10-Q: StepStone Group Reports Q1 Loss Amid Soaring Equity Costs

StepStone Group Inc. reported a net loss of $38.4 million for the quarter ended June 30, 2025, primarily driven by a substantial increase in equity-based compensation, despite strong growth in assets under management and advisory fees.

Summary

• StepStone Group Inc. reported a net loss attributable to the company of $38.4 million for the three months ended June 30, 2025, a significant decline from a net income of $13.3 million in the prior year period.
• Basic and diluted earnings per share of Class A common stock were $(0.49) for the current quarter, down from $0.20 in the same period last year.
• Total revenues increased by 95% to $364.3 million, up from $186.4 million in the prior year, primarily due to higher carried interest allocations and management and advisory fees.
• Management and advisory fees, net, grew by 19% to $211.2 million, driven by new client activity and a 28% growth in average Fee-Earning Assets Under Management (FEAUM).
• Unrealized carried interest allocation revenues saw a positive swing of $96.7 million, reaching $88.9 million, compared to a negative $25.2 million in the prior year, reflecting net unrealized appreciation in private equity funds.
• Legacy Greenspring carried interest allocation revenues also increased significantly to $39.6 million from a negative $9.1 million in the prior year, due to net unrealized appreciation.
• Total expenses surged by 204% to $423.3 million, largely due to an 884% increase in equity-based compensation to $188.7 million, primarily from a $170.5 million increase in liability classified awards related to the SPW profits interest.
• Cash-based compensation increased by 23% to $96.0 million, attributed to a 14% higher average headcount and increased compensation levels.
• Realized carried interest allocation revenues decreased by 42% to $24.4 million, reflecting lower realization activity in private equity, infrastructure, and real estate funds.
• Fee-Related Earnings (FRE), a non-GAAP measure, increased by 13% to $81.2 million.
• Adjusted Net Income (ANI), a non-GAAP measure, decreased by 15% to $48.5 million, and ANI per share was $0.40, down from $0.48.
• Assets Under Management (AUM) grew to $199 billion as of June 30, 2025, up from $189 billion as of March 31, 2025, and $169 billion as of June 30, 2024.
• Fee-Earning AUM (FEAUM) increased to $127.2 billion as of June 30, 2025, from $121.4 billion as of March 31, 2025.
• Undeployed fee-earning capital stood at $28.7 billion as of June 30, 2025.
• The company's effective tax rate increased to 41.0% from 12.4% in the prior year, partly due to additional tax benefits associated with losses not allocated to non-controlling interests in a pre-tax net loss period.

Sentiment

Score: 4

Explanation: The sentiment is neutral to slightly negative. While the company demonstrates strong growth in AUM, FEAUM, and management fees, indicating a robust core business, the significant net loss and negative EPS are concerning. The loss is primarily driven by a large non-cash equity-based compensation expense related to SPW's performance, which is an underlying positive business trend. However, the decline in realized performance fees and acknowledged industry headwinds (fundraising slowdowns, difficulty exiting investments) temper the overall outlook. The long-term growth narrative remains, but short-term profitability is impacted by accounting complexities and market conditions.

Positives

• Total revenues increased by 95% year-over-year, reaching $364.3 million, indicating strong top-line growth.
• Management and advisory fees, net, increased by 19% to $211.2 million, driven by new client activity and a 28% growth in average Fee-Earning Assets Under Management (FEAUM).
• Unrealized carried interest allocation revenues showed a significant positive swing, increasing by $96.7 million to $88.9 million, reflecting net unrealized appreciation in underlying private equity fund investments.
• Legacy Greenspring carried interest allocation revenues also turned positive, increasing by $48.7 million to $39.6 million, due to net unrealized appreciation in underlying fund investments.
• Assets Under Management (AUM) continued to grow, reaching $199 billion as of June 30, 2025, demonstrating continued client capital inflows.
• Fee-Earning AUM (FEAUM) increased to $127.2 billion, indicating a growing base for recurring management fee revenue.
• Fee-Related Earnings (FRE) increased by 13% to $81.2 million, showing improved profitability from recurring fees.
• The company maintains a substantial $28.7 billion in undeployed fee-earning capital, providing a future revenue pipeline.
• Investment income increased by 305% to $10.5 million, reflecting overall positive changes in valuations of underlying investments in StepStone Funds.

