VINP - Vinci Partners Is Still A Buy

Summary

• VINP is a Brazilian asset manager specialized in the alternative assets space.
• The company has shown tremendous growth and great business economics.
• This year has been more challenging on the operational side, with performance and advisory fees down.
• However, the company was more than able to maintain AUM, and sustain its dividend with investment income from its assets.
• In a more positive context, VINP should be able to return to growth.

Vinci Partners ( VINP ) is a Brazilian asset manager, specialized in private equity and credit but already diversified to public equities, hedge funds, special situations and retail pensions.

In November 2021 I wrote a hold rating article on VINP, followed by a buy rating article in June 2022. In this revision, I still consider VINP a buy, after the company showed sufficient resilience to the higher rate environment. The company also maintains its R$1.3 billion securities position, strengthening its balance sheet.

In a more positive context, VINP should be able to significantly increase earnings impulsed by performance fees and advisory revenue. But in the meantime, VINP is paying a $0.2 quarterly dividend (8% yearly yield at current prices), that is in part covered by recurrent earnings from management fees and in part from financial income.

Note: Unless otherwise stated, all information has been obtained from VINP's filings with the SEC .

Business description

I recommend that you read the article from November 2021 for more detail on VINP's historical operations and business characteristics.

Brazil private markets asset manager : VINP is one of the leading asset managers in Brazil when it comes to private markets. The company has launched funds in equity, credit, real estate and infrastructure.

Diversified to other asset classes : Today, around half of VINP's AUM come from other asset classes, including public equities, hedge funds and ETFs.

Long term AUM : 50% of VINP's AUM have formal lockup periods exceeding 5 years (coming from private vehicles and closed-ended ETFs). According to the company, another 40% of AUM comes from institutions and HNWIs that tend to have long term investment horizons.

Great economics : Most of VINP's products are managed by a small group of people that have their compensation tied to performance. This generates fantastic unit economics. VINP's operating margins at the business unit level have been well above 50% and the company does not suffer from enormous operational leverage. The recent fall was caused by a fall in performance and advisory revenue (more on this later).

Cash flow conversion has also been very high. Managerial fee and advisory revenues are tied to cash, while performance revenues are not. Performance revenues may require the exit of a business for cash conversion, particularly for private strategies. The recent fall in cash flow conversion rate was generated by more income coming from the company's investments on its own mutual funds, in comparison to operating income. We will see that even if not considering this income, VINP is attractive.

Zero financial leverage, semi-liquid balance sheet : As of 3Q22, VINP sustains zero debts . Total liabilities are R$150 million. On the other hand, the company has participations on its own funds for R$1.3 billion (~$260 million). These R$1.3 billion were obtained from the IPO and the company will probably deploy them on its own private funds.

High dividend payout ratio : With not many cash needs, and a business that does not require capital, VINP can pay most of its income as a dividend. The 3Q22 dividend was increased to $0.2 per ADR per quarter (a yearly yield of 8% at current prices).

High insider ownership : The Chairman controls 77% of votes through class B shares. Managers and directors control 27 out of 56 million shares, and pre-IPO shareholders control another 14 million shares. Pre-IPO investors were locked from selling until January 2023 but cannot collectively sell more than 5% of the outstanding shares of the company in a six-month period ( FY21 20-F #Liquidity restrictions on pre-IPO holders ).

Recent developments

My main fear in previous articles was that the change from a context of falling rates to one of raising rates in Brazil would affect VINP's AUM and private strategies.

Control in outflows : The company launched R$1.2 billion in private funds in 2022 (from a base of R$22 billion one year ago) and received capital subscriptions on its long-term vehicles from R$4.7 billion in the LTM.

Public strategies saw outflows during that same period of R$1.4 billion. The additional fall in prices has affected liquid strategies AUM, falling 15%. The other segments have grown AUM.

This is one of the main risks, and Brazil is said to have already reached peak rates, after skyrocketing them from 2% in 2021 to 14% in August 2022.

Expansion to new asset management areas : VINP acquired a R$2 billion AUM company in the special situation segment for R$100 million. The company was also recently authorized to offer life insurance and pension savings products to retail clients.

Change in capital strategy? : The new life and pension product have to be followed closely, as they can change the economics of VINP if done wrong. Selling to retailers probably requires a different (more operationally leveraged) asset and personnel structure.

In a similar vein, I do not really like VINP's strategy of investing R$1.3 billion on its own private funds in the future. The company's business should remain managing money, not investing its own. Although investment income is positive some years, it adds volatility to earnings and may reduce returns on capital.

Performance and advisory dry up : As of 9M22, management fees have kept in line with AUM, growing 1% YoY. However, because of clawbacks and the general fall in markets of all types, this has been a bad year for performance fees and advisory, down 82% and 60% during the same period.

The company has compensated that fall with realized income as a general partner in some of its funds, and through financial income from its R$1.3 billion invested mostly in credit products.

Valuation

R$1.3 billion in mutual funds : These funds are only relatively liquid (valued through Fair Value Level 2 indicating lack of direct market), so they cannot be considered cash directly.

VINP will probably not return those funds to shareholders in the form of dividends or share repurchases, but will rather use them to accelerate the launch of its own funds, committing that liquidity to long-term vehicles over time. As commented, I do not believe this is a great strategy.

For these reasons, I do not quickly jump to the conclusion that one has to remove these R$1.3 billion ~ $260 million from VINP's market cap to find a dirt cheap EV of $320 million. However, the funds do provide a significant margin of safety for dividend maintenance.

Net earnings from operations in a dire situation : With performance and advisory at depressed levels, and removing some financial accounts, we can arrive at what I consider a good gauge of earnings in a bad year (as long as the strategy is maintained).

From distributable earnings ( a non-GAAP measure from the earnings presentation ) of R$186 million in 9M22, I subtract R$80 million in financial income ($64 million after tax) and R$13 million in realized GP income ($10 million after tax).

The result is R$112 ~ $22 million in net income from operating sources for the 9M22 period. Annualized this comes to about $30 million. In a good year like 2021, that same income from operating sources reached $40 million.

With operating margins of 50% and taxes of 20%, each additional reais of revenue is transformed into $0.4 reais of net income, so the company can generate profitable growth in a better context too.

Conclusions : The current earnings multiple is not very good, with a market cap of $553 million over operating earnings of $30 million (P/E ratio of 18). Considering a better context, the P/E ratio improves to 14, still a little high. Please keep in mind that market multiples (based on earnings including financial income that I am subtracting) are much lower.

On an EV basis, VINP is much cheaper, but I do not like this approach because the company is not planning to return its net assets to the shareholders. I do like VINP having liquidity for emergencies and investment (if they are applied to good projects).

Overall, however, I believe that VINP is a business of high quality because of the characteristics mentioned in the first section and in previous articles: great economics, low capital requirements, mostly variable expenses, low taxation, good cash conversion.

Therefore, I still consider VINP a buy. The company is financially strong and has shown resilience to a high rate environment. While I wait for more risk-on economic conditions, I can still receive an 8% dividend from the company.

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