Vinci Partners Investments Ltd.

Good afternoon, and welcome to the Vinci Partners third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we 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.

Thank you, and good afternoon, everyone. Joining today are Alessandro Orta, 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 at ir.vinciopartners.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 discussion of some of the risks that could affect results, please see the risk factors section of R20F. 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 venture partners fund. With that, I'll turn the call over to Alessandro.

Thank you, Ana. Good afternoon, and thank you all for joining our call. Vinci Partners announced today remarkable results for the third quarter of 2021. Fee-related earnings reached 63.1 million reais, an increase of 74% year-over-year, a continued progress in FRA results. FRA margin reached 53.5%, over 300 basis points higher than 2020 full year's margin. Distributable earnings, totally R$ 61.7 million, or R$ 1.09 per common share, up 137% year over year. We ended the quarter with 58 billion reais in AUM with private market strategies and IPNS accounting for almost 3 billion in net inflows in the quarter. These results build upon an amazing first half of 2021 and showcase our long-term growth trajectory. Shifting to dividend distribution. From this quarter on, we will start distributing quarterly dividends. For the third quarter, the company declared a dividend of $0.16 on the dollar that, combined with share repurchase, represented 100% of distributable earnings. Our business model is extremely capital efficient, which enables us to deliver strong organic growth while still paying out a relevant portion of our cash earnings to our shareholders. All these great results are a consequence of what we believe to be the key attribute of our business model and the principal message of our call, which is resilience. We are delivering outstanding results while facing some quite volatile market conditions in Brazil. And one of the main attributes that make Vinci so resilient is diversification. We have built one of the most diversified and complete platforms for alternative investments in Brazil, enabling us not to only go through, but to expand our business even during more challenging macro scenarios. As an example, from 2014 to 2016, Brazilian GDP dropped by 7% and Vinci grew its AUM by 10%, and this was in a time when interest rates were in the low teens. We believe that the core strengths of Vinci remain unchanged and we allow the business to thrive even in periods of heightened market volatility. These core strengths include our AUM and revenues are well diversified, within our seven different asset management strategies, in addition to our financial advisory business. Our proprietary funding base relies on five different groups of investors, from retail to institutional. Approximately 50% of this capital carries formal long-term lockups. We have a leading and extremely well-recognized private markets platform, And, at last, a one-of-a-kind IPNS segment that differentiates Vinci and has been a major source of growth inside the firm this past year. On the other hand, the current scenario has a short-term impact on fundraising for liquid strategies, with volatility impacting a more pro-cyclical investor type. In addition, our public market vehicles also present additional challenges going back to market in such conditions. Nonetheless, we raised over R$ 350 million this quarter for one of our REITs, VISC-11, through a pioneer paying-kind all-stock transaction in the REIT market. This will pave the way for additional transactions using the same structure, which allow us to grow AUM in our listed business even when primary issuance is temporarily more challenging. Some parts of the business should actually benefit from the current market scenario. First, our investment income, as we currently carry an asset-sensitive balance sheet. Vinci currently carries approximately 1.5 billion reais in cash with over 85% exposed to fixed income products. Therefore, financial income is set to become a relevant driver to receivable earnings in the mid to long term with the rise in interest rates until proceeds from the IPO are gradually shifted from cash allocation into private market funds GP commitments. We are also very excited for prospects in private credit fundraising. The team is in the process of putting out a new listed product and we expect significant demand for credit products going forward. We believe this to be a great opportunity in the marketplace with traditional credit venues still holding most of the market share in credit in the country. Due to our diversified platform, we can mitigate risks by not being too concentrated in a single asset class, and we benefit from the growth tailwinds of at least one of our segments, as we have seen this year with IPNS, private market funds, and the advisory business. Our management team remains confident that we will continue to grow our platform and generate attractive results for our shareholders. Moving on from this quarter financial results, I'd like to share with you two exciting news for Vinci. First, we are proud to announce that Vinci Partners is the first Brazilian asset manager to receive the Women on Board seal. Women on Board is an independent initiative that seeks to recognize value and publicize the presence of Women on Boards of Directors or Corporate Advisory Boards. As we talked about in our last Earnings the independent part of our board of directors, is composed by four independent members out of a total of eight seats, with two of them being women since we appointed Ms. Sonia Favaretto to our board in August 2021. We are extremely active on our ESG commitment and have installed an ESG committee reporting to the board of directors with Ms. Favaretto as its chairperson. Finally, we are thrilled to share with you the official launch of Vinci's first-ever marketing campaign built on the pillar Reputation is the Best Investment. The project reinforced some of our main values, transparency, solidity, ethics, and consistency, which, together, built up our most valuable asset, our reputation. The campaign has as protagonists two Brazilian personalities that have a parallel with these 20 values, the singer Maria Bethânia, who has a consistent and successful trajectory, and the equestrian athlete, Olympic and world champion Rodrigo Pessoa. In addition, we are also modernizing our brand and visual identity in line with this new moment of growth. always in the best Vinci style. The campaign's content and advertising has been launched in all major advertising outlets in Brazil. We are very encouraged by the feedback of the project so far and expect it to consolidate Vinci as a reference for alternative investments in Brazil. I'd like to thank you all for the continuous support and interest in Vinci Partners. And with that, I'll turn it over to Bruno to go over our financial results for the quarter.

