StepStone Group Inc. (STEP) Earnings

Management highlights

- Financial & Fee Performance * Overall fee and fee-related earnings grew strongly year-over-year, with growth driven by expanding fee-earning AUM, particularly in commingled funds and the private wealth segment * A recent fee structure adjustment for PE secondaries and GP-led secondaries funds created temporary muted average fee rate growth, which is expected to continue over the next 1-4 quarters until fundraising for these funds is complete, after which average fee rate growth will resume * Trailing distribution fees for private wealth funds are currently running at ~$5 million per quarter, fully baked into the company's operating run rate, and will grow proportionally with private wealth assets - SPRING Evergreen Fund Update * SPRING delivered 23% net returns in the first half of the calendar year, driven by multiple significant value creation events; the SpaceX position has decreased to a mid-teens weighting from its peak, and the fund holds over 2,000 diversified positions total * SPRING's performance fees crystallize annually at the end of December, so investors are not charged based on intra-period valuation volatility from public position movements; the company will exit public positions in an orderly manner as lockups expire, per its standard private market investment approach * Redemption activity remains very low, with no visible pent-up redemption demand; the fund continues to see strong inflows and increasing adoption into third-party model portfolios - Fundraising & Capital Deployment * Unfunded committed capital in the UFEC pipeline remains at $39 billion, with $3 billion currently waiting for activation and the remaining $36 billion subject to deployment; the average fee rate across the pipeline is aligned with StepStone's overall average fee rate * Flagship PE Secondaries and GP-led Secondaries funds are off to a stronger fundraising start than prior vintages, reaching $2.5 billion and ~$300 million in raised capital respectively as of quarter-end, with incremental closings continuing post-quarter; the broader secondaries market is on pace for another record annual volume with only ~1 year of available dry powder, leaving StepStone well-positioned * Successive new private wealth funds are tracking at or above the adoption curve of the firm's first private wealth fund; among platforms that have worked with StepStone for over a year, over 50% now use at least two of the firm's funds, with a growing share adopting three to five funds - Strategic Initiatives * StepStone is pursuing the planned buyout of the remaining profit interest in its private wealth platform, with a flexible structure allowing up to 75% of consideration to be paid in StepStone equity, and the remainder in cash; equity issued will have staggered lockups over three years, aligned with prior post-IPO and acquisition incentive structures to support orderly potential sell-downs * Three new data and index partnerships with FTSE Russell, PitchBook, and Kroll are seeing increasing client adoption, but have not yet reached scale to move the needle on revenue; these initiatives are long-term plays to build transparent benchmarking and analytical tools for private markets, targeting future growth in defined contribution/401(k) channels and serving the broader GP and investor community * International private wealth distribution expansion is underway, with dedicated personnel added across over half a dozen international territories focused on onboarding to local platforms, followed by advisor outreach; the private wealth total addressable market is large with low current penetration, and the 401(k) market represents an additional large untapped opportunity, with no expected limiting factor for sustained multi-billion dollar quarterly inflows over the next 3-5 years * On the institutional side, excluding private wealth, strongest demand over the last 12 months has come from the U.S. (particularly private credit and infrastructure), Asia, and Australia (infrastructure separate accounts in Australia, and PE secondaries/co-investment commingled fundraising in Asia)

Guidance

- Management expects average fee rates to stay relatively flat over the next 1-4 quarters as the new lower-fee secondaries funds raise capital, with resumption of average fee rate growth once secondaries fundraising is complete, driven by growing private wealth assets and eventual fee rate step-ups for the secondaries funds - Annual incentive fees from SPRING will be recognized in the fiscal third quarter, consistent with the fund's annual crystallization schedule at the end of December, and the company is on pace for another strong year of private wealth incentive fees driven by SPRING's strong H1 returns - Distribution expenses for private wealth funds are expected to grow in line with the size of private wealth assets, consistent with the current $5 million quarterly run rate - The firm will maintain a conservative leverage approach while funding the private wealth profit interest buyout, targeting retention of its current A+ investment grade credit rating, with all options (cash on hand, operating cash flow, capital markets access, adjusted discretionary capital return) on the table to fund the required cash portion - SPRING's strong H1 returns are not viewed as typical, but the fund is expected to continue generating attractive long-term returns as part of StepStone's platform, though it may see higher near-term performance volatility from public market valuation movements - Management does not expect any limiting factor to sustaining multi-billion dollar quarterly private wealth inflows over the next 3-5 years, given low penetration of the large total addressable market and the untapped 401(k) opportunity

