Vinci Partners Investments Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to VINCI Partners First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer section and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to turn the conference over to Anna Castro, Investor Relations Manager.

Operator

Please Go ahead, Anna.

Speaker 1

Thank you and good afternoon, everyone. Joining today are Alessandro Ota, Chief Executive Officer Bruno Zaremba, Private Equity Chairman and Head of Investor Relations and Sergio Pastos, Chief Financial Officer. Earlier today, we issued a press release, slide presentation and our financial statements for the quarter, which are available on our website atir.vintopartners.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 It may differ from actual results materially. We do not undertake any duty to update these statements.

Speaker 1

For a discussion of some of the risks that could affect results, please see the Risk Factors section We will also refer to certain non GAAP measures and you'll find reconciliations in the release. Also note that nothing on this call constitutes an offer to With that, I'll turn the call over to Alessandra.

Speaker 2

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, adjusted distributable earnings, totally BRL6 1,000,000 or BRL1.10 per share, an increase of 6% in our cash earnings per share year over year. Fee related earnings totaled BRL 49,000,000 in the quarter or BRL0.09 per share, representing an increase of 14 percent 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 Q1, representing a dividend distribution of $0.70 on the dollar over the last 12 months, which as of May 9 stock price represent an appealing 8.5% We are posting another quarter of growth, backed by healthy upward strength in our FRE results.

Speaker 2

Our fundraising across private markets in the latest quarters remain one of the vintage fortresses and has 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 proudest achievements. We ended the Q1 of 2023 with over BRL 62,000,000,000 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 VCP4 during the quarter. This quarter, we held the first closing for VINCI Climate Change Or VICC, our infrastructure climate oriented fund. Between signed and approved, the fund has roughly BRL 1,000,000,000 in commitments. The ICC has observed lots of traction with institutional LPs as they display great appetite To allocate capital to climate focused products in a globally challenging market for fundraising for traditional private equity funds.

Speaker 2

Regarding our broader fundraising efforts, we are pleased to share that we are halfway through Our BRL10 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 VCP4, Finci Credit Infra, the ICC and Oil 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, VRR, now expected to come back to market in the end of the year. VRI IV divested from Proinfusion last year, crystallizing an 83% gross IRR in U.

Speaker 2

S. Dollars from the investment, bringing the fund to a 0.4 dpi. Pinch SPS likewise has been delivering strong numbers as their 2nd vintage already distributed in dollars as of the Q1 of 'twenty three. 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 their strong results Point to good support from existing investors for new vintages.

Speaker 2

On a last note, I would like to give a quick update regarding our Retirement Service segment, VRS. We successfully launched the product in the end of the quarter, and we should start seeing positive inflows Coming in the 2nd 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 capital. 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 2015, when we experienced in Brazil a significant increase in interest rates, when the Central Bank hiked annual interest rates from 7.5% to 14.25%.

Speaker 2

Back then, the easing cycle started only in 2016. During that period, Finci held its 4th with resilient AUM numbers growing from EUR 17,000,000,000 to EUR 19,000,000,000 over that year span. Since our IPO in early 2021, we have encountered similar conditions as the ones from 13 to 15 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 AWAM from BRL50 1,000,000,000 at the year end 2020 to BRL62 1,000,000,000, composed mostly by Fundraising Private Market Strategies and IPNS, remained extremely resilient To all close in liquid strategies despite the general trend for debt asset class in Brazil in the last quarters, Only in the year to date, hedge funds and public equities managers in Brazil suffered from a staggering BRL80 1,000,000,000 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.

Speaker 2

Since our IPO, private markets AUM grew from BRL19 1,000,000,000 to BRL28 1,000,000,000, reaching close to a Total 50% overall growth achieved through organic fundraising across all strategies of BRL9.1 billion and DKK2.1 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 percent, respectively, from the Q4 2020 to our current number this quarter. We are extremely proud We firmly believe today we sit 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, positioned the company to benefit from a new growth cycle. Soon after, as the Brazilian Central Bank started its easing cycle, we grew AUM from BRL21 1,000,000,000 in 2017 to approximately BRL50 1,000,000,000 in the year end of 2020, representing an increase of almost BRL30 1,000,000,000 in additional AUM On an annual compound rate of over 30%.

Speaker 2

At the same time, VINCI posted a stellar posting close to a 20 percent points margin expansion. We are extremely excited of the future ahead as we firmly believe There is another easy cycle just around the corner, and we are today in a better position than in 2016 as a platform for alternative invest. VINCI 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.

Speaker 2

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 pragmatist 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 twenty twenty three, market expectation already pricing cuts of around 400 basis points until the end of 2024.

Speaker 2

We understand that our business will encounter different market conditions throughout the years. Our mission is to be resilient in the tougher ones while driving transformational growth doing the positive ones. Finsch's history ratifies our effectiveness. Before turning the call to Bruno, I would like to reinforce the following. We have once again proven ourselves in Brazil in a difficult scenario for capital markets locally and internationally.

