Vinci Compass Investments Ltd (VINP) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the Vinci Partners Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to turn the conference over to Anna Castro, Investor Relations Manager. Please go ahead, Anna.

Thank you, and good afternoon, everyone. Joining me today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Head of Private Equity and Investor Relations; and Sergio Passos, Chief Financial Officer. Earlier, we issued a press release and slide presentation, 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 IPO prospectus filed with the U.S. Securities and Exchange Commission on January 29, 2021.

We will also refer to certain non-GAAP measures, and you'll find reconciliations in the presentation. Also note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Vinci Partners fund.

With that, I'll turn the call over to Alessandro.

Thank you, Anna. Good afternoon, and thank you all for joining Vinci Partners' inaugural earnings call as a public company. I wanted to start by thanking all of Vinci's employees for their hard work and commitment through the transition. I would also like to thank our clients for their ongoing partnership and trust. Finally, we welcome all our new shareholders and appreciate your vote of confidence.

In January, we successfully completed our initial public offering and are looking forward to continue to drive long-term value for our clients and shareholders. The IPO provided capital to enhance growth, help attract and retain talent, drive awareness and brand recognition and fund investments in our own strategies alongside investors.

As our first earnings conference call, we thought it would be helpful to provide a brief overview of our company and how we are differentiated. Sergio and Bruno will discuss in detail our financial performance and walk through some recent developments and segment highlights.

So starting on Slide 5 of the earnings presentation. Vinci is a leading full-service alternative asset management platform in Brazil. Our diversified business model comprised 8 business units integrated on a single platform. Our assets under management has compounded at a 33% annual growth rate since 2009 and stood at BRL 50 billion as of the end of 2020.

The Brazilian asset management industry is undergoing a number of structural changes, including declining interest rates, incumbents seeding market share to independent players like Vinci, portfolio relocations from fixed income to alternative asset classes and rising acceptance of ESG as an investment factor.

We believe we are well positioned to continue to capture market share given a number of compelling factors. First, we have built investment expertise across all key alternative asset classes in addition to a scaled liquid markets business. Next, we are increasingly leveraging long-term relationship with our broad array of clients. In 2020, nearly 80% of the capital we raised were sourced from existing clients. Finally, we believe we have assembled the best talent in the industry. We have 215 full-time employees across 4 offices in the Americas, helping to generate market-leading returns across all our key investment strategies.

We have built our platform without compromising on the resilience and profitability of our financial model. Our revenue profile is stable and predictable. In 2020, management fees accounted for 80% of our revenues, and around 50% of our capital is sourced from vehicles with at least 5-year commitment period. In terms of profitability, our adjusted fee-related earnings margin reached 50.5% in 2020 with further room to expand, reflecting strong revenue growth and rising operating leverage. Finally, the capital raise for our IPO is expected to be used primarily to fund GP commitments alongside our clients in our expected private market launches during the next 2 years. To that extent, we already signed BRL 120 million of commitments to new private market funds since the IPO and are making good progress. We are going to detail this capital allocation through the presentation.

Next, on Slide 6. We founded Vinci in 2009. The alternative asset management industry in Brazil was still underdeveloped with both institutional and retail investment portfolios, heavily skewed in favor of fixed income products, giving elevated interest rates at the time. The industry was dominated by a handful of banks and macro-focused hedge funds with limited incentives for product innovation given concentrated market share and advantageous economics.

Our partners had the vision to build Brazil's first scaled independent alternative asset management platform and invested personal capital to fund GP commitments. Today, Vinci sits at the center of the alternative investment universe by offering a full suite of products in the private and public markets, a solutions business and financial advisory service. Looking ahead, with interest rates declining, demand for alternative products in Brazil continues to rise, and we believe Vinci is primed to capitalize on industry tailwinds and drive sustainable growth.

Turning to Slide 7. We believe Vinci is the only independent asset manager in Brazil with established teams and infrastructure, long-term investment performance track record and ample dry powder to deploy across all major alternative asset classes. Holistically, our investment platform encompasses 7 investment verticals, each managed by a separate and dedicated investment team and independent investment committee: Private Equity, Infrastructure, Real Estate and Credit in the private market strategies and Hedge Funds and Public Equities in the liquid strategies. We have an investment products and solutions business that provides tailor-made solutions to our clients through asset allocation and risk management and a financial advisory business that provides financial and strategic service focusing on pre-IPO and M&A advisory for our Brazilian middle-market companies.

