Vinci Partners Investments Ltd

NASDAQ:VINP

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and welcome to the Vinci Partners First Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to turn the conference over to Anna Castro, Investor Relations Manager. Please go ahead Anna.

[Anna Castro, IR Manager]

Thank you, and good afternoon, everyone. Joining today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Private Equity Chairman and Head of Investor Relations; and Sanju Pass, Chief Financial Officer. .

Earlier today, we issued a press release, slide presentation in our financial statements for the quarter, which are available on our website at ir.vincipartners.com. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the firm's control. may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 20-F. We will also refer to certain non-GAAP measures and final reconciliations in the release. Also note that nothing on this call constitutes an not resell or solicitation of an offer to purchase an interest in any Vinci Partners fund. With that, I'll turn the call over to Alessandro.

[Alessandro Horta, CEO & Director]

Thank you, Anna. Good afternoon, and thank you all for joining our call. We are very pleased to join you all today as we announce results for the first quarter of 2023. Adjust distributable earnings, totally, BRL 6 million or BRL 1.10 per share, an increase of 6% in our cash earnings per share year-over-year. Fee-related earnings totaling BRL 49 million in the quarter or $0.09 per share, representing an increase of 14% year-over-year on a per share basis. our FRE continues to grow, driven by our continued success in expanding our private markets platform through new capital raisings and inorganic growth. Vinci announced a quarterly dividend of $0.16 on the dollar per common share in the fourth quarter representing a dividend distribution of $0.70 on the dollar over the last 12 months. which as of May 9 stock price represents an appealing 8.5% dividend yield. We are posting another quarter of growth backed by healthy upward trends in our FRE results.

Our front raising across private markets in the latest quarters remain one of the benches for dresses and have driven growth for the entire platform. Even in the tough macro scenario we have been experiencing in the last few quarters for what I believe to be one of our project achievements. We ended the first one of 2023 with over BRL 62 billion in assets under management, up 10% year-over-year, with highlights to the strong first closing of the ICC in infrastructure and additional commitments to VCP IV during the quarter. This quarter, we held the first closing for Vinci Climate Change or the VICC, our infrastructure climate-oriented fund between signed and approved, the fund has roughly BRL 1 billion in commitments.

The VICC has overserved lots of traction with institutional LPs as they display great appetite to allocate capital to climate-focused products in a globally challenging market for front raising for traditional private equity funds. Regarding our broader fundraising efforts, we are pleased to share that we are halfway through our BRL 10 billion target fundraising for private market strategies, which we started in the beginning of 2022. Since then, in approximately 1 year, we were able to reach roughly half of our target. We remain on track for fundraising in the next quarters with additional closings across VCP IV Vinci Credit Infra, the VICC and all initiatives. As anticipated in our last earnings call, we might have some positive surprises with new vintages from SPS and our impact and return strategy, VIR, now expected to come back to market in the end of the year.

VIR IV divested from Prime Fusion last year, crystalizing an 83% gross VIR in U.S. dollars from the investment, bringing the fund to a 0.4 DPI. likewise, has been delivering strong numbers as their second vintage already distributed to its investors more than 75% of the funds committed capital while achieving a gross fund level VIR of 31% in dollars as of the first quarter of '23. Both funds delivered these results in a stellar 2-year window remarkably early in their lifetime. This should be an important addition to our private market fundraising pipeline as there is strong results point to good support from existing investors for new vintages. On a last note, I would like to give a quick update regarding our Retirement Services Segment, VRS.

We successfully launched the product in the end of the quarter, and we should start seeing positive inflows coming in the second quarter, backed by our high net worth investor base. However, as disclosed in our last earnings call, we expect to see expressive contribution only in 2024 as we evolve our fundraising efforts to new pools of gap. I would like now to take you back to Vinci's history.

