Release Date: November 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- StepStone Group Inc (STEP, Financial) reported a significant increase in fee-related earnings, up 65% from the prior year quarter, driven by growth in fee-earning assets.
- The company achieved several fundraising milestones, including closing the fifth vintage of its private equity secondaries fund at $4.8 billion, the largest commingled fund to date.
- StepStone Group Inc (STEP) generated nearly $850 million in private wealth subscriptions, surpassing $5 billion in net asset value in its private wealth platform.
- The firm reported strong growth in management and advisory fees, up 30% year-over-year, with a fee-related earnings margin of 39%, indicating strong operational efficiency.
- The company successfully issued $175 million of 5.52% senior notes, reducing interest costs by approximately 200 basis points, enhancing financial flexibility.
Negative Points
- The pace of monetization in private markets has been slow, with annual realizations cut in half over the last three years, impacting liquidity.
- Realized performance fees were down from the previous quarter, highlighting the potential volatility and unpredictability in performance fee income.
- Cash-based compensation and general and administrative expenses increased, reflecting higher headcount and costs associated with the annual StepStone 360 conference.
- The company faces challenges in liquidity due to extended periods of subdued market activity and corresponding realizations.
- Despite growth, the private wealth platform still represents a relatively modest share of total fee-earning AUM, indicating room for improvement in this segment.
Q & A Highlights
Q: How does the current market environment impact the growth and volumes in the private equity secondaries market?
A: Scott Hart, CEO, explained that the private equity secondaries market is poised for another record year, driven by both LP and GP-led secondaries. StepStone is well-positioned to capitalize on these trends, with their largest private equity secondaries fund to date at $4.8 billion. The market remains undercapitalized relative to the opportunity, providing continued growth potential.
Q: What is the outlook for FRE margins, excluding retroactive fees, and how does StepStone plan to balance growth and profitability?
A: Michael McCabe, Head of Strategy, noted that the company is pleased with margin expansion due to operating leverage and scale. While investing for growth remains a priority, the scale achieved across asset classes is generating operating leverage. David Park, CFO, added that 34% core FRE margins are a reasonable starting point, with continued hiring expected to impact compensation and G&A.
Q: What is the expected realization outlook for accrued carry, and how might it impact StepStone's financial strategy?
A: Scott Hart, CEO, indicated that while realizations have improved from mid-2023 lows, they have not returned to 2021 levels. The company expects a gradual recovery, with performance fees building throughout the year. Michael McCabe added that any increase in performance fees would likely result in a supplemental dividend, similar to the previous year.
Q: How is StepStone's undeployed fee-earning capital pipeline evolving, and what is the expected timeline for conversion to fee-paying AUM?
A: Scott Hart, CEO, stated that the pipeline has grown to nearly $30 billion, with characteristics largely unchanged except for larger account sizes. The company activated over $4 billion in October, reducing the pipeline to $25-26 billion. The conversion timeline varies, but the company maintains a high re-up rate and expects continued growth.
Q: What are StepStone's strategic priorities for future growth, particularly in terms of M&A and distribution?
A: Michael McCabe, Head of Strategy, emphasized that StepStone's platform is largely built out, with M&A focused on enhancing current capabilities. The company prioritizes growth in infrastructure, real estate, and credit asset classes, alongside continued investment in business development and private wealth channels. The private wealth platform recently surpassed $5 billion, indicating strong growth potential.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
