Earnings Call Transcript - VINP Q1 2021

Operator, Operator

Good afternoon, and welcome to the Vinci Partners First Quarter 2021 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 me today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Head of Private Equity and Investor Relations; and Sergio Passos, Chief Financial Officer. Earlier today, we issued a press release, slide presentation and our financial statements for the quarter which are available on our website @ir.vincipartners.com.

Alessandro Horta, CEO

Thank you, Anna. Good afternoon, and thank you all for joining our call. This was the first quarter for Vinci Partners as a public company. After our IPO earlier this year, we were able to generate very strong results as we continue to deliver solid returns for our fund investors. Nonetheless, the current market valuation of our stock, in our view, does not represent the actual value of our platform, our existing investments, and our very significant growth opportunities across the firm. So you're not deficient in analysis in our quality results. We are also initiating our share repurchase program of up to 85 million reais, which has been approved by our board of directors. We are committed to delivering shareholder value, and this buyback program reflects the Board's confidence in our current prospects and long-term growth. We believe that this program represents an accretive opportunity to deploy cash from our results in a way that should benefit our shareholders. Bruno will discuss the repurchase plan in more detail in a few moments. On to our financial results, Vinci Partners reported excellent results for the quarter with IFRS net income of 47 million reais, related earnings of 50 million reais, or 0.88 reais per share and distributable earnings of 47 million reais, or 0.83 reais per share. Our business is profitable and growing with strong operating leverage. Long-term fees and distributable earnings margins continue to expand as our relative fixed costs over assets under management (AUM) are decreasing year after year. We ended the quarter with 55 billion reais in AUM, which represents 45% growth year-over-year. Our very impressive AUM growth this quarter was primarily the result of two factors. First, we had probably one of our best quarters for fundraising in private market strategies. We raised almost 2 billion reais across five different fundraising efforts, of which two are new strategies in the real estate and infrastructure segments for which we will continue to raise capital throughout the year.

Bruno Zaremba, Head of Private Equity and Investor Relations

Thank you, Alessandro, and good afternoon everyone. On slide eight, we will walk through some of the financial highlights for the quarter. Stimulated earnings were 60.2 million reais for the first quarter, or 0.88 reais per share, a 13% increase year-over-year, and 157 million reais over the last 12 months, up 25% year-over-year. Vinci generated distributable earnings of 47.2 million reais in the quarter, or 0.83 reais per share, up 41% year-over-year and 139.8 million reais over the last 12 months, up 17% year-over-year. As I mentioned, total AUM reached 55 billion reais at the end of the first quarter, an increase of 45% on a year-over-year basis. Our ended the quarter at 52 billion reais, growing even faster, up 48% year-over-year, with much of it related to the private market capital subscriptions and the inflow seen across our IP&S business. Performance fee eligible AUM totaled 35 billion reais at the end of the quarter and represented nearly 70% of our total fee-earning AUM. Let me now touch on the rationale and details for the share repurchase program we announced today. We are long-term believers in our business and continue to focus on how to further strengthen it. Our desire is to continue building our shareholder base and our presence in the markets as a public company. All partners are and will continue to be shareholders of the firm for the long-term, given the lockups agreed upon during the IPO process. We're aligned with other shareholders to generate returns while investing in Vinci Partner stock. Our platform is diversified and presents many different growth avenues. We have grown our company against the backdrop of cyclical market volatility in Brazil since our foundation in 2009 and have been able to demonstrate its resiliency over time. As I did some information before, we have not seen any relevant change in the current market scenario that could justify our opportunity being any different than a few months ago, and the acceleration of our AUM growth in the first quarter of 2021 is a testament to that.