We already navigated in the past through difficult environments and particularly during the period from 2013 to '15, when we experienced in Brazil, a significant increase in interest rates when the Central Bank hiked and annual interest rates from 7.5% to 14.25%. Back then, the even cycle started only in 2016. During that period, Vinci held its fourth with resilient AUM numbers growing from BRL 17 billion to BRL 19 billion over the year span. Since our IPO in early 2001 have encountered similar conditions as the one from '13 to '15 in as the Central Bank started the current interest rate hike from 2% in the middle of 2021 to the current 13.75% annual rate.

This time, we grew AUM from BRL 50 billion at the year-end 2020 to BRL 62 billion, composed mostly by fundraising private market strategies and IP&S remained extremely resilient to outflows in liquid strategies despite the general trend for that asset class in Brazil in the last quarters. Only in the year-to-date hedge funds and public equity managers in Brazil suffered from a staggering BRL 80 billion in outflows. When we take a closer look into our private markets growth over that period and taking into account the backdrop, we have been able to continue to strongly develop the platform. Since our IPO private markets AUM grew from BRL 19 billion to BRL 28 billion, reaching close to a total 50% overall growth. achieved through organic fundraising across all strategies of BRL 9.1 billion and BRL 2.1 billion coming from the acquisition of SPS.

This reflects directly into our numbers, our FRE and segment distributable earnings for the private market segment has expanded by 44% and 66%, respectively, from the fourth quarter 2020 to our current number this quarter. We are extremely proud of what we were able to achieve in private markets and believe this performance can be achieved in the rest of the platform as market conditions become more benign. We firmly believe today, we see it at a similar scenario to that of the beginning of 2016. During the years leading to that year, Vinci had invested heavily in its platform, position the company to benefit from a new growth cycle. Soon after, as the Brazilian Central Bank started its easing cycle, we grew AUM from EUR 21 billion in '17 to approximately BRL 50 billion in the year-end of 2020, representing an increase of almost BRL 30 billion in additional AUM or an annual compound rate of over 30%.

At the same time, since you posted a stellar FRE margin expansion posting close to a 20% points margin expansion. We are extremely excited of the future ahead as we firmly believe there is another easy just around the corner, and we are today in a better position than in '16 as a platform for alternative investment has evolved in developing additional investment strategies.

We have a complete platform of products that can deliver stronger growth in the coming years, powered by more favorable markets. With that said, we expect our recent success in fundraising for private markets to be even more relevant over this next cycle. Adding to that, a favorable environment will likely be a key driver for us to go back to be impactful on the liquids front. Looking to our broad platform. we are really excited with the growth potential ahead of us for the next few years. An improved version of the government proposal for the fiscal framework should be approved in Congress in the next few months. after some adjustments on the initial version.

This is a clear indication that pragmatism is leading the government towards the center of the political spectrum in terms of economic policy with lower fiscal risk, inflation expectations for the coming years start to stabilize within the inflation target band, opening room for an easing cycle in the second half of 2023. Market expectation, very pricing cuts of around 400 basis points until the end of 2024. We understand that our business we encounter different market conditions throughout the years. Our mission is to be resilient in the tougher ones while driving transformational growth during the positive ones. Things ratifies our effectiveness. Before turning the call to Bruno, I would like to reinforce the following: we have once again proven ourselves resilient in a difficult scenario for capital markets locally and internationally. At the same time, we believe we are in the beginning of a cycle of decline in interest rates in Brazil that should power attractive growth for the company throughout all initiatives we described today.

The growth we were able to achieve in private markets since our IPO, against historical interest rates tightening cycle at course the potential to increase penetration of alternative investment assets in Brazil, current allocations. Are we still in the low single digits percentage of total industry AUM, and we expect this number to continue to grow over time. We are here to share with shareholders and investors what we have learned resilience in tougher environment paves the way to expansion in favorable ones. With that said, we are digging deeper into our platform from both cost and product offer standpoint. -- to be ready to excel expectations in this future is in cycle. With that, I'll turn it over to Bruno to go over our financial results.

