Earnings Call Transcript - VINP Q2 2025

Operator, Operator

Good afternoon, and welcome to the Vinci Compass Second Quarter 2025 Results Conference Call. 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 Luiza de Castro Santos, Investor Relations Manager

Thank you, and good evening, everyone. Joining us today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, President of Finance and Operations; and Sergio Passos, Chief Financial Officer. Earlier today, we issued a press release, slide presentation, or financial statements for the quarter, which are available on our website at ir.vincicompass.com. I'd like to remind you that today's call may include forward-looking statements, which are uncertain 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 you'll 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 Compass fund. On results, Vinci Compass generated fee-related earnings of BRL 65.2 million or BRL 1.03 per share, and adjusted distributable earnings of BRL 75.8 million or BRL 1.20 per share for the second quarter of 2025. We declared a quarterly dividend of BRL 0.15 on the dollar per common share payable on September 9 to shareholders of record as of August 25. With that, I'll turn the call over to Alessandro.

Alessandro Monteiro Morgado Horta, CEO

Thank you, Anna. Good evening and thank you all for joining our call. We appreciate you joining us. We are pleased to report another strong quarter for Vinci Compass marked by solid financial results, continued fundraising momentum, and the acceleration of key strategic initiatives across our platform. I'll let Bruno and Sergio dive into more details in our results for the quarter, but I wanted to take the time to summarize what I believe are the three key highlights for us and what they mean for our platform. When we take our distributable earnings, we can compose it by looking into three different components of value: FRE, PRE, and investment income. The second quarter posted healthy numbers for our FRE as we continue to bring in additional AUM from a diverse set of different strategies, with infrastructure, credit, and global IP&S being the highlights this time. Vinci Compass continues to grow by raising capital from an extremely diverse set of products, geographies, and investor channels. Shifting to PRE and investment income of our results, I'm very pleased to give attention to this because this is paramount to the value of the investments on our balance sheet and the future earnings power this brings to Vinci Compass. This quarter, in addition to the performance recognized across liquid funds in equities and credit, we had the realization of performance fees coming from one of our infra funds. FIP Infra Transmissao is a fund that was formed back in 2017 before our IPO, in which we made a small commitment from the company's balance sheet at the time and has been collecting its realized returns since 2022. This is the same capital deployment that we have been conducting at a larger scale since our IPO through commitments to proprietary funds using our balance sheet capital. First, we commit this capital to one of our funds, let's say, in private equity, infra credit, real estate strategies. We have a short-term impact on our FRE numbers with the fundraising leverage by this anchor commitment to the fund, which helped the product gain traction in the fundraising process and earn management fees for the company. Then we have a medium-term negative impact on our cash earnings as this cash, which was deployed into the fund, is not earning short-term financial income anymore because it has been deployed into this private market fund. Initially, the appreciation of the closed-end fund commitment is only seen in our net income results, not our distributable earnings. Finally, after the fund matures and returns capital to its LPs, we reap these benefits with capital return and capital gains and obviously, the performance fee recognized by the fund impacting our PRE. The consolidated impact of such events in FIP Infra this quarter to our cash earnings was BRL 50 million pretax. This quarter showed what this effect potentially means for our future as we realized gains from a small commitment made in the past that was not that significant when we compare it to our cash allocation after the IPO. We believe this is a crucial part of the value of the business, and we hope this quarter helps enlightening on this aspect in potential future results. This quarter brought significant accomplishments, and we are excited to share that we successfully executed a series of strategic exits across multiple verticals, clear evidence of our ability to capture value and deliver results in diverse market conditions. A key highlight was the aforementioned full divestment of the remaining asset in FIP Transmissao within our real asset segment, which was concluded in May. These milestones marked the end of a cycle that began in 2017 with the inception of this fund and set the stage for its liquidation, expected to occur 24 months after the closing date pending release of escrow reserves. Still in real assets, we completed the full sale of another asset held by one of our infrastructure funds, the perpetual vehicle VIGT. The transaction was concluded at a value above the appraisal report and contributed directly to the deleveraging of the holding structure. In the private equity segment, we also announced the full exit of Camarada Camarao, a casual dining business held within our Nordeste III fund. This marks the fourth exit out of six investments in this vehicle, further reinforcing our strong track record of realizations within our private equity franchise. On the deployment front, we remain highly active. In July, we closed the third investment of VCP IV AGV, a