We think in our private market strategies, we have raised around BRL 9 billion in the last 2 years, including our third flagship growth equity, private equity fund Vinci Capital Partners III, our first dedicated infrastructure fund, Vinci Infra I in addition to other credit and real estate funds. Turning to liquid strategies, our Public Equities and Hedge Funds AUM has more than doubled since 2018 when interest rates started to decline. The Investment Products & Solutions business has more than doubled its AUM with the increasing demand for exclusive mandates from institutional clients. We expect the low interest rate environment to continue to drive accelerating growth in our liquid strategies, reflecting rising demand for our high value-added products.

In summary, momentum continues to build across our platform with Vinci well positioned to deliver sustainable growth in AUM, fee-related earnings and distributed earnings. And I am more excited than ever about our prospects as we embark on the next stage of our journey as a public company with our team members, limited partners and fellow shareholders.

And with that, I will turn it over to Bruno.

Thank you, Alessandro, and good afternoon, everyone. To start, a quick recap of our results. We reported profit of BRL 52 million for the fourth quarter and BRL 169 million for the full year of 2020. After dividend to partners, adjusted profit totaled BRL 40 million and BRL 132 million for the quarter and full year, respectively.

On Slide 9, we'll walk through some financial highlights. Adjusted fee-related earnings totaled BRL 38 million for the fourth quarter and BRL 151 million in 2020. For the year, FRE was up 54%, with much of the growth driven by higher management fees and a positive contribution from the operating leverage of our business. Importantly, as we continue to grow, our financial profile supports sustained margin expansion and lower breakeven thresholds for new product launches. For the fourth quarter of 2020, Vinci generated adjusted distributable earnings of BRL 37 million, bringing our full year total to BRL 127 million or 30% higher compared to the level of 2019. Net performance revenues totaled BRL 23 million for the quarter and BRL 40 million in 2020.

As mentioned earlier, total AUM reached BRL 50 billion as of the end of 2020, up 36% for the year. Similarly, our fee-earning AUM ended the year at BRL 48 billion, up 37% from the end of 2019, with much of the growth related to private market new capital subscription and net inflows across our liquid strategies and Investment Products & Solutions businesses. Performance-eligible AUM totaled BRL 32 billion at year-end 2020, up 52% for the year and represented nearly 70% of our total fee-earning AUM.

One key point to highlight in Slide 10 is long-term AUM, our assets with lockup periods of at least 5 years to quasi-perpetual funds. This grew by 48% in 2020 to BRL 25 billion and now represent half of our total AUM base. That mix underpins the steady nature of our management fee-focused revenue profile.

Furthermore, our AUM remains broadly diversified by duration, asset class and distribution channel, as shown on Slide 11. More than half of our net revenues were sourced from private market strategies with management fees typically based on long-term capital commitments, thereby mitigating redemption and market-to-market risk. Turning to distribution, local and offshore institutional clients account for about 60% of our AUM, with the remaining 40% well balanced across high net worth individuals and our high-growing, retail-dedicated distribution channels, allocators and distributors and public market vehicles.

In Slide 12, we present AUM roll-forwards for the fourth quarter and full year of 2020. For the fourth quarter, AUM was up [2%] or BRL 1.1 billion to a total of BRL 49.8 billion as strong market appreciation and BRL 861 million of private market net capital subscription were partially offset by a BRL 2.7 billion outflow in our liquid strategies. This outflow was primarily due to a redemption of BRL 2.8 billion from public equities AUM related to the termination of an association with GAS Investimentos. This capital paid nominal management and performance fees. Turning to the full year, AUM was up 36%, primarily driven by strong net flows of BRL 7.1 billion for the year in our liquid strategies and IP&S; and net capital subscriptions of BRL 2.1 billion, which include primarily our REITs and private equity fundraising. In addition, AUM growth in 2020 also benefited from BRL 4 billion of portfolio appreciation.

