STEP

StepStone Group Inc. Q1 2025 (Ended June 30, 2024) Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2024 (First Quarter of Fiscal Year 2025). StepStone Group Inc. is a global private markets investment firm providing customized investment solutions, advisory services, and data analytics. The company manages assets across private equity, infrastructure, private debt, and real estate. As of June 30, 2024, the firm was responsible for approximately $701 billion in total capital, comprising $169 billion in Assets Under Management (AUM) and $531 billion in Assets Under Advisement (AUA).

Key Financial Metrics

Revenue Composition: Management and advisory fees were $178.0 million (up 29% YoY). Total performance fees were $8.4 million, driven by realized carried interest of $41.8 million, partially offset by unrealized reversals of $25.2 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5% to $186.4 million, primarily driven by a 29% increase in management and advisory fees due to new client activity and 12% growth in average Fee-Earning AUM (FEAUM). This included $19.1 million in retroactive fees from fund closings.
• Performance Fee Volatility: Total performance fees decreased significantly to $8.4 million from $39.9 million in the prior year. This was due to a decrease in unrealized carried interest allocations (lower net unrealized appreciation in underlying private equity funds), despite a 189% increase in realized carried interest.
• Expense Increases: Total expenses rose 15% to $139.3 million. Notable increases included equity-based compensation (up 126% to $19.2 million) and cash-based compensation (up 12% to $78.2 million), offset by a decrease in performance fee-related compensation.
• Net Income Attributable to SSG: Decreased 37% to $13.3 million, largely due to higher allocations of income to non-controlling interests and lower performance fee revenues.

Guidance, Outlook, and Risks

Management Commentary: Management noted that while inflation signs are easing, higher interest rates and geopolitical tensions (Russia, Ukraine, Middle East) remain risks. The firm is monitoring potential regulatory developments from U.S. elections. Fundraising activity and capital deployment paces have slowed, potentially delaying management fees and performance fee realizations.

Corporate Transactions: On May 31, 2024, the company completed the first annual exchange under Transaction Agreements to acquire approximately 5% of equity interests in its asset class entities (SRA, SRE, SPD), paying $13 million in cash, 513,394 shares of Class A stock, and 2.2 million Class D units.

Dividends: A quarterly dividend of $0.21 and a supplemental dividend of $0.15 per share were paid on June 28, 2024. A subsequent quarterly dividend of $0.24 per share was declared on August 8, 2024.

Risks: Key risks include market volatility affecting performance fees, potential clawbacks on carried interest (estimated maximum contingent repayment of $297 million net of tax), and the impact of higher interest rates on borrowing costs.

Investor Verification Checklist

• Performance Fee Realization: Verify the sustainability of realized carried interest ($41.8M) versus the volatility of unrealized allocations, which significantly impacted GAAP net income.
• Non-GAAP Measures: Review Adjusted Net Income (ANI) of $57.2 million and Fee-Related Earnings (FRE) of $71.7 million to assess core operating profitability excluding unrealized items.
• Debt Covenants: Confirm continued compliance with the Revolver's financial covenants (total net leverage ratio and minimum fee-earning AUM) given the increased debt balance ($172.1M).
• Fee-Earning AUM Growth: Validate the 12% growth in average FEAUM and the $6.5 billion increase in FEAUM to $100.4 billion as a driver for future management fee revenue.
• Tax Receivable Agreements: Monitor the $215.3 million liability under Tax Receivable Agreements and the impact of future unit exchanges on cash flow.