Vinci Partners Investments Ltd
NASDAQ:VINP
Earnings Call Analysis
Q4-2023 Analysis
Vinci Partners Investments Ltd
Vinci Partners announced confident Q4 earnings, generating fee-related earnings of BRL 57.3 million or BRL 1.07 per share, and adjusted distributable earnings of BRL 63.6 million or BRL 1.18 per share. Their full-year performance also stood strong with fee-related earnings reaching BRL 208.4 million and adjusted distributable earnings soaring to BRL 245.8 million. Parallel to these financial results, Vinci declared a healthy quarterly dividend of $0.20 per common share, signifying a reward for shareholder loyalty, scheduled for payment on March 7 to those holding shares as of February 22.
The past year was significant for Vinci Partners as they celebrated their first Investor Day at the NASDAQ headquarters. This event symbolized an opportunity to convey the company’s future ambitions to investors and shareholders. Additionally, partnering with Ares, a leading force in the alternative asset management space, marked the beginning of a collaborative journey promising valuable future synergies.
Despite global economic hardships, Vinci capitalized on its well-diversified business platform, showcasing growth as fee-related earnings (FRE) and distributable earnings (DE) each surged by 14% and 17% year-over-year on a per share basis. The year concluded with an assets under management (AUM) tally of BRL 69 billion, including BRL 4 billion of capital subscriptions from their private market funds.
Vinci's Real Estate Investment Trust (REIT), VISC, successfully raised over BRL 1 billion within three months, demonstrating the potential of REITs in the Brazilian stock market and positioning the fund for growth amidst conducive conditions. Moreover, the company capped off the Infrastructure fund management mandate for the Sustainable Regional Development Fund (FDIRS) with about BRL 1 billion in initial AUM, setting a confident stride into 2024.
Vinci's keen focus on developing their Voluntary Retirement Savings (VRS) plans is bearing fruit with recent public introduction and substantial media coverage. Now accessible through dedicated apps and websites, VRS aims to cater to a broad investor demographic via the newly launched [Miu] platform. The product, initially released to high net worth individuals, will now broaden its reach to include retail investors, highlighting the company’s strategic expansions.
The year 2024 sees Vinci Partners embarking on a multi-front approach to propel VRS growth. This includes extending services to high net worth individuals seeking better retirement solutions, targeting corporate plans, and cementing distribution partnerships with platforms and fintechs to penetrate the retail investor segment more deeply. Furthermore, they will leverage any legislative tailwinds favoring pension products to enhance their market position.
Eyeing ambitious goals, Vinci has updated its private market fundraising target to BRL 15 billion by the end of 2024. With BRL 8 billion already secured, the company is gearing up for additional closings of flagship funds, new vintages of established strategies, and follow-on offerings for its listed REITs, while also maximizing the collaborative benefits from its partnership with Ares to elevate fundraising and product distribution.
Vinci’s alliance with Ares is instrumental in enhancing best practices and co-investment prospects. Dozens of interactions between management teams have been leveraged to align investment strategies and fundraising efforts, especially for the flagships VCP IV and VICC. The company aims to further harness the Ares partnership, seeing significant upside potential across various fund strategies.
The company's in-house macroeconomic research team effectively navigated market fluctuations, enabling Vinci to capitalize on temporary market dislocations. With the global scene shifting from rising interest rates to an anticipated easing cycle, Vinci foresees a favorable financial landscape. Notably, Brazil's progress in reducing rates and expected further trade surplus growth bodes well for the company's prospective investment strategies.
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Good afternoon, and welcome to the Vinci Partners' Fourth Quarter and Full Year 2023 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 today are Alessandro Horta, Chief Executive Officer; Bruno Zaremba, Private Equity Chairman and Head of Investor Relations; and Sergio Passos, Chief Financial Officer.Earlier today, we issued a press release, slide presentation and our financial statements for the quarter and full year, 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 20-F. 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 Vinci Partners fund.On results Vinci generated fee-related earnings of BRL 57.3 million or BRL 1.07 per share, and adjusted distributable earnings of BRL 63.6 million or BRL 1.18 per share for the fourth quarter 2023. For full year numbers, Vinci posted fee-related earnings of BRL 208.4 million and adjusted distributable earnings of BRL 245.8 million. We declared a quarterly dividend of $0.20 per common share payable on March 7 to shareholders as record as of February 22.With that, I'll turn the call over to Alessandro.