Thank you, Alessandro, and good afternoon, everyone. Starting on slide 9, we go over AOM roll-forwards for the quarter and year-to-date. We ended the third quarter with $58 billion in AOM, driven by strong fundraising of $2.6 billion in the quarter. our private market strategies raised approximately $600 million of long-term commitments with highlights to our real estate and infrastructure strategies. In real estate, our shopping mall REIT, VISC, raised $364 million through a paying-kind stock transaction, as Alessandro mentioned before. In infrastructure, we carried out the second closing of VIAs, our water and sewage strategy. The fund has raised so far R$384 million. We launched a new strategy within our IPNS business called Vinci Strategic Partners, or VSP. The fund is focused on private markets allocation and raised R$61 million in this first round of funding. We expect to continue fundraising for this strategy throughout 2022. Our IPNS business is currently composed mostly of liquid allocations. With VSP, we are adding a new capability within the firm, which we believe opens a highly relevant addressable market for us, where very few players have the track record, knowledge, and experience as Veche does. Additionally, we have $2 billion in net inflows during the quarter, most of it coming from IPNS exclusive mandates with 1.9 billion raised in the quarter, while fundraising for credit funds accounted for 223 million reais. AUM was impacted by negative 1.6 billion from funds depreciation coming mostly from public equities following the 12% decline in the Ibovespa index in the third quarter. Moving on to slide 10, we can see that Vinci continues to display solid trends in AOM growth against the previous year. AOM grew 19% against the same year ago period as we continue to expand our platform by raising new funds and creating new strategies and investment opportunities. Long-term AOM with at least five years of lockup represents roughly 50% of total AOM. Perpetual capital almost doubled in just one year. primarily due to success in our leased fund strategies, and currently represents 25% of long-term AUM. Furthermore, our AUM remains broadly diversified by duration, asset class, and distribution channel, as shown on slide 11. 43% of total revenue so far this year were sourced from private market strategies, with management fees typically based on long-term capital commitments, thereby mitigating redemption and mark-to-market risk. In terms of 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. We reached $36 billion in performance-eligible AUM, as you can see in slide 12. This quarter, aside from IPNS mandates, we generated performance primarily through funds with no high watermark, such as our sovereign wealth mandate in public equities, given the overall decline in local markets during the quarter. On slide 13, we go through our fee-related revenues composed of management and advisory fees. Management and advisory fees totaled R$118 million in the quarter, representing an increase of 64% year-over-year. Management fees were up 30% year-over-year, driven by our strong growth in fee-earning AUM across private market funds and IPNS. Financial advisory contributed with revenues of $25 million in the quarter, adding up to $47 million in the year to date. Advisory fees are up 105% when compared to last year's three first quarters. This has been a very strong year for financial advisory, and the group has driven important upside to our results due to a much stronger deal activity in 2021. Our advisory team has had an exceptional year, and we believe several of the recent closed mandates represent an expansion of the team's core capabilities. An example is advisory service to early-stage and venture capital-type companies, which positions us well in a growing market in Brazil. Turning to slide 14, we go over operating expenses for the quarter. Total operating expenses were up 57% year-over-year, and 49% on a comparable basis to 2020 expenses pre-IPO, where we removed $2.9 million in costs related to being a public company. These costs include the change in the company's compensation structure, hirings for board members and support teams in accounting and shareholder relations, and some third-party services such as NASDAQ listing fees and others. Additionally, during this quarter, we had 2.2 million reais in expenses related to the company's new branding project. As we have been mentioning in the last few calls, we were in the process of launching a new branding project targeting domestic investors looking to raise brand awareness. This resulted in Vinci's first marketing campaign, which has been officially launched in Brazil in all major media outlets, as Alessandro mentioned. We are extremely satisfied with the campaign's impact thus far and look forward to strengthening our brand's recognition as the leading alternative asset management brand in Brazil. Despite the new listed company costs and the branding