[Bruno Zaremba, Chairman, Private Equity Group & Head, IR]

Thank you, Alessandro, and good afternoon, everyone. Starting on Slide 10, we will cover AUM trends for the first quarter. Vinci ended the quarter with BRL 62.2 billion in AUM, up 10% year-over-year boosted by growth in our private market strategies and the acquisition of ISPS. Our long-term AUM accounted for BRL 31.3 billion in the quarter. increasing 19% year-over-year and it currently represents roughly 50% of Vinci's total AUM.

This is a direct result of our efforts into private market strategies as they carry AUM with longer lockups. The highlights to this quarter's fundraising was the first close held by Vinci Climate Change or we're seeing great traction with international fees for this product with several relevant soft circle commitments and we will come back with additional closing for this fund still this year. We are confirming our prior view that there is still significant dry powder available globally for climate transition strategies, which bodes well for the VICC's fundraising cycle. This quarter, we also had some new capital subscriptions in VCP IV. However, we are expecting heavier contributions from this product in the second half of the year as we have been experiencing a congested market worldwide for fundraising private equity. with several struggling with allocations due to the number of funds coming back to market and a temporary overallocation to the asset class.

Although posting another quarter with positive growth trends in AUM on a year-over-year basis, we suffered this quarter with volatile markets that have negatively impacted real estate and liquid strategies. In fact, if you look at the AUM roll forward available in the material, most of the AUM fluctuation in the quarter can be traced to the mark-to-market in these 2 asset classes. The liked REIT industry, in particular, was heavily impacted by mark-to-market effects during the first quarter, but have come back significantly so far in the second quarter. We have GP commitments in some of these listed products and their mark-to-market will fluctuate as unrealized income in our quarterly earnings.

This was the main reason for our lower net income in the first quarter. we should see a positive rebound for unrealized GP commitment in our income statement in the second quarter if the REIT market recovery that we're seeing in the months of April and May continues until the end of the quarter. We expect the Centro Bank to start cutting interest rates still in 2023. This will be an important driver for listed REITs as the funds tend to be more appealing to investors in a lower rate environment.

Currently, funds are trading at prices below NAV, which limits their ability to do primary issuances in the market with an easing cycle in rates we should see a pickup in the REITs market that should put us in a better position to come back with fundraising for these products. The past few quarters have been very challenging period for our liquid strategies. We have seen very strong outflows in the industry, and mark-to-market has also been unfavorable. Despite this reality, we have been resilient in our liquids vertical. We believe our liquid AUM should also benefit from an easing interest rate cycle, both from a reversal to positive net inflows, but also from favorable mark-to-market in our existing funds.

Relative valuation differential support a constructive long-term view for listed equities in the country. Today, for instance, the public markets in Brazil are trading at the lowest relative valuation against developed markets we have seen in the past couple of decades. This comparison was made using next 12-month forward earnings.

Moving on to Slide 12. We go over accrued performance fees in our private market funds. Gross accrued performance fee receivables accounted for BRL 155.2 million in the first quarter. The VCP strategy currently accounts for roughly 90% of accrued performance fees representing an appealing upside for future performance fees, with capital returns happening from SPS and VIR, we expect the source of potential future performance fees from our private market verticals to be diversified in coming quarters. At the end of the quarter, Vinci had BRL 12 billion in performance as AUM coming from private market funds still in investment period that can further contribute to our accrued performance fees as this fund entered their divestment periods.

Turning to Slide 13, we will cover our fee-related revenues. Revenues from management and advisory fees totaled BRL 100.3 million in the quarter, up 10% year-over-year. Management fees accounted for BRL 95.9 million in the quarter, up 10% year-over-year. we should see a continued positive trend coming in the next few quarters with new capital raises in our closed-end products in private markets, combined with the increase in our average fee rates as we deploy capital in SPS III and Vinci Credit infra. Both have significant dry powder to allocate and charge fees over invested capital in the case of Infra and benefit from a step-up in fees in the case SPS. Another important contribution will be retroactive fees in VCP IV and VICC as these funds are currently raising capital and additional commitments will retract fees to the date of the fund's first closing.

