StepStone (STEP) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three months ended June 30, 2023, highlighting a significant increase in total revenues and a turnaround to net income Condensed Consolidated Financial Statements Condensed consolidated financial statements show $3.53 billion total assets, $49.4 million net income, and $57.6 million operating cash flow Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | | Total Assets | $3,530,782 | $3,497,403 | | Cash and cash equivalents | $91,733 | $102,565 | | Accrued carried interest allocations | $1,277,783 | $1,227,173 | | Goodwill | $580,542 | $580,542 | | Total Liabilities | $1,860,621 | $1,844,086 | | Accrued carried interest-related compensation | $668,704 | $644,517 | | Debt obligations | $98,468 | $98,351 | | Total Stockholders' Equity | $1,628,543 | $1,628,787 | Condensed Consolidated Statement of Income (Loss) Highlights (in thousands) | Account | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Management and advisory fees, net | $138,115 | $116,732 | | Total carried interest allocations | $63,837 | $(40,343) | | Total Revenues | $178,011 | $(77,218) | | Total Expenses | $121,196 | $(68,418) | | Net Income (Loss) | $49,446 | $(21,471) | | Net Income (Loss) attributable to StepStone Group Inc. | $21,269 | $(11,040) | | Basic EPS (Class A) | $0.34 | $(0.18) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $57,587 | $57,482 | | Net cash used in investing activities | $(14,486) | $(7,601) | | Net cash used in financing activities | $(43,973) | $(60,718) | | Net decrease in cash, cash equivalents and restricted cash | $(1,588) | $(10,117) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, debt, commitments, and subsequent events, including a declared dividend - The company accounts for its investments in StepStone Funds on a three-month lag, using March 31, 2023, unaudited financial statements for the June 30, 2023, report[57] Revenues by Product Offering (in thousands) | Revenue Source | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Management and Advisory Fees, Net | | | | Focused commingled funds | $67,006 | $52,742 | | SMAs | $55,744 | $50,460 | | Advisory and other services | $14,101 | $12,984 | | Total Management and Advisory Fees, Net | $138,115 | $116,732 | | Carried Interest Allocations | $63,837 | $(40,343) | - The company has a $225.0 million multicurrency revolving credit facility, with $98.5 million outstanding as of June 30, 2023, at a weighted-average interest rate of 7.23%[131][132] - As of June 30, 2023, the company had unfunded capital commitments of $95.0 million, with a maximum potential contingent repayment (clawback) for carried interest estimated at $271.2 million, net of tax, assuming a remote scenario where all investment fair values drop to zero[165][166] - Subsequent to the quarter end, on August 3, 2023, the company declared a quarterly cash dividend of $0.21 per share of Class A common stock[168] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses business overview, operating results, key metrics, and liquidity, highlighting $640 billion total capital and 21% FRE growth Business Overview and Trends StepStone is a global private markets investment firm managing $640 billion in total capital, influenced by macroeconomic trends - As of June 30, 2023, StepStone was responsible for approximately $640 billion of total capital, including $143 billion of Assets Under Management (AUM) and $497 billion of Assets Under Advisement (AUA)[172] - The company's growth is dependent on key trends, including increasing client allocations to private markets, demand from private wealth clients, and the ability to source investments with attractive risk-adjusted returns[179][182] - Management acknowledges that market volatility, rising interest rates, and inflation have adversely affected fundraising and capital deployment, potentially leading to delayed or decreased management and performance fees[182] Consolidated Results of Operations Total revenues increased to $178.0 million due to positive unrealized carried interest and 18% management fee growth, despite 80% decrease in realized carried interest - Total revenues increased by $255.2 million year-over-year, driven by positive unrealized carried interest allocations compared to negative allocations in the prior year, and an 18% increase in net management and advisory fees[234] - Net management and advisory fees grew by $21.4 million (18%) to $138.1 million, supported by 12% growth in average Fee-Earning AUM (FEAUM)[235] - Realized carried interest allocation revenues decreased by $59.1 million (80%) to $14.5 