StepStone Group Inc. Q2 FY2025 earnings call

• Fundraising milestones: Closed the fifth vintage of private equity secondaries fund at $4.8 billion, generated nearly $850 million in private wealth subscriptions, and private wealth platform exceeds $5 billion.
• Financial results: Strong fee-related earnings growth, FRE margin of 39%, core margin excluding retroactive fees 34%. Management and advisory fees up 30% y-o-y. Adjusted net income per share $0.45, up 73% y-o-y.
• Liquidity insights: Liquidity picked up in StepStone funds, though not full resumption of asset sales; sponsors using alternative harvesting methods. Private markets asset values higher than a couple years ago with some pockets of weakness.
• Conference highlights: StepStone 360 Conference had positive client sentiment, liquidity was a key theme.

For the second quarter of fiscal 2025, StepStone generated fee-related earnings of $72.3 million, which was a 65% increase from the prior year quarter. Management and advisory fees were $185 million, up 30% year-over-year. The FRE margin was 39%. Retroactive fees contributed $14.9 million to revenue. The private wealth platform surpassed $5 billion in net asset value. Commingled fund inflows included approximately $600 million in the private equity secondaries fund (final size $4.8 billion) and other funds had inflows like $300 million. Fee-earning AUM grew by $4 billion, and undeployed fee-earning capital was nearly $30 billion.

• Expect seasonal incentive fees in fiscal third quarter related to SPRING Private Wealth Fund, larger than last year. Potential for higher realizations next year to normalize performance fees. Considered a $0.15 per share supplemental dividend payable in June subject to Board approval.
• Continued growth in fee-earning AUM and undeployed fee-earning capital, with expectation of capital activation and deployment over time.

• Market uncertainties: Global financial market conditions and private market dynamics can impact performance. Liquidity constraints remain a challenge with extended periods of subdued market activity and realizations. Bear markets in certain areas like real estate and venture capital could affect asset values.
• Operational risks: Dependence on retroactive fees which can be lumpy. Uncertainty in the timing and extent of realization of net accrued carry and performance fees.

Q: Discuss private equity secondaries business and liquidity impact on growth.

A: Scott Hart mentioned private equity secondaries market expected to be strong, well-positioned to capitalize on LP and GP-led trends. Liquidity recovery seen but partial realizations more common than full; expecting normalized realizations next year.

Q: On profitability and FRE margins ex retro fees, future outlook.

A: Mike McCabe said margins benefited from operating leverage and scale, but priority remains investing for growth. David Park noted core FRE margins 34% over last two quarters, with continued hiring and potential retroactive fees from other funds.

Q: Carry pickup next year and margin impact.

A: Scott Hart discussed realization outlook and normalized performance fees; Mike McCabe mentioned performance fees build throughout year, with potential supplemental dividend like last year.

Q: Undeployed fee-earning capital pipeline.

A: Scott Hart said pipeline characteristics mostly unchanged, with over $4 billion activated in October; conversion to fee-paying AUM expected over 3-5 years with activations front-loading.

Q: M&A and platform expansion.

A: Mike McCabe said M&A has been key to growth, platform largely built out but focus on buying in NCI and accretive M&A. On wealth and 401(k) channel, Jason Ment mentioned target date wrappers and education for private markets penetration.