Vinci Compass Investments Ltd. Q2 FY2023 Earnings Call

Good afternoon, and welcome to the Vinci Partners' Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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.

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 Sergio Passos, 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 and 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 find reconciliations in the release. Also note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Vinci Partners fund. With that, I'll turn the call over to Alessandro.

Thank you, Anna. Good afternoon and thank you all for joining our call. We are very pleased to join you today as we announce results for the first quarter of 2023. Adjusted distributable earnings totaling R$70 million or R$1.30 per share, an increase of 18% in our cash earnings per share year-over-year. Vinci announced a quarter dividend of $0.20 on the dollar per common share. Over the last 12 months, we have distributed $0.73 per share as dividends that at the current stock price level represent a dividend yield close to 8%. Our fee related earnings totaling R$51 million in the quarter, or $0.94 per share, represented an increase of 11% year-over-year on a per share basis, driven by the ongoing fundraising across our private market vehicles and a higher contribution from advisory fees this quarter. AUM reached R$65 billion at the end of the second quarter, up 9% year-over-year. This quarter we had an important contribution from AUM appreciation following the recovery in local markets, which pushed our public equities and REITs strategies to rise by 20% on average. This is one of the few quarters since our IPO that we benefit in a more significant manner from this effect. Since 2021, we have struggled to see a relevant impact from market appreciation as we faced challenging local markets, and our AUM growth has been anchored mainly in new capital subscriptions and inflows. The strong results posted for AUM FRE and distributable earnings this quarter are once again a clear demonstration of the resilience of our platform. We have been discussing constantly in our calls, our current focus in fundraising across our private market strategies and the impact these new capital commitments will have for our management fees. I'm very confident in the prospects for future quarters as we now have additional to the fundraising for private markets, favorable tailwinds for other segments such as our liquid strategies and our public market vehicles. We are now entering a much more constructive scenario for Vinci to start seeing positive inflows into our liquid funds as local markets improve and the opportunity cost of a very high local interest rate lessens. On top of that, our public market vehicles, with the recent appreciation are trading at prices very close or above NAVs, which puts us back in a position to raise capital through primary issuances. This contribution can be very meaningful to our numbers. We have eight perpetual capital AUM funds with sizable NAVs. Once we have surpassed NAV prices, our public market vehicles should go back to being one of the main driving forces for AUM growth, as we have seen from 2018 to 2021, when we grew AUM in this strategy by more than 5x or R$4 billion. This effect was a direct consequence of the market's expectation for the start of the easing cycle for interest rates, which officially began last week as the Brazilian Central Bank announced the first cut in interest rates since 2020 by 50 basis points and sent a clear indication for the easing process ahead of us. For instance, the market expects nominal rates to be at 11.75% by the end of the year and close to 9% by the end of 2024, decreasing nominal rates by roughly 500 basis points in approximately one year and a half. As highlighted before, the last easing cycle took place between 2017 to 2020. Back then, we grew AUM by roughly R$30 billion, posting expansion across all our business lines. At the same time, Vinci posted significant FRE margin expansion with close to a 20 percentage point gain in FRE margin. Keep in mind that our platform was not as developed as it is today. We have been actively working these last few years to be ready to take most of the opportunity once we had more favorable markets. I believe Vinci is very well positioned for this new cycle and we could not be more excited about the future ahead. Interest rates are going down and foreign sentiment towards Brazil is going up. Fitch ratings recently raised Brazil's credit rating, reflecting the improving economic outlook, federal budget control, and record trade balance results. The pro-rated rating connotes greater confidence in Brazil's ability to meet its financial obligations and attract investments and bodes well to a medium-term investment grade that could be highly impactful. For instance, we are two notches away from the investment grade. Based on past cycles, we expect to be awarded with the investment grade by 2025. This would mean a sizable flow from foreigners into Brazil across all strategies. Last time, we had an investment grade, international capital held more than 20% of the domestic Brazilian debt. Today, this number is close to 9%. Given that the Brazilian debt is roughly 70% of the GDP, we could see flows of more than 7% of the Brazilian GDP over the years following the recovery of the investment grade, representing an enormous opportunity to accelerate growth. It is worth mentioning that a significant part of price moves take place before the investment grade stamp is awarded. Also, S&P just put Brazil in positive outlook. To close my remarks, let me provide an update on our fundraising efforts going forward for our closed-end funds. The ICC, our climate-oriented fund in infrastructure, continues to observe lots of traction with Institutional OPs. We should see new commitments coming throughout the second half of the year, and the fund is on track to reach its target by the first half of 2024. VCP IV just closed in July, an important capital raise with XP that will contribute to third-quarter numbers. We also should see new commitments from local institutional players in the second half of the year. And then for the last and potentially more meaningful round of fundraising should come from our international piece, which we are aiming at the end of VCP's Fundraise. Raising capital for traditional private equity funds has been a challenge for all of our global peers. We expect to see improvements on this front in the beginning of next year. Meanwhile, we have been experiencing an increase in appetite from local institutional players towards alternatives. This reinforces the ongoing shift from Brazilian players towards alternatives. We are seeing this in an environment of historically high interest rates. With the easing cycle, we should see a pickup in this trend. Momentum is great for all of our strategies and we are excited for the coming quarters. We will continue to work on delivering on all fronts we have discussed today and we'll keep you posted as we go along. Thank you for the attention and for attending our call today. With that, I'll turn it over to Bruno to go over our financial results.

