Business Context and Reporting Period
StepStone Group Inc. filed this unaudited Form 10-Q for the fiscal quarter and six months ended September 30, 2022. StepStone is a global private-markets investment firm providing customized investment solutions, advisory, data and administrative services across private equity, infrastructure, private debt and real estate.
- As of September 30, 2022, the company oversaw approximately $602 billion of private-markets allocations, comprising $135 billion of AUM and $467 billion of AUA.
- Fee-earning AUM was $80.1 billion, including $52.9 billion in SMAs and $27.2 billion in focused commingled funds.
- The company had 886 employees and operated from 24 cities in 15 countries.
- The Greenspring acquisition was completed on September 20, 2021; therefore, the prior-year comparison includes Greenspring only from the acquisition date.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Six Months Ended September 30, 2022 | Six Months Ended September 30, 2021 |
|---|---|---|---|---|
| Management and advisory fees, net | $119.1 million | $83.6 million | $235.9 million | $161.6 million |
| Total revenues | $(158.5) million | $281.8 million | $(235.7) million | $590.4 million |
| Income (loss) before income taxes | $(74.5) million | $113.7 million | $(94.7) million | $254.7 million |
| Net income (loss) | $(67.1) million | $127.9 million | $(88.5) million | $254.4 million |
| Net income (loss) attributable to StepStone Group Inc. | $(29.2) million | $62.1 million | $(40.3) million | $103.7 million |
| diluted EPS | $(0.48) | $1.45 | $(0.66) | $2.50 |
| Fee-related earnings | $39.0 million | $26.4 million | $75.7 million | $49.5 million |
| Adjusted net income | $37.3 million | $40.1 million | $84.4 million | $80.6 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $145.7 million | $135.5 million |
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and restricted cash totaled $144.5 million at September 30, 2022, compared with $117.4 million at March 31, 2022.
- Total assets were $3.58 billion, down from $4.19 billion at March 31, 2022, primarily reflecting declines in accrued carried interest and legacy Greenspring balances.
- Total stockholders’ equity was $1.64 billion, compared with $1.82 billion at March 31, 2022.
- Debt obligations were $63.1 million, consisting of $65.0 million drawn under a $225.0 million revolving credit facility, net of debt issuance costs.
- The Revolver matures on September 20, 2026 and had a weighted-average interest rate of 5.13% at September 30, 2022. The company was in compliance with its leverage and minimum fee-earning AUM covenants.
- Operating cash flow of $145.7 million exceeded investing cash uses of $17.3 million. Financing activities used $102.8 million, primarily for distributions, dividends, tax receivable agreement payments and employee tax withholding.
- The company stated that it expects sufficient cash to meet obligations over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Management and advisory fees increased 43% year over year in the quarter and 46% for the six-month period, driven by new client activity, higher average FEAUM and the inclusion of Greenspring.
- Total revenues declined sharply because carried interest allocations moved from significant positive amounts to losses. Carried interest allocations were $(154.3) million in the quarter and $(194.7) million for the six months, compared with $196.4 million and $422.7 million, respectively, in the prior-year periods.
- Legacy Greenspring carried interest allocations were $(128.7) million for the quarter and $(282.3) million for the six months. These amounts were offset by corresponding legacy Greenspring performance-fee compensation and were not economically attributable to StepStone.
- Realized carried interest revenue fell to $22.5 million for the quarter and $96.1 million for the six months, reflecting lower realization activity in private equity funds.
- GAAP profitability deteriorated to a net loss attributable to StepStone, primarily because of unrealized depreciation in underlying private-market investments and related carried-interest reversals.
- Underlying recurring performance was stronger: fee-related earnings increased 48% in the quarter and 53% for the six months; adjusted net income increased 5% for the six-month period but declined 7% in the quarter.
- General, administrative and other expenses increased 33% in the quarter and 63% for the six months, reflecting higher intangible amortization, contingent consideration remeasurement, travel, technology and professional costs, partly offset by lower transaction costs and a lease-remeasurement gain.
- FEAUM increased 7% from March 31, 2022, and undeployed fee-earning capital was $16.5 billion.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative revenue or earnings guidance.
- Management continues to monitor COVID-19, inflation, rising interest rates and the Russia-Ukraine conflict. These conditions could slow fundraising and capital deployment, reduce management fees and delay realizations and performance-fee revenue.
- Carried interest and investment income are highly sensitive to unrealized valuations and market conditions. The company reported $1.19 billion of accrued carried interest allocations at September 30, 2022, down from $1.48 billion at March 31, 2022.
- The estimated maximum carried-interest repayment exposure, excluding legacy Greenspring carried interest, was $252.6 million net of tax assuming all related investments became worthless; management considers this scenario remote. No material clawback liability was accrued.
- The company had $84.9 million of unfunded commitments to StepStone Funds, excluding $39.0 million of commitments associated with legacy Greenspring entities for which the company has no direct economic interest.
- The Greenspring acquisition includes an earn-out of up to $75 million payable in 2025, subject to 2024 management-fee revenue targets. The related contingent consideration liability was $35.7 million at September 30, 2022.
- The company entered into new arrangements for its Conversus private-wealth platform in November 2022, including profits interests and future call and put rights that may require cash, Partnership units or tax receivable agreement rights.
- The filing states that there were no material changes to previously disclosed risk factors and no current legal proceedings expected to materially affect the financial statements.
Investor Verification Checklist
- Verify the sustainability of recurring fee growth, including FEAUM growth, fee rates and the conversion of $16.5 billion of undeployed fee-earning capital.
- Assess the sensitivity of carried interest, accrued carried interest and investment income to private-market valuations, realizations and future clawbacks.
- Review the economic effect of legacy Greenspring consolidated entities and the extent to which reported GAAP volatility is attributable to non-controlling interests.
- Monitor Revolver utilization, variable-rate exposure, covenant compliance and the September 2026 maturity.
- Evaluate future cash requirements for dividends, Partnership distributions, tax receivable agreements, unfunded commitments and the Greenspring earn-out.
- Distinguish GAAP results from non-GAAP fee-related earnings and adjusted net income when assessing operating performance.
- Confirm the terms and potential dilution or liquidity impact of the November 2022 Conversus/StepStone Private Wealth arrangements.