Vinci Partners Posted A Challenging Bottom-Line Quarter, But Is Still A Buy (NASDAQ:VINP)

This article analyzes Vinci Partners Investments Ltd. (NASDAQ:VINP) Q2 2024 results and earnings call. It also reviews the company’s valuation and the Buy rating I have maintained on it since 2022.

The company’s results were ok on the top line, but very challenging on the bottom line. The reason is the combination of several (hopefully non-recurring) factors, like the BRL devaluation, the recognition of earnouts, and the payment of consulting fees for the Compass acquisition. This led to one of the worst quarters in terms of net income, although adjusted earnings were more regular.

I believe that after adjusting for the company’s net assets, Vinci still trades at 10x its earnings potential, with many avenues for further appreciation. For that reason, I maintain my Buy rating.

Challenging 2Q24 results

Vinci’s 2Q24 results are the most challenging for the bottom-line since the company went public. Although the top-line keeps performing, and recurring operating profitability was better, the bottom line was hit by several factors which will hopefully not recur.

Revenues growing: Vinci’s top-line grew 11% YoY, sustained by recurrent fee revenues growth of 22%. Performance fees were a negative driver.

Private doing well: The private markets segment is the company’s star, growing 26% YoY for the 1H24 period. This is the most profitable, most recurrent segment. In terms of fundraising, the private strategies added BRL 500 million (~1.5%) in net capital subscriptions and another BRL 500 million from the acquisition of MAV. Private is expected to grow much faster in 2H24 thanks to infrastructure and credit products. The segment’s margins at 57% for fees, and 62% for distributable earnings, are the highest in the company’s history.

Publics and liquids suffering: As has been the case for several quarters already. The reason is the high interest rates in Brazil, which make holding equities undesirable from a risk perspective. The IP&S segment was flat for the year in terms of assets under management, or AUM, and fee earnings, but the public equities segment lost 18% of assets, saw recurrent earnings fall 22%, and performance earnings fall 60%.

Advisory and pensions: The advisory segment was down YoY, but the comparison for the past twelve months is more positive. The segment enjoyed three consecutive quarters of revenues close to BRL 10 million (after 7 quarters of dry-season below 10 million in 2022 and 2023).

The nascent pension business is growing assets at 100% QoQ rates for the fifth consecutive quarter, going from BRL 15 million in 2Q23 to BRL 250 million in AUM, in 2Q24. However, the segment’s revenues are still minuscule (BRL 175 thousand) compared to expenses and investments (BRL 3.5 million). In particular, the company is paying loads in bonus compensation (BRL 1 million out of the 3.5 million) to attract AUM. At the current expense ratio, the segment would need AUM of 1 billion to breakeven.

“Recurring” expenses controlled: When we look at VINP’s adjusted operating income, what management considers recurrent operational expenses are controlled and leveraging, growing 8%, below revenues. The problem, as we will see, comes in the non-recurring section.

Non-recurring expenses hitting: The company’s bottom line was hit by four expenses that should not be recurring, but that still cast doubts about VINP’s future profitability.

The first two were financial: the company recognized earnouts for BRL 5 million to SPS (a distressed credit acquisition from last year), and it also had to record BRL losses from the effect of the depreciation of the BRL on Acre’s preferred shares (which the company correctly considers as debt-like). The earnouts are in some sense positive, as the acquired business is performing better than expected. The BRL depreciation expenses should be occasional, or could even reverse if the BRL appreciates. However, this is still a source of risk for the company.

The third factor hitting profits were consulting fees of BRL 11.6 million (vs BRL 1.1 or 1.9 million in 1Q24 and 4Q23), which are related to the upcoming acquimerger with Compass. These will probably grow in 2H24, but should not recur after the acquimerger is finished in FY25 and FY26.

Finally, the low profitability of the company made it pay more taxes, something not very intuitive but explained by Brazil’s income tax system. In Brazil, companies can elect to be taxed based on presumed profit ratios. This helps more profitable companies pay less taxes. However, if your margins fall in some subsidiaries, they may still be taxed at higher rates. This happened with VINP’s effective tax rate, which reached 29%, the highest since becoming public.

The result was net income of BRL 28 million, the second lowest in the company’s public history, and only surpassed by one quarter in the midst of the 2020 chaos.

Future developments

The second half of the year should be momentous for Vinci, considering the expected improvements in private market fundraising and the combination with Compass.

Fundraising accelerating: Vinci is expecting to meaningfully increase fundraising in three private vehicles. During the 1Q24 call, management commented on one fund for infrastructure (VICC) and one for credit (Vinci Credit), each targeting BRL 2 billion. The SPS IV is expected to be “considerably larger than its predecessor, which raised BRL 1 billion,” according to the 2Q24 call.

Combination with Compass: When the acquimerger with Compass was announced earlier this year, the original combination was dated for 3Q24. During the call this quarter, management confirmed the late 3Q24 or early 4Q24 date. Management revealed some figures about Compass, for example that it had reached BRL 220 billion in AUM, from BRL 205 billion when the merger was announced (even adjusting for the recent BRL depreciation).

Valuation still attractive if the nonrecurring does not recur

If we remove the effect of the high taxes, the earnouts, the consulting expenses and the depreciation of the BRL, then Vinci’s pre-tax results were good, at about BRL 60 million. This was above the long-term average expectation of BRL 50 million per quarter I proposed in previous articles. Annualizing these results leads to BRL 240 million in recurrent pre-tax income for the year, and using the more average 20% interest rate leads to BRL 192 million in net income for the year. This translates to $34 million at the current exchange rate.

The company’s market cap stands at $540 million, but removing net assets of $180 million leads to an adjusted figure of $360 million. Compared to the above, the company is selling for 10x net earnings after removing the investments. This is already an attractive figure, considering the company’s consistent growth even in a very muted scenario.

We should, however, consider some potential risks.

First, out of the $180 million in net financial assets (BRL 2 billion in gross assets minus BRL 230 million in pension liabilities and BRL 730 million in debts), approximately 1 billion are invested as non-liquid GP commitments (this arises from note 5.d in the financial statements where only 70% of Monalisa assets are considered liquid). This generates some liquidity risk (currently debt can be paid from the liquid investments, but it should not keep growing), and also exposes the balance sheet to down marking in the company’s funds, or assets that are marked at a certain price but cannot be realized.

Second, the “non-recurring” expenses can become more recurring. The consulting expenses will probably continue during the year, as the integration of Compass takes place. In addition, the BRL depreciation could continue, generating more losses from dollar-denominated debt translation.

Overall, though, I believe these risks are manageable, and that Vinci Partners Investments Ltd. stock continues to offer an attractive multiple. This was a challenging quarter, but the fundamentals behind a potential multi-thrust improvement in Vinci’s profits are still in place, and they are not incorporated in the stock’s price. For that reason, I continue to believe Vinci is a Buy at these prices.