In Slide 13, we present our robust fundraising across private market funds in private equity and real estate and net flows from our liquid strategies and IP&S. Our real estate team raised over BRL 1.5 billion through 6 different capital raising processes in the Brazilian stock market in 2020 of which, in average, over 60% of the capital raise was subscribed by the existing original shareholders of the funds. In the last quarter, we also started signing commitments for our impact fund within our private equity business, VIR IV, with more than BRL 760 million in capital subscriptions as of January of 2021. Liquid strategies were responsible for more than BRL 2 billion in net flows in the year, including the outflow from GAS during the last quarter. As for our IP&S business, total net flows reached approximately BRL 5 billion in 2020 as we continue to see strong demand for investment advisory services.

Looking ahead, we expect to further expand our fundraising pipeline by capitalizing on all ongoing government privatization programs and the continuing development of private credit in Brazil. We expect that as we continue to strengthen our relationships with LPs, we will see acceleration of fundraising activity across our platform. As an example, the amount of long-term capital raised over the last 5 years is more than 2x the level brought in from 2011 to 2015.

Turning to Slide 14. Since we are approaching the end of the first quarter, we thought it would be helpful to provide an update on how AUM is tracking thus far for the quarter. Total AUM is up to BRL 52 billion as of the end of February 2021 with strong net capital subscription from private equity infrastructure funds in addition to BRL 1.4 billion in net flows. During the first month of 2021, we had inflows of BRL 2.8 billion, including the IPO net proceeds, and BRL 1.4 billion in our IP&S business. Outflows totaled BRL 1.4 billion, of which BRL 660 million came from a sovereign wealth fund mandate in Public Equities, which pays nominal management fees. Therefore, we expect the impact of this outflow in future management fee revenue to be limited.

And with that, I'll turn it over to Sergio.

Thank you, Bruno. As Alessandro mentioned, our revenues are primarily derived from management fees, which accounted for 80% of total net revenues last year, as shown on Slide 15. Furthermore, long-term lockup capital commitments account for around half of our total AUM, thereby enhancing the stickiness of our asset base and related revenues. These generated net revenues of BRL 105 million in the fourth quarter, bringing the total to BRL 340 million for 2020, up 15% year-over-year.

Turning to Slide 16. Management fees were BRL 76 million in the quarter and BRL 271 million in 2020, up 21% year-over-year, reflecting growth across all asset classes. We saw mostly stable management fee trends across our business in 2020, with slight fee increases in IP&S and private markets and a slight decrease in public markets. Going forward, we expect the fee rate for liquid strategy funds to trend higher as a result of the termination of the revenue-sharing agreement with GAS Investimentos.

Turning to Slide 17. Our net performance revenues were down year-over-year, reflecting lower contribution from our liquid strategy funds due to higher market volatility following the COVID-19 outbreak. Nonetheless, the underlying balance across segments improved, reinforcing the benefits of diversification. In terms of our performance fee eligible AUM, 35% comes from preferred return and 65% comes from funds that's charging incentive fees over a hurdle rate, typically the case for funds in our liquid strategies and IP&S. And the appendix in Slide 34 maps out our long-term investment performance track record by strategy. The key takeaway is that Vinci's strategies have consistently outperformed respective benchmarks across all of our business segments. And importantly, Vinci's strategies remain focused on generating sustainable offer to minimize broader market risk.

Next on Slide 18. Adjusted fee-related earnings coming at BRL 38 million for the fourth quarter and BRL 151 million for 2020, both up strongly compared to prior year levels, reflecting robust AUM growth. Furthermore, profitability continues to improve with an adjusted FRE margin of 46% for the fourth quarter and 50% for 2020, up 8 percentage points year-over-year. Our highly diversified assets and revenue profile reinforce our resilient business model with around 50% of AUM held in long-term products and more than half of net revenues coming from private market strategies. In addition, we expect to be able to show continued operating leverage and further margin improvement as our business grows.

