Business Context and Reporting Period
StepStone Group Inc. 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. The submitted filing is a Form 10-K for the fiscal year ended March 31, 2023, not a standalone calendar fourth-quarter 2022 report. The filing text does not provide a separate Q4 2022 income statement.
As of March 31, 2023, StepStone reported $621 billion of total capital responsibility, comprising $138 billion of assets under management (AUM) and $482 billion of assets under advisement (AUA). Fee-earning AUM was $85.4 billion, up from $75.2 billion at March 31, 2022. The company had 956 employees and operated in 25 cities across 15 countries.
Financial Metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Management and advisory fees, net | $497.2 million | $380.3 million | Up 31% |
| Total revenues | $(67.6) million | $1,365.5 million | Down $1,433.1 million |
| Realized carried interest allocations | $131.1 million | $200.7 million | Down 35% |
| Unrealized carried interest allocations | $(253.3) million | $585.9 million | Material reversal |
| Legacy Greenspring carried interest allocations | $(452.2) million | $187.1 million | Material reversal |
| Net income attributable to StepStone Group Inc. | $(18.4) million | $193.9 million | Turned to loss |
| GAAP diluted EPS | $(0.30) | $3.84 | Turned to loss |
| Adjusted net income | $142.7 million | $172.9 million | Down 18% |
| Fee-related earnings | $156.2 million | $122.2 million | Up 28% |
| Operating cash flow | $151.2 million | $214.3 million | Down 29% |
| Cash, cash equivalents and restricted cash | $103.5 million excluding Consolidated Funds; $129.5 million including them | $117.4 million excluding Consolidated Funds | Consolidated Funds began in FY2023 |
| Debt obligations, net | $98.4 million | $62.9 million | Up $35.5 million |
GAAP results were heavily affected by unrealized valuation changes in carried interest and by the consolidation of certain funds. Management and advisory fees increased 31%, while recurring fee-related earnings increased 28%. The FY2023 effective tax rate was negative 9.2%, compared with 5.5% in FY2022, primarily because the company reported a pretax loss.
Balance Sheet, Liquidity and Capital Commitments
- Investments totaled $2.14 billion, including $1.23 billion of accrued carried interest allocations and $770.7 million of legacy Greenspring investments and accrued carried interest.
- Accrued carried interest-related compensation was $644.5 million, and legacy Greenspring accrued carried interest-related compensation was $618.0 million.
- The company had a $225 million multicurrency revolving credit facility, with $100 million drawn before debt issuance costs. The weighted-average interest rate was 6.86%; maturity is September 20, 2026.
- Outstanding letters of credit totaled $7.8 million. The company was in compliance with its leverage and minimum fee-earning AUM covenants at March 31, 2023.
- Unfunded commitments to StepStone Funds were $88.7 million, plus $50.6 million of commitments associated with legacy Greenspring entities for which the company does not hold direct economic interests.
- Contractual obligations totaled $460.4 million, including operating leases, debt, interest, contingent earn-out obligations and capital commitments. Tax Receivable Agreement payments are not included and could be substantial.
- Management stated that available cash, operating cash flow and existing financing capacity should be sufficient to meet obligations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Recurring revenues strengthened: management and advisory fees rose $116.9 million, supported by new client activity and 28% growth in average fee-earning AUM, including the impact of Greenspring.
- Performance-based revenues weakened sharply. Realized carried interest declined $69.6 million, while unrealized carried interest changed from a $585.9 million gain to a $253.3 million loss.
- Legacy Greenspring carried interest changed from a $187.1 million gain to a $452.2 million loss. The related legacy Greenspring investment income also changed from $32.6 million of income to a $44.1 million loss.
- GAAP net income attributable to StepStone changed from $193.9 million of income to an $18.4 million loss. By contrast, fee-related earnings increased to $156.2 million, illustrating the difference between recurring fee earnings and market-sensitive performance revenues.
- Cash-based compensation increased 28% to $252.2 million, while general, administrative and other expenses increased 33% to $147.2 million. Headcount also increased materially, with average full-time headcount up 31%, or 27% excluding Greenspring.