Negatives

• The company reported a net loss attributable to StepStone Group Inc. of $38.4 million, a significant reversal from a net income of $13.3 million in the prior year period.
• Basic and diluted earnings per share of Class A common stock decreased to $(0.49) from $0.20.
• Total expenses increased by a substantial 204% to $423.3 million, largely driven by a massive 884% increase in equity-based compensation.
• Equity-based compensation surged by $169.5 million, primarily due to a $170.5 million increase in expenses for liability classified awards related to the profits interest issued in SPW.
• Realized carried interest allocation revenues decreased by 42% to $24.4 million, indicating lower profitable investment exits compared to the prior year.
• Incentive fees decreased by 77% to $0.2 million, largely due to lower realization activity.
• Adjusted Net Income (ANI) decreased by 15% to $48.5 million, and ANI per share declined to $0.40 from $0.48.
• The effective tax rate increased to 41.0% from 12.4%, partly due to the tax benefit associated with losses not allocated to non-controlling interests in a pre-tax net loss period, which highlights the impact of the loss.

Risks

• Global and domestic market and business conditions, including elevated inflation and interest rates, can adversely affect the value of managed assets and fundraising.
• Slowdowns in fundraising activity and the pace of capital deployment may lead to delayed or decreased management fees.
• Fund managers being unable or less able to exit existing investments profitably can result in delayed or decreased performance fee revenues.
• Uncertainty regarding the economic impact of U.S. trade policy developments, including tariffs and a weakening U.S. dollar, could affect financial markets and business.
• Banking system volatility and geopolitical tensions (e.g., China, Russia, Ukraine, Middle East) pose ongoing risks to financial markets and operations.
• The company's ability to attract new capital is dependent on clients' views of private markets relative to traditional asset classes.
• Maintaining strong, stable investment returns is crucial for attracting and retaining capital, and adverse market conditions could pressure future returns.
• The ability to source investments with attractive risk-adjusted returns is dependent on the macroeconomic environment, valuations, transaction size, and liquidity, with potential for significant adverse effects from decreased opportunities.
• Increased competition and clients' preference for fewer managers could impact the company's competitive position and revenue growth.
• Carried interest allocations are subject to reversal in the event of future losses, and the company may be obligated to repay previously distributed carried interest if cumulative returns fall below specified hurdles (maximum contingent repayment of $367.1 million, net of tax, as of June 30, 2025).
• The valuation of liability classified awards related to the SPW profits interest is inherently subjective and the ultimate settlement amount may differ materially from current estimates, potentially leading to significant future increases in equity-based compensation.

Future Outlook

The company anticipates continued volatility in financial markets due to U.S. trade policy, elevated inflation, and interest rates. It expects potential delays or decreases in management fees and performance fee revenues due to slowdowns in fundraising and challenges in profitably exiting investments. The company is assessing the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) and will monitor regulatory developments related to the Global Anti-Base Erosion (GloBE) Model Rules. Future increases in equity-based compensation are expected due to the performance of SPW, which is projected to increase in profitability.

Management Comments

• Our disciplined investment philosophy across our diversified investment strategies has historically contributed to the stability of our performance throughout market cycles.
• We operate at scale across all four private markets asset classes and service clients across a broad range of geography, type, and size, which contributes to our operating resilience and mitigates against concentration risk.
• We expect that there may be additional significant increases in equity-based compensation in future periods due to further increases in the fair value of liability classified awards, which is driven by the performance of SPW.
• SPW generated profitability in fiscal 2025, and we expect that there will be an increase in the profitability generated by SPW in the future which would increase the fair value of the associated liability for the profits interest issued in SPW.

