economic growth compatible with the minimum inflation rate, so it's a little bit different, so the two things, they're still the same. You make this more operational thing and then, of course, if things go wrong in one way or another, in the case of Brazil, the first priority should be, okay, I have my mandate here. I have to deliver right now a 3% consumer inflation headline. If this starts to affect growth too much, then I will see if I have to change course, et cetera.
Then a little bit from the United States, you have the tolerance band because we are going to probably discuss this. Currency is very volatile in Brazil and the rest of Latin America. Interest rate swings and the swings in consumer price are also more substantial. There is a tolerance band. You are pursuing your target, and then sometimes there is a shock, and this is an intense shock when the currency depreciates in Brazil and Latin America. It doesn't depreciate by 1% or 2%. It goes down or not 10%, 12%. You may miss your target for a little bit. There is the need for the tolerance band. Apart from this, it's another block that was added in Brazil, the central bank independence, in addition to fiscal responsibility law, in addition to a very robust legislation, for example, public concessions of public services.
Has been there for 20 years. Probably the most important factor to explain why Brazil consistently receives $60, $70, $80 billion net foreign direct investment per year is basically because you have very good institutions specifically with granting rights to foreign investors and, of course, to local investors as well. So the central bank independence is actually another block into this building.
Thanks, Luiz. I'd love to go back to some of those sectors that you talked about as being areas of focus for Patria. And something we've talked about in the past is a focus on areas where Latin America has competitive advantage. So you can explain what you mean by that and how you drill down into some of these sectors that are a key focus for Patria and maybe your outlook on one or two of those that are interesting and topical right now.
More than happy, Dan. I need, being an economist, sorry, I'm addicted to PowerPoint. I need to show you something. Bear with me one minute. Let's do the share. It is, let me maximize this one. This one we showed. That is basically to start our conversation. This is data on listed companies in Latin America. We invest in listed companies, but also in non-listed companies. The data is easier to grab in terms of listed companies. It's a sharp story. We are talking about excess return versus volatility. What we are doing here, the horizontal axis from left to right gives our estimated beta or a calculated beta, which is how the volatility of that industry compared to the overall GDP of Latin America. You see here there is a line at one.
One beta, as we know, it basically tells you that the volatility is the same as GDP. If the beta is higher than one, 1.5, 2, this means that this industry grows twice as fast or goes into a slump twice as much as the GDP. So if we move further to the right, it's not exactly a very good story. But then if you move to the left, 0.5, 0 means that the volatility of this industry is smaller than the overall GDP. And then the excess return, we measure on the vertical axis. So it's top-down. Zero means that you don't have any excess return, real revenues, earnings, whatever is the metric, it's similar to the GDP. If you are trending lower, actually the growth story in these industries is not as spectacular as the GDP.
And of course, if you are 1%, 2%, 3% real term, that's important, guys. If you're investing in Latin America, we are used to live with inflation. So everything that you see on the vertical axis is on the top of inflation. So for example, during the pandemic, we had 10%-12% inflation. So 2% here means actually 14%, right? It's 2% real above inflation. So everything here is real. And then the size of the bubbles gives you the size of the industries in Latin America. Of course, bigger bubbles, bigger market capitalization. The smaller bubble tends to be a smaller industry. And then in bold letters, the six sectors we mentioned. So again, it's agribusiness, food and beverage, power generation, logistics and transportation, and health, data, and tech services. So the best quadrant to be is the upper left-hand side, right?
So you have less volatility than GDP, and you have excess return. The worst one to be is basically the lower right-hand side because you have the volatility is worse. It's more pronounced, but you don't have excess return. So if you are doing business in Latin America, and this is going back to the data for the first quarter of 2008 until the third quarter of 2024, we actually had data for the last quarter, but not all the industries have reported the information. So what you see here is basically including the global financial crisis, pandemic, the recoveries, et cetera, Latin America has this comparative advantage on those sectors. And we are not by accident. Those are the sectors that we tend to invest on.
And most interestingly, when we started doing something in Europe as well because of the acquisition of the private arm of Aberdeen, we realized that keeping the focus on the same six sectors still generates excess return. So there was no need to change our investment strategy. And we could leverage on the knowledge and the business and the investment strategy that we developed in Latin America because it's pretty much the same story. A little bit more, for example, of course, software and tech services. We are closer to the frontier in Europe than you are in Latin America. Latin America is more a receiver and more a receiver end. But the six verticals and the comparative advantage that you have the story here for Latin America still holds.