project, expenses are growing at a slower pace in our revenues, which translates into FRA margin expansion. On slide 15, we present our fee-related earnings. FRE was 63.1 million reais, or 1.12 cents per share, representing an outstanding increase of 74% year over year. Our FRE continues to be the core indicator of our business, as management fees continue to grow alongside our strong fundraising. In the year to date, FRE was 168.5 million reais, an increase of 48% year over year. In the FRA bridge chart, we present the breakdowns of our fee-related revenues and expenses. Comparable FRA margin would have been 58%, five percentage points higher than our reported FRA margin for this quarter of 53%, and eight percentage points higher than FRA margin for the third quarter of 2020. We believe this information is interesting to show the operating leverage of the platform in a year of strong AUM growth. Both our new public company costs and the one-time strategic branding effort have represented headwinds for stronger margin gains this year, although we have been able to significantly grow FRA margins in 2021 versus the last year despite these effects, considering the positive trends in AOM growth so far combined with higher fees coming from advisory. Next, in slide 16, PRE was 3.8 million reais in the quarter, up 192% year-over-year. This increase was primarily driven by higher performance fees contributions from IPNS international mandates, which were realized this quarter. We also had performance fees coming from our sovereign wealth mandate in public equities that charge performance based on pure alpha generation. Our international mandates in IPNS have been a major source of upside in performance fees in the year to date, representing 50% of all performance revenue generated by the company in the last three quarters. We believe this business line has great potential to grow, not only in terms of AUM, but as a source of future performance fees, in addition to our domestic IPNS business, our liquid and private market strategies. In the year to date, PRE totaled R21.3 million, up 83% year over year, Shifting to slide 17, we go over our realized GP investment and financial income for the quarter. We had $1.7 million in realized income this quarter coming from gains from our proprietary GP commitments in private market funds and our cash allocated in our liquid fund portfolio. The liquid fund portfolio underperformed the CDI quarterly return in the third quarter by 1.1 percentage points, a consequence of the extremely volatile market and widening of the interest rate curve in Brazil. The portfolio's exposure to fixed rate bonds at about 35% of total allocations suffered negative mark-to-market effects as interest rates began their rising cycle in Brazil. Despite this impact, the portfolio outperformed the IMA-BEA index by 1.7 percentage points, as most of it today is invested in floating rate bonds. Even as we face short-term impact in our fixed bond portfolio from the widening interest rate curve, we expect financial income to benefit from the recent increasing rates, as most of our cash allocations, or about 85% of the total, are exposed to fixed income products. Therefore, once the interest curve settles after this initial widening, we should start earning bigger interest on our cash balance. Turning to slide 18, the shiftable earnings were $61.7 million in the quarter, or $1.09 per share, up 137% year over year. This exceptional result was boosted by the growth in management and advisory fees, combined with realized performance fees coming from international IPNS funds in the quarter. In the year to date, distributable earnings totaled R$163.7 million, or R$2.89 per share, up almost 90% year-over-year. We are also expanding our DE margin significantly. reaching 47% at the end of the quarter, up 12 percentage points year-over-year. Finally, in slide 19, we show our cash and investment balance. We finished this quarter, the third quarter of 2021, with a total of 1.47 billion reais in cash and net investments, or 25.94 reais per share. Today, our cash and investment balances are comprised primarily by fixed income and liquid funds and will gradually be shifted into private market GP fund investments as capital commitments are called into the coming years. In the third quarter, we committed R$36.1 million to our private market funds, with highlights to a new credit fund, VCS, which is in the early stages of fundraising, and to VSP. our new strategy for private market allocation in IPNS. Total capital call during the quarter reached almost 40 million reais, coming primarily from VCS in credit and new strategies in infra and real estate, VIAs and VFDL. So far, the company has committed 302 million reais into private market funds, with about half of that capital having been called by the funds. For more detail, please see slide 32 of this presentation. With that, I'll turn it over to Sergio to go through our segments.

