10-K: StepStone Group Inc. Reports Fiscal Year 2024 Results, Highlights Growth in AUM and AUA

StepStone Group Inc. reports its fiscal year 2024 results, showcasing growth in assets under management and advisement, while navigating market volatility.

Summary

• StepStone Group Inc., a global private markets investment firm, released its fiscal year 2024 results, reporting $678 billion in total capital responsibility, including $157 billion in AUM and $521 billion in AUA.
• The company's management and advisory fees grew to $585 million, reflecting a 25% compounded annual growth rate since fiscal 2019.
• StepStone reviewed over 3,900 investment opportunities and conducted approximately 5,300 meetings with fund managers during the year.
• The company allocated an average of $70 billion annually in capital to private markets on behalf of clients over the last three years.
• The company's investment strategies include primaries, secondaries, and co-investments across private equity, infrastructure, private debt, and real estate.
• StepStone's proprietary data and technology platforms, including SPI Research and SPI Reporting, provide a competitive advantage.
• The company has a diverse client base, including public and private pension funds, sovereign wealth funds, insurance companies, endowments, foundations, family offices, and private wealth clients.
• StepStone's Private Wealth platform is designed to expand access to private markets for high-net-worth and mass affluent investors.
• The company's management and advisory fees were generated from focused commingled funds (51%), SMAs (38%), advisory, data and administrative services (10%) and fund reimbursement revenues (1%).
• The company has a scalable business model with recurring management and advisory fees and upside from performance fees.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong growth in AUM, AUA, and management fees, along with a solid track record. However, it also acknowledges market risks and potential challenges, which tempers the overall sentiment.

Positives

• The company has a truly global scale with local teams in 27 cities across 16 countries.
• StepStone offers a full-service, customized approach to delivering solutions.
• The company has scale across private markets asset classes, including private equity, real estate, infrastructure, and private debt.
• StepStone is well-positioned to serve and grow its diverse and global client base.
• The company has preeminent data and analytics capabilities with proprietary software.
• StepStone has a strong investment performance track record, outperforming the MSCI ACWI Index.
• The company has an attractive financial profile, supported by a longer duration capital base and scalable platform.
• StepStone is led by a seasoned team of professionals whose interests are aligned with clients and stockholders.
• The company is expanding its distribution channel for private wealth clients.
• StepStone is pursuing accretive transactions to complement its platform.

Negatives

• The document notes that markets have experienced meaningful headwinds, including increasing borrowing costs.
• The document notes that the historical investment returns of the StepStone Funds and advisory accounts have benefited from favorable borrowing conditions in the debt markets during such historical periods, and there is no assurance that the StepStone Funds, advisory accounts or the underlying funds in which they invest will be able to avail themselves of comparable opportunities and conditions, particularly in light of recent higher interest rates and other market conditions.
• The document notes that the company may need to pay clawback or contingent repayment obligations if and when they are triggered under the governing agreements of its funds.
• The document notes that the company's investment management activities may involve investments in relatively high-risk, illiquid assets.
• The document notes that the company's real estate asset class is exposed to commercial real estate values and commercial real estate loans, both of which are expected to be adversely affected by decreased occupancy rates, higher prevailing interest rates and decreased credit availability.