Thank you, Alessandro, and good afternoon everyone. Starting on Slide 9, we will cover AUM trends for the second quarter. Vinci ended the quarter with R$65 billion in AUM, up 9% year-over-year driven by growth in our private market strategies over the last 12 months and appreciation markups across liquids and our REITs. Long-term AUM accounted for R$33 billion in the quarter, increasing 20% year-over-year, pushed by the appreciation in the REITs and our new capital commitments across private equity credits and now represents more than 50% of Vinci's total AUM. This quarter, our AUM was positively impacted by market appreciation. For the past two years, we added long-term commitments into our private strategies through organic and inorganic expansion, and this effect was partially offset by market depreciation across liquids. Now we have started to benefit from the early stages of what we believe will be a very positive outlook ahead of us. During our last earnings call, we talked about how the depreciation in the REITs market affected us, and we anticipated that they should recover this quarter. At the end of the second quarter, our REITs have more than fully recovered. Looking across our REIT universe, some have surpassed the threshold where they become eligible for future capital raises. With that said, we expect to see follow-ons in our listed REITs in the second half of the year and even more next year. For the last two years, with rising and very high nominal interest rates in Brazil, primary issuance in the REITs was not possible. We bridged this period with creative, although lower volume share for assets swaps. The REIT vertical has been a meaningful contributor to our fundraising in the past through significant primary issuances, and we are very happy to be at an inflection point where this contribution would once again be expected. We already have new issuances slated for the second half of the year. As previously mentioned by Alessandro, we will be active in the second half of the year with our two main private equity style funds currently raising capital VICC and VCP IV. VCP IV just held a closing with XP that will impact third-quarter numbers as this fund will charge retroactive management fees on all subsequent closes until its final close. We are seeing great traction from locals for VCP IV and this will be the biggest allocation from local investors since the inception of our VCP strategy. Apart from this closing with XP, we should see new commitments for VCP until the end of the year. As we anticipated, international investors would be more impactful towards the final closing of the fund as they continue to digest global overallocation to the asset class. For VICC, we expect to see new commitments both in the third and fourth quarters backed by international investors. The amount of traction obtained in this product was significant with the first close of the fund representing more than 60% of the target amount. Even in positive market conditions, this would have been a great result. In the current environment, this result is remarkable and a merit of the quality and track record of our infrastructure team. On a side note, we are on track to launch VIR V and SPS IV by the end of the year. This should be our next focus for new capital in private markets and carry our fundraising efforts in 2024. Moving on to Slide 11, we go over accrued performance fees in our private market funds. Gross accrued performance fee receivables accounted for R$180.6 million in the second quarter, up 16% quarter-over-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 in SPS and VIR, we expect the source of potential future performance fees from our private market verticals to be diversified in coming quarters. Turning to Slide 12, we will cover our fee-related revenues. Revenues from management and advisory fees totaled R$106.8 million in the quarter, up 11% year-over-year due to a combination of factors. First, the ongoing fundraising across private market strategies for funds that carry full fees and we increase our average free rates, once we close this fundraising cycle; second, the acquisition of Vinci SPS; and third, a higher contribution from advisory fees in this quarter. We should see a continued positive trend coming in the next few quarters following new capital raises across our private market segments. For VCP IV and VICC, we have