Next, on Slide 19. Adjusted performance-related earnings were down for the quarter and for the year driven by lower revenues given stepped-up market volatility, primarily a function of the COVID-19 pandemic. Adjusted PRE totaled BRL 27 million in 2020, down 39% versus the level in 2019, with BRL 50 million coming in the fourth quarter of 2020.

Turning to adjusted distributable earnings. We generated BRL 37 million in the fourth quarter, down 12% year-over-year, with the decline largely a function of lower performance-related earnings. Adjusted DE in the full year 2020 was BRL 127 million, up 30% year-over-year, driven by the strong growth in FRE. Profitability improved for the full year with adjusted DE margin of 38% for 2020 compared to 34% for 2019, reflecting a strong operating leverage across the platform.

And with that, I will turn it back to Bruno.

Thank you, Sergio. In Slide 22, we lay out some key points related to GP commitments and our dividend policy. As Alessandro mentioned, we plan to leverage the capital raise from our IPO to accelerate the growth of our platform. Aside from potentially capitalizing on consolidation opportunities, IPO proceeds are primarily earmarked for seeding new private market funds. We have already signed commitments totaling BRL 120 million, being BRL 70 million to Vinci Fulwood, our real estate industrial site development fund; and BRL 50 million to VIAS, our infrastructure fund focused on water and sewage. We expect to reach full commitment of the IPO primary proceeds by the end of 2022.

In the meantime, uncommitted proceeds will be invested in Vinci's liquid funds. For this liquid market allocation phase, we built a portfolio of products that both intend to maximize leverage on third-party fundraising and also limit volatility in returns. Our target return for this capital will be CDI plus 2.5% per year with 3% annual volatility. Historically, this portfolio has presented 1 negative quarter in every 11 quarters, and that negative return was 1.6%. Therefore, the intention is to drive increased fundraising activities across liquid funds while also limiting the volatility around this capital.

In terms of dividend policy, we intend to return at least 75% of distributable earnings in the form of a semiannual cash dividend and/or share repurchases, reinforcing the high free cash flow nature of our business model. Initially, capital return will likely take the form of cash dividends to common stock shareholders.

Turning to our segment highlights. I would like to clarify that we are presenting gross and net revenues and also operating profit before bonus for each of our verticals. Starting next quarter, we will present FRE, PRE and distributable earnings for each of the verticals as we adapt allocation of expenses within the company post-IPO.

Starting with private markets in Slide 24. Private Equity AUM totaled BRL 11 billion at the end of 2020, up 18% year-over-year. Fundraising activity remained strong with the first closing for our Vinci Impact and Return fund IV in the fourth quarter. On the deployment side, our flagship private equity fund, VCP III, invested during the fourth quarter of 2020 in Agibank, a digital financial service company. As of year-end 2020, VCP III had deployed nearly 50% of the fund's committed capital.

Real Estate AUM increased by 34% for the year ended 2020 at BRL 4.5 billion. Much of the growth can be attributed to 6 successful capital raising processes for listed REIT vehicles last year with additional fundraisings thus far in 2021.

Next, Infrastructure AUM ended 2020 at BRL 2 billion. In the first quarter of 2021, our listed energy infrastructure fund raised BRL 404 million in a follow-on offering, and we also raised BRL 256 million in a first close for our new strategy focused in the water and sewage sector.

Finally, Credit AUM totaled BRL 2 billion at year-end 2020, up 8% over the last 12 months, primarily driven by a first close in our 5th multi-strategy credit fund during the fourth quarter.

Turning to our liquid strategies segment in Slide 25. Public Equities AUM totaled BRL 12 billion on December 31, 2020, up 36% year-over-year despite the previously discussed lower fee outflows related to the GAS Investimentos we dropped in the fourth quarter.

Hedge Fund AUM grew 53% in 2020 and ended the year at BRL 3 billion driven by nearly BRL 800 million of net inflows last year. Much of the organic growth in our Hedge Fund business can be linked to strong investment performance track records. Our flagship strategy has generated a total return of 135% of the Brazilian CDI rate since inception.