company in the Temperature Control Logistics segment, bringing the fund's capital deployment to approximately 40% of total commitments. The team continues to be highly active in origination with numerous opportunities currently under evaluation. Our focus remains on sectors such as financial services, business services, technology, media and communications, agribusiness, education, and healthcare. In parallel, we are closely monitoring opportunities in financially distressed companies, multinational carve-outs, and private equity portfolio businesses, areas where we see meaningful potential for attractive entry points and valuations. Valuations across public and private markets remain compelling, and market multiples have remained suppressed, especially in Brazil, with the Ibovespa currently trading at just 8x forward earnings, well below historical averages. This valuation backdrop becomes even more interesting when considered alongside recent macro developments such as the improving outlook in Brazil. The country is currently at the peak of its real interest rate cycle with clear signs of an inflection. One-year real interest rates reached historically high levels of 11%, but have already begun to decline, driven by easing inflation and gradual improvements in fiscal fundamentals. While cuts to the SELIC rate are expected toward the end of 2025, the yield curve has already begun to price lower rates. For instance, 10-year rates have fallen from above 15% to the low 14% range. The local equity market remains under-allocated, with equities representing just 8% of domestic portfolios, well below historical averages, suggesting ample room for reallocation as rate cuts take hold. We are also seeing a similar setup layout more broadly across Latin America. The recent weakening of the U.S. dollar has contributed to a more dovish tone from central banks in several countries in our region. In Chile and Colombia, policymakers are actively discussing or initiating interest rate cuts. In Mexico, the Central Bank has continued to lower rates with no indication of a pause at this point. The combination of improving inflation expectations and easing policy is helping to strengthen the macro landscape across Latin America, creating a favorable backdrop for alternative investments. A strong reflection of this environment is the performance of one of our LatAm equity funds, which delivered consistent results in the first half of the year, ranking in the top quartile. This is particularly meaningful as the fund represents a core fundraising priority for the Equities team over the coming years, given both the size of the opportunity and our current market share, which remains below what we consider our fair share. This is especially true among Chilean pension funds, which have historically been key investors in this strategy. Adding to this momentum, there is growing optimism around pro-market candidates gaining traction ahead of upcoming elections across South America, further reinforcing the outlook for equity markets in the region. We believe our Credit segment is also well-positioned to keep benefiting from this environment across both local and regional strategies. This quarter alone, we posted over BRL 2 billion in new capital formation and AUM appreciation within this segment. By capital formation, we are referring to a combination of net inflows and capital subscriptions, with contributions coming from a range of sub-strategies and geographies, reinforcing the strength and scalability of the platform we are building. Still on the fundraising front, we are delighted to announce the final closing of our Infrastructure Climate Change fund, the ICC, raising close to BRL 2 billion. The fund was launched after winning a public call for proposals by the Brazilian Development Bank, BNDES, with the remaining capital being raised primarily from reputable international institutions such as development banks and sovereign wealth funds from both Europe and Asia. Our deployment plan is to expand investments in the segment to reach 100 megawatts of distributed solar generation. We also intend to invest in larger-scale renewable energy projects and are currently in discussion about a potential utility-scale solar initiative. Other sectors currently on the fund's radar include energy storage, energy transmission, energy efficiency, 5G tower infrastructure, and data centers powered by renewable energy sources. On the corporate side, we recently inaugurated our new office in Sao Paulo, allowing Vinci Compass 133 team members based in the city to effectively be part of a virtual second headquarters office for the firm. This move follows the acquisitions of SPS, MAV, Lacan, and the combination with Compass Brazilian office, all based in Sao Paulo over the past few years. By fully integrating our teams and aligning daily operations, we can maximize collaboration and deliver the value these combinations were designed to create for our clients and stakeholders. We invite our clients to visit the new space when convenient. Before closing, I'd like to extend a warm invitation to our Investor Day, which we will host on October 7, at the NASDAQ headquarters in New York. This will be a great opportunity for us, including the heads of our strategies, to share a deeper look at our business units, long-term positioning, and key performance expectations for Vinci Compass going forward. We look forward to seeing you there. To wrap up, we believe we are exceptionally well-positioned to navigate today's dynamic environment on behalf of our investors. Our portfolios remain in excellent shape, and we continue to execute with discipline and focus across all fronts. Thank you again for joining our call. With that, I'll turn it over to Bruno.