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 fourth quarter and full year 2023. This year has truly etched its mark in the history of our company. We hosted our first Investor Day as a public company at NASDAQ headquarters. It was a fantastic opportunity to share with shareholders and investors our targets and goals for Vinci's future.Another milestone for us was the partnership with Ares, a market leader in the alternative asset manager space worldwide. We believe this is just the beginning of a successful partnership, and I will provide some additional details in just a moment. In my opening remarks, I would like to cover some important topics before Bruno and Sergio go over the specifics. To start, I would like to be assertive with the following message. Vinci delivered strong results, facing another year with a challenging environment worldwide. We are reaping the benefit of a well-developed platform with several business lines built to succeed across market cycles.We posted another quarter of solid growth with FRE and DE increasing, respectively, 14% and 17% year-over-year on a per share basis. We ended the year with BRL 69 billion of AUM with more than BRL 4 billion in capital subscriptions for our private market funds throughout the year. Fundraising remains on a growth trend going forward. 2023 started at a slower pace, and we experienced a significant pickup towards the second half of the year with several strategies gaining traction. Our shopping mall REIT, VISC, raised more than BRL 1 billion in a 3-month span, a stellar fund raised to reopen primary issuances for public REITs in the Brazilian stock market.As I've highlighted over the past earning calls, this should be an important growth driver for Vinci when facing favorable conditions. We have 7 funds that can proceed with new issuances. In infrastructure, we officially closed the mandate to manage the Sustainable Regional Development Fund or FDIRS with initial AUM of approximately BRL 1 billion. This was truly great news from our Infrastructure segment, and Bruno will cover that in more detail in a moment.Overall, we had important commitments for VICC, and VCP IV throughout the second half of the year, while also benefiting from market appreciation across the board. Momentum is great as we enter 2024.Now I would like to share our main areas of focus for this year. First, we are acutely focused on developing VRS, and we are starting to experience traction. Last week, VRS was officially presented to the general public with an article in a major newspaper in Brazil, featuring a detailed description of our product and the market opportunity ahead of us. The product is now fully accessible to the public through dedicated apps and website and prepared to accept allocations from all investors through our new launched platform called [ Miu ].Now let me delve into a more comprehensive description of our vision for VRS. Over the past year, we launched the product to our high net worth investor base, and our team concentrated their efforts into beta testing and tracing what would be our next steps as we started fundraising. During that period, we encountered several unsatisfied investors with products that are not suitable for the long-term goals and the overall inefficiency of the incumbent banks.With that in mind, we start 2024 tackling a few fronts. First, we will expand our capabilities to raise money with high net worth investors alongside their need to find a better fit for their retirement goals, there is also legislation approval to tax closed-end funds which can boost this growth by redirecting part of these resources for pension products due to its tax and state planning benefits. Second, we are aiming for corporate plans. The corporate market is a fraction of the individual market, but often it is the first contact that investors have with pension plans. Moreover, doing our research, we came across several instances that indicated the experience for corporate plans is even worse than the overall industry because the incumbent providers do not invest in this segment at all.And third, we'll seek distribution partnerships with platforms and fintechs to enhance our penetration within retail investors. We are continuously exploring additional options and we ensure investors stay informed as we develop them. Our second area of focus for this year is developing our private markets fundraising pipeline. As we previously announced in our Investor Day in October, we updated our private market fund raising target to BRL 15 billion until the end of 2024. As of the fourth quarter, we already have BRL 8 billion raised, and we work to reach the target with several initiatives.First, new closing to our existing flagships that are ongoing fundraising such as VCP IV in Private Equity, VICC in Infrastructure and Vinci Credit Infra in credit. Second, new vintages of existing strategy, which we plan to raise this year, such as SPS IV in a special situation, VIR V in our Impact and Return strategy, and VFDL II in real estate.And third, follow-on offerings for our listed REITs. As I mentioned earlier, Vinci alone raised more than BRL 1 billion in a 3-month span. We think