StepStone (US:STEP)2024-05-24 20:37Part I Item 1. Business StepStone Group is a global private markets investment firm managing $157 billion in AUM and $521 billion in AUA, providing customized solutions across diverse private asset classes - StepStone is a global private markets investment firm with $678 billion of total capital responsibility as of March 31, 2024, comprising $157 billion in AUM and $521 billion in AUA31 AUM and AUA by Asset Class (as of March 31, 2024) | Asset Class | AUM (billions) | FEAUM (billions) | AUA (billions) | | :--- | :--- | :--- | :--- | | Private Equity | $82 | $50 | $270 | | Infrastructure | $30 | $20 | $60 | | Private Debt | $28 | $15 | $22 | | Real Estate | $16 | $8 | $168 | - The company's proprietary data platform, SPI Research, contained information on approximately 18,000 fund managers, 46,000 funds, 105,000 companies, and 227,000 investments as of March 31, 202452 - As of March 31, 2024, the company had $22.6 billion of committed but undeployed fee-earning capital, expected to generate management fees upon deployment or activation5965 Investment Strategies - The company's investment strategies are synergistic, spanning primaries, secondaries, and co-investments74 - Primary investments typically have a duration of 10-18 years for private equity, real estate, and infrastructure, and 8-10 years for private debt76 - Secondary investments are considered more mature, typically made when a primary fund is 3-7 years into its life, offering visibility into known assets7879 Responsible Investment Philosophy - StepStone integrates Environmental, Social, and Governance (ESG) factors into its investment process and corporate operations, believing it improves long-term, risk-adjusted returns9295 - The firm has a global Diversity, Equity, and Inclusion (DEI) Committee established in 2017 to lead initiatives, and it supports several industry organizations advocating for diversity101105 - StepStone aims to maintain carbon neutrality in its operations and has engaged a consultant annually since 2019 to measure its carbon footprint and fund sustainable development projects to offset emissions106 Regulatory Environment - The company's business is subject to extensive regulation in the U.S. by the SEC under the Investment Advisers Act, which imposes fiduciary duties and requirements on conflicts of interest, marketing, and reporting131132 - The SEC has recently adopted new rules for private fund advisers that impose significant new disclosure and reporting requirements and restrict certain practices, which will increase compliance risks and operational costs133256 - Internationally, the company is subject to various regulatory regimes, including AIFMD and MiFID II in the European Union, which govern marketing, remuneration, and reporting, adding to operational complexity and costs140141 Risk Factors The company faces significant business, industry, and organizational risks, including investment performance, intense competition, evolving regulations, and its controlled company structure - Business Risks: The company's success depends on identifying suitable investments, and poor performance could lead to a decline in revenues and difficulty raising future capital. The business is also vulnerable to the loss of senior leadership, cybersecurity threats, and potential clawback obligations on performance fees160161169185204 - Industry Risks: The investment management industry is intensely competitive and heavily regulated. Difficult market conditions, such as rising interest rates and inflation, can adversely affect investment values and the ability to deploy capital. Evolving regulations, including new SEC rules for private fund advisers and increased focus on ESG, add to compliance burdens and costs243245252266 - Organizational Structure Risks: As a "controlled company," StepStone is exempt from certain corporate governance requirements. The holding company (SSG) depends on distributions from the Partnership to pay taxes, dividends, and obligations under Tax Receivable Agreements. The dual-class stock structure gives disproportionate voting power to Class B shareholders288292312 Item 1C. Cybersecurity StepStone maintains a comprehensive cybersecurity program overseen by its Board and Audit Committee, employing multi-faceted strategies to mitigate evolving threats, with no material incidents identified to date - The Board of Directors and its Audit Committee oversee the company's cybersecurity risk management processes, receiving periodic reports from the Head of Information Technology and legal team325326 - The company has an Incident Response Plan (IRP) based on the NIST framework and an Enterprise Risk Management Committee (ERMC) to manage enterprise risks, including cybersecurity328329 - Risk management strategies include regular employee training, phishing exercises, information security diligence on vendors, and annual penetration testing by third-party firms333 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities StepStone's Class A common stock trades on Nasdaq under 'STEP,' with recent dividend declarations and a cumulative total return of 55.14% since IPO through March 2024, underperforming key indices - On May 23, 2024, the company declared a quarterly cash dividend of $0.21 per share of Class A common stock and a