Thank you for that, Luiz. I wanted to touch on a few Latin American macro topics. First, you previously mentioned interest rate swings. Real interest rates have surged across many parts of Latin America since 2021. How might a normalization in real yields free up private investment previously crowded out by the public sector to invest in growth capital for the private sector?
It is very contrary to common wisdom. We tend to see Latin America as a follower of economic policies that are enacted in the U.S., Europe, et cetera. Specifically monetary policy, it was the other way around. So you rightly mentioned the timing of the monetary tightening in Latin America. Actually, Latin America was the first region in the world moving out of the COVID crisis to start raising interest rates because the economic recovery in the region was faster than anybody anticipated. That was a very peculiar kind of recovery because the proportion to the GDP, to the per capita GDP, the pandemic was worse in the United States and Europe than it was in Latin America. We suffered, but we are relatively poor to the U.S. But then the recovery story began first.
Because the economic recovery emerged or surfaced at first, the inflation pressures also became very robust very early on. Brazil actually started to raise interest rates in March 2021. We have a story of, because we have a story also of relatively high inflation and the central banks are independent, there is this vigilante kind of thing. The central banks acted very quickly, very swiftly in Brazil, in Colombia, Mexico, Chile, Peru, et cetera. They then got inflation under control before the U.S. and Europe, and they started to cut interest rates before. What we are seeing more recently, actually, is we still don't know if it's another leading indicator of what's going to happen, for example, in the U.S. or Europe, that there are some economies in the region, starting with Brazil, that they saw inflation signals that were not quite good.
And then what happened here, interest rate easing, the easing cycle in Brazil, it's gone. The central bank is already on hiking mode. So the interest rates are rising. And there are some other central banks, for example, in Chile, they are no longer cutting interest rates. In terms of the level of interest rates we are talking here, let's just show you again a little bit what we are talking about. Okay, high interest rates, how much are we talking here? So the story is, so we saw this one. Let's show, these are interest rates. Left-hand side, what we are seeing in advanced economies. Right-hand side, what we are seeing in Latin America. This is not our forecast. This is the forward rates in advanced markets on the left-hand side and the forward rates in Latin America. So we are talking about double digit interest rates in Brazil.
There is, in Brazil, there is a little bit more when we may discuss in addition to inflation signs. The economy is growing strongly, like the U.S., but we have some fiscal concerns. So that's another way the market has to put pressure on the government to deliver more in terms of fiscal consolidation. But then you see that the interest rates were going down, but there was less enthusiasm in Mexico and Colombia. In the case of Chile, which is the most successful story in terms of fighting inflation, it has pretty much halted at 5%. So we have to live with these interest rates and then might ask, oh, private CapEx has been decimated by these interest rates? No. They are very much above international levels.
But any entrepreneur in the region, and that's our case doing business over 30 years there, your business model has to be resilient to face this kind of interest rate hike. So obvious consequences of this, you cannot leverage your business. It's definitely not a leverage buyout story in Latin America because guess what happens if you leverage and then interest rates go up 400, 500 basis points, your investment is basically crushed. And in addition to that, you have to play a lot with equity. So what we do is actually inject equity in our business. Sometimes when you move into a firm, into a company, we have to deleverage because borrowing in Latin America many times is not attractive to growth. It's actually on the other way around. So we have to deleverage the companies.
So, different business model, different strategy, but in no shape or form are we surprised with this kind of interest rate. Just to give you one data point to complete the picture here. When we start doing business, it was basically Brazil. The level of real interest rates above inflation was 15%. It's not the nominal interest rates. Now we are talking this sharp rise in nominal interest rates, right? Not adjusted for inflation. Back then, the real interest rates were 15% and the nominal interest rates were 25%. And we are still here, right? So there is a way to survive all this and prosper, we believe.
Yeah, you mentioned the fight against inflation across the region. I guess, can you kind of walk through some of the current purchasing power parity or PPP valuations of the various Latin American local currencies and how they compare to their historical ranges?