Bruno Zaremba, President of Finance and Operations

Thank you, Alessandro, and good evening, everyone. We are proud to share that we had BRL 12 billion in capital formation appreciation during this quarter across different strategies, underscoring the breadth of our multi-strategy approach and the scalability of our distribution capabilities. Let's start with our Global IP&S business. As we had predicted in our first quarter call, outflows seen in the previous quarter were a passing trend and in the second quarter turned into positive and strong inflows totaling BRL 2.3 billion. The main drivers were TPD Liquid and Alternative strategies, with a notable contribution from Asian liquid managers funds, which attracted significant inflows from investors in Chile, Peru, and Colombia. We are also seeing growing interest in semi-liquid TPD funds, particularly among retail investors through the intermediaries channel. These funds are increasingly viewed as transformative and as an excellent entry point into alternative investments. They offer lower entry barriers, operational simplicity by eliminating repeated capital calls, and a balanced liquidity profile, sitting between open-ended daily liquidity and long-term lockups. We expect this trend to continue gaining traction in the upcoming quarters in the region. In addition to semi-liquid, we believe private debt and middle market funds will remain highly attractive to more sophisticated investors. Within TPD alternative, demand remains robust, and we believe this segment will deliver a strong year. Moving on to liquid credits, we saw continued strength in both our LatAm and Brazilian strategies during the quarter. Our LatAm strategy surpassed BRL 7.2 billion in AUM, supported by strong inflows from institutional clients in Chile and Europe. We've been highlighting since our last call the growing client interest in geographically diversified credit portfolios. This trend has accelerated as investors increasingly recognize the strategic appeal of Latin America, particularly given the region's insulation from the geopolitical conflict unfolding in Europe, Asia, and The Middle East. In this global environment, marked by elevated uncertainty and volatility, Latin America corporates stand out. We're seeing robust fundamentals across the region, with companies exhibiting low leverage, strong liquidity, and limited refinancing risk. These balance sheet dynamics, especially in strategically important sectors, are creating a compelling pipeline of investment opportunities for our team. In Brazil, our open-ended credit funds continue to gain traction with retail investors, particularly through intermediaries and private pension plans, across both liquid public debt and private credit strategies. On the closed-end front, we received new commitments across multiple strategies, including confirming unstructured credit vehicles, PEPCO II within diversified private credit, MAV III in agribusiness, and Credit Infra in infrastructure credits. As anticipated, SPS IV did not receive additional commitments this quarter due to the timing of the closings. However, we are already seeing very encouraging feedback from both global and Brazilian investors for the second half of 2025. This stronger engagement is underpinned by the growing appeal of alternative liquidity solutions, such as the monetization of contingent legal assets, which has been translated into increased use flow in the pipeline. At the same time, the overall risk environment has intensified, leading us to further elevate our due diligence standards. We are prioritizing transactions with stronger collateral structures, lower loan-to-value ratios, and exposure to more resilient sectors and business models. For the second half of the year, we expect continued growth from our credit segments. As we witnessed in the first half, we plan to launch a LatAm Fixed Maturity Corporate Debt Fund in Peru, the first of its kind, in partnership with a local multifamily office. In addition, we will introduce The Vinci Special Opportunities Fund, managed by our hedge fund team, with most of the capital coming from the recycling of the Argentina fund, which delivered an impressive track record and generated significant value to clients. More than 70% of the AUM in this new vehicle is expected to come from re-ups by clients of the Argentina funds. We're also preparing to launch a global USD conservative fund in Chile targeting high net worth clients. Shifting to private equity, as many of you know, our VIR team is preparing to launch the fifth vintage of our flagship