another important contribution. As managed, additional capital commitments in these funds will retract fees to the date of the fund's first closing. VCP's first closing was in the middle of 2022, and the impact of future closes could be meaningful. In slide 13, we present our operating expenses for the quarter and year-to-date. Total expenses accounted for R$61.4 million in the quarter, up 22% year-over-year. Excluding bonus compensation, operating expenses were up 10% year-over-year, driven mostly by the acquisition of Vinci SPS. On a more normalized base, total expenses were R$113.5 million over the year-to-date, an increase of 15% compared to the same period last year. Moving on to Slide 14, we go over a few related earnings for the quarter. FRE totaled R$50.7 million or $0.94 per share in the quarter, up 11% year-over-year on a per share basis. Over the year, FRE was R$100 million, up 10% compared to the first half of 2022, driven by the strong AUM expansion, our private market strategies, and the higher contribution from advisory fees in the second quarter of 2023. Over the next quarters, we should see a positive impact in FRE coming from retracted fees following new commitments in VCP IV and VICC. As those fees retract from the beginning of the fund, they could be relevant additions to management fees. Despite a harsh environment, we were able to maintain margins with disciplined cost control. We expect that concluding this fundraising cycle for private markets and with a better outlook for local markets, we should start to see improvements in margins given the leverage potential of our platform. Turning to Slide 15, we'll cover our performance-related earnings. VRE totaled R$5.4 million in the quarter, an increase of 124% year-over-year, driven by contributions from Liquid Strategies. Although posting modest results, we want to highlight the potential for performance fees from this moment onwards. Most of our funds carry high-watermark clauses, which inhibit them from charging fees on the dull market. With the recent appreciation of the liquids market, our funds are getting close to their high-watermark, therefore becoming eligible to charge fees once again. With the current market appreciation and the good outlook for loser monetary policy in the second half of the year, we could once again show more meaningful PRE results in the fourth quarter, potentially into 2024. Shifting to Slide 16, we go over our realized GP investment and financial income. Vinci had R$34.4 million realized GP and financial income this quarter, up 38% on a year-over-year basis due to a good quarter for a liquid portfolio following a constructive local environment. Over the year-to-date, realized GP and financial income totaled R$60.3 million representing an increase of 16% compared to the same period last year. Turning to Slide 17, we go through our adjusted distributable earnings. Adjusted distributable earnings totaled R$70.4 million or R$1.30 per share, up 18% year-over-year, backed by a higher contribution from financial income, PRE, and FRE. Adjusted DE totaled R$130.4 million or R$2.40 per share over the year-to-date, up 12% when compared to the same period last year. Moving on, I would like to cover our balance sheet highlights in Slide 18. As of the second quarter, Vinci had committed R$1.1 billion to proprietary closed-end funds. These commitments will work as seed investments in our funds to leverage fundraising with LPs and drive future growth in private markets FRE results backed by long-term capital. These commitments also represent a relevant medium to long-term potential return as the realized gains from these funds will be recognized as realized GP investment income in our quarterly earnings. Considering that private markets funds have above average target returns, this could be extremely relevant to earnings in the future. Lastly, I would like to touch on a topic we talked about last quarter. We have proprietary positions in several REITs that suffered from market depreciation last quarter, resulting in a negative impact in our net income. Back then, we anticipated that these funds could recover in the second quarter. We would like to share that these funds have more than fully recovered over the second quarter, which explains the strong accounting net income this quarter. And with that, I will turn it over to Sergio to go through our segments.