As shown in Slide 26, Investment Products & Solutions AUM ended 2020 at BRL 16 billion, representing a 61% growth rate for the year fueled by rising demand for Vinci's allocation services for local and offshore portfolios. As evidence, IP&S net inflows totaled nearly BRL 5 billion in 2020 with about BRL 800 million during the fourth quarter of 2020. This growth is primarily due to 2 factors. One is the increasing demand for separate account mandates from local institutional clients as we won 6 new mandates in 2020 that represent over BRL 1.9 billion in additional AUM for Vinci. Another factor is the growth seen in our offshore mandates. This grew 149% in 2020 as Brazilians increasingly look for investment diversification.

Finally, in Slide 27, we walk through some highlights for our Financial Advisory business. Total net revenues were BRL 6 million in the fourth quarter and BRL 28 million for 2020, up 285% year-over-year, reflecting stepped-up activity across M&A advisory services. As an update, the team has participated at the exclusive financial adviser for Espaçolaser in their successful IPO in the Brazilian stock market during the first quarter of 2021.

In summary, we believe Vinci Partners remain well positioned for sustained growth, reflecting our scale-enabled, diversified and integrated business model, strong long-term investment performance track record across multiple strategies and a global, well-balanced distribution platform.

With that, I will pass it back to Alessandro for some closing remarks.

Thanks, Bruno. In closing, we believe Vinci remains in a very strong position to capitalize on transformational industry trends in Brazil, reflecting our well-diversified platform. Our business model remains a key differentiating factor in light of our long-term lockup AUM concentration, management fee-centric revenue profile and total return investment strategy bias. And our long-standing partnership model strengthened the team's alignment with our clients and shareholders.

We thank you all for joining the call. And I will now like to open it up for questions. Operator?

(Operator Instructions) Our first question comes from Mike Carrier with Bank of America.

Just given some of the recent events in Brazil and expectations for higher interest rates ahead, just wanted to get your thoughts on if you see any impact on the portfolio returns or fundraising ahead. And at what level of interest rates would you expect to see some impact on potential growth?

Okay. This is Alessandro. Thank you for your question. That's a very good question indeed. The point is this level of interest rate up trends in the market right now is something that's pretty much, in a way, implied in the forward interest curve in Brazil. So we are talking about with smaller changes in this curve in the recent, I would say, last few weeks, of course, going up in, I'd say, 50 bps, depending on the maturity of the curve. But this interest rates going up, it's something already implied in the curve. And this is in a way linked with growth in our inflation rate at the same time. So the real interest rate is still very low even in the implied in the interest rate curve. So we are not seeing, and this is, in a way, already -- a good example is the numbers that we have been raising for long-term products in the first quarter until now that we mentioned to you during this presentation. So we are not feeling this effect in any of our fundraising activity yet.

Of course, depending if this trend moves up more than what's implied right now and there is a big shift in interest rates, of course, that will change the perspective going forward. But until now, we are not seeing this changing much the fundraising activity or even the performance of our portfolio, especially on the private market side.

Our next question comes from Tito Labarta with Goldman Sachs.

My question is on your margins. You mentioned a couple of times you see plenty of room for FRE margin expansion. Just if you can help us think about how that should evolve in terms of the margin expansion you could see this year and then beyond. And also just to clarify on the quarter, should we expect to see some seasonality on the FRE margin, like, fourth quarter is typically lower? I just wanted to confirm that.

Okay, Tito, thank you for the question. So in regards to the expansion, we had a substantial expansion in 2020, right, with the growth that we had. Looking forward, I think we're talking about our continued potential to continue to expand this margin. Obviously, it will depend on the speed of our AUM growth. Last year, we grew AUM by about 35%. So that obviously helped us quite substantially with that 800 basis point expansion that we saw. But looking ahead, I mean, if we're able to continue to drive AUM growth in the same level and then, obviously, driving revenue, we should expect that expansion to continue in the same pace, I would say, right, so probably a few years ahead, still with opportunity for us to expand those numbers going forward.

In regards to seasonality, I think there's some seasonality in the end of the year, depends a lot on the -- basically on service and on the bonuses, I would say, the two that are more relevant. But other than that, I wouldn't expect it to be material in regards to seasonality.