Risks

• The success of the business depends on the identification and availability of suitable investment opportunities for clients.
• Poor investment performance could lead to a decline in revenues and difficulty raising capital.
• Competition for access to investment funds and other investments is intense.
• Third-party clients have the right to remove the company as the general partner of the relevant fund and to terminate the investment period under certain circumstances.
• The company's ability to retain its senior leadership team and attract additional qualified professionals is critical to its success.
• Failure to appropriately manage conflicts of interest could damage the company's reputation.
• Obligations to clients and other third parties may conflict with stockholders' interests.
• Increases in interest rates or decreases in the availability of credit may affect the StepStone Funds' ability to achieve attractive rates of return.
• Clients in the StepStone Funds with commitment-based structures may not satisfy their contractual obligation to fund capital calls when requested.
• Failure to comply with investment guidelines set by clients could result in damage awards or a reduction in AUM.
• Valuation methodologies for certain assets in the StepStone Funds are subjective, and the values of assets established pursuant to such methodologies may never be realized.
• The company may not be able to maintain its desired fee structure due to industry pressure.
• The company may need to pay clawback or contingent repayment obligations if and when they are triggered under the governing agreements of its funds.
• The company's investment management activities may involve investments in relatively high-risk, illiquid assets.
• The StepStone Funds may face risks relating to undiversified investments.
• Banking system volatility may adversely affect the results and financial condition of the StepStone Funds or StepStone generally.
• The StepStone Funds make investments in funds and companies that the company does not control.
• The company's risk management strategies and procedures may leave it exposed to unidentified or unanticipated risks.
• The due diligence process that the company undertakes in connection with investments may not reveal all relevant facts.
• Restrictions on the company's ability to collect and analyze data regarding its clients' investments could adversely affect its business.
• The company and its clients depend on the reliability of its proprietary data and technology platforms and other data processing systems.
• A compromise or corruption of the company's systems or that of its vendors containing confidential information could damage its business relationships.
• Cybersecurity risks and cybersecurity incidents could adversely affect the company's business.
• Risks related to emerging and changing technology, including artificial intelligence, could impact the company's results of operations or financial condition.
• Employee misconduct could harm the company by impairing its ability to attract and retain clients.
• The company may face damage to its professional reputation and legal liability.
• The company's non-U.S. operations are subject to certain risks.
• Investments of the StepStone Funds in certain jurisdictions may be subject to heightened risks.
• Revenues from the company's real estate asset class are subject to the risks inherent in the ownership and operation of real estate.
• The company's real estate asset class is exposed to commercial real estate values and commercial real estate loans.
• Investments the company makes on behalf of clients or recommends to clients in infrastructure assets may expose it to increased risks and liabilities.
• The substantial growth of the company's business in recent years may be difficult to sustain.
• The company may enter into new lines of business, which may result in additional risks and uncertainties.
• The company has entered into long-term agreements that provide for it to acquire all the equity interests of its asset class entities that it does not currently own.
• The company may acquire additional businesses or assets or form joint ventures.
• Current or future indebtedness may expose the company to substantial risks.
• The company is subject to risks in using custodians, counterparties, administrators and other agents.
• The investment management and investment advisory business is intensely competitive.
• Difficult or volatile market conditions can adversely affect the company's business.
• A major public health crisis could severely disrupt the global financial markets and business climate.
• The company operates in a heavily regulated industry and any failure to comply with government regulations could adversely affect it.
• Evolving laws and government regulations could adversely affect the company.
• Future changes to tax laws or the company's effective tax rate could materially adversely affect the company.
• The company may be required to pay additional taxes under the Centralized Partnership Audit Regime.
• Federal, state and foreign anti-corruption and sanctions laws create the potential for significant liabilities and penalties and reputational harm.
• Regulation of investment advisers outside the United States could adversely affect the company's ability to operate its business.
• The company is subject to increasing scrutiny from institutional clients with respect to ESG costs of investments made by the StepStone Funds.
• The company is a controlled company within the meaning of the Nasdaq Global Select Market listing standards and, as a result, qualifies for, and relies on, exemptions from certain corporate governance requirements.
• SSG depends on distributions from the Partnership to pay any dividends, if declared, taxes and other expenses, including payments under the Tax Receivable Agreements.
• The IRS might challenge the tax basis step-ups and other tax benefits the company receives.
• In certain circumstances, payments under each Tax Receivable Agreement may be accelerated and/or significantly exceed the actual tax benefits, if any, that SSG actually realizes.
• In certain circumstances, the Partnership will be required to make distributions to the company and the existing partners of the Partnership, and the distributions that the Partnership will be required to make may be substantial.
• The company may be required to fund withholding tax upon certain exchanges of Class B units or newly-created Class D units into shares of Class A common stock by non-U.S. holders.
• The company may have tax and other liabilities attributable to its pre-IPO investors as a result of certain reorganization transactions.
• SSG may not be permitted to deduct its distributive share of compensation expense pursuant to regulations issued under Section 162(m) of the Code.
• If StepStone Group Inc. were deemed an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for the company to continue its business as contemplated.
• A change of control of the company, including the effect of a Sunset, could result in an assignment of its investment advisory agreements.
• Because members of the company's senior leadership team hold their economic interest through other entities, conflicts of interest may arise between them and the holders of the company's Class A common stock or with the company.
• The company relies on its equity ownership, governance rights and other contractual arrangements to control certain of its consolidated subsidiaries that are not wholly-owned.
• The disparity in the voting rights among the classes of the company's common stock and inability of the holders of its Class A common stock to influence decisions submitted to a vote of its stockholders may have an adverse effect on the price of its Class A common stock.
• Distributions made by the Partnership to the company may be substantial, and the company's ability to use the cash it receives in such distributions may be limited.
• The dual class structure of the company's common stock may adversely affect the trading market for its Class A common stock.
• The company currently pays dividends to its stockholders, but its ability to do so is subject to the discretion of its board of directors and may be limited by its holding company structure and applicable provisions of Delaware law.
• The market price of the company's Class A common stock has been, and may continue to be volatile.
• Anti-takeover provisions in the company's charter documents and under Delaware law could make an acquisition of the company more difficult.
• The company's amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by its stockholders.

Future Outlook

The company aims to leverage its core principles and values to continue to grow its business, focusing on expanding existing client mandates, adding new clients globally, expanding its distribution channel for private wealth clients, enhancing operating margins, monetizing data and analytics capabilities, and pursuing accretive transactions.

Industry Context

The document highlights the increasing investor desire for exposure to private markets, the rising complexity within private markets, the global nature of private markets, and the need for customized solutions, all of which are driving the company's growth and strategy.

Comparison to Industry Standards

• The document compares StepStone's investment performance to the MSCI ACWI Index, a common benchmark for global equity performance, showing that StepStone has outperformed this index on an inception-to-date basis.
• The document notes that StepStone competes with a variety of traditional and private markets managers, commercial banks, investment banks and other financial institutions, indicating a competitive landscape.
• The document notes that investors are increasingly allocating capital to fund managers that have expertise across a wide range of asset classes within private markets, which is a trend that StepStone is positioned to capitalize on.

Stakeholder Impact

• Shareholders will benefit from the company's growth and potential for future dividends.
• Employees will benefit from the company's success through compensation and long-term incentive plans.
• Clients will benefit from the company's expertise and access to private markets opportunities.
• The company's growth will have a positive impact on the communities where it operates.

Next Steps

• The company will continue to grow with existing clients by expanding mandates and deploying already raised committed capital.
• The company will add new clients globally by leveraging its distribution networks.
• The company will continue to expand its distribution channel for private wealth clients.
• The company will leverage its scale to enhance operating margins.
• The company will monetize its data and analytics capabilities.
• The company will pursue accretive transactions to complement its platform.

Key Dates

Keywords

private markets, investment management, asset management, advisory services, private equity, infrastructure, private debt, real estate, AUM, AUA, alternative investments, fund of funds, secondaries, co-investments