this could be an important contributor with a more constructive environment and mainly with lower nominal interest rates expected as the Brazilian Central Bank continues on its easing cycle.Lastly, we work to leverage our partnership with Ares. One of the aspects that we found the most appealing in our partnership with Ares was the possibility to have several interactions with their management and commercial teams to seek best practice enhancements, potential co-investment opportunities to work on asset origination and product development. All of this on top of distribution efforts to raise additional capital to our funds and to distribute Ares products in Brazil.So far, we had dozens of interactions between management teams across all our private market strategies, IP&S, corporate adviser, commercial teams and VRS. We have been mapping for each of the strategies what are the opportunities to allocate capital and where we can find synergies on the investment side and on the fundraising side. In the short term, we will tackle fundraising efforts for VCP IV and VICC, which are the main flagships we are working on fundraising at the moment and collaborate with Ares to leverage cross LP relationships.We see substantial upside for fundraising across other strategies, and one of those would be SPS. We are very excited for SPS IV and see some interesting upside to our new vintage with the Ares team as our partners. We will keep you posted as we advance on those fronts throughout the year. Before diving deeper into market framework for 2024, I would like to highlight the pivotal role of our data and macroeconomic research teams. In the second half of 2023, we experienced in Brazil a temporary impact on real interest rates following the challenging macroeconomic environment in the U.S. and a bump in medium- to long-term real rates for treasury bonds. This period was marked by market speculation about the Brazilian Central Bank's stance on the forthcoming easing cycle.Our in-house macroeconomic research team highlighted the transient nature of these fluctuations, which allowed our investment strategies to take advantage of the market dislocation. We believe having a top-tier strategy team is a key foundation to a successful asset management firm.As I conclude my remarks, I wish to share our insights on market expectations and their implications to Vinci. Last year, the discussion in global markets revolved around rising interest rates. But now we find ourselves in an environment where expectations are for an impeding easing cycle globally. This debate has evolved to timing and intensity of this decline in rates in the tone of monetary policy. This move will likely positively impact financial markets around the world.It's noteworthy that Brazil is ahead of the global curve in the easing cycle and has already implemented 5 rate cuts with rates decreasing from 13.75% to 11.25%. It's worth mentioning that Brazil trade surplus is poised to increase even further in the years ahead. The additional gains will likely come from a significant upward trend in oil production and exports. This structural change will drive a substantial positive impact on exchange rates and therefore, inflation, helping to restrain it and paving the way for deeper interest rate cuts. This will potentially be an important driver for our long-term easing cycle, which could become more aggressive than currently anticipated by the market, leading to further GDP growth.This outlook is excellent for assets, both private and public and substantially positive to drive meaningful reallocation in alternative asset classes as we saw in the 2016 to 2021 cycle. When we combine these elements with a commitment to comply with the Brazilian fiscal framework, we see enormous potential for the economic landscape, which would mean a construction environment across all strategies. As overnight rates revert to single digits, the landscape for investors is shifting, prompting a quest for diversification to fulfill their financial objectives.Another important positive note worth mentioning is that last week, a new measure has been approved, restricting new issuance of tax-free CDs backed by agriculture and real estate assets, which had been absorbing a significant amount of flows. In recent years, the Brazilian asset management industry has suffered with substantial outflows with a considerable part migrating to tax-free CD products issued by local banks. The new measure aims to restrict the type of tax-free CDs that can be issued and also increase minimum liquidity requirements for these instruments. Market expectations anticipate the cancellations of 30% of new issuances. This opens opportunity to expand allocations to riskier investments, attracting flows back to the asset management industry.Throughout the years, we have diligently constructed a robust platform featuring a complete array of alternative products tailored to meet the needs of our clients. We are confident that as the transition away from fixed income unfolds, Vinci is strategically positioned to capture substantial market share.With that, I will turn it over to Bruno to go over our fundraising efforts and pipeline.
