Stock of Patria Investments Defends Rising Rate Environment (NASDAQ.PAX).

A Quick Look at Patria Investments

Patria Investments (NASDAQ:PAX) went publicIn January 2021, the company raised approximately $512,000,000 in gross proceeds from an IPO that was priced at $17.00 a share.

The firm offers investors access and alternative investments in Latin America.

It is likely that the U.S. Federal Reserve may raise interest rates through 2022, which could harm portfolio company valuations. This makes it difficult to find a positive upside catalyst for the stock in the near-term.

Accordingly, I am a Hold on the short-term outlook of PAX.

Company

Patria, Cayman Islands-based Grand Cayman was established to provide global investors investment access to institutional equity investments into private companies in Latin America.

Alex Saigh is the co-founder of the company and is now the Chief Executive Officer. Saigh was previously the CEO/CFO at Drogasil in Brazil.

PAX is looking for investment from limited partners, which could include pension funds, sovereign wealth funds and insurance companies.

Additionally, the firm helps private companies find suitable investments through either minority interest purchases or outright acquisitions.

Management claims that more than 60% of the current limited partners have invested in the firm for over ten years.

Patrias Recent Financial Performance

Source data for the above GAAP financial charts

As the chart below illustrates, the PAX stock market has fallen 19.2 percentage over the last 12 months relative to the U.S. S&P 500 index increase of 12.8 percent.

(Source)

Valuation Metrics for Patria

Below is a table with relevant valuation and capitalization figures for the company.

(Source)

Vinci Partners is a good example of a comparable public. (NASDAQ:VINP)Listed below is a comparison between their primary valuation metrics.

(Source)

Commentary on Patria

Management stated that it believes it’s a year ahead in raising its next flagship fund for investment.

Management also briefly discussed the previously announced merger with Chile-based Moneda Asset Management. This will provide PAX an alternative credit investment platform in this region and expand its participation in PIPE transactions.

The company recognizes that global investors are decreasing the number of their GP connections and is looking to offer one-stop-shop capabilities in order to gain more investment wallet share.

CEO Saigh emphasized the successes of its Infrastructure Fund IV portfolio, notably in the telecom infrastructure sector and the renewable energy sectors, during the call.

Financial results: Fee revenues increased by 16% quarter over quarter in Q3 2021, but total revenue fell from a lumpy Q2 result.

Management projects that fee related earnings will rise by more than 50% in 2022. The margin for fee related earnings will be low at fifty percent.

Management cited the $0.85/share dividend in 2021 as creating a 5% return on its IPO share price or 4x yield from an S&P 500 index funds. They believe that the firm is well positioned for further growth in 2022.

The company is also looking for additional M&A opportunities. They have $200 million in cash and are still searching for more. Management appears to be likely to make a significant purchase in 2022.

In terms of valuation, PAX has a higher value than Vinci Partners. As a result, PAX has a lower forward yield at 3.18%, compared to 5.05% in VINP.

A rising interest rate environment, and its negative effects on emerging markets economies, is the main risk to the company’s outlook. Management sees the Moneda purchase as offering greater opportunities.

Another risk is the possibility of falling valuations for technology companies that have been hard hit by rising interest rates.

Private equity firms provide a significant portion of their valuation and dividend yield upside through the harvesting of winning investments and related performance fees. If those investment valuations drop, those lower gains will be passed on to a lower bottom line.

It is unlikely that the U.S. Federal Reserve would raise interest rates in the future, so it is difficult for investors to see a positive catalyst for the stock’s near-term.

Accordingly, my outlook for PAX is a Hold.