10-Q: StepStone Reports Q2 Loss Amid Soaring Equity Compensation

StepStone Group Inc. reported a significant net loss for the quarter ended September 30, 2025, primarily driven by a substantial increase in non-cash equity-based compensation, despite strong revenue growth across its asset management business.

Summary

• StepStone Group Inc. reported a net loss attributable to the company of $366.1 million for the three months ended September 30, 2025, compared to a net income of $17.6 million in the prior year period.
• For the six months ended September 30, 2025, the net loss attributable to StepStone Group Inc. was $404.6 million, a significant decline from the $31.0 million net income in the same period last year.
• Total revenues increased by 67% to $454.2 million for the three months ended September 30, 2025, and by 79% to $818.5 million for the six months ended September 30, 2025, driven by higher management and advisory fees, incentive fees, and carried interest allocations.
• Management and advisory fees, net, grew 17% to $215.5 million for the quarter and 18% to $426.7 million for the six months, supported by new client activity and 27-28% growth in average Fee-Earning AUM (FEAUM).
• Realized carried interest allocation revenues surged 234% to $58.9 million for the quarter and 40% to $83.3 million for the six months, reflecting higher realization activity in private equity funds.
• Unrealized carried interest allocation revenues increased significantly, up 196% to $206.7 million for the quarter and 270% to $320.0 million for the six months, due to higher net appreciation in underlying private equity fund investments.
• Total expenses dramatically increased by 433% to $1,177.0 million for the quarter and 345% to $1,600.3 million for the six months, primarily due to an $847.1 million (quarter) and $1,016.7 million (six months) increase in equity-based compensation.
• The surge in equity-based compensation was mainly attributable to unrealized mark-to-market changes in the fair value of liability classified awards related to the profits interest issued in StepStone Group Private Wealth LLC (SPW).
• Cash-based compensation increased 21% to $100.3 million for the quarter and 22% to $196.3 million for the six months, driven by a 13-16% higher average headcount and merit increases.
• Assets Under Management (AUM) reached $209 billion as of September 30, 2025, up from $189 billion on March 31, 2025.
• Assets Under Advisement (AUA) grew to $562 billion as of September 30, 2025, from $520 billion on March 31, 2025.
• Fee-Earning AUM (FEAUM) increased to $132.8 billion as of September 30, 2025, from $121.4 billion on March 31, 2025.
• Undeployed fee-earning capital stood at $29.8 billion as of September 30, 2025.
• The company lost its 'controlled company' status on September 18, 2025, as Class B common stock voting power reverted to one vote per share, necessitating a transition to a majority independent board by September 18, 2026.
• The company completed its second annual exchange on May 30, 2025, to acquire approximately 5% of the equity interests of SRA, SRE, and SPD, increasing its ownership in these entities to approximately 60% for SRA/SRE and 59% for SPD.
• A quarterly cash dividend of $0.28 per share of Class A common stock was declared on August 7, 2025, and paid on September 15, 2025.

Sentiment

Score: 3

Explanation: While the company demonstrated strong revenue growth and expansion in AUM/AUA, the significant net loss driven by a massive increase in non-cash equity-based compensation related to the SPW profits interest is a major negative. The future cash obligation for this liability is substantial, creating uncertainty despite operational positives.

Positives

• Total revenues increased significantly by 67% for the quarter and 79% for the six months ended September 30, 2025, demonstrating strong top-line growth.
• Management and advisory fees, net, grew 17% for the quarter and 18% for the six months, indicating robust core business performance and client activity.
• Realized carried interest allocation revenues saw substantial increases of 234% for the quarter and 40% for the six months, reflecting successful investment exits.
• Unrealized carried interest allocation revenues also showed strong growth, up 196% for the quarter and 776% for the six months, driven by appreciation in underlying fund investments.
• Assets Under Management (AUM) increased to $209 billion, and Assets Under Advisement (AUA) grew to $562 billion, indicating continued expansion of the firm's capital responsibility.
• Fee-Earning AUM (FEAUM) increased to $132.8 billion, with $29.8 billion in undeployed fee-earning capital, providing a strong base for future management fee revenue.
• The company successfully completed its second annual exchange to increase its economic interest in SRA, SRE, and SPD, enhancing its ownership in key asset class entities.
• StepStone continues to pay a consistent quarterly cash dividend of $0.28 per share of Class A common stock.
• The company remains in compliance with all covenants under its various debt agreements.