In Slide 14, we present our operating expenses for the quarter and last 12 months. Total expenses accounted for BRL 52 million in the quarter, up 8% year-over-year. This quarter, we had an on-off expense effect related to our efforts into cost efficiency. As we anticipated last quarter, we are hugely focused on cost consciousness this year, looking actively for efficiency across our platform.

This resulted in an internal personnel restructure during the first quarter will ultimately result in savings into 2023. We will continue to look for efficiency across our business lines, focusing on accelerating the operating leverage of our platform to deliver healthy margins every quarter. We believe that this approach, alongside our fundraising cycle in private markets should result in long-term margin expansion.

Moving on to Slide 15. We go over our fee-related earnings for the quarter. FRE totaled BRL 49.1 million or $0.90 per share in the quarter, up 14% year-over-year on a per share basis. The platform is starting to reap the benefits from the fundraising cycle and private market strategies, and we should see greater contribution towards the end of the year. Another driver for FRE growth year-over-year was the acquisition of Vinci SPS. Over the last 12 months, FRE is down 9% when we compare the same last 12 months period in first quarter of '22, given the outstanding performance from our advisory segment throughout 2021, which did not occur in 2022 given market conditions.

Considering only our core asset management business, FRE was BRL 194 million over the last 12 months or BRL 3.51 per share representing a 4% increase year-over-year on a per share basis.

Shifting to Slide 17, we'll go over our realized GP investment in financial income. Vice had BRL 26 million in realized GP and financial income this quarter, roughly in line with the same period of last year. Over the last 12 months, realized GP and financial income totaled BRL 106.1 million, representing an increase of 64% compared to the same period last year.

Turning to Slide 18. We go through our adjusted distributable earnings. Adjusted distributable earnings totaled BRL 60 million or BRL 1.10, up 6% year-over-year on a per share basis, backed by fundraising across private markets and the acquisition of Vinci SPS.

Adjusted DE totaled BRL 250.1 million or EUR 4.53 in the last 12 months up 3% on a per share basis when compared to the same period of last year.

Moving on, I would like to spend a few moments covering our GP commitments in Slide 20. As of the first quarter, Vice had committed BRL 1.1 billion proprietary closed end funds. These commitments work as steel investments in our funds to leverage fundraising with LPs and drive future growth in private market for results backed by long-term capital. When the IPO-ed in January of 2021, we expect to use most of the cash proceeds from our primary as seeds to develop new private market products and launches of new vintages in existing strategies. As Alessandro mentioned, our ability to leverage our capital to launch products was one of the main drivers of the strong private market growth we realized since our IPO. However, Don't lose sight of the fact that these commitments are assets in our balance sheet and are relevant drivers of long-term value creation, not only through FRE growth, but also from expected returns to our commitments as relevant LPs in our strategies.

Taking into account the expected historic returns of each of our strategies, the current BRL 1.1 billion commitment translates into a weighted average net IRR of close to 20%, which in turns equate to an expected 2.3x net for this capital over a 5-year span. Net of fees and taxes, this represents a potential of approximately BRL 1.2 billion in profits to be realized from this commitment is currently on the balance sheet. Therefore, we are talking about an additional BRL 4.40 per share of value being created by our current balance sheet over the next 5 years. Over the short term, our proprietary positions in listed REITs are paying us predictable monthly dividend distributions that have provided an interesting contribution to R&D numbers. At the same time, these commitments have allowed us to issue more share in the REITs, which benefits FRE.

Our priority continues to be adding long-term shareholder value. We believe we have several levers to achieve strong value creation over time through AUM and management fee revenue growth Increased performance revenues contribution expected GP commitment returns and inorganic expansion through acquisitions to name a few. All of these individually represent meaningful value to be created. We continue to be very focused on delivering on these initiatives as we move forward. And with that, I will turn it over to Sergio to go through our segments.

[Sergio Passos, COO & CFO]

Thank you, Bruno. Turning to our segment highlights. As you can see in Slide 22, our platform remains widely diversified, which we believe should be the main contributor to the resilience of our business. Regarding the investments made in the VRS segment, 57% of our FRE over the last 12 months came from our private market strategies, followed by IP&S with 20% liquid strategies with 18% and financial advisory contributing with 4%.

