StepStone Group Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021. The filing does not provide a separate fourth-quarter 2020 or calendar-year 2020 income statement; therefore, this summary reflects fiscal 2021 and comparable fiscal 2020 results.
Business Context
StepStone is a global private-markets investment firm providing customized investment solutions, asset management, advisory, data, portfolio analytics and reporting services across private equity, infrastructure, private debt and real estate. As of March 31, 2021, the Company oversaw approximately $427 billion of private-markets allocations, including $86 billion of AUM and $340 billion of AUA. Fee-earning AUM was approximately $52.0 billion, up 26% year over year.
The Company completed its IPO and related reorganization on September 18, 2020. Historical periods primarily reflect the predecessor StepStone Group LP, while fiscal 2021 reflects the post-IPO corporate structure for part of the year.
Key Financial Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total revenue | $787.7 million | $446.6 million | +76% |
| Management and advisory fees, net | $285.5 million | $235.2 million | +21% |
| Realized carried interest allocation | $63.0 million | $46.2 million | +36% |
| Unrealized carried interest allocation | $433.8 million | $161.8 million | +168% |
| Total expenses | $459.5 million | $294.7 million | +56% |
| Income before tax | $337.8 million | $148.7 million | +127% |
| Net income | $314.6 million | $144.8 million | +117% |
| Net income attributable to SSG | $62.6 million | Not applicable after predecessor presentation | Not comparable |
| Adjusted net income | $85.4 million | $50.1 million | +70% |
| Fee-related earnings | $89.5 million | $61.6 million | +45% |
| Adjusted net income per share | $0.87 | $0.51 | +71% |
GAAP income before tax represented approximately 42.9% of revenue, and GAAP net income represented approximately 39.9%. Fee-related earnings were approximately 31.3% of management and advisory fees, while adjusted net income was approximately 23.8% of adjusted revenue. These margins are affected by the substantial increase in performance-based revenue and are not directly comparable to a recurring-fee-only business.
Cash Flow, Liquidity and Capital Structure
- Net cash provided by operating activities was $149.3 million, compared with $65.9 million in fiscal 2020.
- Net cash used in investing activities was $11.2 million, primarily reflecting net investment contributions and capital expenditures.
- Net cash used in financing activities was $45.3 million, including debt repayment, distributions, dividends and purchases of non-controlling interests.
- Cash, cash equivalents and restricted cash totaled $183.9 million at March 31, 2021, including $179.9 million of cash and cash equivalents.
- The Company repaid its $146.6 million senior secured term loan in September 2020 and had no debt outstanding at fiscal year-end.
- Investments in StepStone Funds totaled $970.9 million, including $896.5 million of accrued carried interest allocations and $465.6 million of accrued carried interest-related compensation payable.
- Contractual obligations included $86.8 million of operating lease commitments, $1.5 million of contingent earn-out payments and $60.5 million of unfunded capital commitments. Tax Receivable Agreement payments are not included because they depend on future taxable income.
- Management stated that existing cash, operating cash flow and other resources should be sufficient to meet obligations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by a 26% increase in FEAUM, new client activity, higher realized carried interest and substantially higher unrealized carried interest.
- Unrealized carried interest increased sharply as underlying fund valuations recovered after an initial COVID-19-related decline. The Company reported an initial $128.5 million decline during the first three months of fiscal 2021 followed by a $625.3 million increase.
- Cash-based compensation increased 20% to $157.1 million, while performance fee-related compensation increased 124% to $246.0 million. Approximately 50% of carried interest allocation revenue is awarded to employees as long-term incentive compensation.
- General, administrative and other expenses decreased 7% to $48.5 million, principally because of lower travel, marketing and amortization costs, partly offset by higher insurance, legal and technology costs.
- Equity-based compensation increased to $7.9 million, primarily due to restricted stock unit grants following the IPO. Unrecognized compensation expense related to RSUs and Class B2 units was $47.4 million at March 31, 2021.
- Management and advisory fees remained more recurring than performance fees; approximately 80% of adjusted revenue came from management and advisory fees, and approximately $14.0 billion of fee-earning capital remained undeployed.
Guidance, Outlook, Commentary and Risks
The filing does not provide specific quantitative earnings or revenue guidance. Management highlighted continued growth opportunities from existing-client expansion, deployment of committed capital, global client acquisition, private-wealth distribution, data and analytics monetization, operating leverage and selective acquisitions.
- Performance-fee volatility: A significant portion of fiscal 2021 revenue came from unrealized carried interest based on estimated fair values. Such revenue may reverse if investment valuations decline or realizations underperform.
- COVID-19: Future fundraising, capital deployment, portfolio-company performance, client capital calls and realizations remain subject to pandemic-related economic and market effects.
- Valuation and clawbacks: Private-market valuations rely substantially on manager estimates and may not be realized. The maximum estimated carried-interest amount subject to contingent repayment was $105.1 million net of tax, although management viewed the assumed total-loss scenario as remote and had accrued no material clawback liability.
- Client and key-person risk: Many SMAs and advisory contracts may be terminated on short notice, and fund investors may remove the general partner or terminate investment periods under specified circumstances.
- Competition and talent: Competition for investment opportunities, clients and qualified professionals may pressure fees, fundraising and investment performance.
- Regulatory and structural risk: The Company operates in a heavily regulated global industry, is a controlled company with dual-class voting rights, and is an emerging growth company that is exempt from auditor attestation of internal control over financial reporting.
- Tax Receivable Agreements: SSG is generally obligated to pay 85% of realized or deemed net cash tax savings to specified partners and pre-IPO investors. Payments may be substantial and, in certain circumstances, may exceed actual tax benefits.
- Technology and cybersecurity: Reliance on proprietary data platforms, third-party providers and confidential client information creates operational, cyber and regulatory exposure.
Important Facts for Investors to Verify
- Separate recurring management-fee growth from volatile unrealized carried-interest revenue when assessing normalized earnings.
- Review the composition, age and realizability of the $896.5 million accrued carried interest balance and the related $465.6 million compensation accrual.
- Monitor FEAUM growth, deployment of the $14.0 billion undeployed fee-earning capital and changes in weighted-average fee rates.
- Assess cash conversion and future liquidity needs after considering distributions, capital commitments, lease obligations and Tax Receivable Agreement payments.
- Evaluate the implications of the IPO-related reorganization, non-controlling interests, dual-class voting structure and SSG’s approximately 40.5% economic interest in the Partnership at March 31, 2021.
- Confirm future effects of the expected lease-accounting adoption, which management estimated would add approximately $67 million of right-of-use assets and $77 million of lease liabilities.
- Review the impact of COVID-19, market valuation changes, client termination rights, clawback exposure, regulatory developments and cybersecurity events on future results.