StepStone Group Inc. — Form 10-Q Summary
Business context and reporting period
StepStone is a global private-markets investment firm providing customized investment solutions, advisory services, data services and portfolio analytics across private equity, infrastructure, private debt and real estate. This filing covers the three and six months ended September 30, 2021, corresponding to fiscal 2022 second quarter and year-to-date results. The comparative periods ended September 30, 2020 reflect the predecessor partnership for periods before or shortly after the September 2020 IPO and are not fully comparable.
As of September 30, 2021, StepStone oversaw approximately $519 billion of private-markets allocations, comprising $121 billion of AUM and $397 billion of AUA. Fee-earning AUM was $66.7 billion, including $43.2 billion in SMAs and $23.5 billion in focused commingled funds.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Six months ended September 30, 2021 | Six months ended September 30, 2020 |
|---|---|---|---|---|
| Total revenue | $281.8 million | $242.9 million | $590.4 million | $181.5 million |
| Management and advisory fees, net | $83.6 million | $75.7 million | $161.6 million | $139.2 million |
| Carried interest allocations | $196.4 million | $166.1 million | $422.7 million | $37.6 million |
| Income before income tax | $113.7 million | $109.3 million | $254.7 million | $58.0 million |
| Net income attributable to StepStone Group Inc. | $62.1 million | $(0.8) million | $103.7 million | $(0.8) million |
| Diluted EPS | $1.45 | $(0.03) | $2.50 | $(0.03) |
| Fee-related earnings | $26.4 million | $27.9 million | $49.5 million | $46.1 million |
| Adjusted net income | $40.1 million | $18.3 million | $80.6 million | $33.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $134.9 million | $82.9 million |
GAAP income-before-tax margin was approximately 40.4% for the quarter and 43.1% year to date. Net income attributable to StepStone margin was approximately 22.0% for the quarter and 17.6% year to date. These margins were significantly influenced by carried interest allocations, including unrealized amounts.
- Quarterly revenue increased 16% year over year, while year-to-date revenue increased 225%, primarily because of higher carried interest allocations and higher management and advisory fees.
- Quarterly realized carried interest increased to $52.5 million from $8.6 million; year-to-date realized carried interest increased to $102.5 million from $12.2 million.
- Year-to-date unrealized carried interest was $320.3 million, compared with $25.4 million in the prior-year period.
- Operating cash flow was $134.9 million. Investing cash flow was $(190.0) million, mainly due to $181.5 million of cash paid for the Greenspring acquisition. Financing cash flow was $47.1 million, including net revolving-credit borrowings.
- Cash, cash equivalents and restricted cash totaled $176.0 million at September 30, 2021, compared with $183.9 million at March 31, 2021.
- Debt obligations were $112.6 million net of debt issuance costs, consisting of borrowings under a $225.0 million revolving credit facility. The reported interest rate was 2.13%, and maturity is September 20, 2026.
- Investments totaled $2.515 billion, including $1.216 billion of accrued carried interest allocations and $1.209 billion of legacy Greenspring investments and accrued carried interest allocations.
Material changes versus the prior comparable period
- StepStone completed the Greenspring acquisition on September 20, 2021 for total estimated consideration of $898.2 million, consisting of approximately $186.6 million in cash, $558.6 million of Class A stock, $135.2 million of Class C partnership units and $17.8 million of contingent consideration.
- Greenspring contributed $2.3 million of revenue and $1.0 million of net income after the acquisition date. It added approximately $23 billion of AUM and $11 billion of FEAUM.
- The acquisition increased goodwill to $583.0 million from $6.8 million and net intangible assets to $420.1 million from $5.5 million. It also added substantial legacy Greenspring carried-interest assets and related liabilities that are largely attributable to employees and non-controlling interests.
- General, administrative and other expense increased 123% in the quarter and 91% year to date, including Greenspring transaction costs of $10.3 million in the quarter and $13.8 million year to date.
- Fee-related earnings declined 5% in the quarter to $26.4 million, primarily because higher compensation and operating expenses more than offset higher recurring fee revenue. Year-to-date FRE increased 7% to $49.5 million.
- Cash-based compensation increased 17% in the quarter, while total headcount increased 32% year over year, or 10% excluding Greenspring.
- The company adopted the new lease standard prospectively on April 1, 2021, recording significant right-of-use assets and lease liabilities without a material income-statement effect.
- The effective tax rate was a benefit of 12.4% in the quarter and 0.1% year to date, partly reflecting a $25.3 million tax benefit from releasing a valuation allowance following the Greenspring acquisition.
Outlook, risks, contingencies and unusual items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that existing cash, operating cash flow and financing capacity should be sufficient to meet obligations for the next 12 months.
- Future results are sensitive to private-market valuations, realizations, fundraising, capital deployment and investment performance. Carried interest is volatile and includes significant unrealized amounts that may reverse.
- COVID-19 and the Delta variant could slow fundraising and capital deployment, reduce management fees, and delay or reduce performance-fee realizations.
- Carried interest is subject to reversal and potential clawback. No material clawback liability was accrued, but the estimated maximum contingent repayment exposure, excluding legacy Greenspring allocations, was $156.0 million net of tax under an extreme assumption that all investments become worthless.
- The revolving facility is secured by certain assets and includes restrictions on indebtedness, liens, asset transfers, investments, distributions, affiliate transactions and business activities. Financial covenants begin with the quarter ending December 31, 2021.
- Unfunded commitments totaled $72.3 million, excluding $39.2 million of commitments held by legacy Greenspring entities for which StepStone 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.
- Tax Receivable Agreements require StepStone to pay eligible partners and investors 85% of realized or deemed net cash tax savings from specified tax basis increases and related benefits.
- A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $0.9 million and investment income by approximately $9.0 million, excluding legacy Greenspring investments. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $1.2 million on outstanding revolver borrowings.
- The company announced a quarterly dividend of $0.15 per Class A share payable December 15, 2021. Future dividends remain subject to board approval.
Most important facts for investors to verify
- Separate recurring fee earnings from volatile realized and unrealized carried interest when assessing sustainable profitability.
- Review the final purchase-accounting valuations for Greenspring, including goodwill, acquired intangibles, contingent consideration and legacy Greenspring non-controlling interests.
- Monitor FEAUM growth, management-fee rates, undeployed fee-earning capital of $17.8 billion and the contribution of Greenspring to future recurring fees.
- Assess leverage, revolver utilization, covenant compliance and the effect of variable interest rates on liquidity.
- Evaluate potential carried-interest reversals and the $156.0 million estimated maximum contingent repayment exposure.
- Consider the effect of non-controlling interests: StepStone held approximately 50.1% of the Partnership’s economic interest as of September 30, 2021.
- Review the tax benefit from the valuation-allowance release separately from recurring tax performance and consider future Tax Receivable Agreement payments.
- Confirm that the comparative 2020 results are affected by the predecessor-company presentation, the September 2020 IPO and different ownership and tax structures.