Thank you, Bruno. Turning to our segment highlights, as you can see in slide 21, the strength of our business, as Alessandro stated in his prepared remarks, relies on the platform's diversification. 47% of our FIE in the year to date is coming from our private market strategies, followed by liquid strategies with 21%, IPNS with 17%, and financial advisory contributing with 15%. The same level of diversification is reflected in our segment distributable earnings, except for IPNS that increased to 23% of segment DE with its contribution in performance fees this year. Moving on to each of the segments, starting with our private market strategy on slide 22. FIE in the third quarter was up 7% year-over-year following strong growth in fee-earning AUM. Total AUM grew 16% year-over-year and fee-earning AUM grew by 19% in the same period, highlighting important fund-raises across our four strategies within private markets, such as the final closing for VIR4, follow-on offerings in listed products across real estate and infra, and the launch of new strategies like VFDL and VIAs. Our deployment capabilities remain extremely strong in our private market strategies. Our flagship strategy in private equity, VCP3, recently announced its fifth investment with the acquisition of Pharmax, a leading Brazilian cosmetic platform, resulting in a 71% allocation of the fund's commitments. The fund is expected to close its 60 transactions soon. In addition, VCP3 has formally passed its successor fund allocation threshold, which means we are in a position to come back to mark with VCP4. VIR4 also closed an acquisition recently, which it announced through press release last week. An investment in Verge Fruit a Brazilian company focused on fruits and vegetable markets in the Northeast region. This transaction marked the fourth investment for VIR4, resulting in a 33.5% gross allocation of its capital commitments. Our closed and private market funds continue to deliver outstanding returns. VCP3 is currently marked at a 51% gross IRR in reais and 36% gross IRR in dollars. FIP transmission in infrastructure is marked at a gross IRR of 78.5% in reais and almost 60% in dollars. Turning to slide 23, liquid strategies FIE was up 60% year-over-year, with a strong increase in management fee revenues with the end of the revenue sharing agreement with GAES Investments by late 2020, which is the driver behind the expansion in average management fee. Performance-related revenues were down 41% year-over-year due to lower contribution from performance fees since most of our liquid funds carry a high water marker benchmark and, with the markets going down, are not able to charge performance fees. The only exception is our sovereign wealth mandate, which was the main contributor to performance revenues in the quarter. AUM and fee-earning AUM went down 17% year-over-year following significant market depreciation in the quarter. Moving on to our P&S business, on slide 24, following exceptional growth in fee earning AUM of 59% year-over-year, FIE was up 75% year-over-year. PIE posted an even bigger jump, up 346% year-over-year, driving by very strong performance in our international separate mandates. That was realized this quarter. Finally, in slide 25, our FIE for financial advisory totaled 15.2 million reais in the third quarter. In the year to date, advisory contributed to the company's FIE with 25 million reais, an increase of 95% year over year, a consequence of the much higher deal activity in 2021. As you go through our segments, it becomes evident that FIE and distributable earnings momentum is happening across all our business segments despite short-term market volatility. We believe the broad platform we have at Vinch put us in a great position to continue with the positive momentum despite the recent market volatility in the country. Once again, we would like to thank you for joining our call and your interest in our company. With that, I would like to open the call for questions. Operator?

