Earnings Call Transcript - VINP Q1 2023

Operator, Operator

Good afternoon, and welcome to the Vinci Partners First Quarter and Full Year 2022 Earnings Conference Call. 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, Investor Relations 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, a slide presentation, and 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 final reconciliations in the release. Also note that nothing on this call constitutes an offer to purchase an interest in any Vinci Partners fund. With that, I'll turn the call over to Alessandro.

Alessandro Horta, CEO

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 totaled 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 totaled 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 9th 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 fundraising across private markets in the latest quarters remains one of the benchmarks for our successes and has driven growth for the entire platform. Even in the tough macro scenario we have been experiencing in the last few quarters, which I believe to be one of our significant achievements. We ended the first quarter 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 observed a lot 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. 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 at the beginning of 2022. Since then, in approximately one 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 at the end of the year. VIR IV divested from Prime Fusion last year, crystalizing an 83% gross IRR in U.S. dollars from the investment, bringing the fund to a 0.4 DPI. Likewise, VIR has been delivering strong numbers as their second vintage has already distributed to its investors more than 75% of the funds committed capital while achieving a gross fund level IRR of 31% in dollars as of the first quarter of '23. Both funds delivered these results in a stellar two-year window remarkably early in their lifetime. This should be an important addition to our private market fundraising pipeline as strong results point to good support from existing investors for new vintages. On a final note, I would like to give a quick update regarding our Retirement Services Segment, VRS. We successfully launched the product at 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 significant contributions 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 have already navigated difficult environments in the past, particularly during the period from 2013 to '15 when we experienced in Brazil a significant increase in interest rates, with the Central Bank hiking annual interest rates from 7.5% to 14.25%. Back then, the even cycle started only in 2016. During that period, Vinci held its fort with resilient AUM numbers growing from BRL 17 billion to BRL 19 billion over the year span. Since our IPO in early 2001, we have encountered similar conditions as those from '13 to '15 and as the Central Bank started the current interest rate hike from 2% in mid-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 of fundraising for 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 at our private markets growth over that period, considering 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 have expanded by 44% and 66%, respectively, from the fourth quarter of 2020 to our current number this quarter. We are extremely proud of what we have been able to achieve in private markets and believe this performance can be replicated across the rest of the platform as market conditions become more favorable. We firmly believe today, we are seeing a similar scenario to that at the beginning of 2016. During the years leading to that year, Vinci invested heavily in its platform, positioning 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 at 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 we posted stellar FRE margin expansion, posting close to a 20 percentage points margin expansion. We are extremely excited about the future ahead as we firmly believe there is another easing cycle just around the corner, and we are today in a better position than in '16, as our 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. Additionally, a favorable environment will likely be a key driver for us to become impactful on the liquid front. Looking at our broad platform, we are very excited about the growth potential ahead 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 to the initial version. This is a clear indication that pragmatism is leading the government toward the center of the political spectrum in terms of economic policy with lower fiscal risk. Inflation expectations for the coming years are starting to stabilize within the inflation target band, opening room for an easing cycle in the second half of 2023. Market expectations are pricing cuts of around 400 basis points until the end of 2024. We understand that our business encounters different market conditions throughout the years. Our mission is to be resilient in the tougher times while driving transformational growth during the positive ones. This attests to 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 at the beginning of a cycle of decline in interest rates in Brazil that should drive attractive growth for the company across all initiatives we described today. The growth we were able to achieve in private markets since our IPO, against the historical interest rate tightening cycle, showcases the potential to increase penetration of alternative investment assets in Brazil, where current allocations are still in the low single digits as a 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 environments paves the way for expansion in favorable ones. With that said, we are digging deeper into our platform from both a cost and product offer standpoint to be ready to exceed expectations in this upcoming cycle. With that, I'll turn it over to Bruno to go over our financial results.

