StepStone Group Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2022, representing the third quarter and first nine months of fiscal 2023. Results are unaudited and should be read with the fiscal year ended March 31, 2022 Form 10-K. StepStone is a global private-markets investment firm providing investment management, advisory, data and administrative services.
Business Context and Operating Metrics
- Total capital responsibility was approximately $602 billion, comprising $134 billion of AUM and $468 billion of AUA.
- FEAUM increased to $83.0 billion at December 31, 2022, up 10% from March 31, 2022 and 4% from September 30, 2022. Undeployed fee-earning capital was $14.0 billion.
- There were 920 employees, including 312 investment professionals, operating across 25 cities in 15 countries.
- The company operates as one reportable segment. Greenspring results have been included since the September 20, 2021 acquisition.
Financial Results
| Metric | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | Nine Months Ended December 31, 2022 | Nine Months Ended December 31, 2021 |
|---|---|---|---|---|
| Management and advisory fees, net | $128.8 million | $106.4 million | $364.6 million | $268.0 million |
| Total revenues | $(4.2) million | $410.5 million | $(239.9) million | $1,000.8 million |
| Net income attributable to StepStone Group Inc. | $(6.9) million | $48.3 million | $(47.2) million | $152.1 million |
| GAAP diluted EPS | $(0.11) | $0.83 | $(0.77) | $3.22 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $151.7 million | $182.0 million |
| Fee-related earnings | $42.7 million | $36.8 million | $118.4 million | $86.4 million |
| Adjusted net income | $31.2 million | $48.6 million | $115.5 million | $129.2 million |
- Management and advisory fees increased 21% year over year in the quarter and 36% for the nine-month period, driven by new client activity and higher average FEAUM.
- GAAP revenue and earnings were significantly affected by unrealized carried-interest and investment valuation changes. Total carried-interest allocations were $(47.0) million in the quarter and $(241.7) million for the nine months, versus $199.1 million and $621.8 million, respectively, in the prior-year periods.
- Legacy Greenspring carried-interest allocations were $(88.9) million in the quarter and $(371.2) million for the nine months, compared with positive amounts in the prior-year periods. These economics are allocated to legacy Greenspring non-controlling interests rather than directly to the company.
- FRE increased 16% in the quarter and 37% for the nine months. FRE margin on management and advisory fees was approximately 33% in the quarter and 32% for the nine months.
- Adjusted net income declined 36% in the quarter and 11% for the nine months, primarily because of lower realized performance-fee earnings and greater income allocated to non-controlling interests.
Liquidity, Debt and Capital Resources
- Cash, cash equivalents and restricted cash totaled $141.0 million at December 31, 2022, including $20.0 million held by consolidated funds.
- Debt obligations were $83.2 million, consisting of $85.0 million drawn under a $225.0 million revolving credit facility, net of debt issuance costs. The weighted-average interest rate was 6.42%, and maturity is September 20, 2026.
- The company had $7.8 million of outstanding letters of credit and remained in compliance with its leverage and minimum fee-earning AUM covenants.
- Nine-month cash flow included $151.7 million from operations, $23.4 million used in investing activities and $104.7 million used in financing activities, resulting in a $23.6 million increase in cash, cash equivalents and restricted cash.
- The company paid $37.4 million of common-stock dividends and $6.0 million under Tax Receivable Agreements during the nine months.
- Management stated that existing liquidity and expected cash generation should be sufficient to meet obligations for the next 12 months.
Material Changes, Outlook and Risks
- Private-markets valuation declines reduced unrealized carried interest, investment income and GAAP earnings. The company uses a three-month lag for certain fund investment valuations, so reported results may not reflect the most recent market conditions.
- Management continues to monitor COVID-19, inflation, rising interest rates and the Russia-Ukraine conflict. These conditions may slow fundraising, capital deployment and investment exits, reducing management fees and performance-fee revenue.
- A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $2.6 million and income from fund investments by approximately $12.3 million. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by $0.9 million.
- Carried interest is subject to reversal and potential clawback. The estimated maximum contingent repayment exposure, excluding legacy Greenspring carried interest, was $260.7 million net of tax assuming all related investments became worthless; management considers that scenario remote. No material clawback liability was accrued.
- Unfunded capital commitments were $87.0 million, excluding $51.7 million attributable to legacy Greenspring entities in which the company has no direct economic interest.
- In November 2022, the company implemented new private-wealth arrangements that granted profits interests and created call and put rights. The related liability-classified awards generated $3.8 million of expense in the quarter and nine months.
- The board declared a quarterly dividend of $0.20 per Class A share payable March 15, 2023. Future dividends remain subject to board approval and available funds.
- The filing reports no material changes to previously disclosed risk factors, no material current litigation exposure and effective disclosure controls.
Most Important Facts to Verify
- Whether the sharp decline in unrealized carried interest represents a temporary valuation effect or a sustained reduction in realizations and fundraising momentum.
- The composition, valuation methodology and concentration of the $1.1 billion accrued carried-interest balance and the related $597.3 million compensation payable.
- Future realization timing, clawback exposure and the effect of private-markets exit conditions on cash generation.
- Compliance with revolving-credit covenants as interest rates and fee-earning AUM change.
- The ultimate cash or equity cost of the Greenspring earn-out, private-wealth option arrangements and Tax Receivable Agreements, including the $199.7 million TRA liability.
- The comparability of reported results because of Greenspring acquisition effects, consolidated-fund accounting and the three-month valuation lag.