Thank you, Bruno. Turning to our segment highlights. As you can see in slide 20, our platform remains highly diversified, which we believe to be the main contributor to the resilience of our business. Disregarding investments made in the VRS segment, 59% of our FRE over the year-to-date came from our Private Market Strategies, followed by IP&S and Liquidity Strategies with 16%, and Financial Advisory contributing with 8%. The same level of diversification is reflected in our segment distributable earnings. Moving on to each of the segments. Starting with our Private Markets Strategies on Slide 21. FRE totaled R$29.8 million hires in the quarter, up 23% year-over-year, driven by the strong fundraising cycle experienced over the last 12 months and the acquisition of Vinci SPS. Please note that as previously mentioned by Alessandro and Bruno, we should see new commitments coming from VCP IV and VICC over the next few quarters that will positively impact management fees, both from a recurring standpoint and one-off basis due to retroactivity fees that new commitments trigger for the start of the fund. Segment Distributable Earnings were R$35.4 million in the quarter, an increase of 17% year-over-year, boosted by FRE growth. Total AUM was R$29.4 billion at the end of the quarter, up 22% year-over-year. Moving on to our IP&S business on Slide 22. FRE totaled R$7.8 million in the quarter, down 32% on a year-over-year basis. Even though our AOM numbers remain consistent year-over-year, we experienced a shift in the allocations with IP&S. The IP&S segment as in the last 12 months raised capital from exclusive separate mandates, which carry a lower fee rate, while suffering punctual redemptions in our open-ended products that are offered to individual investors through distributors and platforms. This shift in the AUM mix impacted management fee revenues on a year-over-year basis. Nevertheless, we expect IP&S to benefit from the current improvement in the macroeconomic environment, as institutional investors tend to seek assistance in meeting their material goals when rates stabilize at a more constructive level. With that said, we should expect a pickup in AUM numbers between the end of 2023 and through 2024. Moving on to Slide 23, we go over the results for Liquidity Strategies. Fee-related earnings in the quarter of R$8.1 million down 15% year-over-year. Total AUM was R$11.5 billion at the end of the quarter, with AUM being backed by favorable market-to-market effects, which were concentrated in the later part of the quarter. The same phenomenon I described for the IP&S segment we can attribute to our liquid in this quarter. As we have also experienced fundraising in its majority for exclusive mandates that carry a lower fee rate than the flagship strategy. These were the main reasons that upheld a lower FRE with AUM improving on a year-over-year basis. We expect to see a pickup in management revenues over the third quarter following this recent appreciation that occurred in the end of the second quarter. On a broader spectrum, Liquidity strategies should benefit from this easing cycle started last week by the Central Bank as we expect investors to be more inclined to allocate capital towards public equities. That should take a few quarters to materialize. On a last note, I would like to cover the PRE potential with Liquid Strategies. Since our IPO, we faced volatile public markets, which inhibit us from charging performance fees in several funds that carry a high-watermark clause. Now, with the recent pickup in local markets aligned with the good outlook ahead of us, we could be once again impactful for performance fees in the end of the year. Turning to Slide 24. We cover our results for Financial Advisory. FRE for Financial Advisory was R$7.1 million in the quarter, up 119% on a year-over-year basis. This quarter we were able to close a few mandates that contributed to an increase in advisory fees. For the year-to-date, FRE totaled R$8.6 million, representing an increase of 118% compared to the same period last year. Finally, moving on to Slide 25, we go over results for the Retirement Services segments. Fee-related earnings for the quarter were negative R$2 million, and over the year-to-date represented negative R$3.6 million. We officially launched the products this quarter to our partners and employees, and we are expanding to our high net worth investors base throughout the second half of the year. We are very optimistic and excited about the prospects for VRS. However, as we have been discussing over the past few calls, we should only see manifold numbers next year. That's it for today's presentation. Once again, we'd like to thank you for joining our call. With that, I'd like to open the call for questions.