million, reflecting lower realization activity in private equity funds[237] - Cash-based compensation increased by $10.0 million (17%) to $70.1 million, primarily due to an 18% increase in average full-time headcount[240] Operating Metrics Key operating metrics show growth, with AUM at $143 billion, AUA at $497 billion, and FEAUM at $87.4 billion Key Operating Metrics (in billions) | Metric | June 30, 2023 | March 31, 2023 | June 30, 2022 | | :--- | :--- | :--- | :--- | | Assets Under Management (AUM) | $143 | $138 | $137 | | Assets Under Advisement (AUA) | $497 | $482 | $452 | | Fee-Earning AUM (FEAUM) | $87.4 | $85.4 | $78.6 | FEAUM Roll-Forward (in millions) | Description | Three Months Ended June 30, 2023 | | :--- | :--- | | Beginning balance (Mar 31, 2023) | $85,431 | | Contributions | $2,221 | | Distributions | $(681) | | Market value, FX and other | $436 | | Ending balance (June 30, 2023) | $87,407 | - As of June 30, 2023, the company had $16.9 billion of undeployed fee-earning capital, which will generate management fees once invested or activated[266] Non-GAAP Financial Measures Non-GAAP measures show FRE increased 21% to $44.4 million, while ANI decreased 38% to $29.4 million Non-GAAP Performance Summary (in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Fee-Related Earnings (FRE) | $44.4 | $36.6 | +21% | | Adjusted Net Income (ANI) | $29.4 | $47.1 | -38% | | Adjusted Revenues | $152.8 | $190.3 | -20% | - The 21% increase in Fee-Related Earnings (FRE) was primarily driven by higher net management and advisory fees[274] - The 38% decrease in Adjusted Net Income (ANI) was mainly due to lower net realized performance fee-related earnings[276] Adjusted Net Income Per Share | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Adjusted Net Income (in thousands) | $29,388 | $47,134 | | Adjusted weighted-average shares | 114,673,696 | 114,466,962 | | Adjusted Net Income Per Share | $0.26 | $0.41 | Liquidity and Capital Resources The company maintains strong liquidity with $92.4 million cash and $57.6 million operating cash flow, continuing its dividend policy - As of June 30, 2023, the company had $92.4 million of cash, cash equivalents, and restricted cash (excluding Consolidated Funds) and $98.5 million in debt obligations, net of issuance costs[299] - Net cash provided by operating activities was $57.6 million for the quarter, consistent with the prior year, while financing activities used $44.0 million, primarily for distributions to non-controlling interests ($25.7 million) and dividends to common stockholders ($28.3 million)[302][305] - On August 3, 2023, the company announced a quarterly dividend of $0.21 per share of Class A common stock[312] Item 3. Qualitative and Quantitative Disclosures about Market Risk The company faces market risk, with a 10% investment decline potentially reducing annual management fees by $3.7 million and investment income by $12.2 million - A hypothetical 10% decline in the market value of investments would result in an estimated $3.7 million decrease in annual management fees and a $12.2 million decrease in investment income[325][326] - The maximum potential clawback of carried interest subject to contingent repayment was estimated at $271.2 million (net of tax) as of June 30, 2023, assuming a remote scenario where all investment fair values drop to zero[326] - With $100.0 million in borrowings outstanding under the variable-rate Revolver, a 100 basis point increase in interest rates would increase annual interest expense by an estimated $1.0 million[329] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[333] - No changes occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[334] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any current legal proceedings expected to materially affect its financial statements - The company states that it does not expect any potential liability from current legal proceedings to materially affect its condensed consolidated financial statements as of June 30, 2023[160][336] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Form 10-K for the fiscal year ended March 31, 2023 - No material changes from the risk factors disclosed in the Form 10-K for the fiscal year ended March 31, 2023, have been reported[338] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[339] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the reporting period[343] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data files - The exhibits filed with this report include certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act and financial statements formatted in Inline XBRL[345]