Vinci Partners Investments : VINP 2Q23 Transcript

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VINP.OQ - Q2 2023 Vinci Partners Investments Ltd Earnings Call

EVENT DATE/TIME: AUGUST 10, 2023 / 9:00PM GMT

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AUGUST 10, 2023 / 9:00PM, VINP.OQ - Q2 2023 Vinci Partners Investments Ltd Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Alessandro Monteiro Morgado Horta Vinci Partners Investments Ltd. - CEO & Director

Bruno Augusto Sacchi Zaremba Vinci Partners Investments Ltd. - Chairman of Private Equity Group & Head of IR

Sergio Passos Ribeiro Vinci Partners Investments Ltd. - COO & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Daer Labarta Goldman Sachs Group, Inc., Research Division - VP

Ricardo Buchpiguel Banco BTG Pactual S.A., Research Division - Research Analyst

William Barranjard

Yuri Rocha Fernandes JPMorgan Chase & Co, Research Division - Analyst

P R E S E N T A T I O N

Operator

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

Voxtab_VINP_1847758638 Thank you, and good afternoon, everyone. Joining today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Private Equity Chairman and Head of Investor Relations; and Sergio Passos, Chief Financial Officer.Â

Earlier today, we issued a press release, 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 factor section of our 20-F. We will also refer to certain non-GAAP measures, and you can find reconciliations in the release. Also note that nothing on this call constitutes enough for the sale or sensation of enough to purchase an interest in any Vinci Partners fund. With that, I'll turn the call over to Alison.

Alessandro Monteiro Morgado Horta - Vinci Partners Investments Ltd. - CEO & Director

Thank you, Anna. Good afternoon, and thank you all for joining our call. We are very pleased to join you today as we announce results for the second quarter of 2023. Adjusted distributable earnings totalled BRL 70 million or EUR 1.30 per share, an increase of 18% in our cash earnings per share year-over-year. Vinci announced a quarter dividend of $0.20 on the dollar per common share. Over the last 12 months, we have distributed EUR 0.73 per share as dividends that at the current stock price level, represent a dividend yield close to 8%. Our fee-related earnings totaled BRL 51 million in the quarter or $0.94 per share, representing an increase of 11% year-over-year on a per-share basis, driven by the ongoing fundraising across our private market vehicles and a higher contribution from advisory fees this quarter.Â

AUM reached BRL 65 billion at the end of the second quarter, up 9% year-over-year. This quarter, we had an important contribution from AUM appreciation following the recovery in local markets, which pushed our public efforts and REIT strategies to rise by 20% in average. This is one of the few quarters since our IPO that we benefit in a more significant manner from this effect. Since 2021, we have struggled to see a relevant impact from market appreciation as we face challenging local markets, and our AUM growth has been anchored mainly in new capital subscriptions and inflows.Â

The strong results posted for AUM, FRE, and distributable earnings this quarter are once again a clear demonstration of the resilience of our platform. We have been discussed constantly in our calls our current focus in fundraising across our private market strategies and the impact these new

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AUGUST 10, 2023 / 9:00PM, VINP.OQ - Q2 2023 Vinci Partners Investments Ltd Earnings Call

capital commitments will have for our management fees. I'm very confident in the prospects for future quarters as we now have additional to the fundraising for our private markets, favorable tailwinds for other segments, such as our liquid strategies and our public market vehicles. We are now entering a much more constructive scenario for Vinci to start seeing positive inflows into our liquid funds as local markets improve and the opportunity cost of a very high local interest rate lessons.Â

On top of that, our public market vehicles, with the recent appreciation, are trading at prices very close or above NAV, which put us back in a position to raise capital through primary issuance. This contribution can be very meaningful to our numbers. We have 8 perpetual capital AUM funds with sizable NAVs. Once we have surpassed NAV prices, our public market vehicle should go back to be one of the main driving forces for AUM growth, as we have seen from 2018 to 2021 when we grew AUM in this strategy by more than 5x or BRL 4 billion. This effect was a direct consequence of the market's expectations for the start of the easing cycle for interest rates, which officially began last week as the Brazilian Central Bank announced the first cut in interest rates since 2020 by 50 basis points and sent a clear indication for the easing process ahead of us.Â