Thank you. We'll now start the question-and-answer session. Our first question comes from William Barranjard from Itau BBA. Please, Mr. William, your microphone's open.

Good night everyone. Thank you for the opportunity and congratulations on the good quarter. So from our side, I have two questions. I'll start with the first one, and then I'll ask the second. So the first one is on liquid strategies and REITs. You showed good performance in AUM this quarter, but they're mainly from the appreciation of the AUM, right? So for REITs, you already told us that fundraising is already loaded, but I would like to grasp here what is the impact you see in nominal terms, if you could, in terms of inflow and fundraising. And I know for liquid strategies it's a little bit harder to predict, but if you could also give us a view on that, it would be nice?

Thank you, William. This is Bruno. As you mentioned, liquidity is somewhat unpredictable. Our focus is on performance. The good news is that both our liquid equity funds and the commingled funds within IP&S are currently performing well. Our equity strategies are in the top quartile, and the commingled funds in IP&S are likely in the top decile or at least the top quartile, with very strong numbers. Following the first interest rate cut, we saw immediate positive flows for equities, which have not been sustainable for a while in IP&S. Given the performance of the commingled funds, we anticipate that trend will continue. Funds are well positioned, and we are seeing positive flows. We expect these flows to increase as interest rates decline. REITs are also crucial for Vinci's fundraising potential, an area we've missed significantly in recent years. As Alessandro noted in his remarks, during the last positive cycle in the first half of 2021, we raised nearly $2 billion. Currently, we have a diverse array of funds in the REIT sector, including agriculture, credit, shopping malls, logistics, offices, urban rental income, and an MLP in infrastructure. These products are well positioned for capital raising, with total assets under management approaching R$7 billion. This indicates substantial potential for organic AUM inflows. We anticipate initial inflows from new capital in the second half, potentially around R$1 billion, if conditions are favorable. Looking ahead to 2024, we expect inflows from REITs and the MLP to significantly contribute to our AUM growth, which has not been the case in recent years.

And William, this is Alessandro. Just to complement Bruno's answer, just a brief comment. This fundraising for the REITs, they go straight to our waterline because this is really the management fees with no cost associated in terms of people and teams. So this is really a very immediate impact on our numbers.

That's very clear, Bruno and Alessandro. Thank you. Now, if I could ask a second one. This one on the FRE margin, it decreased a bit this quarter, I guess mainly due to a shift in the fundraising and fee mix in both IP&S and liquid strategies. Is it right? Is that right? And if so, could you elaborate more on that helping us understand here, what you expect ahead in terms of mix and margins on these strategies?

Okay, it's Bruno again. The reason why we had this shift in the margin in the second quarter was mainly given the fact that we had very strong advisory quarters in relation to the rest of the business. And then that creates a little bit of a shift from a bonus composition standpoint. So the bonus provision is a little bit higher when we have this type of mix in the revenue right. Going forward, it's very difficult to say when the advisory business is going to have a strong quarter like this one, but the mix will have some impact on the bonus provision side. The company, we underwent a productivity effort now in the beginning of the year that we were able to curb some of the cost escalation that we had. So if you look at the corporate center costs on a year-on-year basis, we're basically flat. So it was a very good performance on that side of the business. And now with inflows accelerating, hopefully that's going to happen in the next few quarters, we expect to be able to show more material cost leverage, right? So the idea is really to be very focused on expanding margins going forward. And as Alessandro said, the REITs are a good example, but this is true for most of our business lines. The structure that we have can absorb additional incremental AUM with very limited cost addition. So the expectation is that as we accelerate the fundraising, we'll be able to begin the gain in margins as well.

Thank you, Bruno.

Our next question comes from Ricardo Buchpiguel from BTG Pactual. Please Mr. Ricardo, your microphone is open.