Thank you, Alessandro, and good afternoon, everyone. I would like to begin my remarks reinforcing to what Alessandro mentioned earlier in the call. Vinci had another strong quarter of fundraising for private markets. Momentum is picking up, and we are excited with the prospects for the year ahead. First, let me provide some color on 2 important closings held in the fourth quarter. Our shopping mall REIT, VISC, held another closing this quarter. VISC raised BRL 875 million through an oversubscribed public follow-on offering closed in mid-December. When you add to the previous offering held in late September, the fund added BRL 1.2 billion in perpetual AUM for Vinci in a 3-month span. We raised this amount backed up by a diverse investor base, comprising retail institution and other funds, underscoring the strong demand for this type of product when facing favorable market conditions.The capital raise not only solidified our leadership position in the REIT market, but also enhanced portfolio diversification. We closed our follow-on offering with 7 advanced prospect acquisitions to fully deploy the capital, of which 2 were already closed. The real estate market is full of opportunities to deploy capital, and we should go back to the market to capitalize on and seize these opportunities. The other important clause was in our infrastructure strategy. Back in late 2022, we announced that the federal government had selected Vinci to manage the Sustainable Regional Development Fund or FDIRS. Given the fund's complex structure, we spent the year discussing details and specifics were demanded, and we carried out the transfer in December. FDIRS will start with roughly BRL 1 billion in AUM and has room to grow over the years, both by appreciation and new commitments by the federal government.We are proud to be the partner of choice for such an important product to Brazil's sustainable infrastructure landscape. The fund will work on 3 different fronts. First, structuring concessions and PPP projects helping state and municipalities to bring their infrastructure projects to an auction to raise private capital. Second, implementing guarantees instruments, which can be carried out through participation in guarantee funds. And third, directly investing in infrastructure investment funds. Each investment scope above carries different types of fees. For instance, we are eligible to charge some success fees over the structuring of infrastructure projects that are acquired in an auction. The magnitude will depend on the size of each project. As a regular fee base, we will have a management fee over the committed capital. That should be the main revenue stream in the short term. We will keep investors up to date as we structure these operations and other revenue streams take place. On a general note, this fund is key to consolidate our position as a leader in infrastructure investments in Brazil. This is another important step in a segment that has substantial room to scale over the next few years.To conclude the quarterly update on private markets, I would like to highlight the following. Our climate-oriented fund in infrastructure, VICC, closed a few commitments in the end of the year, reaching 75% of its fundraising targets. Another northworthy achievement is that VICC has officially attained Article 9 compliance. To put this into perspective, only a selected few funds worldwide meet the standards set by Article 9. This is a truly remarkable milestone for us.The Article 9 stamp has a direct effect over our fundraising efforts, allowing us to access other pools of capital. Several investors from Europe and the U.S. demand the highest standards from climate-oriented funds before committing their capital. We are thrilled to be among these few funds.Moving on to VCP IV. We also closed a few commitment stores at the end of the year. The fund had the stellar semester. Adding up the third quarter closes with [ XP ], we raised close to BRL 1 billion over the last 6 months, mostly backed by local investors. VCP IV is officially the vintage within the VCP strategy with the biggest absolute commitment coming from locals. This was crucial to the fund's fundraising success and bodes well to allocation into future vintages.Now let me provide some details regarding our fundraising targets for private market funds. As most of you know, during Investor Day, we updated our fundraising target to BRL 15 billion until the year-end 2024. And as Alessandro mentioned, this is a key area of focus for us this year. Since the beginning of the cycle in mid-2022, we raised more than BRL 8 billion for private market products backed by products such as VCP IV, VICC and others. We accomplished that facing a challenging worldwide scenario to raise capital for calls and products.During this period, Vinci's proprietary wide and diverse distribution capabilities was our greatest assets with international investors pushing back to investing close in private products, we leverage our local presence with LPs that exhibit strong appetite for these asset classes.Going forward, we have a robust pipeline for private in 2024. First, we will work on final closings for VICC and VCP IV. VICC is close to the targets, and we're experiencing traction with international investors that have shown strong appetite for climate-related products. We should see final commitments coming over the next few quarters.For VCP IV, we will expand our efforts with international players. The size and timing of this final round of investments will depend on these allocations. Based on recent interactions, we are seeing a more constructive environment than past quarters. We also work alongside Ares to understand if there are LPs with whom we could work in partnership to boost the final round of commitments.Moving on to the next piece of the puzzle. As we discussed on our last earnings call and also during Investor Day, we will start fundraising for new vintages of additional strategies at some point during the first semester. The first will be Vinci SPS new vintage, SPS IV. We have started testing the waters over the last few weeks, and we are excited with the prospects for these funds. The track record for the last 3 vintages is stellar with funds 1 and 2, posting attractive DPI to investors. To provide you with some updates regarding the strategy and illustrate the success of our special situations vertical, the first vintage raised in 2018 is marked today at a 26% gross IRR.Towards the end of 