strategy in the second half of 2025. We're encouraged by the early feedback from existing LPs, many of whom have already expressed interest in re-upping their commitments. In addition, as Alessandro mentioned earlier, Nordeste III, our VIR Family Fund announced the full exit of Camarada. Maintaining an active pace of realizations both for Nordeste III and VIR IV remains a priority for 2025. In our VCP strategy, the aggregate performance of our portfolio companies delivered over 20% year-over-year revenue growth and over 30% year-over-year EBITDA growth in first quarter of 2025. A standout highlight was Agibank from Fund III, which achieved over BRL 350 million in net income, representing over 60% year-on-year increase and setting a new quarterly record. These results underscore the strength of our disciplined investment process in generating sustainable and transformative growth at portfolio companies. As expected and discussed in our prior earnings call, we're seeing recovery of the gross accrued performance fees in our offshore vehicles, which had experienced a temporary negative impact from the depreciation of the Brazilian real. In the real asset segment, on top of the final closing of the ICC within infrastructure, we received capital subscriptions both in Lacan IV within Forestry and our Opportunistic Real Estate Funds. The primary focus for our Forestry vintage remains in international markets, particularly DFIs, in which we expect most of the commitments to come in the second half of the year. We also established a new Forestry sub-strategy in addition to Lacan IV, designed to capitalize on wood supply-demand imbalances. This vehicle targets Brazilian multi- and single-family offices and pension funds through a tax-exempt FIAGRO structure. To support our extensive fundraising pipeline, and in line with the DNA of Vinci Compass, we continue to strengthen relationships through our proprietary LP distribution channel. In June, we hosted the Vinci Compass Alternatives Week, bringing a delegation of single-family offices from Brazil, Colombia, Mexico, Peru, and The Dominican Republic to New York, for a curated agenda of meetings with leading alternative asset managers and technology firms. The program aimed to provide insights into global investment trends and explore opportunities across private equity, credit, real assets, infrastructure, and secondaries. The trip fostered meaningful dialogue between Latin American investors and sophisticated global asset managers, offering valuable perspectives on navigating global markets and effectively allocating capital across alternative strategies. Discussions focused on portfolio construction, diversification, and identifying long-term opportunities in an increasingly complex and dynamic environment. Finally, I would like to briefly update you on our recent operational advances. As Alessandro mentioned, we recently inaugurated our new office in Sao Paulo, now fully operational and providing enhanced technology to our teams. We also implemented cloud backup solutions for offices with local server infrastructure, such as a few that were brought in through the Compass combination, improving security and reducing operational risk. In addition, we completed the identification of our combined company Bloomberg accounts under a single contract, enabling better management and cost efficiencies. These are just some small examples of what has been done across finance, operations, and IT, and initiatives like these are expected to generate positive margin impact over the next 12 to 18 months. There are several such initiatives ongoing, and we will continue to update you as they take shape. Our original rich platform committed to technological evolution positions us to grow with discipline and lead in an increasingly dynamic and expansive market landscape. As we look to the remainder of 2025, we remain focused on delivering high-quality investment outcomes for our clients while reinforcing our role as a premier partner for alternative investments and global solutions in Latin America. As discussed so far, the level of product and solutions diversification available to our clients is second to none as we can provide capital allocation opportunities in Latin American countries in regional mandates and present curated global solutions, be it non-discretionary or on a non-discretionary basis. With this breadth of solutions available to our clients, we believe Vinci Compass to be the partner of choice in the region. With that, I'll turn it over to Sergio to walk us through the financial results.