Negatives

• StepStone Group Inc. reported a net loss attributable to the company of $366.1 million for the three months and $404.6 million for the six months ended September 30, 2025, a significant reversal from prior year profits.
• Basic and diluted earnings per share of Class A common stock were negative $4.66 for the quarter and negative $5.17 for the six months.
• Total expenses increased by an alarming 433% for the quarter and 345% for the six months, primarily due to a massive increase in non-cash equity-based compensation.
• Equity-based compensation increased by $847.1 million for the quarter and $1,016.7 million for the six months, mainly due to unrealized mark-to-market changes in the fair value of liability classified awards related to the SPW profits interest.
• The estimated maximum potential cash payable to settle the SPW liability classified awards is $1,708.8 million, representing a significant future cash outflow.
• Investment income decreased to a loss of $1.2 million for the quarter, reflecting overall changes in underlying investment valuations.
• Interest expense increased by 26% for the quarter and 38% for the six months due to higher average outstanding debt balances.

Risks

• Significant volatility in financial markets due to U.S. trade policy, tariffs, and a weakening U.S. dollar could adversely affect the value of StepStone Funds' holdings and the company's ability to source attractive investments.
• Persistent elevated inflation and decreasing but still elevated interest rates could impact financial markets and the company's business.
• Slowdowns in fundraising activity and the pace of capital deployment may lead to delayed or decreased management fees and performance fee revenues.
• Fund managers being unable or less able to exit existing investments profitably could result in delayed or decreased performance fee revenues.
• An ongoing U.S. federal government shutdown (as of October 1, 2025) could adversely affect operations, investments, regulatory approvals, financial performance, and interrupt access to capital markets.
• The fair value of liability classified awards related to the SPW profits interest is subject to significant management judgment and estimation, and the ultimate settlement amount may differ materially from current estimates.
• The company has a maximum contingent repayment obligation of an estimated $396.4 million (net of tax) for carried interest allocations, assuming the fair value of all investments was zero, although this is viewed as remote.

Future Outlook

The company expects continued significant increases in equity-based compensation in future periods due to further increases in the fair value of liability classified awards, driven by the anticipated increase in profitability generated by SPW. The company will continue to evaluate the effect of new tax legislation (One Big Beautiful Bill Act) but does not expect a significant impact on full-year fiscal 2026 financial statements. The company believes it will have sufficient liquidity for the next 12 months through operating cash flows, existing cash, and future financing. The board plans to transition to a majority of independent directors by September 18, 2026, following the loss of controlled company status.

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 in fiscal 2026 to date, 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.
• We currently do not expect the U.S. government shutdown to have a significant impact on our condensed consolidated financial statements.

Industry Context

The company's results are influenced by broader industry trends, including the increasing importance of private markets investment strategies, growing demand from private wealth clients, and shifting asset allocation policies of institutional clients. Despite these tailwinds, the industry faces challenges from persistent elevated inflation, high interest rates, and geopolitical tensions, which have led to slowdowns in fundraising and investment exits. The company's diversified multi-asset class approach and global presence aim to provide resilience against these market fluctuations and competitive pressures, as larger institutional investors increasingly seek deeper relationships with fewer private markets managers.

Comparison to Industry Standards

• The company's weighted-average management fee rate from SMAs was approximately 0.39% of average FEAUM for the twelve months ended September 30, 2025.
• The weighted-average management fee rate from focused commingled funds was approximately 1.00% of average FEAUM for the twelve months ended September 30, 2025, reflecting the timing of new funds and growth in private wealth funds which earn higher fee rates.
• The overall weighted-average management fee rate across SMAs and focused commingled funds was approximately 0.63% of average FEAUM for the twelve months ended September 30, 2025.
• Private equity primaries strategy achieved a Net IRR of 14.0% and Net TVM of 1.5x as of June 30, 2025.
• Private equity secondaries strategy achieved a Net IRR of 14.5% and Net TVM of 1.4x as of June 30, 2025.
• Private equity co-investments strategy achieved a Net IRR of 15.2% and Net TVM of 1.6x as of June 30, 2025.
• Real estate Core/Core+ fund investments achieved a Net IRR of 6.9% and Net TVM of 1.4x as of June 30, 2025.
• Infrastructure Core/debt all strategies achieved a Net IRR of 7.0% as of June 30, 2025.
• Private debt primaries strategy achieved a Net IRR of 7.7% as of June 30, 2025.
• These performance metrics are presented for illustrative purposes and are net of hypothetical StepStone fees and underlying fund manager fees, and are not directly comparable to specific competitor fund performance without detailed fund-by-fund analysis.

