StepStone Group Inc. Form 10-Q Summary
Business Context and Reporting Period
StepStone is a global private markets investment firm providing investment management, advisory, data and administrative services across private equity, infrastructure, private debt and real estate. This unaudited filing covers the quarter and six months ended September 30, 2023, corresponding to fiscal second quarter and year-to-date fiscal 2024. The company reported approximately $659 billion of total capital responsibility, comprising $146 billion of AUM and $513 billion of AUA, at quarter-end.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30, 2023 | Six Months Ended September 30, 2023 |
|---|---|---|
| Management and advisory fees, net | $142.1 million | $280.2 million |
| Total revenues | $191.4 million | $369.4 million |
| Income before income tax | $67.0 million | $125.0 million |
| Net income attributable to StepStone Group Inc. | $26.2 million | $47.5 million |
| GAAP diluted EPS | $0.42 | $0.75 |
| Fee-related earnings | $43.8 million | $88.2 million |
| Adjusted net income | $30.2 million | $59.6 million |
| Net cash provided by operating activities | Not separately provided | $128.7 million |
- GAAP net income margins were approximately 30.9% for the quarter and 29.4% for the six-month period. Fee-related earnings increased 12% year over year in the quarter and 17% year over year for the six-month period.
- Net management and advisory fees increased 19% year over year for both the quarter and six-month period, driven by new client activity and average FEAUM growth of 10% and 12%, respectively. Retroactive fees contributed $3.7 million in the quarter and $5.3 million year to date.
- Total carried interest allocations were $57.0 million for the quarter and $120.8 million year to date, compared with losses of $154.3 million and $194.7 million, respectively, in the prior-year periods. The improvement primarily reflected net unrealized appreciation in underlying private equity investments.
- Realized carried interest declined to $1.6 million for the quarter and $16.1 million year to date, reflecting lower realization activity.
- Cash-based compensation increased 26% in the quarter and 21% year to date, primarily due to increased staffing, compensation levels and bonus accrual timing. Average full-time headcount increased 14% and 17%, respectively.
- Cash, cash equivalents and restricted cash totaled $118.2 million excluding Consolidated Funds and $176.8 million including Consolidated Funds. Operating cash flow was $128.7 million year to date, compared with $145.7 million in the prior-year period.
- Investing activities used $27.4 million year to date, including $14.6 million of property and equipment purchases. Financing activities used $53.4 million, including $41.5 million of dividends and $58.9 million of distributions to non-controlling interests.
- Debt obligations were $123.6 million net of debt issuance costs, consisting of $125.0 million outstanding under the $225.0 million revolving credit facility. The weighted-average interest rate was 7.48%, and the facility matures September 20, 2026.
- FEAUM was $87.3 billion at September 30, 2023, up 2% from March 31, 2023. Undeployed fee-earning capital was $18.1 billion. The weighted-average management fee rate was 0.57%, compared with 0.54% at March 31, 2023.
Material Changes Versus the Prior Comparable Period
- Total revenue shifted from a $158.5 million prior-year quarterly loss to $191.4 million of revenue, and from a $235.7 million prior-year six-month loss to $369.4 million of revenue. The prior-year results were significantly affected by unrealized carried-interest reversals.
- Net income attributable to StepStone Group Inc. improved from a $29.2 million loss to $26.2 million of income for the quarter and from a $40.3 million loss to $47.5 million of income year to date.
- Adjusted revenue declined 1% in the quarter and 11% year to date because lower realized carried interest and incentive fees offset growth in recurring management and advisory fees.
- Adjusted net income declined 19% in the quarter and 29% year to date, primarily due to lower realized performance-fee earnings, higher interest expense and a higher allocation of income to non-controlling interests.
- Revolver borrowings increased from $100.0 million at March 31, 2023 to $125.0 million at September 30, 2023. Interest expense increased to $4.1 million year to date from $1.4 million.
- Class A shares outstanding increased to 64.1 million from 62.8 million at March 31, 2023, primarily due to exchanges of Partnership units and vesting of restricted stock units.
Outlook, Commentary, Risks and Unusual Items
Management stated that it expects available cash, operating cash flow and financing capacity to be sufficient to meet obligations for the next 12 months. No specific financial guidance was provided in the filing.
- Management continues to monitor inflation, higher interest rates, banking-system volatility, the Russia-Ukraine conflict and the Israel-Hamas conflict. Slower fundraising, slower capital deployment and reduced exit activity may delay or reduce management fees and performance-fee revenue.
- Results remain sensitive to private-market valuations and unrealized carried interest. A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $4.2 million and investment income by approximately $13.0 million, based on September 30, 2023 exposures.
- The estimated maximum carried-interest repayment exposure, net of tax and excluding legacy Greenspring allocations, was $271.9 million assuming all relevant investments became worthless; management views this scenario as remote. No material clawback liability was accrued.
- The company had $98.2 million of unfunded commitments to StepStone Funds, excluding $48.8 million of commitments associated with general partner entities in which it has no direct economic interest.
- Tax Receivable Agreement liabilities totaled $198.2 million. The agreements generally require payment of 85% of realized or deemed net cash tax savings to specified former and current Partnership interest holders.
- Management reported no material changes to previously disclosed risk factors, no material current litigation exposure, and effective disclosure controls as of September 30, 2023.
- A quarterly dividend of $0.21 per Class A share was paid on September 15, 2023, and another $0.21 dividend was declared on November 6, 2023 for payment on December 15, 2023.
Important Facts for Investors to Verify
- Confirm the sustainability of recurring fee growth and the conversion of $18.1 billion of undeployed fee-earning capital into fee-generating assets.
- Assess the timing and volatility of realized carried interest, particularly given the decline in realizations despite improved unrealized valuations.
- Review the valuation assumptions underlying accrued carried interest allocations of $1.33 billion and the related $697.4 million of accrued carried-interest compensation.
- Monitor leverage, variable-rate interest expense, Revolver capacity, covenant compliance and the $7.9 million of outstanding letters of credit.
- Evaluate liquidity needs from dividends, Partnership and other non-controlling-interest distributions, Tax Receivable Agreement payments, capital commitments and elevated capital expenditures.
- Distinguish GAAP results, which include Consolidated Funds and substantial unrealized items, from recurring non-GAAP measures such as FRE and ANI.
- Consider that investment-performance data is based substantially on estimated private-market valuations and, for many funds, information reported on a three-month lag; historical fund performance is not indicative of Class A stock returns.