For instance, the market expects nominal rates to be at 11.75% by the end of the year and close to 9% by the end of 2024, decreasing nominal rates by roughly 500 basis points in approximately 1.5 years. As highlighted before, the last easy cycle took place between 2017 to 2020. Back then, we grew AUM by roughly BRL 30 billion, posting expansion across all our business lines. At the same time, Vinci posted significant FRE margin expansion with close to a 20 percentage point gain in FRE margin. Keep in mind that our platform was not as developed as it is today. We have been actively working these last few years to be ready to take most of the opportunity once we had more favorable markets. I believe Vinci is very well positioned for this new cycle, and we could not be more excited with the future ahead. Interest rates are going down, and foreign sentiment toward Brazil is going up. Fittings recently raised Brazil's credit rate, reflecting the improving economic outlook, federal budget control, and record trade balance results.Â

The prorated rating connotes greater confidence in Brazil's ability to meet its financial obligations and attract investments and bodes well to a medium-term investment grade that could be highly impactful. For instance, we are 2 notch away from the investment grade based on the past cycles. We expect to be awarded with the investment grade by 2025. This would mean a sizable flow from foreigners into Brazil across all strategies. Last time, we had an investment grade. International capital held more than 20% of the domestic Brazilian debt. Today, this number is close to 9%.Â

Given that the Brazilian debt is roughly 70% of the GDP, we could see flows of more than 7% of the Brazilian GDP over the years following the recovery of the investment grade. This represents an enormous opportunity to accelerate growth. It is worth mentioning that a significant part of price moves take place before the investment-grade stamp is awarded. Also, S&P just put Brazil in a positive outlook. To close my remarks, let me provide an update of our fundraising efforts going forward for our closed-end funds. The ICC, our climate-oriented fund in infrastructure, continues to observe lots of traction with institutional Ps. We should see new commitments coming throughout the second half of the year, and the fund is on track to reach its target by the first half of 2024.Â

The VCP 4 just closed in July an important capital raise with XP that will contribute to third quarter numbers. We also should see new commitments for local institutional players in the second half of the year. And then for the last and potentially more meaningful round of fundraising should come from our international piece, which we are aiming at the end of ECP's fundraise. Raising capital for traditional private equity funds has been a challenge for all of our global peers. We expect to see improvements on this front in the beginning of next year. Meanwhile, we have been experiencing an increase in appetite from local institutional players to alternatives. This reinforces the ongoing shift from Brazilian players towards alternatives. We are seeing this in an environment of historically high-interest rates with the easing cycle, we should see a pickup in this trend. Momentum is great for all of our strategies, and we are excited for the coming quarters. We will continue to work on delivering on all fronts we have discussed today, and we'll keep you posted as we go along. Thank you for your attention and for attending our call today. With that, I'll turn it over to Bruno to go over our financial results.

Bruno Augusto Sacchi Zaremba - Vinci Partners Investments Ltd. - Chairman of Private Equity Group & Head of IR

Thank you, Alessandro, and good afternoon, everyone. Starting on Slide 9, we will cover AUM trends for the second quarter. Vinci ended the quarter with BRL 65 billion in AUM, up 9% year-over-year, driven by growth in our private market strategies over the last 12 months and appreciation, markups across liquids, and our REITs. Long-term AUM accounted for BRL 33 billion in the quarter, increasing 20% year-over-year, pushed by the

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AUGUST 10, 2023 / 9:00PM, VINP.OQ - Q2 2023 Vinci Partners Investments Ltd Earnings Call

appreciation in the REITs and our new capital commitments across private equity, in front credits, and now represents more than 50% of each total AUM.Â