Speaker 2

At the same time, we believe we are in the beginning of a cycle of declining 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 market Ciserna, our IPO against historical interest rates tightening cycle, underscores the potential to increase penetrate Of alternative investments assets in Brazil, current allocations are 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 offering standpoints, to be ready to excel expectations in this future easing cycle.

Speaker 2

With that, I'll turn it over to Bruno to go over our financial results.

Speaker 3

Thank you, Alessandro, and good afternoon, everyone. Starting on Slide 10, we will cover AUM trends for the Q1. VINCI ended the quarter with BRL62.2 billion in AUM, Up 10% year over year, boosted by growth in our private market strategies and acquisition of VINCI SPS. Our long term AUM accounted for BRL31.3 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 lock ups.

Speaker 3

The highlights to this quarter's fundraising was the first close held by VINCI Climate Change or VICC. We are seeing great traction with international fees for this product with several relevant soft circle commitments, and we will come back with additional closings for this Funds 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 VICC's fundraising cycle. This quarter, we also had some new capital subscriptions in VCP4. 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 over allocation to the asset class.

Speaker 3

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 two asset classes. The liquid REITs industry, in particular, was heavily impacted by mark to market effects during the Q1, 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 a low in our income in the Q1.

Speaker 3

We should see a positive rebound for unrealized GP commitment in our income statement in the second If the REIT market recovery that we're seeing in the months of April May continues until the end of the quarter, We expect the Central 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.

Speaker 3

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 markets in our existing funds. Relative valuation differentials 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.

Speaker 3

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 BRL155.2 million in the Q1. The VCP strategy currently accounts for roughly 90% of accrued performance These represent an appealing upside for future performance fees. With capital returns happening from SBS and VIR, We expect a source of potential future performance fees from our private market verticals to be diversified in coming quarters.

Speaker 3

At the end of the quarter, VINCI had BRL12 1,000,000,000 in performance eligible AUM coming from private market funds still in investment period that can further contribute to our accrued performance fees as these funds enter their divestment periods. Turning to Slide 13, We will cover our fee related revenues. Revenues from management and advisory fees totaled BRL100.3 million In the quarter, up 10% year over year. Management fees accounted for BRL95.9 million in the quarter, up 10% year over year. We should see a continued positive trend coming the next few quarters with new capital raises in our closed end products in private markets, combined with the increase in our average fee rate as we deploy capital in SPS III and VINCI Credit Infra.

Speaker 3

Both have significant dry powder to allocate and charge fees over invested capital in the case of Infra and benefits from a step up in fees in the case of SPS. Another important contribution will be retroactive fees In VCP4 and VICC, as these funds are currently raising capital and additional commitments will redirect fees to the date of the fund's first closing. In Slide 14, we present our operating expenses for the quarter last 12 months. Total Expenses accounted for BRL52 1,000,000 in the quarter, up 8% year over year. This quarter, we had an on off expense effect related to our efforts into cost efficiency.

Speaker 3

As we anticipated last quarter, we are acutely focused on cost consciousness this year, looking actively for efficiency across our platform. This resulted in an internal personnel restructure during the Q1, which will ultimately result Savings in 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.

Speaker 3

FRE totaled BRL49.1 million or BRL0.90 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 in 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 Q1 of 2022, 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 BRL194 BRL4 million over the last 12 months or BRL3.51 per share, representing a 4% increase year over year on a per share basis.

Speaker 3

Shifting to Slide 17, we go over our realized GP investment and financial income. VINCI had BRL26 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 BRL106.1 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 BRL60 1,000,000 or BRL1.10 up 6% year over year On a per share basis, backed by fundraising across private markets and the acquisition of VINCI SBS.

Speaker 3

Adjusted E TOTED BRL250.1 million or BRL4.53 in the last 12 months, up 5% on a per share basis when compared to the Moving on, I would like to spend a few moments covering our GP commitments in Slide 20. As of the Q1, VICI had committed BRL1.1 billion proprietary closed end funds. These commitments work as seed investments in our funds to leverage fundraising with LPs and drive future growth in private market FRE results, backed by long term capital. When we IPO ed in January of 2021, We expected to use most of the cash proceeds from our primary as seeds to develop new private market products and launches of new vintages and 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.

Speaker 3

However, Don't lose sight of the fact that these commitments are assets in our balance sheets and are relevant drivers of long term value creation, not only through FRA Growth, but also from expected returns to our commitments as relevant LPs in our strategies. Taking into account the The current BRL1.1 billion commitment Translates into a weighted average net IRR of close to 20%, which in turns equate to an expected 2 This represents a potential of approximately BRL1.2 billion in profits to be realized from these commitments Currently on the balance sheet. Therefore, we are talking about an additional $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 REITs are paying us predictable monthly dividend distributions that have provided an interesting contribution to our D numbers. At the same time, these commitments have allowed us to issue more share in the REITs, which benefit FRE.