2023, we successfully exited the fund's largest assets, originally a nonperforming loan acquired from a bank. We executed our collateral, our real estate assets and concluded sale in the fourth quarter. The proceeds of that sale represents 40% of the investors' total commitment in the fund, which will be fully returned until the end of the first quarter of 2024. With that, the fund should achieve a 1.3x DPI. Fund 2 launched in 2020 has anticipated divestment period into 2023 and has already returned over 55% of total commitments to investors, underscoring the ongoing success of the strategy across all of its vintages.The last vintage of SPS strategy was raised in 2021 with more than BRL 1 billion in committed capital. That fund has already called 65% of the total capital commitments and allocated across 20 assets. The fund has exposure to 5 different substrategies and hold a broad array of opportunities in pipeline to continue to deploy the capital in coming quarters, especially in legal claims, litigation finance and secondary corporate loan acquisitions. SPS raised this fund relying mostly on their proprietary relationship with the high net worth individuals. Now we have Vinci's extensive distribution capacity to different pools of capital, and we are seeing strong demand as we have been introducing the strategy to [ RLPs ], especially when it comes to international investors.The second initiative we will start to fund raise in 2024 is VIR V. The fifth vintage in our Impact and Return strategy. The previous vintage raised BRL 1 billion in 2020, and it's also performing well, already divesting from assets and returning capital to [ Ops ]. Lastly, we plan to launch VFDL II, our second vintage for our development strategy within real estate. We're working to divest from assets from the first vintage to enroll in fundraising conversations for the second. Compared to VIR V and SPS IV, VFDL II should come back to market on the second half of the year. To wrap up our fundraising prospects for private market products in 2024, we should see, first, new commitments for the Vinci Credit Infra strategy and our credit strategy coming from both local and international investors. We are active on this fund, mostly in 2022, having raised BRL 1.4 billion during that period. We will continue fundraising for the strategy this year.And second, new offerings for the REITs. VISC was just the first of our funds to come back to market. We expect that with the scenario of lower interest rates, there will be an important window for new issuances for the public rated REITs. We currently have 7 of them waiting for the right timing. On a last note, it's worth mentioning that we are always looking for new product development opportunities, which could come up throughout the year.To close my remarks, let me provide for an update for the liquid portion of our business. Throughout the fourth quarter, we experienced the effect of mark-to-market appreciation, which is anticipated to result in a higher fee level as we move into 2024. However, we are still trailing to see some positive impacts from flows, both in IP&S and public equities. We do not expect any substantial inflows until nominal interest rates become more constructive at single-digit levels. We still suffer from the trade-off between still high overnight returns and the diversification into riskier asset classes.Another relevant effect, mostly on IP&S is the real interest rate level. Last time we were experiencing a strong pickup in flows and new mandates, long-term real rates were around 4%. In order to see the same traction, we need real rates to stabilize at a level at least in the low 5s. Please note that we will continue to show significant resilience in our liquids AUM. Several players suffered from huge redemptions throughout the last 2 years and Vinci remains protected against a very negative market backdrop. We are reaping the benefits from a strategy that we adopted a long time ago, proprietary distribution channels with a close relationship with our clients. With that said, private market should continue to set the tone in 2024 with liquids and IP&S being potential upsides over the second half of the year. And with that, I'll turn it over to Sergio to go through our results.
Thank you, Bruno. Let's start by covering management and advisory fees. Fee-related revenues totaled BRL 190 million in the quarter, up 14% on a year-over-year basis. Management fees were flat on a year-over-year basis, yet they exhibit a positive growth trend going forward. Upon closer examination, property market management fees were up 11% year-over-year, backed by the strong fundraising over the last 12 months. This growth was partially offset by liquid strategies and IP&S, both faced challenging market conditions that led to a decrease in management fees on a year-over-year basis. As previously mentioned by Bruno, we should see a pickup of the short-term for liquid strategy avenues, given the AUM appreciation occurred in the later part of the year.Moving on, our advisory fees were the main driver behind fee-related revenues growth on a year-over-year basis. In recent years, our corporate adviser segment has been diligently engaged in refining the deal origination process, resulting in a diversified exposure across the various sectors. This strategic initiative is designed to mitigate risk across different economic cycles, positioning us strategically to capitalize when favorable market conditions arise. Currently, M&A market is gaining momentum as market conditions improve. Our corporate adviser team successfully surpassed our BRL 30 million annual target for advisory revenues. And we believe to be in a great position to repeat its success in 2024.Turning to FRE results. In the fourth quarter, FRE totaled BRL 57.3 million or BRL 1.07 per share, representing a 14% year-over-year increase on a per share basis. Looking at the annual figures, FRE reached BRL 208.4 million or BRL 3.85 per share, up 11% on a per share basis. FRE continues to grow, pushed by the strong fundraising for private market products and a higher level of advisory fees.Disregarding our investment in VRS, private markets comprise more than 60% of Vinci's FRE in 2023. When we IPOed the company in January 2021, private market's last 12 months FRE was BRL 85.2 million and scale up to BRL 134.1 million in 2023, showcasing a 57% increase. These numbers reflect the success of our ongoing efforts to scale our private markets business. This