Okay. So again, we have to show you a chart, but let me give you the numbers and then we'll illustrate the numbers with the chart. So currencies in Latin America are very volatile. Part of the reason is because, remember, with the exception of Mexico, most of the exports of the region are commodities and commodity prices are very volatile. And in addition to that, we have in some economies like Brazil, the capital markets are more regulated than should be given the size of the economy. So what you have is you have this effect that because the channel that connects the FX channel, the foreign exchange channel that connects the economy with the rest of the world is narrower than it should be. When there is an inflow of capital, the currency tends to appreciate a lot. But if there are capital outflows, the depreciation is substantial.
At this stage, we are in a situation in which probably no currency in the region is fairly valued. Fair valuation, what we do, we do a purchasing power parity calculation. So everything that affects currency compared to interest rate differentials, fiscal accounts, terms of trade, because most of Latin America supports commodities, anything that affects the currencies, we calculate and the model gives you what would be a fair exchange rate in theoretical terms. And then we compare this fair exchange rate with the market exchange rate. If the two rates coincide or are very close to each other, you say the currency is not overvalued or undervalued, fair valuation. If the market is trading higher than the PPP, the purchasing power parity and estimated currency, you see that the currency is probably overvalued. And because there is mean reversion, we are going to show the chart.
Next significant shift or significant move is going to be this overvalued currency will depreciate. On the other way around, if the market FX is trading below the purchasing power parity estimated value, this currency is undervalued and then most likely move is going to be appreciation towards a fair valuation. The problem is the purchasing power parity; it's very good in the long term. It doesn't give you the precise timing when the adjustment is going to take place. So having said all that, again, perhaps the last slide. We are here. Everybody's seeing the FX chart, right? So what we are here, fair valuation zero, remember the currencies are trading at fair value. Let's start actually with a non-Latin currency, which is the U.S. dollar. This is the bluish blue. It's not the light blue, not the dark line.
I think there is a reasonable consensus around the globe that the U.S. currency is trading more expensive than it should be. So you can see here, U.S. fluctuates around long-term equilibrium, purchasing power parity. But because it's the reference currency in the world, for example, anytime that there is an adverse global shock, there are capital flows to the U.S., safe haven, et cetera. So the traditional thing, something goes wrong in the world and then the U.S. currency appreciates. That's something that we are seeing recently. The euro, a little bit less so. But then the black line or the very dark blue is the combination of several Latin American currencies. This is Brazil because it's the largest currency. This is Mexico, Colombia, Chile, and Peru. At this stage, the most depreciated, undervalued currency is Brazilian Real.
So we are talking about 22% undervaluation according to our latest estimate. The Mexican Peso, the second largest economy, it was overvalued until Claudia Sheinbaum was elected. And then the adjustment started to take place. So the currency was overvalued, started to move into fair valuation. Of course, there was a currency depreciation taking place. And then when President Trump was elected, Mexico moved into undervaluation territory, something close to 10% undervaluation according to our view. The other currencies in the region, Colombian Peso, the Peruvian Sol, the Chilean Peso, they are also undervalued, but not as much as the Brazilian Real. They are in something similar to the Mexican Peso, a little bit less. So if you are getting exposure to Latin America as we speak, for example, the one risk that you don't have is that, oh, I'm investing in a region that the currency is too expensive.
Probably the next significant move is going to be a correction of these currencies because they are, remember, the volatility you can see here, the ups and downs. There is room for another round of depreciation, yes, but the starting point at this stage is significantly already undervalued, not as bad as we were in 2020 during the COVID crisis, nor in the early 2000. But for those who are getting exposure to Latin America right now, interesting thing. And last but not least, how we particularly cope with this kind of thing. So let me stop the sharing here. Because we have lived all these cycles, ups and downs in the currency, our investment strategy that we mentioned before, one of the tenets of it is very simple.
We target a return that is probably around, or the best number that we should give you is at around 20% net dollar return to our investors in our funds. But then we have to take into account that there is a gross to net differential or a gross to gross to net gap, so another 5 percentage points. So we should target 25% gross dollar returns. But then we are investing mostly in local currency, right? There are ways to invest in dollar contracts. There are dollar revenues in Latin America, but it's not as usual. But then if you're investing mostly in local currencies that are very volatile, we price in and we assume that there will be 5% currency depreciation every year forever in the region, even if the starting point is an undervalued currency.