Speaker 3

Our priority to be adding long term shareholder value. We believe we have several levers to achieve strong value creation over time 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.

Speaker 4

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 The resilience of our business is regarding the investments made in the VRS segment, 57% Of our FRE over the last 12 months came from our Private Markets Strategies, followed by IP and 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 Markets strategy on Slide 23.

Speaker 4

FRE totaled BRL31.6 BRL6 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 Fintech 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, we have the international base. Please note that the close was held in the end of the quarter. Therefore, we will start to earn management fees in this second quarter. Also, Bear in mind that VICC has a retroactive fees clause.

Speaker 4

Thus, following commitments We will retroactive fees to the start of the funds. Segment distributable earnings were BRL37.5 million in the quarter, An increase of 39% year over year, boosted by FRE growth. Total AUM was BRL28.2 billion for the end of the quarter, up 34% year over year. Adding to the previously mentioned contribution for VICC, we also had new commitments in our 4th vintage in our flagship private equity strategy, VCP 4. As anticipated by Bruno, we should expect more impactful commitments for VCP 4 towards the second half of the year.

Speaker 4

Moving on to the Slide 24, we go over results for liquidity strategies. Fee related earnings in the quarter of BRL8.4 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 BRL9.8 billion at the end of the quarter, With AUM being resilient for outflows compared to the Brazilian industry for liquidity strategies. As an example, according to the public Data from Ambima, the public equities industry in Brazil had closed to BRL19 1,000,000,000 in the redemption this quarter Or 4% of the total AUM. Meanwhile, VINCI's public equity segment posted BRL108 1,000,000 in Inflows over the Q1, we are reaping the benefits from prioritizing our proprietary relationship with our clients.

Speaker 4

As previously mentioned by Alessandro and Bruno, we've had an improved outlook for an easing cycle in local interest rates Align with a more market friendly fiscal framework, we could see a pickup in liquid charges 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 and S business on Slide 25. FRE totaled BRL9 1,000,000 in the quarter, down 3% On a year over year basis, over the last 12 months, FRE totaled BRL41.1 million, up 3% compared to the same period last year.

Speaker 4

Segment the year totaled BRL9.5 million in the quarter, up 1% year over year. Total AUM as of the end of the quarter was BRL24.2 billion, up 4% 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 slower growth pace for our IP and S business. With the expectations of lowering rates in the second half of twenty twenty We shall see a pickup on AUM numbers for IP and S as institutional investors have stronger incentives to seek assistance to be able to outperform their actuary goals.

Speaker 4

Turning to Slide 26, we cover our results for financial advisory. FRE for financial advisory was BRL1.5 million in the quarter. For the last 12 months, FRE totaled BRL9 million, representing a decrease of 6%, 7% 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 experience a pickup in deal activity. Finally, moving on to Slide 20 7, we go over results for the Retirement Service segment.

Speaker 4

Fee related earnings for the quarter was negative BRL1.5 million and over the last 12 months represented negative BRL6.1 million. As Alessandro mentioned earlier, we launched The VRS product in the later part of the Q1. Therefore, we should start to see modest revenue contributions at same point As we have been stating, these numbers 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.

Speaker 4

Once again, we'd like to thank you for joining our call. With that, I would like to open the call for questions. Operator?

Operator

Our first question comes from Tito Labarto from Goldman Sachs. Please, Mr. Tito, your microphone is open.

Speaker 5

Hi, good afternoon, Alessandro, Bruno, Sergio. Thank you for the call taking my questions. A couple of questions, I guess. Just on the outlook for fundraising, I know you're halfway through on the private market And Ana Santos, 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?

Speaker 5

Rates maybe in the year 12, 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 the single digits? Just to put it a little bit into context given where we are in Brazil Today. And then and also on the IP and S strategy, that was a big grower last year, Had some outflows this quarter. Just to understand a little bit what happened this quarter with the outflows

Speaker 2

Hi, Tito. 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, it's not A mathematical relationship, but I would say that we would see a 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.

Speaker 2

When we see Not just starting the days in 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 This rate is 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 on 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 REITs market on real estate recovering, we'll see more money going towards Infrastructure, too.

Speaker 2

So I expect this to happen start to happen 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 answering the second question regarding IP and S, I'll take this question too. What we saw In the last quarter, it was more like redemptions coming from retail, 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 and 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 rebalanced the portfolios.

Speaker 2

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.

Speaker 5

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

Speaker 2

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.

Speaker 2

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 have kept, as I said, like corporate plans, like more like distribution channels, Etcetera, etcetera. But till the end of the year, we will start seeing the numbers picking up very slowly because it's our intention to really We have a soft opening of the 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 to 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 evolve to a more broad group of clients.

Speaker 5

Okay, great. That's helpful. Thank you,

Operator

This does concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Alessandro Orta for any closing remarks. Please, Mr. Alessandro, you may proceed.

Speaker 2

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 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 till 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.

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Vinci Partners Investments Q1 2023
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