StepStone Group Inc. — Form 10-Q Summary
Business context and reporting period
StepStone is a global private markets investment firm providing investment solutions, advisory, data and administrative services across private equity, infrastructure, private debt and real estate. The filing covers the three months ended June 30, 2023, the company’s fiscal first quarter of fiscal 2024. The financial statements are unaudited and consolidate the Partnership, certain variable-interest entities and one investment fund. As of June 30, 2023, StepStone reported approximately $143 billion of assets under management, $497 billion of assets under advisement and $640 billion of total capital responsibility.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Management and advisory fees, net | $138.1 million | $116.7 million |
| Total revenues | $178.0 million | $(77.2) million |
| Income before taxes | $58.0 million | $(20.2) million |
| Net income | $49.4 million | $(21.5) million |
| Net income attributable to StepStone Group Inc. | $21.3 million | $(11.0) million |
| Basic and diluted EPS | $0.34 | $(0.18) |
| Net cash provided by operating activities | $57.6 million | $57.5 million |
| Fee-related earnings | $44.4 million | $36.6 million |
| Adjusted net income | $29.4 million | $47.1 million |
| Adjusted net income per share | $0.26 | $0.41 |
Net income attributable to StepStone represented approximately 11.9% of total GAAP revenue. Fee-related earnings increased 21% and provided a recurring earnings measure, while adjusted net income declined 38% because of lower realized carried interest and a higher allocation of income to non-controlling interests.
- Realized carried interest allocations were $14.5 million, down from $73.6 million.
- Unrealized carried interest allocations were $49.4 million, compared with $(114.0) million in the prior-year quarter.
- Legacy Greenspring carried interest allocations were $(23.9) million, compared with $(153.6) million.
- Cash-based compensation increased 17% to $70.1 million; total compensation and benefits were $87.9 million.
- Cash, cash equivalents and restricted cash were $92.4 million excluding Consolidated Funds and $127.9 million including Consolidated Funds.
- Debt obligations were $98.5 million, consisting of $100.0 million drawn under the $225.0 million revolving credit facility, net of debt issuance costs.
- The Revolver had a weighted-average interest rate of 7.23% and matures September 20, 2026. The company was in compliance with its financial covenants and had $7.8 million of outstanding letters of credit.
- Total assets were $3.53 billion and total stockholders’ equity was $1.63 billion at June 30, 2023.
Material changes versus the prior comparable period
- Total revenue improved by $255.2 million, primarily because the prior-year period included substantial reversals of unrealized carried interest, while the current period reflected positive carried interest allocations and higher management and advisory fees.
- Management and advisory fees increased 18% to $138.1 million, driven by new client activity and 12% growth in average fee-earning AUM. The quarter included $2.8 million of retroactive fees from fund closings.
- Total expenses increased to $121.2 million from a prior-year credit of $68.4 million, largely because the prior period benefited from reversals of legacy Greenspring performance compensation and carried-interest-related amounts.
- Operating cash flow was broadly stable year over year. Investing cash use increased to $14.5 million, including $7.8 million of property and equipment purchases. Financing cash use decreased to $44.0 million, although dividends and tax receivable agreement payments remained significant.
- AUM increased to $143 billion from $138 billion at March 31, 2023, AUA increased to $497 billion from $482 billion, and fee-earning AUM increased 2% to $87.4 billion.
- Undeployed fee-earning capital was $16.9 billion as of June 30, 2023.
Outlook, commentary, risks and unusual items
Management did not provide formal quantitative earnings guidance in the filing. It stated that it expects liquidity to be sufficient to meet obligations for the next 12 months and continues to monitor inflation, interest rates, economic growth, the Russia-Ukraine conflict and banking-system volatility.
- Slower fundraising, slower capital deployment and reduced realization activity may delay or reduce management fees, carried interest and incentive fees.
- Carried interest and investment income are sensitive to private-market valuations and include significant unrealized amounts based on judgmental valuations and, in some cases, a three-month reporting lag.
- The company estimated that a 10% decline in fund investment values would reduce annual management fees by approximately $3.7 million and investment income by approximately $12.2 million, based on June 30, 2023 exposures.
- The estimated maximum carried-interest repayment exposure, excluding legacy Greenspring allocations and net of tax, was $271.2 million assuming all investments became worthless; management views this scenario as remote. No material clawback liability was accrued.
- Unfunded commitments were $95.0 million, excluding $50.1 million of commitments related to general partner entities in which the company has no direct economic interest.
- The Tax Receivable Agreements liability was $191.6 million. StepStone paid $7.7 million under these agreements during the quarter.
- The company paid a regular $0.20 per-share dividend and a $0.25 supplemental dividend on June 30, 2023. It subsequently announced a $0.21 per-share quarterly dividend payable September 15, 2023.
- Management reported no material litigation exposure, no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Confirm the sustainability of recurring fee growth and the 21% increase in fee-related earnings, separate from volatile carried interest.
- Assess the amount and timing of realized carried interest relative to unrealized carried interest and potential future reversals.
- Review the effect of non-controlling interests, Partnership ownership and exchangeable units on earnings attributable to Class A shareholders.
- Monitor leverage, variable-rate interest expense, Revolver covenant compliance and available borrowing capacity after letters of credit.
- Evaluate liquidity after dividends, distributions, tax receivable agreement payments, unfunded commitments and planned capital expenditures.
- Review valuation assumptions underlying accrued carried interest, private-market investments and the $35.3 million Level III contingent consideration liability.
- Consider the impact of the company’s three-month investment reporting lag and the concentration of accrued carried interest in certain SMAs and legacy Greenspring funds.