So what's happening here is we are actually targeting 30%, around 30 percentage returns in local currencies because we're assuming that every year currency depreciation will shave 5 percentage points of this return. So the best way to navigate these fluctuations is not to hedge the currency throughout the cycle. It's very expensive. So you add the volatility we just showed in the previous chart, plus an interest rate differential that is huge. Always interest rates in Latin America are much higher than in the U.S. and Europe. So they charge you, the banks that provide the hedge, they charge you for an interest rate differential. So it's very difficult to hedge long term. So what do we do? Assume that the currency will depreciate forever 5% if the business case stands, it's a go.
If it's not there, oh, there are some issues here, so we don't do the investment. That's the way we see how we state and we assess the currency situation and how we do investments in the region because of this currency volatility.
Great. Thanks, Luiz. I feel like it's become all of our jobs over the past month or so to try to digest the changes in U.S. trade policy. You pointed out earlier there's acute impacts on Mexico, broader continent, more kind of domestic economies. But if you think about Latin America's kind of two major global trade partners, the U.S. and China, as the U.S. becomes more America First in its policy, what does that mean for the relationship between the broader Latin American economy and the U.S.? And then as a corollary to that, what does it mean to their relationship with China as if they step into that void to a certain extent?
The best way perhaps to answer your question is to state that actually for Latin America as a whole, Brazil, all the major economies, the trade story and the investment story is a trio story. It's a play with the United States, Asia, mostly China, and Europe. What happens here? If you go to the obvious target, Mexico is in a more delicate situation because, as I mentioned before, 75% of exports, 77% goes to one country, which is the United States. Less room to maneuver, to diversify, et cetera. Life is going to be tougher for Mexico. We are cautiously optimistic that President Claudia Sheinbaum's approach towards Trump has been effective. Concessions, yes, some noise between first reaction of the Mexican government vis-à-vis the U.S., but then noise goes down.
So the story probably is not going to be fabulous for Mexico. But then perhaps one important thing to add is that if you take long-term growth, past 10 years, Mexico has been growing on average 1.4%. And then if you take, for example, the latest estimate coming from the Independent Central Bank of Mexico, they are forecasting 0.6% growth 2025 near future. So the impact is there. If you go to the other countries, however, in the region, I think most of Central America, which are in smaller economies, they tend to be closer to the Mexican story. If you are moving further south, so again, we are talking about South America, this is Brazil, Chile, Colombia, Peru, et cetera. Then actually, for example, if you take Brazil, trade partner U.S. is number two to three. Actually, China is more important.
There is this U.S. and Europe very close by. Same story for Chile, same story for Colombia, Peru, et cetera. So what's happening here? The trade risk is increasing. America first. So it's up to President; it's his prerogative to implement the platform that he promised or he said that he would deliver during the campaign. So it's fair enough. But then the other countries are with much more room to maneuver than Mexico. They are speeding up the trade agreement. For example, in between President Trump being elected and the first trade restrictions being announced, there is this free trade zone, so to speak, in the Southern Cone of South America, which is basically Brazil, Argentina, Uruguay, and Paraguay. It's called Mercosur. They were negotiating a free trade agreement with the European Union for 25 years, so a quarter of a century.
And then overnight announced, "let's move on, let's do it," et cetera. So what's happening here in terms of trade diversification, the country is already moving. And there is another player that is gravitating towards the region. And you are seeing the trade missions are here. The governments are exchanging investment protocols, et cetera, the Middle East. The Middle East can provide some interesting commodities, for example, oil and gas. But they want to attract investment from Latin America. And for example, Latin America has this comparative advantage in agribusiness, even in regions in which the weather is not benign. So the kind of thing that came in, transfer technology came in, transferred to the Middle East. So even the Middle East, which is used not to be a very important trade partner or investment partner, their move is getting closer to South America, especially.
So we are seeing already the effects of America First as a response of the region to what's going on in the U.S.
Great. Thank you, Luiz. I think maybe now we'll open it up to some of the Q&A from the audience, and we do have a question here for you, Luiz, on pension reform, so the question is, with pension reform discussions underway in countries like Brazil and Colombia, which could channel more capital into alternatives, can you share an update on that progress? What key steps are needed for this to take effect? Talk a little bit about what recently took place in Chile and what you think the potential impact is for Patria's asset growth.