Industry Context

The private markets industry is experiencing increasing importance and market share, driven by clients' focus on lower-correlated and absolute levels of return, growing demand from private wealth clients, and shifting asset allocation policies of institutional clients. There are increasing barriers to entry for competitors, and larger institutional investors are seeking deeper relationships with fewer private markets managers, sometimes leading to oversubscribed funds. However, the industry is also facing headwinds, including slowdowns in fundraising activity and the pace of capital deployment, which can delay or decrease management fees. Fund managers are also finding it more challenging to exit existing investments profitably, impacting performance fee revenues.

Comparison to Industry Standards

• No specific comparable companies, projects, or results are mentioned in the filing for direct comparison to industry standards or global benchmarks.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to various legal, regulatory, and administrative proceedings in the ordinary course of business. No material amounts for potential liabilities related to current legal proceedings or claims had been accrued as of June 30, 2025, and management does not expect them to materially affect the condensed consolidated financial statements.

Related Party Transactions

• A substantial portion of management and advisory fees ($151.6 million) and carried interest allocations ($113.3 million) were earned from StepStone Funds.
• Legacy Greenspring carried interest allocation revenues of $39.6 million were earned from certain legacy Greenspring funds, with no direct economic interest to the company.
• Amounts receivable from StepStone Funds were $56.2 million as of June 30, 2025.
• Amounts receivable from employees were $34.5 million as of June 30, 2025.
• Amounts payable to non-controlling interest holders in connection with Tax Receivable Agreements were $315.9 million as of June 30, 2025.
• Amounts payable to StepStone Funds were $25.9 million as of June 30, 2025.
• Payments of $11.5 million were made under Tax Receivable Agreements during the quarter.
• The liability for profits interest issued in SPW, accounted for as a liability classified award, was $841.7 million as of June 30, 2025, with an estimated potential cash payout between $209.5 million and $838.1 million.

Stakeholder Impact

• **Shareholders**: Experienced a net loss and negative EPS, but continued to receive dividends. The growth in AUM/FEAUM and positive unrealized carried interest may signal long-term value creation.
• **Employees**: Benefited from increased headcount and higher cash-based compensation. Significant equity-based compensation was recognized, though it contributed to the net loss due to accounting treatment.
• **Clients**: Continued to entrust the company with capital, as evidenced by AUM and FEAUM growth. Investment performance data is provided to clients.
• **Creditors**: The company remains in compliance with all debt covenants, indicating financial stability from a lending perspective.

Next Steps

• Monitor and incorporate the impact of the One Big Beautiful Bill Act (OBBBA) in future reporting periods.
• Continue to monitor and evaluate legislative developments related to the Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two framework).
• Proceed with future annual exchanges to acquire additional equity interests in SRA, SRE, and SPD as per Transaction Agreements.
• Manage potential significant increases in equity-based compensation in future periods, driven by the performance of SPW.
• Pay a quarterly cash dividend of $0.28 per share of Class A common stock on September 15, 2025.

Key Dates

Recommendation

The company's core business shows strength with significant growth in AUM, FEAUM, and management fees, alongside an increase in Fee-Related Earnings. The reported net loss is primarily attributable to a substantial non-cash equity-based compensation expense related to the SPW profits interest, which is an accounting impact of a growing and profitable underlying business. However, the decline in realized carried interest and the broader industry headwinds, such as fundraising slowdowns and challenges in profitable investment exits, introduce near-term uncertainty. While the long-term growth trajectory in private markets remains compelling, the current financial results present a mixed picture, warranting a 'hold' position for seasoned investors to monitor how these factors evolve.

Keywords

Private Markets, Investment Management, Asset Management, SEC Filing, 10-Q, Alternative Investments, Private Equity, Infrastructure, Private Debt, Real Estate, AUM, FEAUM, Carried Interest, Financial Performance, Investment Firm, Corporate Governance, Risk Management