Sergio Passos, CFO

Thank you, Bruno. In slide 16, we can see that our fee-related revenues continue to expand alongside AUM growth; management and advisory fees were 97 million reais high in the quarter, representing an increase of 23% year-over-year. Management fees have been the main contributor to revenues, accounting for almost 80% of total net revenues over the last 12 months and have grown 30% year-over-year. As we have mentioned in our 20-half and during our IPO process, management fee revenues during 2019 benefited from an extra revenue recognition coming from the management fee catch-up charge that was applied on the last closes of VCP III. This was fully charged during the first and second quarter of 2019 and not to the fundraising period of VCP III. This affects the base of our first quarter of 2020 last 12 months numbers favorably. We are showing a 19% growth over the last 12 months of the first quarter of 2020 against the prior year period on an adjusted basis. But adjusted for the VCP III catch-up revenue, this growth would have been a much higher 31% figure. The main reason for this growth rate was due to the growth in fee-paying AUM. In slide 16, we give a little more detail regarding our expenses for the product. Total expenses saw an increase of 52% year-over-year during the first quarter of 2021. This is primarily due to new recurring costs related to becoming a public company totaling about 3.3 million reais. These new costs can be segregated into three categories: the first and most relevant, representing 40% of new recurring costs related to becoming a public company, are third-party services fees, such as auditor fees, NASDAQ listing fees, and others. Additionally, as a public company, we had to make some adjustments in our structure. We hired new members of our board of directors, and we also had to make some new additions to our support teams, like the shareholder relations team and additional people for financial reporting. That's the last, as we stated in our F1 during our IPO process, we adjusted the company's compensation structure for regular general and administrative compensation following that IPO, which impacted personnel costs. So when you look at our expenses line bonus related to management and advisory fees, you view that at a 24% rate year-over-year in line with the growth seen in fee-related revenues. Therefore, compensation is directly linked to performance revenues. So when they have a quarter with a bigger contribution from performance, we should see higher compensation as well. We also incurred an additional 1.6 million reais in expenses in the quarter related to a new branding project that is not mentioned at the beginning of our call, targeted mainly towards our retail dedicated distribution channels. We initiated this process during the quarter and it should take place throughout the year. Both the new public company costs and one-time strategic brand effort will present headwinds for stronger margin gains easier. Although we do expect to be able to grow FRE margins in 2021 versus last year, despite the effects, if the current AUM growth trends continue. An additional comment: our Board of Directors just approved the stock compensation plan representing 5% of the company's total stock on this first range. We will allocate approximately 2.8% of the shares for senior employees with a strike of 18 reais per share, as the company's IPO price. This plan will take place three years from our IPO date with a one-year maximum deadline for full exercise. Turning to slide 17, we present fee-related earnings; FRE was 50.2 million reais or 0.88 reais per share, an increase of 13% year-over-year. Over the last 12 months, FRE was 157 million reais, an increase of 25% year-over-year. It would be even greater considering the catch-up effect from VCP III in private equity. FRE continues to be the core indicator of our business. As management fees continue to grow alongside our strong fundraising in the FRE Bridget chart, we present a breakdown of fee-related revenues and expenses disregarding additional costs for the quarter. Our compatible FRE margin would have been 57%, five percentage points higher than our fee management margin for the quarter of 52% and 50 basis points higher than the margin for the first quarter of 2020, which was positively impacted by lower-than-usual expenses. In slide 32 in the presentation's appendix, we break down our expenses for the quarter in comparison to the same period last year. For the full year 2020, FRE margins reached 50.5% as a typical quarter was normalized throughout the middle of the year. Next is slide 18; pre was 6.7 million reais in the quarter, most of it coming from our international IP&S business, which was up 9.2 million reais year-over-year. This increase was primarily due to a bigger contribution from performance fees in IP&S in the first quarter of 2021. Additionally, FRE in the first quarter of 2020 was impacted by a reversal effect since we had provisioned performance fees as negative during the quarter. Over the last 12 months, PRE was still at 6 million reais, a 2% year-over-year increase. It's important to mention that our PRA has a seasonal effect since most of our liquid funds charge performance semiannually, usually in the second and fourth quarters of the year. Next is slide 2019, we present results from GP commitments in private market funds. We broke down the exposure and results between our GP investment income, which reflects the returns of capital allocated to our liquid funds, and financial income, which is the result of our liquid allocations. Total portfolio returns reached 5.6 million reais in the quarter, representing an increase of 536% year-over-year, as we had the relevant increase in financial income due to the impact from the deployment of the IPO proceeds. As discussed in the last call, we designed the portfolio to locate our balance sheet capital until resources are called into our private funds. This portfolio was designed for a targeted return of CDI plus 2% per year, while we also displayed low volatility. Given the market volatility required, we allocated the IPO proceeds conservatively. Therefore, at the end of the quarter, we still had about 82% of our cash allocated in fixed income investments. Since the end of the quarter, as we see markets starting to recover, we accelerated cash deployment toward the target portfolio. In terms of returns, we presented the quality direct records of the proposed target, looking at the purchase volume for the last 24 months on a quarterly basis. We do expect to see some minor volatility in our financial income throughout the quarters. As you can see in the back test, we have some quarters that perform better than others, but in the long term, we expect to achieve returns at the target of CDI plus 2% per year for the liquidity portfolio location. Turning to slide 20, distributable earnings were 47.2 million reais in the quarter, or 0.83 reais per share, representing an increase of 41% year-over-year. Over the last 12 months, distributable earnings totaled 140 million reais, or 2.46 reais per share. Finally, slide 21 shows our cash and investment balance. We finished the first quarter of 2021 with a total of 1.45 billion reais in cash and investments, or 25.39 reais per share. To date, our cash investment balances are comprised primarily of fixed income and liquid funds. Although we expect to gradually shift into private markets, GP funds’ investments as capital commitments are called in the coming years. As shown in the appendix, we ended the first quarter of 2021 with total GP commitments of 179 million reais, of which 24 million reais have been called, and that is currently valued at approximately 40 million reais. With that, I will turn the call back to Bruno.