represents a high-quality FRE growth backed by long-term lockups in AUM and a higher fee rate. When we discuss trends for FRE going forward, we should continue to post healthy numbers as we develop our fundraising pipeline in private markets. We expect new subscriptions coming over the next few quarters for both VICC and VCP IV, that will contribute via catch-up effects but also with recurring revenues.In addition, as Bruno mentioned on his remarks, we have a robust pipeline of new vintage with SPS IV and VIR V additional to the REITs and other funds that should boost FRE in 2024.Now let me spend some time covering expenses. Margins remained stable on a full year basis. As we have been discussing over the past quarters, we were actually focused on cost consciousness in 2023, actively seeking efficiency across the entire platform. It's important to mention that although inflation in 2023 was under control, the inflationary pressure on expenses last year reflected upon inflation levels from 2022. Our cost control proved its efficiency, preventing a meaningful growth in G&A expenses.To finalize my remarks on expenses and margins, I would like to reinforce the following. We have well-developed platform ready to leverage growth. To illustrate with an example, our real estate team concluded 2 consecutive offerings for our shopping mall REIT, VISC, adding roughly BRL 1.2 billion in perpetual AUM without adding hardly any costs. With that said, with a success fundraising cycle for private market products in 2024, aligned with a more constructive scenario in IP&S and liquid strategies, we could experience margins improvements towards the end of the year.Shifting to PRE results, performance fees remain at a relatively modest level, influenced by the recent turbulence in global and local markets that has adversely affected portfolio appreciation. As Alessandro previously highlighted, there are positive signals of stability emerging in global markets, which bodes well for potential future performance recognition. Please note that we have approximately BRL 17 billion in performance-eligible AUM across IP&S and liquid strategies.Governing our private market funds, gross accrued performance fees reached closer to BRL 300 million in the fourth quarter. As we divest from assets and returning capital to our limited partners, we should see a significant impact coming from this front, starting in late 2025.To wrap up, I would like to cover our distributable earnings. Adjusted distributable earnings totaled BRL 64 million in the fourth quarter of 2023 or BRL 1.18 per share, up 17% year-over-year on a per share basis, boosted by a combination of higher FRE and realized gains in our liquid portfolio. On an annual basis, adjusted distributable earnings totaled BRL 246 million or BRL 4.54 per share, flat on a year-over-year basis. It's important to note that Vinci has BRL 1.1 billion in proprietary capital commitment to private market products with approximately BRL 400 million [indiscernible]. The remaining capital commitments is invested in our liquid portfolio. We anticipate a more significant flow of this capital into the private funds starting 2024 onwards as the funds call for capital. This anticipated reduction in our liquid portfolio combined with the expected easing cycle in Brazil will have an impact to our financial income in 2024 when compared to 2023, in which we hadn't called much of the capital from the GP commitments and interest rates were at the high of the cycle.Therefore, moving forward, we expect moderation in our realized financial income line, which should once again show strong contribution later in the cycle as commitments into private funds returns as realized GP income. We have talked about this effect at length during our Investor Day.With that, I'd like to close our remarks and open the call for questions. Once again, I would like to thank you for joining our call. Please, operator, you can proceed with the questions. Thank you.
[Operator Instructions] Our first question comes from William Barranjard from Itau BBA.
My question here is directed to REIT. So thinking about the fundraising scenario in 2024, can you give us more color of when to expect new tranches, if it should be more concentrated in the first or the second half of the year? And then a second question here is still in the same topic. And perhaps this is more regarding the 2025 outlook and onwards. So if the tax regulations for income tax for REITs, they change in Brazil. And from now on investors need to pay taxes on the dividends of the [ FEEs ], the REITs. So I would like to understand how should this impact expected future fundraising and the attractiveness of the product.
Okay, William, that's Alessandro. Thank you for your question. I will start with the timing of new issuances on the REIT side. As we have several different REITs as taking the example of VISC that we raised around BRL 1 billion in the end of 2023, it's difficult to predict exactly when we'll go back to the market with that. We normally go with one product at a time, of course, to concentrate the efforts of fundraising in one product at a time. But we expect that will be well-distributed throughout the year. So we do not have a specific date or quarter that we expect more issuances. But of course, as the easing cycle develops, so the interest rates go down, the appealing for these products for the general public will grow. So normally, our expectation is that as the year progress and the interest rates continues to go down, we have more issuance towards the end of the year than the beginning because of the level of interest rates. And regarding your consideration about possibility of change in terms of taxation of the fund, my personal view is that, that will affect more people that will come into the market for the first time during the first IPO of fund, then follow-on. Did change in taxation of the rise in the bracket of tax will affect more the price of the REIT itself, not necessarily the fundraising going forward. That's my view. That could affect the market as a whole in terms of adapting the IRR net to the new taxation more than really affecting future fund raise that will be automatically adapt in terms of the yields that we will require for the seller when we acquiring assets from the REIT, okay? So what I'm trying to say is that the cost of capital for the overall market in real estate will go up if there is the case of a change in the taxation for this product.
