Vinci Compass Buys Austral Re for R$336 Million

In a significant strategic maneuver, Vinci Compass has finalized the acquisition of Austral Re for R$ 336 million (approximately $65 million USD, based on current exchange rates). This transaction sees the asset manager transition from a potential seller to a buyer, acquiring a key reinsurance entity that was previously managed within one of its own funds. The deal also involves existing minority investors, including the IFC and Banco Genial, alongside the founders of Vinci and other stakeholders.

Austral Re, established in 2010 as the reinsurance arm of Austral Participações, emerged during Brazil's insurance market liberalization. The company demonstrated robust performance, generating R$ 2.9 billion in premiums last year and reporting a profit of R$ 93 million over the trailing twelve months, with a leverage ratio of 3.5 times its net equity. This acquisition marks a pivotal moment for Vinci Compass, allowing it to consolidate a critical piece of the insurance value chain.

The path to this acquisition was complex, originating from a decision four years ago by the partners to divest both the insurance and reinsurance operations of Austral. Over 300 potential buyers expressed interest, with some targeting only the insurance segment and others focusing solely on reinsurance. A notable development last year was Liberty Mutual's expressed interest in entering the Brazilian market, specifically the surety insurance sector, as part of its Latin American expansion strategy. This interest from Liberty Mutual ultimately influenced the decision to separate the two Austral entities.

“At the offer levels we were seeing, we concluded it was more advantageous to cease pursuing a joint sale and instead separate the operations, as the combined value would significantly exceed the offers received to date,” stated Bruno Zaremba, CFO and COO of Vinci. This strategic unbundling paved the way for a focused pursuit of a buyer for the reinsurance business. While four candidates emerged for Austral Re, Vinci Compass itself submitted a proposal, drawing inspiration from similar transactions observed in the U.S. private equity sector, such as those involving firms like Apollo Global and KKR.

The rationale behind Vinci Compass's shift to a buyer's position is rooted in the substantial capital flows generated by insurance operations, which can effectively fuel the growth of an asset management firm. “Insurance operations generate significant capital flow, enabling the manager's growth to be leveraged,” Zaremba explained. This thesis propelled Vinci Compass back into negotiations as a principal acquirer, offering terms that were deemed superior in price and structure, including disbursement and payment conditions.

To navigate potential conflicts of interest inherent in an internal transfer, Kroll was engaged to provide a fairness opinion, ensuring the economic terms were equitable for all investors. Following a positive assessment, key fund stakeholders were consulted and ultimately endorsed the strategy: selling the insurance business to Liberty Mutual and acquiring the reinsurance arm, Austral Re, through Vinci Compass. This dual transaction is expected to yield a combined value approximately 15% higher than the assets' valuation within the funds.

Further aligning stakeholder interests, Vinci Compass plans a dividend distribution estimated between R$ 150 million and R$ 200 million. The payment structure for the Austral Re acquisition involves a mix of Vinci Compass stock exchange or a closing payment. The three founders of Vinci and Zaremba will convert their payment into Vinci Compass shares, representing about 1.7 million shares, or 22% of the operation. Similar terms will be extended to other investors and fund limited partners. Approximately R$ 900 million from Vinci's 2021 IPO proceeds will be allocated to bolster Austral Re's capital base. Seneca Evercore advised the sellers, while Itaú BBA represented Vinci Compass in this transaction.