Segment performance

This quarter, StepStone earned total fee revenue of $271 million, representing a 27% increase year-over-year, driven by broad growth in fee-earning AUM across the platform, with particularly strong growth in commingled drawdown and evergreen funds. Fee-related earnings (FRE) hit $106 million, up 30% year-over-year, with an FRE margin of 39% on both reported and adjusted bases after normalizing for retroactive fees. Adjusted cash-based compensation was $117 million, up from $111 million last quarter, reflecting annual merit increases effective April 1 and headcount growth; the adjusted cash compensation ratio was 43%, and adjusted equity-based compensation was $7 million, both in line with prior year-end expectations. General and administrative expenses were $42 million, up $10 million year-over-year, with $3 million of the increase coming from trailing platform distribution fees for private wealth funds, which currently run at ~$5 million per quarter and are expected to grow in line with private wealth assets. Gross realized performance fees were $30 million this quarter, or $16 million net of related compensation expenses. Net accrued carry reached $935 million, up 19% year-over-year, with over 70% of this amount tied to programs older than five years that are ready to harvest. The company's own investment portfolio ended the quarter at $363 million, and adjusted income per share was $0.48, up from $0.40 in the prior year quarter.

Risks & headwinds

- Performance fees are episodic by nature, and the company does not control the pace of portfolio realizations, so the timing of accrued carry conversion to realized revenue is uncertain - SPRING holds liquid public positions that may introduce higher near-term performance volatility due to public market valuation movements, though this does not impact annual performance fee crystallization - Most recent exit activity across private markets has consisted of partial realizations rather than full exits, which can delay the recognition of carried interest; many funds with European waterfalls have not yet returned full cost plus preferred returns, so carry recognition may not occur even as partial exit activity picks up - Distribution fees vary by distribution channel, with some channels charging higher fees than others, so margin can vary slightly period to period based on fundraising mix - Expansion into new international and 401(k) private wealth channels is early stage, with adoption still ramping up, so material revenue contribution from these initiatives will take time, and success is not guaranteed

Analyst Q&A

• Q: Why was average fee rate growth muted this quarter despite strong AUM and fundraising growth, and what should we expect going forward? /

  A: This quarter's muted fee growth was explicitly flagged in prior guidance, resulting from a recent fee structure adjustment for the new PE and GP-led secondaries funds. The lower fee rates on these funds will create temporary fee pressure that will be offset by growth in private wealth assets, so average fee rates are expected to stay flattish over the next year until the secondaries funds finish fundraising. After fundraising is complete, average fee rate growth will resume as private wealth assets grow and fee rates step up for the secondaries funds. The pipeline of unfunded UFEC fee-earning AUM stands at $39 billion with an average fee aligned to the firm's overall average, so no structural change to long-term fee trends is expected.

• Q: What is your plan for funding the private wealth profit interest buyout, and how will you manage potential share overhang from the equity portion as lockups expire? /

  A: The buyout structure allows up to 75% of consideration to be paid in equity, with 30% tradable immediately and the remainder locked up over three years. This staggered lockup structure matches the framework used for the IPO, Greenspring acquisition, and prior asset class buy-ins, designed to align management incentives and enable orderly potential sell-downs. For the cash portion, the firm will use cash on hand, operating cash flow, and access to capital markets if needed, while maintaining its current A+ investment grade credit rating as a conservative leverage guardrail. Discretionary capital return programs like share repurchases will be re-evaluated as the firm prepares for the transaction.

• Q: What has been LP feedback on the adjusted fee structure for the new secondaries funds, and how is fundraising progressing? /

  A: The firm is off to a very strong fundraising start for both the flagship PE secondaries fund (at $2.5 billion raised) and the GP-led secondaries fund (at $300 million raised), ahead of expectations compared to prior vintages. It is hard to isolate the impact of the fee adjustment from other factors like strong fund performance, platform quality, and broad market demand, but overall receptivity is very positive. The broader secondaries market is on pace for another record full year of volume with only ~1 year of available industry dry powder, leaving StepStone well-positioned to capture market share.

• Q: Given 70% of the $935 million net accrued carry is from programs older than five years, what should we expect for the pace of realization into revenue over the next few years? /

  A: While realization activity has improved recently, most current exits are partial realizations (via continuation vehicles, minority sales, or structured exits) rather than full exits. For funds with European waterfalls, carry is only recognized after returning full cost plus preferred return to LPs, so many partial exits have not yet generated realized carry. Management expects this dynamic to improve in coming quarters, with a growing pipeline of announced full exits that will deliver realized carry. Realization timing remains unpredictable, as the firm does not control exit pacing, but more consistent carry flow is expected as more vehicles move into carry-paying mode over the next few years.

• Q: What has been the client impact of SPRING's large SpaceX position, and what are your expectations for future flows and redemptions? /

  A: The SpaceX position has fallen to a mid-teens weighting from its peak, so it is no longer an outsized position. The firm has always marketed SPRING as a diversified venture portfolio, not single-company exposure, and continues to see strong interest from distribution partners with no pent-up redemption demand. The firm always manages evergreen fund liquidity to accommodate maximum allowed redemptions, and continues to see strong inflow momentum and increasing adoption into third-party model portfolios.