StepStone Group Inc. — Form 10-Q Summary
Business Context and Reporting Period
StepStone is a global private markets investment firm providing customized investment solutions, investment management, advisory, data and portfolio analytics services across private equity, infrastructure, private debt and real estate. The filing covers the three months ended June 30, 2021, the company’s fiscal first quarter of fiscal 2022. The prior comparable period was the three months ended June 30, 2020, when the predecessor partnership operated before the September 2020 IPO and reorganization.
- Combined private markets allocations were approximately $465 billion, comprising $90 billion of AUM and $375 billion of AUA.
- Fee-earning AUM was approximately $52.9 billion, including $41.4 billion in SMAs and $11.5 billion in focused commingled funds.
- The company had approximately 586 employees operating from 19 offices across 13 countries.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 |
|---|---|---|
| Management and advisory fees, net | $78.1 million | $63.5 million |
| Incentive fees | $4.2 million | $3.6 million |
| Carried interest allocation | $226.4 million | $(128.5) million |
| Total revenues | $308.6 million | $(61.4) million |
| Total expenses | $173.7 million | $(15.1) million |
| Income before tax | $140.9 million | $(51.2) million |
| Net income | $126.5 million | $(52.4) million |
| Net income attributable to StepStone Group Inc. | $41.7 million | Not applicable |
| Basic/diluted EPS | $1.07/$1.06 | Not presented |
| Operating cash flow | $75.1 million | $28.9 million |
- GAAP income-before-tax margin was approximately 45.7%; GAAP net income margin was approximately 41.0%; net income attributable to StepStone margin was approximately 13.5%.
- Fee-related earnings increased to $23.1 million from $18.2 million, with an approximate 29.6% margin on management and advisory fees.
- Adjusted net income increased to $40.5 million from $15.5 million, and adjusted net income per share increased to $0.41 from $0.16 on a fully exchanged share basis.
- Cash, cash equivalents and restricted cash totaled $222.6 million at June 30, 2021, compared with $183.9 million at March 31, 2021.
- Total investments were $1.16 billion, including $1.07 billion of accrued carried interest allocations.
- The company had no debt obligations outstanding at June 30, 2021. Lease liabilities totaled $75.5 million.
- Total assets were $1.62 billion and total liabilities were $861.6 million. The company stated that it expected sufficient cash to meet obligations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Total revenue increased by $370.0 million, primarily because carried interest shifted from a $128.5 million loss to $226.4 million of revenue. The change reflected appreciation in underlying private market investments versus COVID-19-related depreciation in the prior-year quarter.
- Management and advisory fees increased 23% to $78.1 million, driven by new client activity, 27% growth in FEAUM and $0.9 million of retroactive fees.
- Realized carried interest increased to $50.0 million from $3.6 million, reflecting higher realization activity in private equity funds.
- Performance fee-related compensation increased to $110.9 million from a prior-year benefit of $65.8 million, largely corresponding to the increase in carried interest revenue.
- Cash compensation increased 8% to $42.7 million, equity compensation increased to $3.7 million, and general and administrative expense increased 56% to $16.4 million. General and administrative expense included $3.5 million of transaction costs.
- Interest expense declined to $6,000 from $2.1 million because the senior secured term loan was fully repaid in connection with the IPO.
- Operating cash flow increased to $75.1 million from $28.9 million. Financing cash outflows were $30.5 million, principally distributions to non-controlling interests.
- In June 2021, 1.9 million Class B units were exchanged for 1.9 million shares of Class A common stock, increasing Class A shares outstanding to 40.3 million and reducing Class B shares outstanding to 54.5 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal numerical revenue or earnings guidance.
- Management expects continued demand for private markets, private wealth expansion, client allocation shifts and growth in fee-earning assets to support the business. At June 30, 2021, undeployed fee-earning capital was $13.6 billion.
- Carried interest and incentive fees are volatile, dependent on investment valuations and realizations, and may reverse. Approximately $129.9 million of carried interest allocations, net of tax, was subject to contingent repayment under an extreme assumption that all underlying investments became worthless; management considered that scenario remote.
- COVID-19, including the Delta variant, could slow fundraising, capital deployment and investment exits, reducing management fees and performance fees. Carried interest balances are recorded using underlying fund valuations generally subject to a three-month lag.
- A 10% decline in fund investment values was estimated to reduce annual management fees by approximately $0.7 million and investment income by approximately $8.3 million. A 100-basis-point increase in interest rates was estimated to increase annual interest income by approximately $2.2 million.
- The company had $54.0 million of unfunded capital commitments as general partner or managing member of StepStone Funds.
- The company adopted the new lease standard prospectively on April 1, 2021, recording approximately $66.7 million of right-of-use assets and $76.9 million of lease liabilities at adoption. The adoption did not materially affect income or cash flows.
- In July 2021, StepStone agreed to acquire Greenspring Associates for approximately $185 million in cash, 12.6 million Class A shares and 3.1 million Class C partnership units, plus up to $75 million of contingent earnout consideration. The transaction is expected to expand venture capital and growth equity capabilities.
- The company declared a $0.07-per-share quarterly dividend paid in July 2021 and announced another $0.07-per-share dividend payable in September 2021.
- Management reported no material changes to previously disclosed risk factors, no material pending litigation exposure and effective disclosure controls as of June 30, 2021.
Important Facts for Investors to Verify
- Separate recurring fee performance from volatile, largely unrealized carried interest when assessing earnings quality and valuation.
- Confirm the effect of the three-month valuation lag on carried interest, investment income, AUM and AUA metrics.
- Review the Greenspring acquisition agreement, financing commitment, share and unit issuance, and potential $75 million earnout.
- Assess the economic impact of non-controlling interests: $79.3 million of quarterly net income was attributable to Partnership non-controlling interests, while StepStone Group Inc. reported $41.7 million.
- Monitor potential carried interest reversals, the $129.9 million maximum contingent repayment exposure and $54.0 million of unfunded commitments.
- Review tax receivable agreement obligations, which require payment of 85% of certain realized or deemed cash tax savings; amounts payable to non-controlling interest holders were $120.8 million at quarter-end.
- Consider that AUA increased partly because the company changed its AUA methodology beginning in the prior quarter; historical amounts were not recast.