10-Q: StepStone Group Inc. Reports Third Quarter Fiscal Year 2024 Results

StepStone Group Inc. reports a net loss for the third quarter of fiscal year 2024, impacted by unrealized carried interest allocations, but shows growth in management and advisory fees.

Summary

• StepStone Group Inc. reported a net loss of $20.2 million for the third quarter of fiscal year 2024, compared to a net loss of $6.9 million in the same period last year.
• The company's total revenues decreased to $(14.6) million, primarily due to a significant reversal of carried interest allocations.
• Management and advisory fees, however, increased by 18% to $151.5 million, driven by new client activity and an 8% growth in average fee-earning assets under management (FEAUM).
• Incentive fees saw a substantial increase of 500% to $17.9 million, due to higher realization activity.
• Realized carried interest allocation revenues decreased by 6% to $15.3 million, while unrealized carried interest allocations decreased to $(114.3) million, reflecting a net decrease in the cumulative allocation of gains within private equity funds.
• Legacy Greenspring carried interest allocation revenues decreased to $(69.7) million, due to lower net unrealized depreciation in the fair value of certain underlying fund investments.
• Total expenses increased to $19.2 million, driven by higher cash-based compensation, equity-based compensation, and general administrative costs.
• The company's fee-earning AUM increased to $89.4 billion as of December 31, 2023, a 5% increase from March 31, 2023.
• The company had $21.4 billion of undeployed fee-earning capital as of December 31, 2023.

Sentiment

Score: 4

Explanation: The document presents mixed results with strong growth in some areas but a net loss and decreased carried interest allocations. The overall sentiment is cautiously negative due to the net loss and market volatility, but the company's growth in management fees and undeployed capital provide some optimism.

Positives

• Management and advisory fees showed strong growth, increasing by 18%.
• Incentive fees saw a significant increase, indicating successful performance in certain areas.
• Fee-earning AUM continues to grow, reaching $89.4 billion.
• The company has a substantial amount of undeployed fee-earning capital, which represents future revenue potential.
• The sale of GBOS for $8.4 million provides additional capital.

Negatives

• The company reported a net loss of $20.2 million for the quarter.
• Total revenues decreased due to a significant reversal of carried interest allocations.
• Realized carried interest allocation revenues decreased by 6%.
• Unrealized carried interest allocations decreased to $(114.3) million.
• Total expenses increased due to higher compensation and administrative costs.

Risks

• The company's performance is sensitive to market fluctuations, which can impact carried interest allocations and investment income.
• The company's carried interest allocations are subject to clawback, which could result in repayment obligations.
• The company's performance is subject to the risk of changes in interest rates, which could impact the cost of borrowing.
• The company's performance is subject to the risk of changes in foreign exchange rates, which could impact the value of investments and revenues.
• The company's performance is subject to the risk of banking system volatility, which could impact the results and financial condition of the StepStone Funds or StepStone generally.

Future Outlook

The company is continuing to closely monitor developments related to inflation, rising interest rates, the ongoing Russia-Ukraine conflict, banking system volatility, the Israel-Hamas conflict and the geopolitical responses thereto, and assess the impact on financial markets and the company's business. The company's results and the overall industry results have been and may continue to be adversely affected by slowdowns in fundraising activity and the pace of capital deployment, which have resulted in, and may continue to result in, delayed or decreased management fees. Further, fund managers have been unable or less able to exit existing investments profitably. Such conditions have resulted in, and may continue to result in, delayed or decreased performance fee revenues.

Management Comments

• Management believes that the company will have sufficient cash to meet its obligations for the next 12 months.
• Management is continuing to closely monitor developments related to inflation, rising interest rates, the ongoing Russia-Ukraine conflict, banking system volatility, the Israel-Hamas conflict and the geopolitical responses thereto, and to assess the impact on financial markets and on the company's business.

Industry Context

The document reflects the challenges faced by private market firms in a volatile economic environment, with decreased carried interest allocations and increased expenses. However, the growth in management and advisory fees and the substantial amount of undeployed capital indicate a positive outlook for future growth. The company's multi-asset class expertise and global presence are critical to securing a competitive edge in the private markets.

Comparison to Industry Standards

• StepStone's performance is mixed compared to industry benchmarks. While the growth in management and advisory fees is positive, the net loss and decrease in carried interest allocations are concerning.
• Compared to peers like Blackstone, KKR, and Apollo, StepStone's reliance on carried interest allocations makes it more vulnerable to market fluctuations.
• The company's fee-earning AUM growth of 5% is moderate compared to some of its larger competitors, but its substantial undeployed capital provides a potential for future growth.
• StepStone's focus on customized investment solutions and advisory services differentiates it from some of its competitors that primarily focus on fund management.
• The company's global presence and multi-asset class expertise are competitive advantages, but its performance is still subject to broader market trends.

Related Party Transactions

• A substantial portion of the company's management and advisory fees and carried interest allocations is earned from various StepStone Funds that are considered equity method investments.
• The company made payments of $2.6 million and $1.1 million during the three months ended December 31, 2023 and 2022, respectively, and $10.3 million and $6.0 million for the nine months ended December 31, 2023 and 2022, respectively, under the Tax Receivable Agreements.

Stakeholder Impact

• Shareholders may be concerned about the net loss and decreased carried interest allocations.
• Employees may be affected by changes in compensation related to performance fees.
• Clients may be impacted by the performance of the StepStone Funds and the company's ability to generate returns.
• Creditors may be impacted by the company's debt obligations and ability to meet its financial covenants.

Next Steps

• The company will continue to monitor market conditions and their impact on performance.
• The company will focus on deploying its undeployed fee-earning capital to generate future revenue.
• The company will continue to manage its expenses and improve profitability.
• The company will continue to evaluate the impact of inflation, rising interest rates, the ongoing Russia-Ukraine conflict, banking system volatility, the Israel-Hamas conflict and the geopolitical responses thereto on its business.

Key Dates

Keywords

private markets, asset management, carried interest, management fees, incentive fees, AUM, FEAUM, investment, financial results, alternative investments