The same level of diversification is reflected in our segment distributable earnings. Moving on to each of the segments. We start with our private market strategy on Slide 23. FRE totaled BRL 31.6 million in the quarter, up 27% year-over-year driven by the strong fundraising cycle experienced over the last 12 months and the incorporation of Vinci SPS. The biggest achievement across private markets this quarter was the first closing of Finch climate change or VICC. The first close was backed by BNDES and international LPs, and we expect to announce new subscriptions over the next few quarters as we are seeing great traction for this product with the international base.

Please note that the closing was held in the end of the quarter. Therefore, we will start to earn management fees in this second quarter. Bear in mind that the VICC has a retroactive fees clause. Thus, following commitments will retroactive fees to the start of the fund. Segment distributable earnings were BRL 37.5 million in the quarter, an increase of 39% year-over-year, boosted by FRE growth. TAUM was BRL 28.2 billion for the end of the quarter, up 34% year-over-year.

Adding to the previously mentioned contribution from BNDES, we also had contributions throughout the year in our fourth vintage for our flagship private equity strategy, VCP IV.

As anticipated by Bruno, we should expect more impactful meets for [indiscernible] towards the second half of the year. Moving on to Slide 24. We go over results for liquid strategies. Fee-related earnings in the quarter of BRL 8.4 million, down 19% year-over-year as our management fee revenues were impacted by AUM depreciation. -- as fees are charged over funds NAVs. Total AUM was BRL 9.8 billion at the end of the quarter with AUM being resilient for outflows compared to the Brazilian industry for liquid strategies.

As an example, according to the public data from Ambien, the public equities industry in Brazil had close to BRL 19 billion in the redemption this quarter or 4% of the total AL. Meanwhile, Vinci's Public Equity segment posted BRL 18 million in inflows over the first quarter. We are reaping the benefits from [indiscernible] our biter relationship with our clients. As previously mentioned by Alessandro, Bruno, we improved outlook for an easing cycle in local interest rates aligned with a more market-friendly fiscal framework we could see a pickup in liquidity there from both inflows and appreciation standpoint. That should happen towards the end of the year and throughout 2024. Meanwhile, we have positioned ourselves to take advantage of this new market cycle. Moving on to our P&S business on Slide 25. FRE totaled BRL 9 million in the quarter, down on year-over-year basis. Over the last 12 months, FRE totaled BRL 41.1 million, up 3% compared to the same period last year [indiscernible] segment the year totaled BRL million in the quarter, up 1% year-over-year.

Total AUM as of the end of the quarter was BRL 24.2 billion, up year-over-year. Over the last 12 months, we encountered a high level of both real and nominal interest rates in Brazil. This contributed to a lower growth pace for our IP&S business with the expectations of lowering rates in the second half of 2022. We shall see a pickup on AUM numbers or IPS as institutional investors have stronger incentives to seek assistance to be able to outperform their actuary goals.

Turning to Slide 26. We cover our results for financial advisory. FRE for financial advisory was BRL 1.5 million in the quarter. For the last 12 months, FRE totaled BRL 9 million representing a decrease of 67% compared to the last year as we experienced a stronger year for our advisory business in 2021, although uncertainty to predict we should expect an improvement for next quarter onwards as we are experiencing a pickup in deal activity.

Finally, moving on to Slide 27, we go over results for the Retirement Services segment. Fee-related earnings for the quarter was negative BRL 1.5 million. And over the last 12 months represented a negative BRL 6.1 million. As Alain mentioned earlier, launched the VRS product in the later part of the first quarter.

Therefore, we should start to see modest revenue contributions at the same point in the second quarter. As we have been stating, this number should become more relevant to the business next year. We are very optimistic and excited with the prospect for VRS and we'll keep updating our investors as the business develops throughout the year. That's it for today's presentation. Once again, we would like to thank you for joining our call.

[Operator]

[Operator Instructions]. Our first question comes from Daer Labarta from Goldman Sachs.