Yeah, this is part of the story, Rob, of the question. Part of the narrative related to Ryan's question about institutions. So we discussed about central bank independence, rule of law, et cetera. But there are what we call second and third generation reforms. And the pension industry is clearly a target of this. So we had recent pension reforms in Brazil, new round of fiscal reform in Colombia, Chile, et cetera. So what's the nature of the reform? A little bit of it is to complement the shift away from a defined benefit system into a defined contribution system, which was not very clear in some geographies.
So we know that the obvious impact of this in the defined benefit system, especially if it's a pay-as-you-go, it's basically you take contributions for the working force, the people that are still working, and then pay for the retirement benefits of those who are already retired. When you move into the defined contribution system, and especially individual capitalization, it's a brand new game. So we start to create these massive amounts of savings, grow over time. Of course, the fund managers, they have to do something with this money. The short term, maybe they have some investments in government bonds, et cetera. But looking over, because you are talking about the duration of these investments should be 15-20 years plus, they have to invest in alternative assets in the region, especially they like a lot infrastructure investment, real estate investment, significant gaps there.
And then the latest round of reforms, what they discovered, those countries that moved first into the individual capitalization system, they discovered first that the contribution from employers and employees was probably not the best, the optimal one. They were contributing 8% of their labor earnings or on the payroll or 10%. And this number is being moved at 12%-15%. So you need to increase the contribution to the system in order to generate more savings. And then over the long term, you can retire with something closer to your compensation when you are working, et cetera. So the sheer effect or the simple impact of having much higher contributions, it is a major plus for the industry. We are already seeing this. We are talking to institutional investors, all the countries, even in Mexico, the same story.
Because we have in the region mostly governments that are more liberal or they're towards the left side of the political spectrum, one very important component for them is to cater more for the low-income. For example, if your labor earnings and the unit we use here in Latin America a lot is the minimum wage. If you are earning one minimum wage, two minimum wages, when you retire, even with increasing contribution, probably your pension is not going to be close or very clear. It's going to be 70% of your minimum wage, which is too low, so in all this recent reform, there is what they call the social pillar in which part of the contributions, especially from the wealthier individuals, they go to compensate or pay for higher retirement benefits for the very low-income people.
There is a little bit of social wellness here, some transfer within the system. Even if you discount this, that part of the story is not actually to benefit everybody, it's just basically for the lower income people. We did a calculation. Past 12 months in U.S. dollars, remember the currency is very volatile in Latin America, even taking into consideration the currency depreciation. You are talking about AUM for the pension industry in Latin America going up 15%-16%, 12 months trading. If you analyze this, you're talking about a lot of money. You are already seeing the pension managers, they don't part of the allocation, they do them themselves, but there is also another round of reform. They are becoming more professional.
It's basically they hire or they get into deals with private managers in order to get them the best allocations in private equity, infrastructure, real estate, et cetera, so very interesting thing, and again, everything is happening with interest rates as high as they are.
Great. Thank you. We also have another question from the audience here. So how is the region impacted by the shift to foreign direct investment away from China? And more broadly, what role does foreign direct investment play in regional development?
The overall impact is the following. If you take, let's zoom out a little bit and then take the global foreign direct investment. Global foreign direct investment has been trending lower since the global financial crisis in 2008 and 2009. And over the past couple of years, with two to three years with COVID, et cetera, even worse. Latin America is taking an increasing share of this pie that is being shaken. So the data that I have here, foreign direct investment, Latin America, we were around 6% to 7% of total FDI 10, 15 years ago. And we are getting to 15% of the total. So what is happening here? Part of this FDI, foreign direct investment, is actually going to the question of long-term investment that was flowing to China and now it's flowing to Latin America. A lot of it has to do with commodities.
So for example, investing in minerals in China became a more challenging proposition. Does Latin America have minerals that were produced by China before? Yes. Can we replace China? The answer is also yes. You still have to see there is another round of investment that is taking place right now on prospection. And it has to do with the rare minerals, these critical minerals that the industry, the AI industry, needs so much. So it's not massive yet, but we are seeing the prospectors arriving from other regions. Okay, I need lithium, I need copper, I need manganese, everything. And this thing is Brazil has it, Chile has it, Peru has it. So probably you're going to see more foreign direct investment, a good bit, a good chunk out of China. But then there are other things that probably are not related to China.