supplemental cash dividend of $0.15 per share, both payable on June 28, 2024342 Quarterly Dividends on Class A Common Shares (FY2022-FY2024) | Fiscal Year | Total Dividend Per Share | | :--- | :--- | | FY2022 | $0.44 | | FY2023 | $0.80 | | FY2024 | $1.08 | - The stock performance graph indicates that from September 16, 2020, to March 31, 2024, the cumulative total return for StepStone Group Inc. was 55.14%, underperforming the S&P 500 Index (63.89%) and the Dow Jones US Asset Managers Index (82.85%)354355 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For FY2024, StepStone reported total revenues of $711.6 million and net income of $58.1 million, driven by positive carried interest allocations and growth in management fees, while maintaining strong liquidity Consolidated Results of Operations (Fiscal Years 2022-2024) | (in thousands) | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Total revenues | $711,631 | $(67,574) | $1,365,525 | | Management and advisory fees, net | $585,140 | $497,179 | $380,257 | | Total performance fees | $126,491 | $(564,753) | $985,268 | | Total expenses | $539,860 | $(67,077) | $913,163 | | Net income (loss) | $167,820 | $(45,275) | $484,281 | | Net income (loss) attributable to StepStone Group Inc. | $58,091 | $(18,398) | $193,885 | Key Operating Metrics (as of March 31) | (in billions) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | AUM | $157 | $138 | $134 | | AUA | $521 | $482 | $436 | | FEAUM | $93.9 | $85.4 | $75.2 | Non-GAAP Financial Measures (Fiscal Years 2022-2024) | (in thousands) | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Fee-Related Earnings (FRE) | $189,793 | $156,158 | $122,242 | | Adjusted Net Income (ANI) | $139,393 | $142,663 | $172,943 | | ANI per share | $1.21 | $1.24 | $1.61 | - On February 7, 2024, the company entered into agreements to acquire all outstanding equity interests of its asset class entities (SRA, SRE, and SPD) over a defined period, with the first exchange having a reference date of April 1, 2024373376 Item 7A. Quantitative and Qualitative Disclosures About Market Risk StepStone's primary market risk stems from fund investment fair values impacting performance fees and investment income, with additional exposure to interest rate fluctuations on its revolving credit facility - A hypothetical 10% decline in the market value of fund investments as of March 31, 2024, would result in an estimated $5.8 million decrease in annual management fees and a $13.5 million decrease in investment income602604 - As of March 31, 2024, the maximum potential contingent repayment (clawback) of carried interest, net of tax, was estimated at $287.5 million, assuming the fair value of all investments dropped to zero603 - The company is exposed to interest rate risk on its $150.0 million of outstanding borrowings under the Revolver. A 100 basis point increase in interest rates would increase annual interest expense by an estimated $1.5 million as of March 31, 2024607 Item 8. Financial Statements and Supplementary Data This section presents StepStone Group Inc.'s consolidated financial statements for fiscal years 2022-2024, accompanied by Ernst & Young LLP's unqualified opinion on both the financials and internal control over financial reporting - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of March 31, 2024613622 Consolidated Balance Sheet Data (as of March 31) | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Total Assets | $3,788,807 | $3,497,403 | | Cash and cash equivalents | $143,430 | $102,565 | | Investments (incl. Accrued Carried Interest) | $2,120,294 | $2,113,012 | | Goodwill | $580,542 | $580,542 | | Total Liabilities | $1,915,673 | $1,844,086 | | Accrued carried interest-related compensation | $719,497 | $644,517 | | Debt obligations | $148,822 | $98,351 | | Total Stockholders' Equity | $1,654,591 | $1,628,787 | - The critical audit matter identified by the auditor was the valuation of underlying investments of equity method investments, specifically for co-investment funds valued using significant unobservable inputs, which involved a high degree of auditor subjectivity618 Item 9A. Controls and Procedures Management concluded that StepStone's disclosure controls and internal control over financial reporting were effective as of March 31, 2024, with no material changes during the fourth fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2024855 - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2024, based on the criteria in the Internal Control-Integrated Framework (2013) issued by COSO860 Part III Items 10-14 Information for Items 10 through 14, covering governance, compensation, and related party disclosures, is incorporated by reference from the company's forthcoming 2024 Proxy Statement - The information for Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accountant Fees and Services is incorporated by reference from the forthcoming 2024 Proxy Statement868869870873874 Part IV Item 15. Exhibit and Financial Statement Schedules This section provides an index to the consolidated financial statements and a comprehensive list of all exhibits filed with the Form 10-K, including key corporate documents and certifications - This section contains the index to the consolidated financial statements and a list of all exhibits filed with the Form 10-K876