Bruno Zaremba, Private Equity Chairman and Head of Investor Relations

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 SPS. Our long-term AUM accounted for BRL 31.3 billion in the quarter, increasing 19% year-over-year and currently representing roughly 50% of Vinci's total AUM. This is a direct result of our efforts in private market strategies as they carry AUM with longer lockups. The highlights of this quarter's fundraising were the first close held by Vinci Climate Change, where we're 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 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 faced challenges 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 effects in these two asset classes. The listed REIT industry, in particular, was heavily impacted by mark-to-market effects during the first quarter but has rebounded 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 commitments in our income statement in the second quarter if the REIT market recovery we are seeing in April and 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 will put us in a better position to resume fundraising for these products. The past few quarters have been a challenging period for our liquid strategies. We have seen 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 and favorable mark-to-market 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. This comparison was made using the 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 diversify in the coming quarters. At the end of the quarter, Vinci had BRL 12 billion in performance AUM coming from private market funds still in the 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 BRL 100.3 million in the quarter, up 10% year-over-year. Management fees accounted for BRL 95.9 million in the quarter, also up 10% year-over-year. We expect to 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 of 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 the 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 toward cost efficiency. As we anticipated last quarter, we are heavily focused on cost consciousness this year, actively looking for efficiency across our platform. This resulted in an internal personnel restructure during the first quarter, which 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 contributions 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 the first quarter of '22, given the outstanding performance from our advisory segment throughout 2021, which did not occur in 2022 due to 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 will go over our realized GP investment in financial income. Vinci 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 cover 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 last year. Moving on, I would like to spend a few moments covering our GP commitments in Slide 20. As of the first quarter, Vinci had committed BRL 1.1 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 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 launch 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 achieved 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 on 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 turn equates to an expected 2.3x net for this capital over a five-year span. Net of fees and taxes, this represents potential profits of approximately BRL 1.2 billion to be realized from this commitment 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 five years. Over the short term, our proprietary positions in listed REITs are paying us predictable monthly dividend distributions that have contributed to our financial results. At the same time, these commitments have allowed us to issue more shares 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, 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 the 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 at 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, the following commitments will retroactively generate 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 at 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 contributions toward the second half of the year. Moving on to Slide 24, we go over results for liquid strategies. Fee-related earnings in the quarter totaled BRL 8.4 million, down 19% year-over-year as our management fee revenues were impacted by AUM depreciation. Total AUM was BRL 9.8 billion at the end of the quarter, with AUM being resilient against outflows compared to the Brazilian industry for liquid strategies. As an example, according to public data, the public equity industry in Brazil had close to BRL 19 billion in redemptions this quarter, or 4% of the total AUM. Meanwhile, Vinci's public equity segment posted BRL 18 million in inflows over the first quarter. We are reaping the benefits of our strong relationship with our clients. As previously mentioned by Alessandro, with an 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 from both inflows and appreciation standpoint. That should happen toward 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 IP&S business on Slide 25. FRE totaled BRL 9 million in the quarter, down on a year-over-year basis. Over the last 12 months, FRE totaled BRL 41.1 million, up 3% compared to the same period last 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 slower growth pace for our IP&S business. We expect a pickup in AUM numbers for IP&S as institutional investors have stronger incentives to seek assistance in order to outperform their actuarial 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 last year, as we experienced a stronger year for our advisory business in 2021. Although it's uncertain 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 were negative BRL 1.5 million, and over the last 12 months, they represented a negative BRL 6.1 million. As Alessandro mentioned earlier, we 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, we expect this number to become more relevant to the business next year. We are very optimistic and excited about the prospects for VRS and we will 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

Our first question comes from Daer Labarta from Goldman Sachs.

Daer Labarta, Analyst

I have a couple of questions regarding the fundraising outlook. I understand you're halfway through with the private market strategies, and although you've mentioned that you're entering an easing cycle, this cycle might not be as robust as the previous one, correct? Rates could be around 12 by year-end, but I’m uncertain how that will play out next year. What kind of rate reduction do you believe is necessary to generate more interest in the liquid strategies? Specifically, do we need to see rates drop to single digits, especially considering the current situation in Brazil? Additionally, regarding the IP&S strategy, which experienced significant growth last year, it faced some outflows this quarter. Could you clarify what led to those outflows this quarter and how you envision the evolution of that strategy moving forward?

Alessandro Horta, CEO

This is Alessandro. Thank you for the questions. To begin with the fundraising for private markets and its relationship with rates, I believe that we will witness stronger flows not just for private markets but for all our asset classes when we begin to see the start of an easing cycle. This is likely to happen, though perhaps not as quickly or strongly as in previous cycles, with targets in the high single digits. As we anticipate these rates lowering to high single digits, we expect a significant movement of capital. We are already noticing some dislocation in that direction. However, in the second half of the year, as rates start to decline nominally, even if not dramatically, we will likely see investment shifting towards our asset classes, particularly private markets. For instance, we expect the REIT market in real estate to recover and additional investments in infrastructure. These developments should begin in the latter part of the year. For a more substantial movement, we do need to see rates align with our high single-digit target. Regarding the question about IP&S, I'll address that as well. In the last quarter, we experienced redemptions mainly from products sold through retail channels. However, this isn't particularly significant, and we are already noticing a stabilization. We foresee that the largest inflow into IP&S will occur alongside the commencement of the easing cycle, as pension funds and institutional clients begin to reallocate from pure fixed income to rebalance their portfolios. Recently, we observed more redemptions from funds distributed through retail channels, but going forward, we expect that the largest flow will come from institutional clients returning to more structured portfolios.

Daer Labarta, Analyst

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

Alessandro Horta, CEO

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. So it's really recent. We are starting the activity of fundraising with our high net worth clients today. So we are starting to see this AUM come in, but we are still managing a very careful approach in terms of clients that we are reaching now. We will evolve that to other pools of capital by the end of the year, but we expect it to be relevant in our numbers just next year when we start going for other pools of capital, such as corporate plans and more distribution channels. Until the end of the year, we will start to see the numbers picking up very slowly because it's our intention to really have a soft opening for this strategy, as everything is really new and has just gone live recently. There is a lot of technology that we have invested in that we believe will be transformational for the industry. This technology, of course, we are evolving and testing with clients that are more like wholesale near us, and then we will evolve to a broader group of clients.

Operator, Operator

This concludes the question-and-answer section. I would now like to hand it back to Mr. Alessandro Horta for any closing remarks. Please proceed, Mr. Alessandro.

Alessandro Horta, CEO

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 our achievements over the last few quarters, especially in fundraising for private markets. We believe that as we move closer to the easing cycle, we will soon have another important growth path for the firm until the end of the year. Thank you very much, and hope to see you soon in the next quarter.

Operator, 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.