For example, we mentioned the Middle East. The Middle East are investing increasingly in Latin America. And it was not a previous investment. As far as we know, it's not a previous investment in China. So what we are seeing is basically Middle Eastern countries, they want to, for example, an issue very important for them is food security. So they want to secure not only minerals, but also food, which is basically grains and animal proteins, steak, poultry, pork, et cetera. So we are receiving this increased amount of investment. That has to also help to explain the first part of our conversation, which we tried to show you that Latin America is actually not slowing down.
So the story in terms of global growth is less spectacular, but Latin America has been speeding up from a lower base, or we are growing less than it was. Not a spectacular story. But part of this thing why Latin America has been able to speed up growth is the FDI. The FDI is not trending lower. It's fairly resilient. But then remember, the total FDI is going down. So we are becoming an increasingly important share of this FDI story.
Great. I do have another question. More and more of Patria's fundraising is coming from local investors within the region. I mean, how do you see local capital flows into private markets evolving in the next few years, both from an institutional and individual investor perspective? And what do you see driving that?
When we do our fundraising, or if we're having this conversation 10, 12 years ago, the vast majority, two-thirds, three-quarters of the fundraising would take place in the United States or Europe or Asia, in which the investors or the LPs were more used to alternative assets such as private equity, infrastructure, so on and so forth. This picture has been changing. So the local investors could be institutional investors, pension plans, insurance companies, but even high-net-worth individuals with their family offices. We do have quite a number of billionaires in Latin America. They are becoming more used to this kind of investment. So increasingly, fundraising became local. It's not the majority, but it's growing significantly. And then there are actually two ways to address this market that is gaining momentum. For those investing in Latin America, they are getting their first contact with alternative assets.
Basically, what we provide them is, do you like infrastructure? Okay, these are the assets that we are developing in Latin America. Do you like private equity? Okay, these are the assets which we are developing in Latin America. So it's presenting alternative assets which are based in Latin America or developed in Latin America to these investors. And the story has been very, very successful. But then there's another thing. Some of those investors are already past the first stage or they are more familiar investors, and they want to get a little bit of more diversification away from Latin America. And then one of the reasons of the deal we did with Aberdeen and then getting the private equity, we can provide them with, again, remember, middle market, six investment verticals, et cetera. In Europe and Latin America, we also can provide that.
So part of this fundraising also is our catering to these investors, the LPs in Latin America. But then the underlying fund is not a fund in Latin America. The guys actually investing something in Europe or even in the US. But we are controlling this distribution channel, which is important. So it was not a very important pillar of fundraising in the past, but it has been growing significantly. And then because of the reform that we're experiencing, for example, the pension plans, they are going to manage much more money than they were before. Probably the fundraising in this region is going to grow as fast as it is growing right now or perhaps even faster.
Great. Thank you. As we approach the hour, why don't I open it up back to Ryan and Dan just to see if you have any final questions you'd like to ask?
Thank you, Rob. I think one other topic, Luiz, that I could touch on is politics, so over the decades, Latin American governments have at times trended in policy waves, so to what extent could Milei of Argentina's rise mark a broader regional movement toward more free market policies?
Okay, Ryan, this is a controversial one, but I like that. You are right. We tend to move. It's not perfectly synchronized, but clearly, if you look at the election cycles in Latin America, you can identify whether the region, the pendulum is moving towards the left, the more progressive administration, or to the right, the more conservative administration. So what we are seeing right now, definitely the pendulum moving from liberal left-wing administration into more conservative. So Argentina was probably the first major economy in the region that came actually not to a conservative administration. The guy, Mr. President Milei, is a libertarian. And he had to deal with a very complicated inheritance, a social welfare state in Argentina, sorry, that became too big, unmanageable, huge fiscal debts, et cetera. But even before Milei in Argentina, the pendulum had already moved in smaller economies like El Salvador or Ecuador.
Right now, we are going to have elections towards the end of this year in Chile. The incumbent ruling coalition probably is going to be defeated. The opinion polls strongly suggest that you are going to have not a libertarian in Chile, but a center-right politician. In Colombia, the President Petro, left-wing, controversial, probably his ruling coalition is going to be defeated as well. In Colombia, it is not quite clear whether the pendulum will shift toward the center-right or there will be a libertarian candidate more like Milei. And even in Brazil right now, the election is a little bit far away. So President Lula is halfway through his third term. So election is going to be in the end of 2026. But if you take the approval, disapproval rating, we have 40% approval for Lula, 50%-55% disapproval rating.
