StepStone Group Inc. 10-Q Summary
Business Context and Reporting Period
StepStone is a global private markets investment firm providing customized investment solutions, investment management, advisory, data and administrative services across private equity, infrastructure, private debt and real estate. The filing covers the three and nine months ended December 31, 2021, the Company’s fiscal third quarter and year-to-date period. The financial statements are unaudited.
As of December 31, 2021, the Company oversaw approximately $548 billion of private markets allocations, including $127 billion of AUM and $421 billion of AUA. FEAUM was $71.2 billion, compared with $52.0 billion at March 31, 2021.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | Nine Months Ended December 31, 2021 | Nine Months Ended December 31, 2020 |
|---|---|---|---|---|
| Total revenues | $410.5 million | $247.2 million | $1,000.8 million | $428.7 million |
| Management and advisory fees, net | $106.4 million | $70.1 million | $268.0 million | $209.2 million |
| Carried interest allocations | $199.1 million | $176.7 million | $621.8 million | $214.3 million |
| Income before tax | $142.1 million | $116.9 million | $396.7 million | $175.0 million |
| Net income | $126.3 million | $107.4 million | $380.7 million | $163.4 million |
| Net income attributable to SSG | $48.3 million | $25.6 million | $152.1 million | $24.8 million |
| Diluted EPS | $0.83 | $0.87 | $3.22 | $0.84 |
| Fee-related earnings | $36.8 million | $22.3 million | $86.4 million | $68.4 million |
| Adjusted net income | $48.6 million | $27.0 million | $129.2 million | $60.8 million |
GAAP net margin was approximately 30.8% for the quarter and 38.0% for the nine-month period. Net income attributable to SSG represented approximately 11.8% and 15.2% of total revenues, respectively. Fee-related earnings margins on management and advisory fees were approximately 34.6% for the quarter and 32.2% year to date.
Cash-based compensation was $51.7 million for the quarter and $138.2 million year to date. Total performance fee-related compensation was $102.4 million for the quarter and $314.3 million year to date. General, administrative and other expenses were $30.3 million for the quarter and $72.0 million year to date.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $182.0 million for the nine months ended December 31, 2021, compared with $120.3 million in the prior-year period.
- Investing activities used $201.5 million, including $181.5 million of cash paid for the Greenspring acquisition, net of cash acquired.
- Financing activities used $27.1 million, including $74.5 million of distributions to non-controlling interests, $14.8 million of dividends and $65.0 million of net Revolver borrowings.
- Cash, cash equivalents and restricted cash totaled $136.9 million at December 31, 2021, down from $183.9 million at March 31, 2021.
- Debt obligations were $62.8 million, net of issuance costs, against a $225.0 million multicurrency revolving credit facility maturing September 20, 2026. The weighted-average interest rate was 2.13% at quarter-end.
- The Company was in compliance with its net leverage and minimum fee-earning AUM covenants and stated that it expects sufficient liquidity to meet obligations over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 66% and year-to-date revenue increased 133%, primarily due to higher carried interest, growth in management and advisory fees, and the inclusion of Greenspring results.
- Quarterly management and advisory fees increased 52% to $106.4 million; year-to-date fees increased 28% to $268.0 million. Management attributed the increase to new client activity and higher average FEAUM.
- Quarterly realized carried interest increased 155% to $66.6 million; year-to-date realized carried interest increased 342% to $169.1 million.
- Unrealized carried interest was $132.5 million for the quarter and $452.8 million year to date. These amounts are sensitive to underlying private-market valuations and may reverse.
- SSG completed the Greenspring acquisition on September 20, 2021 for total purchase consideration of approximately $898.2 million, including $186.6 million of cash, $558.6 million of Class A stock, $135.2 million of Class C Partnership units and $17.8 million of contingent consideration.
- The acquisition added approximately $576.4 million of goodwill, $409.2 million of net intangible assets at December 31, 2021, approximately $11.4 billion of FEAUM and approximately 130 employees.
- The acquisition also introduced $104.96 million of legacy Greenspring carried interest revenue and an equal amount of related compensation. These legacy Greenspring economics are attributable to non-controlling interests and not directly to SSG.
- Net income attributable to SSG increased 89% for the quarter and 514% year to date, while diluted EPS declined to $0.83 from $0.87 for the quarter because of the significantly higher share count.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management cited continued demand for private markets, growth in private wealth and institutional allocations, new client activity, and $17.3 billion of undeployed fee-earning capital as potential sources of future management-fee growth.
- COVID-19 and the Omicron variant could slow fundraising, capital deployment and investment exits, reducing management fees and performance fees.
- Carried interest and investment income are volatile and include substantial unrealized amounts. The Company estimated maximum potential repayment exposure for carried interest, excluding legacy Greenspring carried interest, of $189.1 million net of tax if all investments were valued at zero; management considers that scenario remote.
- At December 31, 2021, accrued carried interest allocations were $1.35 billion, with $688.1 million payable as carried interest-related compensation.
- Unfunded commitments totaled $73.2 million, excluding $42.1 million of commitments held by legacy Greenspring entities in which the Company has no economic interest.
- The Greenspring transaction includes an earn-out of up to $75 million payable in 2025 if specified 2024 management-fee revenue targets are achieved. The contingent consideration liability was approximately $19.4 million at year-end.
- The Company had $201.3 million of Tax Receivable Agreement liabilities at December 31, 2021 and is generally required to pay 85% of realized or deemed net cash tax savings to specified partners and investors.
- A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $1.0 million and investment income by approximately $9.9 million. A 100-basis-point increase in interest rates was estimated to increase annual Revolver interest expense by approximately $0.7 million.
- The filing reports no material pending litigation, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate recurring fee earnings from volatile realized and unrealized carried interest, particularly the impact of Greenspring-related items that are allocated to non-controlling interests.
- Reconcile GAAP net income and diluted EPS with non-GAAP FRE and adjusted net income, including acquisition costs, amortization, equity compensation and other adjustments.
- Assess the sustainability of the $71.2 billion of FEAUM, $17.3 billion of undeployed fee-earning capital and the stated 0.52% weighted-average management fee rate.
- Review the Greenspring acquisition’s integration, earn-out exposure, goodwill and intangible-asset amortization.
- Monitor carried-interest reversals, clawback exposure, fund valuation changes and the timing of realizations.
- Review Revolver covenants, variable-rate exposure, Tax Receivable Agreement payments, unfunded commitments and distributions to non-controlling interest holders.
- Consider that fund investment and AUM data generally incorporate a three-month reporting lag and that historical fund performance is not indicative of Class A common-stock returns.