StepStone Group Inc. Form 10-Q Summary
Business Context and Reporting Period
StepStone is a global private-markets investment firm providing investment management, advisory, data and administrative services across private equity, infrastructure, private debt and real estate. This unaudited filing covers the three months ended June 30, 2022, the company’s fiscal first quarter of fiscal 2023, compared with the three months ended June 30, 2021.
- Private markets allocations overseen: approximately $588 billion, including $137 billion of AUM and $452 billion of AUA.
- Fee-earning AUM: $78.6 billion, up from $75.2 billion at March 31, 2022 and $52.9 billion at June 30, 2021.
- Employees: approximately 840 across 23 cities and 14 countries.
- The September 2021 Greenspring acquisition significantly affects comparability and added approximately $22 billion of AUM at acquisition.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 |
|---|---|---|
| Management and advisory fees, net | $116.7 million | $78.1 million |
| Total carried interest allocations | $(40.3) million | $226.4 million |
| Legacy Greenspring carried interest allocations | $(153.6) million | — |
| Total revenues | $(77.2) million | $308.6 million |
| Total expenses | $(68.4) million | $173.7 million |
| Income (loss) before tax | $(20.2) million | $140.9 million |
| Net income (loss) | $(21.5) million | $126.5 million |
| Net income (loss) attributable to StepStone Group Inc. | $(11.0) million | $41.7 million |
| Basic and diluted EPS | $(0.18) | $1.07 basic; $1.06 diluted |
| Net cash provided by operating activities | $57.5 million | $75.7 million |
- GAAP revenue and profit were heavily affected by unrealized valuation changes in carried interest and legacy Greenspring interests; therefore, GAAP revenue margins are not economically meaningful for the quarter.
- Adjusted revenues increased 40% to $190.3 million, fee-related earnings increased 58% to $36.6 million, and adjusted net income increased 16% to $47.1 million.
- Adjusted net income per share was $0.41 in both periods, calculated on a fully exchanged and diluted basis.
- Management and advisory fees increased 50%, driven by new client activity, 47% growth in average FEAUM, the Greenspring contribution and $2.4 million of retroactive fees from the final closing of StepStone Capital Partners V.
- The weighted-average management fee rate was 0.54%, compared with 0.52% a year earlier. Undeployed fee-earning capital was $17.1 billion.
Financial Position, Cash Flow and Liquidity
- Cash and cash equivalents were $106.4 million; cash, cash equivalents and restricted cash totaled $107.3 million at June 30, 2022.
- Total assets were $3.91 billion and total stockholders’ equity was $1.75 billion.
- Total investments were $2.62 billion, including $1.37 billion of accrued carried interest allocations and $1.14 billion related to legacy Greenspring entities.
- Debt obligations were $63.0 million, consisting of $65.0 million drawn under a $225.0 million revolving credit facility, net of debt issuance costs. The weighted-average interest rate was 3.69%, and maturity is September 20, 2026.
- The company had $2.6 million of outstanding letters of credit and remained in compliance with its leverage and minimum fee-earning AUM covenants.
- Operating cash flow was $57.5 million. Investing activities used $7.6 million and financing activities used $60.7 million, resulting in a $10.1 million decrease in cash, cash equivalents and restricted cash.
- Financing uses included $45.2 million of distributions to non-controlling interests, $12.2 million of dividends to common stockholders and $4.8 million of Tax Receivable Agreement payments.
- Management stated that existing cash, operating cash flow and available financing should be sufficient to meet obligations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Recurring management and advisory fees grew substantially, but total GAAP revenue fell from $308.6 million to negative $77.2 million because of adverse unrealized carried interest and investment valuation changes.
- Realized carried interest increased 47% to $73.6 million, while unrealized carried interest declined sharply and included reversals associated with lower valuations in certain private-equity portfolios.
- Legacy Greenspring produced negative carried interest allocations of $153.6 million and a corresponding negative performance-fee compensation expense; these amounts are attributable to non-controlling interests and do not represent direct economics acquired by StepStone.
- Cash-based compensation increased 41% to $60.1 million, reflecting higher staffing and compensation levels. Average headcount increased 41%, or 22% excluding Greenspring.
- General, administrative and other expense increased 108% to $34.2 million, primarily due to higher amortization, contingent consideration remeasurement, travel, technology and professional expenses.
- Cash flow from operations declined 24% year over year, while financing outflows increased because of dividends, distributions and Tax Receivable Agreement payments.
- In June 2022, 257,776 Class B partnership units were exchanged for an equal number of Class A shares; Class A shares outstanding increased to 61.4 million.
Outlook, Risks and Unusual Items
- 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 or reduce performance-fee realizations.
- Carried interest and investment income are highly sensitive to private-market valuations, realizations and fund performance. A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $1.7 million and investment income by approximately $10.8 million.
- A 100-basis-point increase in interest rates was estimated to increase annual Revolver interest expense by approximately $0.7 million, while increasing annual interest income on cash by approximately $1.1 million.
- Accrued carried interest-related compensation was $728.9 million, and the maximum estimated carried-interest repayment exposure, excluding legacy Greenspring interests, was $241.4 million net of tax under an extreme assumption that all investments become worthless. No material clawback liability was accrued.
- Unfunded commitments to StepStone Funds were $82.5 million, excluding $39.0 million of commitments related to legacy Greenspring entities for which the company has no direct economic interest.
- The company had a $193.9 million Tax Receivable Agreement liability at June 30, 2022; the agreements generally require payment of 85% of realized or deemed net cash tax savings.
- Greenspring acquisition earn-out consideration is subject to performance targets and was carried at a $31.1 million fair-value liability at quarter-end. The filing states that the valuation uses subjective revenue and discount-rate assumptions.
- The company announced a $0.20-per-share Class A dividend payable September 15, 2022, subject to the stated record-date conditions.
- No material changes were reported to previously disclosed risk factors, and management reported effective disclosure controls with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate recurring fee growth and non-GAAP earnings from volatile unrealized carried interest and legacy Greenspring consolidation effects.
- Confirm the sustainability of FEAUM growth, the $17.1 billion of undeployed fee-earning capital and the stated management fee rates.
- Monitor private-market valuations, realized exits, carried-interest reversals and potential future clawbacks.
- Assess liquidity after dividends, partnership distributions, Tax Receivable Agreement payments and unfunded commitments.
- Review the variable-rate Revolver, covenant headroom, collateral provisions and exposure to further rate increases.
- Evaluate Greenspring earn-out liabilities, legacy Greenspring non-controlling interests and the effects of the acquisition on future comparability.
- Reconcile adjusted net income and fee-related earnings to GAAP results, including all exclusions and the fully exchanged share count used for adjusted EPS.