All the candidates that are faring well or are tracking well in the opinion polls are center-right. Some of them are a little bit more with the libertarian stuff. What we are going to see probably in this cycle is moving away from more progressive administrations and moving into more market-friendly administrations. This speaks to an important point here. It is not that when you move from progressive administrations to more conservative ones, you are going to dismantle the social programs or become less friendly to the environment. That is not the way it works in Latin America. Typically, the move to the center-right is to preserve social programs. They are not going to be increased, but they are going to be preserved. The basic changes are that we live in a more challenging world with trade frictions and investments.
So we have to play a more sophisticated game in terms of trade investments, another round of perhaps third round or fourth round of reforms in the pension system, more fiscal consolidation. So typically in the region, the more conservative governments, they produce the economic reforms that generate the growth. And then the liberal left wings, they came back again to better redistribute the income, address income inequality. That's the way it works. But we are in the very middle of this transition right now.
I'll ask since we only have a minute left just to piggyback on that. Do you think Milei will be successful in slowing the devaluation and removing the currency controls and reaccelerating foreign investment in Argentina?
To be completely candid here then, when he took over, we could see it. It could happen, yes. It was a protest vote, clearly. And then he said, we like his economic program. We discussed it with his economic team. A lot of them we work with. We have a previous life in the banking industry, et cetera. So we know several of these economic aides. But then he said the major challenge for Milei is that he won the presidency landslide, victory hands down, but he doesn't have a functional ruling coalition in Congress. And the president cannot govern by decree. So the executive decrees that, for example, President Trump has in the U.S., it's not something that doesn't work like this in Argentina. Same thing in Brazil, I said. So we have to do something in the Congress.
But to our surprise, his success in bringing inflation down, restoring growth, combating or fighting corruption, et cetera, was so spectacular that every attempt of the Congress, still dominated by the opposition parties, more state interventionists, et cetera, they failed in all attempts to shoot down Milei's policies. Now we have midterm elections in Argentina, November this year. And the opinion polls strongly suggest that if Milei doesn't get a full majority, he has been very, very close to that. So what happens here? He has been given the room of maneuver to create all the necessary economic things that he needs in order to do the final step. Actually, he did what was crucial to restore some credibility to the currency and start thinking about removing currency controls, which was fiscal. Argentina is generating robust, sustainable fiscal surplus before interest payments and after interest payments as well.
According to the economic team, when we visit Argentina, we talk to them, there were several layers of currency controls. They were removing one by one. But of course, they cannot remove everything. They said, oh, no, it's a free trading Argentine peso. No, they cannot do that. But for example, past midterm elections, if there is a better now a functional working ruling coalition in the Congress, Milei can deliver the last batch of reform that he needs to finally remove, if not all, most of the currency controls. The one thing you have to pay attention to be a little bit careful about Argentina, remember the currency volatility thing. Last year, the currency devaluation was the story in most of Latin America. True for Brazil, true for Colombia, true for Chile, true for other economies, but not for Argentina. The currency in Argentina appreciated by 44%.
Currency appreciation may become an issue in Argentina because if the market gets enthusiastic about Milei and the removal of the currency controls, et cetera, Argentina may move in the situation in which the currency was massively undervalued. Now it's less undervalued, but moving into overvaluation. Remember, the currencies are very, very volatile in the region. Beware of where the currency is, if Milei succeeds. Everybody's looking at this midterm election.
Great. Thank you, Luiz. We are out of time. So look, Dan, Ryan, Luiz, thank you so much for doing this and participating in it. Everyone who registered and signed in, thank you very much for your participation. We will be posting this on our website probably in a couple of days for anyone who wants to follow up. I do see that there was one or two questions that came in towards the end. We'll be happy to try to address your questions offline. So we'll follow up with you. But again, thank you, everyone, for participating in this first PAX Talks. We hope you found it helpful. Welcome any suggestions or feedback. Ryan, Dan, Luiz, thanks again. And everyone have a wonderful rest of the day. Thank you.
Thank you, Rob.
Thank you.
Thank you, all guys.
Thank you. Bye.