Sergio Passos Ribeiro, CFO

Thank you, Bruno. Let me start with AUM and the impact of FX variation. We ended the second quarter with BRL 304 billion. As Bruno mentioned, we are very pleased with the BRL 8 billion in portfolio appreciation delivered by our strategies, along with more than BRL 3.5 billion in capital formation. However, because the Global IP&S segment is almost entirely priced in U.S. dollars, the 5% appreciation of the Brazilian real against the U.S. dollar during the quarter created a currency headwind to our reals AUM figure. This impact was partially mitigated by the fact that our other strategies are denominated in Brazilian reals, helping to smooth the overall effect in our AUM hold forward to a 4% FX rate variation. Even so, it generated approximately BRL 12 billion in negative variation, which offset the appreciation and capital formation achieved during the period. When we look into our AUM in U.S. dollars, we ended the first quarter with $53 billion, expanding to $56 billion at the end of the first half of 2025. Turning now to fee-related revenues, which totaled BRL 233 million in the quarter, up 85% year over year. This growth reflects our strong strategic inorganic growth and organic momentum with the final closing of VICC and positive inflows in the quarter across credit and Global IP&S. Advisory fees totaled BRL 26 million, comprising upfront fees charged for third-party distribution alternative commitments in the Global IP&S as well as fees from our Corporate Advisory business. The Corporate Advisory segment delivered revenues in line with our expectations, posting a more normalized quarter with over BRL 80 million in advertising revenues as we had anticipated in prior communications. Moving from the top line to expense, our total fee-related expenses were broadly in line with the prior quarter, which already reflects a full period including Compass. For a more meaningful comparison of our fee-related earnings, we excluded net catch-up fees. In the second quarter of 2024, these fees were more elevated due to the fundraiser cycle of VCP IV. Excluding them from both quarters, FRE grew 25% year-over-year on a nominal basis. For the second half of the year, while we expect catch-up fees from SPS IV as new commitments are signed, we do not anticipate them to be as significant as those in the second half of 2024, which reflects two years of charge since the inception of VCP IV. Turning now to our performance-related earnings, our PRI recorded a 50% increase on a year-over-year basis with net performance fees recognized across credit, equities, Global IP&S, and real assets. Within real assets, the exit of the FIP Transmissao asset generated realized performance fees in the quarter. However, there was no PRE impact since those fees had already been booked as unrealized in prior periods in accordance with accounting standards. On the other hand, our distributable earnings did benefit from the transactions. For context, as noted in the presentation, BRL 1.7 million of fee premium from unrealized performance fees remain on the balance sheet at quarter-end, tied to the escrow release expected over the next 24 months. Below the line, realized GP investment and financial income totaled BRL 35 million, a 49% increase year-over-year driven by capital return from our proprietary commitments in FIP Transmissao and Nordeste III and also solid results from our liquid portfolio. Let me take a moment to remind you that due to our GP commitments and the nature of the business, the exceptional performance of our funds creates value in three ways. First, fee-related earnings driven by leveraging the capital raise. Second, through carry recognized upon realization of performance fees. And finally, capital gains at the GP investment level, which flows through financial income. Finally, putting it all together, adjusted distributable earnings totaled BRL 76 million or BRL 1.20 per share, representing a 30% increase year-over-year on a nominal basis and 9% growth on a per-share basis. We are very pleased to be delivering what we believe reflects our true value proposition, ensuring that every marginal dollar of free cash flow generates the maximum possible long-term earnings per share. We remain focused on disciplined growth, margin expansion over time, and prudent capital allocation. The first half of 2025 delivered solid progress despite FX headwinds, and with a strong fundraise visibility and execution across strategies, we are well-positioned for continued growth in the second half of the year. With that, I would like to close our remarks and open the call for questions. Once again, I would like to thank you for joining our call. Please, operator, you may proceed with the questions. Thank you.

Operator, Operator

Our first question comes from Guilherme Grespan with JPMorgan.

Guilherme F. Grespan, Analyst

Congratulations on the results. I have two questions. The first is about fundraising; you had strong numbers this quarter. I adjusted for the upfront TPD, and it was even stronger than I thought. Looking to the second half, what net inflow levels do you think are realistic if we continue seeing these figures? Additionally, could you remind us how much capital you have available to deploy from VCP IV and VICC, along with a rough estimate of AUM still needing to be deployed into fee-earning AUM? My second question pertains to GP commitments and financial income. You provided some insights on this. From my calculations, you have just over BRL 1 billion in gross cash. Considering SELIC, you should be generating more than what you reported this quarter, which was already strong. How should we approach forecasting this area? Is there a timeline or trajectory we can expect for GP income and financial results? I understand there’s a J curve, but it’s challenging for us to know when these investments will mature. Any guidance on how to think about this going forward would be helpful.