[Daer Labarta, Goldman Sachs Group]

A couple of questions, I guess. Just on the outlook for fundraising, I know you're halfway through on the private market strategies. But I know the sand that you mentioned you're going into an easing cycle. However -- I mean this easing cycle likely may not be as strong as the last one, right, rate maybe in the year 12, I'm not sure how that will end up next year. How much of a reduction in rates do you think would really be needed to really see a lot more interest or for the liquor strategies, I guess, in particular, to do much stronger and for that to improve? I mean, do you need to get to single digits? Just to put it a little bit into context, given where we are in Brazil today? And then -- and also on the IT&S strategy, it was a big grower last year. had some outflows this quarter. Just to understand a little bit what happened this quarter with the outflows and how that strategy in particular should continue to evolve.

[Alessandro Horta, CEO & Director]

This is Alessandro. Thank you very much for the questions. First, starting with the fundraising for private markets and I would say the relation with the rates, that's my opinion, of course, is not a mathematical relationship. But I would say that we would see more like, I would say, more stronger flow not just for private markets, but I would say for all the other asset classes that we have, when we see not just starting the cycle and as you said, that probably will happen maybe not so strongly and fast as other cycles.

But with some kind of targets in the high single digits. To the point that we expect that we can see these rates coming down to high single digits. I believe that we start a very important movement of capital. Having said that, we believe that we are already starting some dislocation, okay, on that direction. But we believe in the second half of the year, when we start seeing the rates going down nominally even if not strongly, we will start to see some movement to our asset classes, especially private markets. We will see, for instance, the REIT market on real estate recovering, we'll see more money going towards infrastructure, too.

So I expect this to happen -- start happening in the second half of the year. But to see a more strong movement we need to see in our horizon, something on the high single digits as a target. And as for the second question regarding IP&S, I'll take this question, too. What we saw in the last quarter was more like redemptions coming from to, especially related with more like products that were distributed through some retail channels. But this is really not very relevant, and we are seeing already this is stabilizing. We expect the largest flow for IP&S will come together with the starting of the easing cycle when the pension funds, institutional clients as a whole, we started reallocating out from just fixed income, pure fixed income to rebalance the portfolio. So recently, we saw more redemption related with funds that we have distribution through retail. But going forward, we expect the biggest flow to start with institutional clients coming back to more structured portfolios.

[Daer Labarta, Goldman Sachs Group]

Okay. Great. Alessandro. That's helpful. Maybe just one follow-up. Just on -- any color on the VRS segment and when that can become to -- start to be a contributor here?

[Alessandro Horta, CEO & Director]

Okay. That's a good question. As we mentioned in the call, we just started VRS, it's live -- from the end of the quarter, okay, so it's really recent. We are starting the activity of fundraising with our high net worth clients today. So we start seeing this AUM coming in, but still we are in a very, very, I would say, careful approach in terms of clients that we are reaching now. We will evolve that to other pools of capital to the end of the year. but we expect really that to be relevant in our numbers just next year when we start going for other pools of capital. As I said, like corporate plans like more like distribution channels, et cetera, et cetera. that till the end of the year, we will start seeing the numbers picking up very slowly because it's our intention to really have a soft opening this strategy because everything is really new and just became live recently. And there is a lot of technology that we invested in, that's really we believe that will be transformational for the industry. And this technology, of course, we are evolving that and testing that with clients that are more like wholesale near us, and then we evolved to a more broad group of clients.

[Operator]

[Operator Instructions]. This does concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Alessandro Horta for any closing remarks. Please, Mr. Alessandro, you may proceed.

[Alessandro Horta, CEO & Director]

Thank you. I'd like to thank you all for attending our call today and for your continued support. As we said during the call, we are very proud of what we have been doing in the last few quarters, especially on the fundraising of private markets. And we believe that since we are more towards near the easing cycle, we believe that very soon, we'll have another important growth path to the firm in the -- until the end of the year. So thank you very much, and hope to see you soon next quarter. .

[Operator]

Vinci Partners conference call has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a wonderful day. Thank you.