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 quarter and nine months ended December 31, 2023, the Company’s fiscal third quarter. The financial statements are unaudited and include consolidated variable-interest entities and certain investment funds.
- Total capital responsibility was approximately $659 billion, comprising $149 billion of assets under management and $510 billion of assets under advisement.
- Fee-earning AUM was $89.4 billion, up 5% from March 31, 2023; undeployed fee-earning capital was $21.4 billion.
- StepStone held approximately 57.0% of the Partnership’s economic interest at December 31, 2023.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2023 | Nine months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Management and advisory fees, net | $151.5 million | $128.8 million | $431.7 million | $364.6 million |
| Incentive fees | $17.9 million | $3.0 million | $22.8 million | $8.3 million |
| Total carried interest allocations | $(114.3) million | $(47.0) million | $6.5 million | $(241.7) million |
| Legacy Greenspring carried interest allocations | $(69.7) million | $(88.9) million | $(106.3) million | $(371.2) million |
| Total revenues | $(14.6) million | $(4.2) million | $354.8 million | $(239.9) million |
| Net income attributable to StepStone Group Inc. | $(20.2) million | $(6.9) million | $27.3 million | $(47.2) million |
| GAAP diluted EPS | $(0.32) | $(0.11) | $0.43 | $(0.77) |
| Fee-related earnings | $50.7 million | $42.7 million | $138.9 million | $118.4 million |
| Adjusted net income | $42.1 million | $31.2 million | $101.7 million | $115.5 million |
- Quarterly management and advisory fees increased 18%, primarily from new client activity, 8% growth in average FEAUM and $8.6 million of retroactive fees from fund closings.
- Quarterly incentive fees increased 500% because of higher realization activity.
- Quarterly GAAP revenue remained negative because unrealized carried interest allocations included a $129.6 million negative amount and legacy Greenspring carried interest allocations included a $69.7 million negative amount.
- Nine-month GAAP revenue improved by $594.8 million year over year, primarily because carried interest allocations shifted from a substantial prior-year reversal to a modest current-year gain and legacy Greenspring reversals were lower.
- Fee-related earnings increased 19% for the quarter and 17% for the nine-month period, reflecting higher recurring management and advisory fees partly offset by higher operating expenses.
- Quarterly GAAP net loss widened to $20.2 million attributable to StepStone, while nine-month results turned profitable. Adjusted net income increased 35% for the quarter but declined 12% for the nine months.
Cash flow, balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash attributable to the Company were $140.7 million at December 31, 2023, or $174.3 million including Consolidated Funds, compared with $103.5 million and $129.5 million, respectively, at March 31, 2023.
- Operating cash flow was $153.9 million for the nine months, compared with $151.7 million in the prior-year period.
- Investing cash outflow was $38.3 million, including $18.7 million of property and equipment purchases.
- Financing cash outflow was $67.2 million, including $55.0 million of dividends, $71.5 million of distributions to non-controlling interests and $10.3 million of Tax Receivable Agreement payments.
- Debt obligations were $123.7 million net of debt issuance costs, consisting of $125.0 million drawn under a $225.0 million revolving credit facility. The weighted-average interest rate was 7.48%, and maturity is September 20, 2026.
- The Company had $8.0 million of outstanding letters of credit and remained in compliance with its leverage and minimum fee-earning AUM covenants.
- Accrued carried interest-related compensation was $635.2 million, and the Tax Receivable Agreement liability was $195.9 million.
- Management stated that available cash, operating cash flow and financing capacity should be sufficient to meet obligations for the next 12 months.
Material changes, outlook and unusual items
- On December 31, 2023, StepStone sold Greenspring Back Office Solutions for an $8.4 million secured promissory note payable over approximately six years. The transaction generated a $0.8 million net charge and transferred 42 employees to the independent buyer, renamed Viridis Fund Solutions.
- In September 2023, the Company issued 105,598 Class A shares in exchange for Class B Partnership units and 551,954 Class A shares in exchange for Class C units.
- On February 7, 2024, the Company entered agreements providing a path to acquire all outstanding equity interests in certain asset-class entities over time through exchanges of Partnership interests or Class A shares plus cash.
- The Company announced a quarterly dividend of $0.21 per Class A share payable March 15, 2024.
- No formal quantitative earnings or revenue guidance is provided in the filing. Management expects results to remain sensitive to fundraising, capital deployment, realizations, valuations and market conditions.
- Management cited risks from higher interest rates, slower fundraising and deployment, reduced exit activity, geopolitical conflicts, banking-system volatility, competition and difficult private-market valuations.
- Carried interest is highly volatile and may reverse with future investment losses. The estimated maximum contingent repayment exposure for carried interest, excluding legacy Greenspring allocations, was $278.7 million net of tax, although management views the assumed total-loss scenario as remote; no material clawback liability was accrued.
- Legal proceedings are described as ordinary-course matters, with no currently expected material liability. The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP revenue and earnings with fee-related earnings and adjusted net income, particularly the effects of unrealized carried interest and legacy Greenspring items.
- Monitor realization activity, private-market valuations and potential reversals of the $1.2 billion accrued carried interest balance.
- Review recurring fee growth, FEAUM, fee rates and the conversion of $21.4 billion of undeployed fee-earning capital.
- Assess liquidity after dividends, Partnership distributions, Tax Receivable Agreement payments, capital commitments and the variable-rate Revolver.
- Evaluate the effect of the proposed asset-class entity ownership transactions on dilution, cash needs, non-controlling interests and future economics.
- Confirm that consolidated-fund results, non-controlling interests and three-month investment reporting lags are properly understood when comparing periods.
- Review the Company’s approximately $96.1 million of unfunded commitments and the estimated $278.7 million maximum carried-interest repayment exposure.