Hi, I have two questions on my side. Looking at Q3 dynamics, given the better inflows that you already mentioned in terms of REITs and liquid strategies, the appreciation of the AUM for the full quarter, and more private market closing especially with the retractive fees, it's reasonable to expect the expansion in FRE quarter-over-quarter and also related to FRE, we'll notice a strong increase in the advisory fee business recovering from the levels a little bit that it had in the prior quarters. So I want to understand a little bit if we should see advisory fees running with double-digit revenues in the following quarters, given all the capital markets improvement. And then I ask my second question. Thank you.

Okay, Ricardo. So going to your two questions, the impact on the management fee revenue for the third quarter can be relevant. So we have visibility today of at least R$1 billion between VCP and VICC that are being closed in the third quarter. I would say probably 60% to 70% of that would be related to VCP, and 30% to 40% of that related to the VICC. VCP's AUM are going to retract a full-year. So it can be a number north of R$10 million, let's say in terms of impact from those two effects. So those could have really a meaningful impact on the numbers in the quarter. In regards to advisory, quarter-to-quarter is very tough to forecast, right? So we tend to look at this more on at least a two or three-quarter rolling basis because the timing of closing of deals is very difficult to predict. What I can tell you is the following. Today our pipeline is over R$100 million in terms of the total pipeline for M&A. On the M&A side, the advisory business and usually we expect this to be realized in a period between three and four years. If the capital markets activity continues to improve, we can eventually pull forward some of these mandates and close them quicker. So that would obviously be a positive impact on our short-term numbers, but on average, we are still seeing at least at this point in time, what we had guided to you guys in the past, which has been a number in terms of advisory, between R$30 million and R$40 million per year. So that continues to be the expectation for 2023, but without really being able to say how much of that will fall in the third quarter or in the fourth quarter. But we expect to do within that range of R$30 million to R$40 million on a normalized basis, right. So that would be expectation for a 12-month rolling basis with the level of backlog that we have today in that part of the business.

Very clear. And if I may have another follow-up, with the capital markets becoming more active, we have observed a lot of investment exits by private equity funds. So could you explain a little bit more how the rules for the funds of Vinci to begin paying performance fees in private markets in particular if there are any catch-up rules, any sort of particularity about this process? And also comment a little bit about the difference in impact that we should have in terms of accounting and income and distributable earnings, given that your book and realized performance fees? Thank you.

Okay, so let's divide here between the liquids and IP&S side and the private. Liquids and IP&S is what we discussed in the call, right? So we have a report, internal report. There is a watermark report that we track on a weekly basis, if I'm not mistaken, where we see the distance of our funds in general to their respective watermarks. And what I can tell you now is that we are at the money, right? So that means that any outperformance that we have for most of the strategies of the company, we are going to earn performance fees. This is a number that if you go back to 2018, 2019, 2020, we had R$40 million, R$50 million, R$60 million of performance revenues coming from the liquid side of the business, which again, as the case of the retail AUM in the past couple of years was very small, right? So we didn't have this contribution, which given the levels that we have today in the market, they can be more meaningful going forward, right? In terms of the performance for the private side of the business, typically what we have is a structure where we pay carry on a European waterfall basis, right? So what that means is that we need to return to RLPs, their full capital with the opportunity cost, right? And then depending obviously on the index and on the currency. In the case of the international capital, usually it's dollar plus eight preferred return. In the case of the Brazilian fundraising, it depends on the fund, but it's between 6% and 8% plus inflation. So once we return 100% of the capital plus the preferred return rate, we're eligible to start both accruing on the balance sheet and also receiving performance fees. The accrual on the balance sheet, what we have in terms of historical conversations with our auditors is that we're going to start recognizing those performance fees in our balance sheet once the probability of them being materialized becomes very high, which means having already surpassed the preferred return with the full capital realization. So today, we only have one of our funds in that situation which is our FIP Infra, which is a fund that we already returned 100% of the capital, and we have booked the current mark of the asset that is remaining in the fund on our balance sheet which is also in the presentation. It's a number around R$80 million that is booked in our balance sheet as performance, right? We have that in one of the slides. When we recognize, when we sell this asset, and this asset is currently in process of being sold, we are already in due diligence phase to sell the asset. Once this asset is sold, we're going to recognize the performance fees and lower the amount of receivables that we have on the balance sheet. In addition, and this is going to be the first time that we're going to have a material impact coming from the side of the business as well. This fund had GP investment in it, one of the private funds that we had GP investments. So it's going to impact both lines. We are going to revert the receivable in the balance sheet as performance fees and on top of that, we're going to realize the gain in our distributable earnings that is currently obviously in our cash position but booked as unrealized. So those will be the two impacts. So that's how we would expect this to happen. So we need to have capital return, full capital return, put a preferred rate, then the gains going forward will be accrued as a receivable on the balance sheet and impacting our income statements as unrealized performance fees. And then once we exit, we realize and they impact our distributable earnings.