This quarter, our AUM was positively impacted by market appreciation. For the past 2 years, we added long-term commitment into our private strategies through organic and inorganic expansion. And this effect was partially offset by market depreciation across liquids. Now we have started to benefit from the early stages of what we believe will be a very positive outlook ahead of us. During our last earnings call, we talked about how the depreciation of the REITs market affected us, and we anticipated that they should recover this quarter. At the end of the second quarter, our REITs have more than fully recovered. Looking across our REIT universe, some have surpassed the threshold where they become eligible for future capital raises. With that said, we expect to see follow-ons in our listed reach in the second half of the year and even more next year.Â

For the last 2 years, with rising and very high nominal interest rates in Brazil, primary issuance in the REIT was not possible. We bridge this period created although lower volume share for asset swaps. The REIT vertical has been a meaningful contributor to our fundraising in the past through significant primary issues, and we are very happy to get an inflection point where this contribution would once again be expected. We already have new issues slated for the second half of the year. As previously mentioned by Alessandro, we will be active in the second half of the year with our 2 main private equity style funds currently raising capital, the ICC and VCP IV. VCP IV just held a closing (inaudible) that we impact third-quarter numbers as this fund will charge retroactive management fees on all subsequent closes on to its final close. We are seeing great traction from locals for VCP, and this will be the biggest allocation from local investors since the inception of our VCP strategy.Â

Apart from this closing with VCP, we should see new commitments for VCP until the end of the year. As we anticipated, international investors should be more impactful towards the final closing of the fund as they continue to digest global overall location to the asset press. For the ICC, we expect to see new commitments both in the third and fourth quarters backed by international investors. The amount of traction obtaining this product was significant, with the first close of the fund representing more than 60% of the target amount. Even in positive market conditions, this would have been a great result. In the current environment, this result is remarkable and the merits of the quality and track record of our infrastructure team.Â

On a side note, we are on track to launch VIR5 and SPS IV by the end of the year. This should be our next focus for new capital in private markets and carry our fundraising efforts in 2024. Moving on to Slide 11, we go over crude performance fees in our private market funds. Gross accrued performance fee receivables accounted for BRL 18.6 million in the second quarter, up 60% quarter-over-quarter. The VCP strategy currently accounts for roughly 90% of accrued performance fees, representing an appealing upside for future performance fees.Â

With capital returns happening in SPS and GIR, we expect a source of potential future performance fees from our private market verticals to be diversified in the coming quarters. Turning to Slide 12, we will cover our fee-related revenues. Revenues from management and advisory fees totaled BRL 106.8 million in the quarter, up 11% year-over-year due to a combination of factors. First, the ongoing fundraising across private market strategies for funds that carry full fees, and we increased our average fee rates once we closed this fundraising cycle. Second, the acquisition of ISPS, and third, a higher contribution from advisory fees in this quarter. We should see a continued positive trend coming in the next few quarters following new capital raises across our private market segments.Â

For VCP IV and the ICC, we have another important contribution as managed additional capital committee in this fund will retract fees to the date of the fund's first closing. DCP's first closing was in the middle of 2022 and the impact of future closes would be meaningful. The ICC started its first close at the end of the first quarter of 2023. In Slide 13, we present our operating expenses for the quarter and year-to-date. Total expenses accounted for BRL 61.4 million in the quarter, up 22% year-over-year. Excluding bonus compensation, operating expenses were up 10% year-over-year, driven mostly by the acquisition of VICSPS. On a more normalized basis, total expenses were BRL 113.5 million over the year-to-date, an increase of 15% compared to the same period last year.Â

Moving on to Slide 14, we go over our fee-related earnings for the quarter. FRE totaled BRL 50.7 million or $0.94 per share in the quarter, up 11% year-over-year on a per-share basis. Over the year, FRE was BRL 100 million, up 10% when we compare with the first half of 2022, driven by the strong EM expansion in our private market strategies and a higher contribution from advisory fees in the second quarter of 2023. Over the next quarters, we should see a positive impact in FRE coming from retroactive fees following new commitments in VCP IV and VICC. As those fees retract from the beginning of the fund, they could be relevant additions to management fees.Â

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AUGUST 10, 2023 / 9:00PM, VINP.OQ - Q2 2023 Vinci Partners Investments Ltd Earnings Call