- Operating cash flow decreased by $63.1 million, while investing cash use declined substantially because FY2022 included $181.5 million of cash paid for the Greenspring acquisition.
- Beginning in the quarter ended December 31, 2022, the company consolidated one investment fund. Consolidation increased reported assets, liabilities, expenses and cash flows, while related third-party interests were recorded as redeemable non-controlling interests.
- StepStone entered new arrangements with the StepStone Private Wealth management team in November 2022. The arrangement includes put and call rights that could require cash or Partnership-unit payments beginning in specified future periods.
Outlook, Commentary, Risks and Unusual Items
Management identified continued demand for private-markets exposure, private-wealth expansion, growth from existing clients, deployment of $15.7 billion of undeployed fee-earning capital and potential operating leverage as key growth drivers. The company also reported approximately $1.23 billion of accrued carried interest allocations and more than $63 billion of performance-fee-eligible capital across approximately 180 programs.
Management cautioned that fundraising and capital deployment slowed amid rising interest rates, high inflation, tighter credit, recession concerns, market volatility, the Russia-Ukraine conflict and banking-system stress. These conditions may delay management fees, reduce realizations and impair carried interest. Silicon Valley Bank’s March 2023 failure temporarily delayed certain client capital calls.
- Carried interest is based in part on estimated fair values of illiquid investments and may be reversed if future valuations or realizations decline. The filing identified valuation of underlying co-investments as a critical audit matter because of significant unobservable inputs.
- No material carried-interest clawback liability was accrued at March 31, 2023; however, the estimated maximum contingent repayment exposure for company-attributable carried interest, excluding legacy Greenspring, was $264.1 million net of tax under an extreme zero-value assumption.
- Real estate strategies face risks from lower occupancy, remote work, higher interest rates, reduced refinancing availability and declining commercial real-estate values.
- The business is exposed to client termination or removal rights, fee pressure, investment underperformance, competition for talent and investment opportunities, cybersecurity incidents, regulatory changes and conflicts of interest.
- The company is a controlled company with a dual-class voting structure. Class B shares generally carried five votes per share before the specified Sunset, and the Sunset is scheduled no later than September 18, 2025 unless triggered earlier.
- Tax Receivable Agreements require payment of 85% of specified net cash tax savings and could accelerate or exceed realized tax benefits in certain circumstances. The related liability was $199.3 million at March 31, 2023.
- The Greenspring acquisition includes a contingent earn-out of up to $75 million, payable in 2025 subject to achievement of calendar-year 2024 management-fee targets; the recorded fair-value obligation was $36.7 million at March 31, 2023.
- The company announced after year-end a $0.20 quarterly dividend and a $0.25 supplemental dividend per Class A share, payable June 30, 2023. FY2023 dividends paid totaled $0.80 per Class A share.
Investor Verification Checklist
- Verify the sustainability of the $497.2 million management and advisory fee base, the $85.4 billion FEAUM balance and the expected timing of deployment of $15.7 billion of undeployed fee-earning capital.
- Reconcile GAAP net loss with adjusted net income and fee-related earnings, particularly the treatment of unrealized carried interest, legacy Greenspring items, equity compensation and consolidation adjustments.
- Assess the sensitivity of the $1.23 billion accrued carried interest balance to further valuation declines, realization delays and clawback obligations.
- Review Revolver utilization, variable-rate exposure, covenant headroom and the September 2026 maturity.
- Evaluate liquidity needs for $139.3 million of stated and legacy Greenspring capital commitments, dividends, tax distributions, Tax Receivable Agreement payments and the Greenspring earn-out.
- Confirm the economic impact and future cash obligations associated with the Private Wealth transaction and its put and call provisions.
- Monitor fundraising, deployment and realization trends in the context of higher rates, tighter credit, commercial real-estate weakness and banking-system volatility.
- Consider the effects of the controlled-company structure, dual-class voting rights and the potential 2025 Sunset on governance and change-of-control risk.