Okay. Bruno, that's helpful. Maybe just one follow-up then. I guess, in terms of the AUM growth and following up on Mike's previous question, is the level of growth that we saw this year, do you think that's doable again -- I mean, in 2020, doable again in 2021? And given sort of, I guess, the rising, any strategies that concern you more, I guess specifically more on the liquid strategies, I imagine. But just trying to get a sense of how that growth could evolve in '21.

Okay. This is Bruno again, Tito. So as Alessandro said, I think we started the year pretty strong on the private markets side. It's something that we are very happy. We were able to close VIGT. We're able to close VIAS, VFDL. So several -- VIR, we did further closings during the 2021 period. So on the private market side, the drivers of value and of fundraising are very strong. And we expect, on our listed funds, to continue to have opportunity throughout 2021 for follow-ons. In regards to IP&S, we're seeing very strong momentum. So we saw several big wins in this first 2 months of the year. And we have a very good pipeline, and we don't see that trend abating anytime soon. So I would expect that also to continue to trend favorably.

What we did have in the first couple of months was a little bit more volatility on the Public Equities side, right? So we had the IBOVESPA is down about 7% until the end of -- 7.5% year-to-date until the end of February. I think that creates two consequences for us. I think it creates some volatility around fundraising. Although we did have some pent-up demand for one of our funds, which we opened recently, and we expect some flows to come in. But obviously, the volatility in the public market, it acts as a break on short-term inflows. And the other point is that it also creates some volatility around performance in the short term, right, because we had this drawdown in the public markets. So from the Public Equities side, there might be some volatility in performance in the short term. So -- but we're still seeing very good trends in several of our business lines.

(Operator Instructions) Our next question comes from Thomas Peredo with BTG.

I have one follow-up question on your capital raising. I just want to get a sense if, with the IPO and the stronger position outside, you see that you could continue improving the percentage of your AUM that comes from long-term investments. For example, you mentioned that in the quarter in the year, you reached 50% with 5 years or more and growing 48% year-over-year. Just want to get a sense if you expect this trend to continue, eventually helped by the IPO. And how -- what would be a level that you would think it is ideal to have from long-term investments versus shorter-term investments?

Okay, Thomas, thank you very much for your question. This is Alessandro. That's a very good question, indeed. I think I can attest to you that in the last 2 months, after the IPO, almost 2 months since we became public, the effect was really very important to us. We have been very successful in converting all the brand awareness and all the effect of the IPO in fundraising. Especially on the private market side, as Bruno mentioned, with some successful fundraising like VFDL and VIGT. Also the follow-on fundraising of VIR and also VIAS, that's our water and sewage fund on the infrastructure side. Another very important point, and this, I could cover all types of investors, not just local but international investors, with more interest -- with the awareness of the IPO and the interest of becoming partners and LPs of more, like, a transparent and listed company that's not very typical in the market here.

Another very important point, especially in IP&S, we saw ourselves being much more competitive in terms of full mandate for asset allocation for local institutional investors, especially one from multinational companies where the fact of being listed in the NASDAQ made all the difference. So to your point, I would say that we are really converting all this brand awareness and marketing in a way of being listed in fundraising, okay? To your point, the balance -- the ideal balance, I don't know exactly how to answer this question. What I would like to say is that, in the short term, probably, we should see the balance moving towards a higher portion of our AUM going for long-term type of mandates because of our fundraising pipeline of private market funds, because of the IPO making it possible for us to accelerate this fundraising like we saw in the first 2 months of the year but, at the same time, we are winning mandates on the IP&S business that not necessarily has a 5-year formal lockup. So in a way, we see this trend of more private market funds but, in the other side, we are seeing also money flowing from IP&S.

I'm not showing any further questions at this time. I would now like to turn the call back over to CEO, Alessandro Horta, for closing remarks.

So thank you all for listening to our first call as a public company. Again, we are very excited and very upbeat with the opportunity. We are seeing the effect of the trust that the market put on us really converting in fundraising and very good perspective going forward. Of course, we would love to hear your suggestions and ideas about how to translate our numbers and our strategy more of a clear message to you going forward. And thank you again to you all who listened to us today. Good night to you all, good evening, and see you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.