Bruno Zaremba, Head of Private Equity and Investor Relations

Thank you, Sergio. Turning to our segment highlights. As we have stated in our latest earnings conference call, we will start presenting this quarter FRE, PRE, and segment distributable earnings for each of our segments. As you can see in slide 23, almost 50% of our effort in segment distributable earnings comes from our private market strategies followed by a 20% contribution from liquid strategies, and both in our FRE and segments of business represent 13% of FRA and 21% of our segment distributable earnings. As in this quarter, it had a bigger contribution to realized performance revenues. Finally, our financial advisory business accounted for 18% of FRA and 16% of segment distributable earnings in the quarter. Moving on to each of the segments, starting with our private market strategies: on slide 24, FRE and segment distributable earnings were up 14% year-over-year due to the growth in CPA AUM we have seen over the year, with highlights from our fundraising in our listed vehicles in real estate and infrastructure. The final closing of VIR IV in private equity and the first close of two new strategies, FDL and VS. Our private market strategy still has great room to grow, especially across new strategies. We are allowing over the year, such as our newly listed REIT that is currently going through an IPO process in the Brazilian stock market. We have also signed a joint venture recently for a new strategy in the agribusiness sector, which will be co-managed by our real estate and credit segments; therefore, we have great opportunities to continue to grow our business. We're seeing a great deal of activity in our funds. Our private equity impact funds VIR IV has already deployed about 10% of its committed capital in VIGT. Our listed infrastructure fund fully deployed the proceeds raised in its latest fundraising this year and already has a pipeline of potential assets that can lead to a follow-on offering for the funds. Liquid Strategies: FRE was up 12% year-over-year; as you can see in slide 25, while segment distributable earnings were up 20% year-over-year due to a bigger contribution from our performance season this quarter compared to the first quarter of 2020, which had booked about 1 million realized and unrealized performance. Fee-Paying AUM grew at a 40% rate year-over-year, with a significant portion coming from the sovereign wealth fund mandate that does not pay management fees we mentioned earlier on the call. Because of this effect, the average management fee rate decreased by seven basis points year-over-year, but over the next quarters, this effect will be lapped, and we should also see a positive impact on the average management fee rates coming from the end of the revenue share agreement with clients that happened at the end of last year. Moving on to our IP&S business on slide 26; AUM almost doubled since the first quarter of 2020, which translated into FRA growth of 71%. This quarter, the IP&S offshore mandates were the main contributors to realized performance revenues, bringing the IP&S PER to 5 million reais, which translated into 183% growth in segment distributable earnings year-over-year. Finally, in slide 27, we can see advisory revenues for our financial advisory business, which is mostly aligned with the same quarter the year before. In this quarter, we acted as an exclusive advisor to Espaçolaser and its shareholders in its initial public offering in the Brazilian stock market or B3. The company was the first beauty service company to publicly list shares in the Brazilian stock market. With that, we thank you all for joining the call, and I would like to open it for questions.