Despite a harsh environment, we were able to maintain margins with a disciplined cost control. We expect that concluding this fundraising cycle for private markets with a better outlook for local markets, we should start to see improvements in margins, given the leverage potential of our platform.Â

Turning to Slide 15. We will cover our performance-related earnings. PRE totaled BRL 5.4 million in the quarter, an increase of 124% year-over-year, driven by contributions from liquid strategies. Although posting modest results, we want to highlight the potential for performance fees from this moment onwards. Most of our funds carry high watermark clauses, which inhibits them to charge fees on the down market. With the recent appreciation of the liquids market, our funds are getting close to their high watermark, therefore, becoming eligible to charge fees once again. With the current market appreciation and the good outlook for looser monetary policy in the second half of the year, we could once again show more meaningful PRE results in the fourth quarter, potentially into 2024.

Shifting to Slide 16, we go over realized GP investment and financial income. Vinci had BRL 34.4 million in realized EPM financial income this quarter, up 38% on a year-over-year basis due to a good quarter for our liquid portfolio following a constructive local environment. Over the year-to-date realized GP and financial income totaled BRL 60.3 million, represent an increase of 16% compared to the same period last year.Â

Turning to Slide 17. We go through our adjusted tie earnings. Adjusted receivable earnings totaled BRL 70.4 million or EUR 1.30 per share, up 18% year-over-year, backed by a higher contribution from financial income, PRE and FRE. Adjusted FRE totaled BRL 130.4 million or EUR 2.40 per share over the year-to-date, up 12% when compared to the same period last year. Moving on, I would like to cover our balance sheet highlights in Slide 18.Â

As of the second quarter, Vinci had committed BRL 1.1 billion to proprietary closed-end funds. These commitments will work seed investments in our funds to leverage fundraising with Pace and drive future growth in private markets, FRE results backed by long-term capital. These commitments also represent a relevant medium- to long-term potential return as the realized gains from these funds will be recognized at realized GP investment income in our quarterly earnings. Considering that private markets fund have above-average target returns, this could be extremely relevant to earnings in the future.Â

Lastly, I would like to touch on a topic we talked about last quarter. We have prepatory positions in several reads that suffered from market depreciation last quarter, resulting in a negative impact in our net income. Back then, we anticipated that these funds could recover in the second quarter. We would like to share that these funds have more than fully recovered over the second quarter, which explains the strong accounting net income this quarter. And with that, I will turn it over to Sergio to go through our segments.

Sergio Passos Ribeiro - Vinci Partners Investments Ltd. - COO & CFO

Thank you, Bruno. Turning to our segment highlights. As you can see in Slide 20, our platform remains highly diversified, which we believe to be the main contributor to the resilience of our business. Disregarding investments made in the VRS segment, 59% of our FRE over the year-to-date came from our private market strategies, followed by IP&S and the liquid strategies with 16% and financial advisory contributing with 8%. The same level of diversification is reflected in our segment distributable earnings.Â

Moving on to each of the segments is starting with our private market strategies on Slide 21. FRE totaled BRL 29.8 million in the quarter, up 23% year-over-year, driven by the strong fundraising cycle experienced over the last 12 months and the acquisition of VinciSPS. Please note that as previously mentioned by Alessandro and Bruno, we should see new commitments coming from VSPIV and VICC, over the next few quarters that will impact positively management fees, both from a recurring standpoint and a one-off basis due to attractive fees that new commitments trigger to the start of the front.Â

Segment distributable earnings were BRL 35.4 million in the quarter, an increase of 17% year-over-year, boosted by FRE growth. Total AUM was BRL 29.4 billion for the end of the quarter, up 22% year-over-year. Moving on to our IP&S business on Slide 22. FA totaled BRL 7.8 million in the quarter, down 32% on a year-over-year basis. Even though our AUM numbers remain consistent year-over-year, we experienced a shift in the allocations with IP&S. The IP&S segment has, in the last 12 months, raised capital from exclusive separate mandates, which carry a lower fee rate while suffering punctual redemptions in our open-ended products that are offered to individual investors through distributors and platforms. This

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