Bruno Zaremba, President of Finance and Operations

Okay, this is Bruno. Thanks for the questions. I'll start off, and then Alessandro and Sergio can add their insights. Regarding the financial income, I believe Sergio touched on this earlier. We anticipate a gradual decrease in the financial income over time. There may be a transition effect from liquid funds to closed-end funds as we invest the remaining liquid portfolio into closed-end funds. This will likely lead to a temporary shift from financial income to net income on the income statement. Once we begin to realize or receive capital back from the closed-end funds, this will return to the distributable earnings number, similar to the impact we saw from CPM this quarter. It's a complex situation since we're not yet at a steady state; we're still in the process of transferring capital from the balance sheet to closed-end funds. We plan to discuss this in greater detail during the Investor Day on October 7, to which Alessandro has invited everyone. In the short term, as we prepare for that, I suggest thinking about it this way: we expect around BRL 200 million to BRL 300 million in additional commitments moving from liquid funds into closed-end funds, impacting the net income line over the next year. Currently, the liquid portfolio stands at about BRL 600 million, or slightly less, around BRL 550 million. This amount will decrease as we continue investing in closed-end funds. Once these funds begin returning capital, which we expect to occur more significantly starting in 2027, we should see a similar impact to what we experienced with FIP Infra this quarter. The flow will shift from distributable earnings to the income statements and back to distributable earnings once the funds start realizing and returning capital. More details will be provided during the Investor Day. Specifically for the second quarter, the liquid portfolio performed exceptionally well, significantly exceeding CDI returns. Additionally, we saw strong performance from closed-end funds, not just from the REITs that are still paying dividends, but also from the realization of the FIP Infra fund. Regarding our initial expectations for the year, we anticipated double-digit AUM growth on an FX-adjusted basis, aiming for approximately BRL 30 billion from inflows and appreciation. The first quarter did not meet expectations due to negative TPD Liquid, which set us back. However, the second quarter improved as expected, and the third quarter also started off strong. From the data in July, it appears that the positive flows continue. While it's uncertain if we can fully recover our initial goals, the results from the second quarter and the beginning of the third quarter are encouraging. We have several funds open, along with various strategies and credit opportunities in Brazil, such as SPS and Lacan IV. Our Commingled Funds, pension plans, and TPD products are also active. We're optimistic about the flow of TPD alternatives in the second half, which should bring favorable updates. Overall, the outlook remains positive, and we hope to return to double-digit growth on an FX-adjusted basis, keeping in mind the slower first quarter.

Alessandro Monteiro Morgado Horta, CEO

And Guilherme, this is Alessandro. Just to complement what Bruno said to your first question on fundraising. Basically, two verticals, we are very constructive in terms of traction, credit in general terms, both more liquid credit up to SPS, that's still in fundraising mode. And the TPD, of course, with the recovery of the overall sentiment of the international market and the S&P going up and et cetera, we are seeing a more constructive fundraising second half for these two main strategies here at Vinci Compass.

Operator, Operator

Our next question comes from Lindsey Shema with Goldman Sachs.

Lindsey Marie Shema, Analyst

We saw the FRE margin fall in this quarter. So my main question here is just at what point should we start to see the FRE margin expand to that low 30s percent run rate that you had mentioned previously? Do you expect that by the end of this year? And then what kind of levers do you expect to pull? Is it all going to be the cost control initiatives that you've recently enacted? And how much of an impact should we see from those? And then my second question is just a quick follow-up on Guilherme's question. I was wondering when it comes to the PRE realizations that you were mentioning, I know it's kind of hard to have visibility into that. But how should we think about the path of those going into 2027? Is it not going to happen until 2027 or do you still expect some realizations up until then?

Bruno Zaremba, President of Finance and Operations

Thank you for the questions, Lindsey. This is Bruno again, and I'll address both of them. Regarding margins, we've experienced a challenging first quarter in terms of flow, but the second quarter has shown improvement. Revenue is crucial for long-term margin expansion, and I believe we are in a comfortable position to reach a low 30s margin rate by the second or third quarter of next year, thanks to our ongoing bottom-up initiatives. This outlook does not factor in an acceleration in AUM growth. We have several drivers contributing to this, particularly in IT, corporate restructuring, and the optimization of projects and programs as we integrate the companies. There are some expenses reflected in our FRE that are not recurrent, but we have chosen not to adjust it. For example, there’s a retention plan related to the Compass transaction, which will end in the fourth quarter of this year. These non-recurring expenses and the benefits of our integration will begin to materialize, and we anticipate an annualized margin improvement of 2 to 3 points, expected to be fully realized by the third quarter of 2026. We are also focused on leveraging our business and fundraising efforts, as fundraising is critical to driving margins significantly higher. As for PRE, there are a couple of factors to consider, especially regarding Guilherme's earlier question. Our business's PRE consists of two components. First, we have liquid funds that pay PRE, including credit, investment solution, and equity funds. With market improvements, we expect these to generate PRE effectively. For instance, our equity funds were nearing their high watermark at the end of the second quarter, allowing us to produce more PRE as the market returns to previous highs. On the credit side, the growth in our Credit business is expected to generate more consistent PRE, which should continue to support our growth plans. Additionally, we have PRE potential coming from closed-end funds, like FIP Infra, which we started funding with IPO capital. So far, we've invested around BRL 700 million, with an additional BRL 600 million to BRL 700 million to allocate. These funds, particularly the closed-end and private equity funds, often face a J-curve effect. Initial contributions from these funds are low, but we expect performance improvements by 2026, which will positively impact net income. As these funds mature, we will begin to recognize gains that affect net income, with significant impacts anticipated starting next year and continuing to escalate into 2026. For distributable earnings, we will recognize these once the funds return capital to LPs. The PRE will be the final step in this cycle, occurring after capital returns and performance are finalized. In terms of timing for PRE and financial income, I anticipate it will begin together in 2028, with some distributable earnings expected in 2027. Net income impacts from appreciating funds should start emerging in 2026. Lastly, regarding unactivated capital in our AUM, it’s currently minimal. Most of our funds charge management fees based on committed capital, with a few exceptions. Overall, the effect on the company’s size remains relatively insignificant. Those are the key points I'd like to convey.

