StepStone Group Inc. Q3 FY2024 earnings call

• Delivered solid performance in fiscal third quarter with robust earnings, fundraising, and asset growth.
• Gross new commitments were $6 billion in the quarter, with separately managed accounts raising $4.3 billion and commingled funds $1.7 billion.
• Launched the StepStone Private Credit Income Fund (CredEx), an interval fund for U.S. investors focusing on U.S. direct lending and specialty credit.
• Announced agreements to purchase non-controlling interests in infrastructure, private debt, and real estate businesses over time, structured as a gradual exchange to incentivize asset class teams and improve alignment for shareholders.
• Sold non-core subsidiary Greenspring Back Office Solutions (GBOS), with the run rate net benefit expected to increase fee-related earnings by $2 million annually.

For the fiscal third quarter of 2024, StepStone generated fee-related earnings of $50.7 million, up 19% from the prior year quarter with an FRE margin of 33%. Adjusted net income for the quarter was $42.1 million or $0.37 per share, up from $31.2 million or $0.27 per share in the prior year quarter. Separately managed accounts raised $4.3 billion in fundraising during the quarter, while commingled funds had gross inflows of $1.7 billion. The quarter also saw the generation of $17.5 billion of gross AUM inflows over the last 12 months, with over $11 billion from separately managed accounts and over $6 billion from commingled funds.

• Aim to double fee-related earnings by fiscal 2028 driven by the combination of bespoke separately managed accounts, commingled funds, and private wealth offerings.
• Undeployed fee-earning capital of over $21 billion is expected to be deployed over a 3 to 5 year period.
• Buy-in of non-controlling interests will occur on an accretive basis, with a cadence of one-tenth of the 50% interest per year over 5 years, with potential to accelerate after 5 years if mutually agreed.
• Expect FRE margins to continue expanding from operating leverage and strategic cost-saving opportunities.

• Uncertainties in forward-looking statements due to changes in circumstances, risks, uncertainties, and assumptions.
• Market conditions could impact fundraising and deployment of undeployed fee-earning capital.
• Contingency in NCI buy-in where if StepStone's multiple trades below 16x, an exchange in a given year would pause and resume in the following year.

Q: On SMAs, how big is the total asset pool migrating into fee-paying AUM and over what period?

A: The $21 billion of undeployed fee-earning capital is largely driven by separate accounts, with deployment expected over a 3 to 5 year period.

Q: What is the cadence of the NCI buy-in?

A: One-tenth of the 50% interest will be bought in each year over 5 years, with potential to accelerate after 5 years if mutually agreed.

Q: Can you unpack the incentive fee dynamic?

A: Incentive fees crystallize annually, with fiscal second and third quarters typically stronger, and SPRIM contributing a portion.

Q: How does the NCI buy-in impact FRA margin?

A: FRE is reported on a consolidated basis, and while no direct margin expansion from buy-ins, operating leverage is expected to drive margin expansion over time.

Q: How much of undeployed fee-earning capital is in secondary strategies?

A: $2.5 billion of commingled funds activating shortly are entirely secondary funds, but deployment driven by fee holiday expiration and investment completion.

Q: Any contingencies in NCI buy-in?

A: If StepStone's multiple trades below 16x, an exchange in a given year pauses and resumes in the following year.

Q: Outlook for commingled fundraise?

A: Lots of opportunity with key funds like private equity secondaries, venture capital secondaries, special situation real estate secondaries, etc., in market for fundraising