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the found key. Our first question comes from the line of Ricardo Vidal from BTG. Your question, please.

Good afternoon, everyone, and congrats on the good results. I have only one question. We saw good resilience in terms of AUM in this quarter, despite all the market conditions and the worst macro environment, and was mainly helped by good inflows and fundraising, right, and also potentialized by the diversification of the AUM. With that in mind, and considering the further deterioration of the macro scenario you could see in the coming quarters, how can we expect this behavior for AUM growth, fundraising, Also, if you could comment a little bit more about how you're seeing investors' appetite for new funds in private markets and other more riskier type of vehicles. Thank you.

Okay. Thank you for the question. I will start answering you. That's Alessandro. And then if Bruno or Sérgio would like to complement, also I will let them jump in if it's necessary. So as you saw, we have been able to, of course, we suffered in terms of market-to-market, especially on the liquids side of the business, but we have been able to compensate that with the inflow that kept the average that we saw during this year of around R$1 billion a month. of net new money. We continue to see a positive market for some of our strategies, especially as we mentioned IPNS credit and some of our private market strategies. On IPNS, it's clear that the trend that we saw so far of us winning mandates for a more complete asset allocation both locally and internationally, it's still with some momentum. We saw a pickup of interest in our private credit products, and this is a consequence, of course, of assets migrating for more like fixed income type of assets. And finally, we have been able to raise money in our private market strategies in very specific strategies in infra or even private equity, but specifically also creating new fronts to raise money in listed vehicles like we did in real estate this quarter, this last quarter, with transactions where we acquire assets issuing shares of the fund without accessing the market that's, of course, with this volatility, it's not so easy. Having said that, Of course, especially from the public equities and hedge funds, we see a more challenging environment, not just for our products that are posting interesting performance, especially in public equities in terms of our peer group, but because the overall market, as we saw, there is an overall redemption of assets from these asset classes and when we look for NBIMA numbers and et cetera. We are not feeling that, but it will be probably a more challenging market. But we intend to compensate that with IPNS, private credit, and some specific fundraisings in our private market strategies. Bruno, do you want to add on top of that?

Yeah, just to complement the answer of Alessandro, this is Bruno. We are in a position in the private market side where several of our funds are fully invested. So we have already announced that our REITs and the listed infrastructure fund, they are all fully invested. On top of that, we recently announced another signing in our flagship private equity fund, Pharmax, and we expect a sixth transaction to also be added to that fund quite soon. So that would push the fund as well to close to a fully invested status. So we have a position today where cyclically we're going to be looking into a 2022, which will have the potential of being a heavy year for private market fundraising in big strategies for us, right? So, VCP, the REITs, the infrastructure listed vehicle. We are rolling out a new climate change fund in infrastructure as well. There are several strategies that are coming back and the other ones that Alessandro already mentioned. So, we do have initiatives that are lined up for 2022 that will work very hard to be able to compensate temporarily weaker environment for the liquid side of the business.

Makes sense. Thank you very much.

Thank you. Once again, if you have a question, please press star then 1. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Alessandra Horta for any further remarks. Oh, we just got a question. Would you like to take it?

Yes, of course.

Yes? Yes. Our next question comes from UBS. Your question, please. You may have your phone on mute.

Hello, everyone. Are you listening now? Yes. Okay, great. Thank you very much. Thank you, everyone, for taking my question. Just have a quick one on the management fee rates. So we see that the net management fees reduce it quite a lot. So I just would like to have more details on this trend in terms of management fee rates, we saw a reduction, especially in IPNS. So I just would like to get a sense from you what can we expect going forward, specifically in the IPNS. And additionally, still on the rates, if these scenarios with higher interest rates could enable you to have like higher net minimum fees across strategies and going forward. Thank you.

Thank you for the question. I think the rates regarding APNS, what happened is that when we're in a mandate, normally we start allocating this money over time, okay? So this starts with more like fixed income. When we receive the mandate, our very liquid assets, and we start allocating over time. And there is a composition of our fees that we can allocate to a certain limit in our own products that normally carries a high interest rate inside a fund structure, for example. And we can allocate in one of our products in one of our divisions. inside the APNS. So what happens is that the average management fee rate starts going up over time. So since we have been growing that during this time, we start in a lower fee bracket and start growing over time. So when we grow AUM, normally we reduce a little bit the fee bracket and then start recovering that over time. So this is the question regarding... management fee rates regarding IPNS. To your question regarding interest rates going up and how that could interfere with the management fee rate, I believe that that, of course, takes out some pressure over reduction in interest rates, even though we were not feeling that. And there is some space, especially in IPNS, that was a very good point of yours, where we can charge marginally higher rates. And also, this is true for private credit, where also that relates with high interest rates, so we can eventually have higher management fee rates. I don't know if Bruno or Sérgio would like to complement.

No, just to complement, Alessandro, the average fee rates are numbers that we monitor all the time, so... We see a very stable environment across the verticals. The only relevant change was the change that we saw in the liquids part of the business with the change in the association with gas late last year that created a more significant jump up in the average fee rate for the liquid side. But other than that, the trends in management fees have really been very stable. Of course, the mix of the business changed a little bit this year with IPNS growing very strongly. But other than mix and this impact on the equity side with the guys, investment mentors, dissolving the JV, the dissolving of that JV, the other trends are very stable.

Okay, good.

Thank you very much. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Alessandro Horta for any further remarks.

Thank you very much for your continued support, as I said, and the interest in our company. So thank you for the attendance and all the support, and see you very soon. Any questions that you have, you may address to our investor relations group. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.