Our next question comes from Ricardo Buchpiguel from BTG Pactual.
I have 2 topics I wanted to ask. First, we saw a very good recovery in terms of public equity [ net in full ]. You guys reached a very important mark of BRL 1 billion in inflows and that during an environment where interest rates were very high. So I wanted to understand if mix [indiscernible] expect is BRL 1 billion in inflows as a floor and progressively improve over the next quarter? Or should it be kind of a one-off and mainly in the second half of the year we should see kind of higher numbers, more towards the billion in the public equity side? And also, I wanted to understand a bit that despite the very strong advisory fees that you registered in Q4, reaching almost BRL 20 million in top line, I wanted to understand what should be a more recurring level for the advisory business going forward, especially in 2024?
Okay, Ricardo, thanks for the question. This is Bruno. So in regards to equities, we actually saw in '23 kind of a flattish inflow environment. It was actually a little bit positive, but it wasn't very material. What we did have in the fourth quarter was a material appreciation impact in the AUM. So thinking about the inflows, the situation is kind of stable at this point at least. We're still seeing kind of stable equity inflows. IP&S continues to be a little bit down. It's the same environment that we saw in the last several quarters with equities kind of stable and IP&S in terms of flows a little bit down. So as we mentioned during the call, we expect this to turn at some point in the second half, likely with nominal interest rates reaching a number close to single digits. We believe that could be an important trigger. And historically, when you look at our performance in the past, when that happens, usually we see very strong flows in both equities and IP&S. So hopefully this is a second half event for us that will allow us to start to grow within those [indiscernible] quicker. But the appreciation impact last year was relevant when you combine equities with IP&S. And I think Alessandro is going to take the advisory question.
Thank you, Ricardo. I think regarding your question, it's a very good question indeed, about revenues coming from advisory. We have been discussing and what we are seeing now is that really our advisory business changed in terms of the level of recurrent fees. I think during this last few years, we had been seeing very, very repeated clients and a lot of reference from former clients. So I think our franchise of course being a very straightforward execution franchise, especially on the M&A side, but we have been able to capture some additional market share in this whole M&A market. So our expectation is that our recurrent fees regarding advisory will really reach a new level. So I think we could take an average of what we did in 2023 and take in consideration that we really changed the, I would say, the penetration of our franchise that due to the pipeline that we currently have in future and current mandates where we believe that will materialize in revenues in the future quarters.
Very clear. And given what you mentioned in terms of the inflows for liquids, all the private market fundraising you have and this improvement in the advisory business, does it make sense to think about an FRE growth of around 15% for this year, more or less?
Hi, Ricardo. I mean when we look at our internal budgets, we are positive for the year '24 if everything goes well because we have several different opportunities to grow the business. I think double-digit growth certainly is possible given all the -- given all the things that we have at our table at this point.
Our next question comes from Mrs. Beatriz Abreu from Goldman Sachs.
I have 2 questions, if I may. The first question is regarding fee-related expenses for VRS. So you had a significant increase in expenses for the segment in the fourth quarter. My question is, how much more do you expect to invest in this segment? And what kind of expenses are there more to do? Is it in terms of personnel or related to the product itself? Also, do you still expect VRS to break even this year given the pace it's been evolving? And my second question is regarding your M&A strategy. If you can give us more color on how you're thinking about potential M&A and inorganic growth, especially given the recent investment that you got from Ares. Those will be my questions.
Hi, Beatriz, thank you for the question. That's Alessandro. In terms of VRS, what started to happen in the last quarter of the year is that we started to amortize part of the, I would say, the investment especially in technology. So I think that was the first quarter that we have this effect. So since the beginning of the project, we started investing and have running costs. And on this last quarter, we started to amortize. So what we saw in our financial statements is exactly this effect. We do not expect to invest more. I think the platform is evolving. We are seeing a very good, I would say, outlook for VRS. So I personally believe that with probably the end of this year, we will have a running rate that could be already on the breakeven side. So 2024 is an important year for VRS for different reasons, but especially all this change on the tax system in Brazil, it's benefited a lot the retirement type of products, as you know. So we are very, very optimistic about that. And for the end of the year, we believe that we could be reaching something near the breakeven and the investments that's exactly what I explained to you. Concerning the M&A side, we continue to be very, very active on the M&A and things are developing. We have 2 main, I would say, paths in terms of M&A that we are pursuing right now. One is our international expansion, especially for Latin America. So we are currently analyzing as we told you in the last few quarters a few opportunities. And at the same time, we are looking specifically for asset managers, especially that focus in just one asset class, normally that will have a presence or a very small presence or reasonable presence that could add not just AUM but also capability to our platform. We have a pipeline that's strong in that sense. And we believe that we will probably have some of these deals that we analyzed concluded in the near future.