Very clear. Thank you.

Our next question comes from Tito Labarta from Goldman Sachs. Please Mr. Tito, your microphone is open.

Hi, good evening, Alessandro, Bruno, Sergio, and Anna. Thank you for the call and for taking my question. I want to follow up on the FRE margin to ensure I understand the explanation correctly. Bruno, if I understood you right, you mentioned that the increase in advisory contributed to this. However, the FRE margin for financial advisory was actually higher this quarter compared to the first quarter. It seems that the main decline in IP&S and the slight drop in private markets are notable. You explained that the IP&S decline was due to the mix. I would like to better understand the decline in the private markets FRE margin and whether we can expect it to return to the level we saw in the first quarter to clarify the quarterly dynamics a bit more.

In the first quarter of 2023, we saw a closing for VCP IV where we adjusted rates, which led to a one-time revenue management fee that was recognized in that quarter but not in the second quarter. This significantly impacted our private market performance when comparing the quarters. Additionally, with no similar revenue in the second quarter, there was some cost de-leveraging, which slightly affected our margin. For IP&S, we experienced an impact stemming from the second quarter of last year when our patient plan funds reached peak exposure of around R$3 billion in AUM. This product has a high fee structure, but we withdrew over half of that capital because the fund consists of a mix of equities and fixed income, and we faced poor market performance in the latter half of last year, leading to lower fund performance and withdrawals. Consequently, while AUM dropped in single digits year-over-year, revenue fell more significantly due to losses in those high-fee pension plan funds. Last year, the average fee rate for these funds was in the high 30s, while this family of products typically carries an average fee of 1%. The withdrawal of funds, paired with new separate mandates, affected our fee rate, leading to cost de-leverage and margin impacts. Looking ahead, we expect the impact of upcoming closings in private markets—such as REITs, VICC, and VCP—to shift positively, bringing in one-time fees and higher carry fees as AUM increases, which will help us manage costs better. On the IP&S side, we're seeing gradual improvements in daily flows without the significant one-time impacts seen in private markets. Thus, the second quarter comparison is challenging as we are juxtaposing a peak allocation with a low allocation, which we anticipate to be the case in the second quarter of 2023.

Okay, great. Thanks for clarifying, Bruno, I think that's pretty clear. So you could have some retroactive fees again in 3Q, it sounds like. So that could boost a little bit there FRE margin for private markets and just on the IP&S. So is a more normalized margin for IP&S around this mid-40% range that we saw, I guess in 1Q and 2Q, not the 50% something that we saw last year?

Hopefully, we can return to that level. It will depend on the mix of products we develop moving forward. The encouraging aspect is that the contributions to the pension plans are increasing. Since those plans carry higher fees, the potential for fixed cost dilution is significant. The team will remain unchanged, which is crucial. Whether the IP&S team manages R$20 billion or R$30 billion, it will still be the same team. There will be some bonus provision, currently running at about 19% to 20%, with the remainder being FRE. Therefore, the leverage we experience will be closely tied to the amount of AUM and the fee rate we maintain. Depending on the revenue base, it could return to the levels we had last year.