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 liability related to any current legal proceedings or claims are expected to individually or in the aggregate materially affect the condensed consolidated financial statements as of September 30, 2025.

Related Party Transactions

• The company earned $156.3 million in net management and advisory fees from StepStone Funds for the three months ended September 30, 2025, and $307.9 million for the six months.
• Carried interest allocation revenues from StepStone Funds totaled $206.7 million for the three months and $320.0 million for the six months ended September 30, 2025.
• Legacy Greenspring carried interest allocation revenues from legacy Greenspring funds totaled $27.1 million for the three months and $66.8 million for the six months ended September 30, 2025.
• Amounts receivable from StepStone Funds were $66.8 million as of September 30, 2025.
• Amounts receivable from employees were $36.0 million as of September 30, 2025.
• Amounts payable to non-controlling interest holders in connection with Tax Receivable Agreements were $321.6 million as of September 30, 2025.
• Amounts payable to StepStone Funds were $21.8 million as of September 30, 2025.
• Amounts payable to certain employee equity holders of consolidated subsidiaries were $3.5 million as of September 30, 2025.
• The company made payments of $11.5 million under the Tax Receivable Agreements for the six months ended September 30, 2025.

Stakeholder Impact

• Shareholders: Experienced a significant net loss and negative EPS, which could negatively impact share price. However, continued dividends and strong revenue growth may offer some long-term confidence.
• Employees: Cash-based compensation increased due to higher headcount and merit increases. Performance fee-related compensation also increased, aligning interests with fund performance. However, the large non-cash equity-based compensation expense related to SPW profits interest creates a significant liability.
• Customers: Benefit from the company's expanding AUM, AUA, and diverse investment strategies, as well as strong carried interest allocations from private equity funds.
• Creditors: The company remains in compliance with all debt covenants, indicating sound financial management of its debt obligations.
• Non-controlling interest holders: Received distributions and have a significant liability recorded under Tax Receivable Agreements, reflecting future tax benefits.

Next Steps

• The board of directors will transition to being composed of a majority of independent directors by September 18, 2026, following the loss of controlled company status.
• The Compensation Committee and Nominating and Corporate Governance Committee plan to be composed entirely of independent directors on or before September 18, 2026.
• The company will continue to evaluate the effect of the One Big Beautiful Bill Act on its financial statements for the full year ending March 31, 2026.
• The company will continue to closely monitor developments related to inflation, interest rates, trade, regulatory policy, foreign currency exchange rates, banking system volatility, and geopolitical tensions.

Key Dates

Recommendation

StepStone Group Inc. presents a mixed financial picture. While the company demonstrates robust revenue growth across its core business segments, significant increases in AUM, AUA, and FEAUM, and strong performance in realized and unrealized carried interest allocations, the substantial net loss for the quarter and six months ended September 30, 2025, is a major concern. This loss is primarily driven by a large non-cash equity-based compensation expense related to the mark-to-market valuation of a profits interest in SPW, which also represents a significant future cash liability. The operational strengths are undeniable, but the accounting impact of this liability creates considerable uncertainty regarding future profitability and cash flows. Investors should hold to monitor the trajectory of this liability, the underlying profitability of SPW, and the company's ability to manage this significant future obligation, while acknowledging the strong underlying business growth.

Keywords

Private Markets, Asset Management, SEC Filing, 10-Q, StepStone Group, AUM, AUA, Fee-Earning AUM, Carried Interest, Equity Compensation, Net Loss, Financial Results, Investment Firm, Private Equity, Infrastructure, Private Debt, Real Estate, SPW, Liability Classified Awards