Operator, Operator

Our first question comes from the line of Tito Labarta of Goldman Sachs. Your line is open.

Tito Labarta, Analyst

Hi, good evening, everyone. Thank you for the call and taking my question. A couple of questions; first, maybe if you can give an update on how you see the fundraising continuing into Q2 so far. I guess in April and May, can you give any color on that? Second question: in terms of margin, you highlighted some additional expenses you're incurring, but how should we think about that FRE margin going forward, particularly as you continue to grow and gain scale? Do you think that can expand this year or any color you can give on the evolution of that FRE margin going forward? Thank you.

Alessandro Horta, CEO

Hi, Tito, this is Alessandro. Thank you for attending our call. Taking your first question about the fundraising trends, we are seeing pretty much the same trends that we saw in the last quarter. We believe that we continue to see a very strong trend, both from the private market side, comprising all the different private market strategies: private equity, real estate, infrastructure, and also private credit, and we are also seeing very strong activity and gaining various different mandates and competing for others in our IP&S division. So we have seen pretty much the same trends, especially strong in private markets as a whole. Regarding the FRE margin, to your point, we continue to see the trends of the FRE margins keeping growing as we gather more AUM. Of course, as Bruno explained during the call, we will have some effects this quarter, especially related to costs incurred from being a public company, but going forward, of course, that will be a normal situation as we move forward as a public company. However, we will continue to expect improvements over time in our FRE margin due to the gains in AUM.

Tito Labarta, Analyst

That's pretty clear. Maybe just a couple of follow-ups if I may. Just, how about on the public equity side? Some concerns this Thursday afternoon; do you think that the outlook for the public equity side will improve on the fundraising? And just to be clear on those additional expenses, is this sort of like the new recurring level or do you expect those to continue to grow? Just to get a sense of how much of those recurring expenses will impact going forward knowledge Republic?

Alessandro Horta, CEO

Okay, I'll take the first question about public equity fundraising, and Bruno will address the details about the expenses. In terms of public equity, we are not seeing any important redemptions, but of course, the public markets have been a little softer in terms of fundraising in the first quarter, as you saw. Taking out the redemption that came from the sovereign wealth fund that Bruno explained, on average, the core of AUM in public equities has been very stable and growing slightly, but not as strongly as the other asset classes. We are seeing the same trend a few now in this quarter; you will probably see the growth in AUM coming more from private markets and IP&S.

Sergio Passos, CFO

Yeah, Tito, regarding the margins, there are two effects that I would say in the first quarter. First, we started a new, recurring level of expenses that will impact our first quarter 2021 number. So that will be the current level of expenses going forward. If you look at the second quarter, third quarter, we will only be able to lap that next year once we have a full year of expenses coming from our public company costs. The second point is that last year, the first-quarter margin was seasonally very high. You remember that the year ended FRE margin was about 50%; for the first quarter, we did close to 52%. I think if the trends continue in the same direction, we should be able to post a low fifties type of FRE margin, around 51-52%. That should be more or less the forecast for margins this year if the trends continue at the current pace.