And Tito, this is Alessandro. To emphasize Bruno's point, over the past year in IP&S, we faced challenges. We experienced some redemptions from retirement and pension products that cater to retail clients, which are influenced by retail decisions. These products have higher fees but are also more volatile. We have been offsetting this in terms of assets under management by attracting more institutional money that comes with lower fees. Looking ahead, we are already noticing a shift in retail flows towards a more positive direction, but we are also observing increased inflows and requests for proposals from institutional investors. Therefore, we anticipate growth in assets under management from both retail and institutional investments. We believe institutional growth will lead, but retail is also improving, which carries higher fees. This may enhance the margin and average fee across the segment, but it's challenging to predict exactly how this will unfold moving forward.

Okay, great. That's very clear. Thanks, Alessandro and Bruno. And if I can ask the second question, more on the performance fees. Alessandro sounded like you sounded optimistic, but you could potentially realize more performance fees in the second half of the year, maybe towards the end of the year. Did I read that correctly? Would that be more like towards the end of the year? And on the PRE margin? Typically it's around 65%. This quarter fell to 50. Just understand whether the amount you paid from the performance fees was higher this quarter?

We anticipate an increase in performance-related earnings, particularly in the fourth quarter. With our liquid strategies reaching or exceeding the high-water mark, any additional returns will incur performance fees. Additionally, in the private market, several funds are already generating performance fees, including the Infra fund. This is expected to influence our fourth quarter results. Specifically, in terms of margins, during the second quarter, we saw positive performance from a particular strategy in our liquid segment, which resulted in a larger portion of the performance fee being allocated to our team. This is why we experienced a lower margin in PRE for this quarter.

Hi guys, thank you very much. Most of my questions, they were already answered, but I have one regarding inflows, when we check the June data agreement, we see more inflows, I guess this quarter you have the figures and ex-IP&S I guess most of your strategies, they are performing well. So just an outlook here for the second half, if you are expecting like you already have July on your plate, right? So just checking how you're seeing flows for the second half, if we should see an acceleration on inflows and especially if we need to see a certain level of Selic for you to start to see things getting more material. So, just checking how you're seeing things. And the second question is if there is a Selic going to low double-digits, single-digits, that would be where you believe deceleration may gain more momentum? Thank you.

Hi, Yuri. This is Alessandro. Thank you for the question. Yes, we are seeing more inflows as we mentioned, especially in July and et cetera, there are subsequent numbers that we already mentioned regarding the private market strategy, especially the private equity VCP IV with this XP and some others fundraising efforts that will be materialized in the third quarter and also VICC that will continue over the rest of the second half where we really expect this to pick up. As we mentioned again, we saw a lot of interest and the numbers slowly being positive for equities and also for some IP&S strategies. So yes, we expect the inflows to improve already in the second half of the year. Okay, to your second question regarding a level, we believe that when we will have on the high single-digit Selic that will be really an environment that we expect a very strong growth in terms of AUM across all of our strategies. Because that will translate in real interest rates that will turn a lot of our products that now we are in a very good position since they are in the first quartile of their benchmarks of the peer groups. We could really take advantage of that position when the Selic rate is in a more normalized level. Of course, we'll see on the second half and next year already a good inflow, but when we see something under 10% or high single-digits, around 9% and 9.70%, really, we expect that to pick up strongly in all of our investment strategies. So, I would like one more time to thank you for your support, your interest and say that we are becoming increasingly more optimistic with the next few quarters. The environment is much more benign. And we are seeing this improving going forward. And we are very, very well positioned to capture this opportunity right now, not just because of capabilities, our capacity, our deep knowledge of all the verticals, but also because the funds are performing relative to the peers, really in a good shape. So we expect you in the next few quarters. So thank you very much and have a good night.

Vinci Partners conference is now closed. We thank you all for your participation and wish you a very good night.