Our next question comes from [ Leandro Latu ] from UBS.
Congrats on the results. My question, perhaps a more qualitative one is regarding the interactions with the Ares team. You already talked about a bit on the new vintage in the SPS IV. But if you please could talk about how conversations are going, strategic plans and what we can expect throughout the year?
Leandro, thank you for the question. This is Bruno. The Ares partnership so far has been excellent. I think we're making progress in several different fronts. This week we have several of our people in the United States visiting the offices of Ares. We had, just to give you some examples, we had Carlos Eduardo, the Co-Head of Private Equity, he went to the Los Angeles headquarters of Ares. We had Marcelo Mifano, the Head of our SPS special situations unit also in Los Angeles. Pedro Quintella, who runs our International Distribution business was in both offices in New York and Los Angeles. So we are really very engaged with them, talking about all of the potential opportunities for us to develop with them. There are certainly some that are more meaningful and have more potential impact in the short term. We are working with the team there to find which would be the more interesting products for us to represent them in Brazil across our investor base. So there are several interesting products that we can show to an investor base in Brazil that people that want to allocate both institutions and high net worth individuals that want to allocate capital outside of the country. There is obviously the opportunity for us to work alongside with them on improving the relationship with common LPs and perhaps some LPs that they have that might have interest in strategies in Latin America with whom we can discuss allocation to our products. And finally, there is a very strong effort to originate opportunities to invest together. So we have a pipeline in infrastructure, private equity, pension situations, credit, where we feel there is fit for Ares to co-invest with us. We're starting to analyze that opportunity. And hopefully, by the end of the year, we're going to have 1 or 2 of those opportunities turning into real co-investment situation. So it's a very broad conversation. The interaction there are becoming more polarized and the teams are getting to know each other, and that's probably going to speed up the opportunity set for us and for the partnership. But we're extremely happy with what we have been able to accomplish with them so far. So things are looking very promising for the next few years.
Our next question comes from [ Gilermi Grisband ] from JPMorgan.
Two questions on our side. The first one is IP&S. If you can remind us a little bit what we should expect going forward in terms of outflows. Specifically just remind us if this is a specific client or if it's a broader outflow related to the pension, given interest rates, et cetera, just to see how we model going forward the vertical? And the second question is related to performance fees. Basically, on the 2 sides, first equities. If you can remind us the -- how far you are from the watermarks on the funds and if you believe can be a relevant driver of performance going forward. And on the private side, we noticed a pretty strong unrealized adjustment. I think it was 40% growth in the unrealized performance fees. The question is basically if there was any specific event or basically what drove this increase.
Okay. Thank you very much. And that's Alessandro. I'll start with IP&S. IP&S, the outflows is concentrated more on the clients that distribute for retail through our allocators and distributors channel. And this is more related with the high interest rates and the outflows, our vision that some of them went to tax-exempt CDs incentivized by this tax issues that recently the government closed some doors. But this is not a specific client, not necessarily pensions, but more retail products that we have in our AP&S strategy. Regarding equities, to your question, we are close -- very close on the majority of the funds to the high watermarks. So yes, we could expect that will be a more relevant driver in terms of performance going forward if the market continues to behave appropriately. And finally, the unrealized number is related to mark-to-market to our VCP III fund where it's a relevant fund and the -- we had a recent reevaluation of the portfolio, and that translated in an uptick in the marks that of course on the end translate in a more higher expected unrealized performance numbers.
Thank you. I would now like to turn the floor back to Mr. Alessandro Horta for the closing remarks. Please, Mr. Horta, you can proceed.
So I would like to thank you again for your continued support and interest. We believe that 2024 would be a very important year where we will expect to accelerate our growth while again showing our resilient and well-constructed business model. So thank you again, and have a good night to you all.
This does conclude today's presentation. We thank you all for participation, and wish you a very good evening.