Operator, Operator

Thank you. Our next question comes from the line of Michael Carrier of Bank of America. Your question, please.

Dean Stephan, Analyst

Hey guys, this is Dean Stephan on for Mike. Given the announcement around the share buyback program, can you just provide an update on your capital priorities moving forward and how they may be split between buybacks, the semi-annual dividend that you mentioned, potential M&A opportunities, as well as investment in the business? And then related to that, do you expect the buyback to be more of a one-time authorization, or do you expect to have a continual authorization moving forward? Thanks.

Bruno Zaremba, Head of Private Equity and Investor Relations

Okay, thank you so much. This is Bruno again. We made a commitment of distributing as cash dividends at least 75% of our distributable earnings, and we expect to continue with that commitment. But we do have flexibility regarding the autonomous 25%, so the idea was to take advantage of that excess 25% now, in a moment where we still have a very large cash balance from the IPO, that's going to be directed towards mostly funding new private market funds that are still unallocated. So we will use that excess 25% of distributable earnings to buy back our stock. We thought about this by looking forward a few quarters regarding the amount of distribution we expect to post and then back that 25% to see what would be a medium-term buyback that we could support through operational free cash flow. So that's the plan for the current buyback program. I think once this program is exhausted, we will probably sit down again and rethink what will be the destination of that excess 25% distributable earnings that we currently have that is unallocated. So that could either be a refresh into a new buyback program or, eventually, pay it out as dividends. That was more or less a lot of thought regarding the buyback. As for other capital uses, it really hasn't changed. We're looking forward to deploying capital into our public market funds. Currently, we have commitments of about 175 million to 180 million of commitments to our private market funds. So the idea is to continue to roll out those commitments at the leverage ratio we mentioned during our IPO process, using about 5% of the total size of the funds. We also continue to look for M&A opportunities as well in the markets to see if there's anything that might enhance the platform. So that continues to be a potential use of capital that we have on our balance sheet today.

Dean Stephan, Analyst

Got it. Thanks. That's helpful. As a follow-up, you highlighted the new branding project that started in Q1 and is expected to run through 2021. Can you just provide some additional detail on what that project entails and what impacts that could potentially have on both revenues and expenses in the near and long term? Thanks.

Alessandro Horta, CEO

Okay. Thank you very much. This is Alessandro. The idea is that, as of today, we have a minority portion of our AUM coming from retail, being directly through our listed funds as traded on the stock exchange or funds located as distributors. However, this is growing over time, as a large number of retail investors are exposed to our brand, and we have never communicated through a marketing branding strategy directly to this public. The project we have been developing is aimed exactly at how we can tap into this market more effectively through a branding and marketing project. We expect this to create a highly positive understanding of our platform and the related products and services we can offer to retail clients. We have done some insights through interviews and surveys to understand how the public views us. We found they know not so much about Vinci beyond the high level. Therefore, we decided to create this project to develop a deeper understanding of our brand, as we believe this will translate into increased avenues in the future and ultimately into more AUM from public retail investors.

Bruno Zaremba, Head of Private Equity and Investor Relations

Yeah, and just to complement that, this is Bruno again. You asked the question regarding costs. Currently, we anticipate that expenses will stabilize somewhat in terms of additional expenses in the next few quarters. We had 1.5 million in the first quarter, and it's expected to be somewhat spread out over the next few quarters.

Operator, Operator

Thank you. There are no further questions in the queue at this time. Are there any closing remarks?

Alessandro Horta, CEO

That's Alessandro. I just would like to thank you all for your patience and attention with us. We are very happy to deliver these results as our first quarter as a public company, and we expect to deliver all the growth that we anticipate going forward. So I'd like to thank you all and good evening to everybody.

Operator, Operator

This concludes today's conference call. Thank you for participants. You may now disconnect.