Operator, Operator

Our next question comes from Ricardo Buchpiguel with BTG.

Ricardo Buchpiguel, Analyst

Only one question here. During the quarter, we saw that management fees stood flat quarter-over-quarter, pretty much in line with the AUM, which was also flat. And when we look at the bridge of the AUM expansion, the main drag was related to the FX variation. So my question, is it fair to say that the flattish management fees also related to this FX change? And if so, do you have an estimate of how much the FRE or management fee would have grown if it wasn't for this effect?

Bruno Zaremba, President of Finance and Operations

Okay. When we examine the revenue figures from quarter to quarter, the primary factor is the foreign exchange impact. We mainly faced revenue losses in the IP&S sector, particularly due to the effect of TPD. This sector experienced a decline because of the foreign exchange fluctuations, and it's quite significant for us. If foreign exchange rates had remained stable during the quarter, we likely would have seen revenue growth in the low to mid-single digits. Additionally, the FRE could have absorbed some costs, leading to a potential increase in FRE of around 5 to 6 percentage points more than we achieved. Importantly, despite the negative effects on revenue from foreign exchange, we created more value for shareholders in terms of dollars when considering the distributable earnings. Although there is an impact on our financial statements, from a constant currency perspective, the appreciation of local currencies, particularly the real, benefits our overall business. We see improved dollar profitability per share and greater future carry realization, as our international limited partners have dollar-based carry hurdles. Therefore, even though the foreign exchange fluctuations may affect our top line and FRE, the appreciation of local currency is beneficial for us overall.

Operator, Operator

Our next question comes from Pedro Leduc with Itau BBA.

Pedro Leduc, Analyst

Two quick ones, please. On credit, again, you mentioned some optimism there. We saw some nice inflows. Could you elaborate a little bit how this portfolio that we're seeing today is spread out to regions, if it's new products or new geographies that you're getting new business in? And if that's a pace indeed that we should see accelerating. You still got little market share in this big market. And then second question, you briefly mentioned Argentina. Just trying to get a little more detail on what opportunities you're seeing there and how you're seeing it playing out for the next few quarters?

Alessandro Monteiro Morgado Horta, CEO

Thank you for the question, Pedro. To provide more detail about credit, we have reached just over 10% of our total assets under management in this area, which represents a significant growth opportunity. We have identified and acted on this growth across various fronts and regions. Our credit business in Latin America is expanding, as we offer products that serve the entire region with stable currency. We have dollar-denominated credit funds with Latin American mandates that are experiencing growth, and we see strong inflows in this specific credit strategy. Additionally, we have successfully raised capital in Brazil with SPS, MAV, and our more liquid credit funds, and we are also witnessing interest in private credit from Colombia and Peru. We anticipate potential fundraising opportunities in Mexico and Chile, with Mexico having a shorter timeline than Chile. Regarding Argentina, the majority of our asset management activities there are focused on credit and fixed income. With the recovery of confidence and ongoing macroeconomic developments, including upcoming legislative elections, we are optimistic about seeing increased inflows in that market. In summary, our credit initiatives are widespread across the regions we serve, with several efforts currently underway and a successful regional strategy for credit fundraising.

Operator, Operator

I would like to turn the floor back to Mr. Alessandro Horta for the closing remarks. Please proceed, Mr. Horta.

Alessandro Monteiro Morgado Horta, CEO

Thank you all once again for your support and interest in our developments. As mentioned during this call, we are very pleased with the dynamics within the firm. We are also satisfied with the productive integration of all the companies within our combined Vinci Compass partnership. We anticipate providing even better news soon as we see our strategy evolving and the market becoming more favorable for our fundraising and investment activities. Thank you very much, and have a good evening.

Operator, Operator

This does conclude today's presentation. We thank you all for participation and wish you a very good evening.