StepStone Group Inc. (NASDAQ:STEP) is a global private markets investment firm that has demonstrated impressive financial performance and growth in recent quarters. The company reported annual net income of $58,091,000, annual revenue of $710,601,000, annual operating cash flow of $244,738,000, and annual free cash flow of $225,131,000 for the fiscal year ended March 31, 2023.
Business Overview
StepStone is a fully-integrated private markets solution provider, offering customized investment solutions and advisory, data, and administrative services to a diverse client base. The company's clients include some of the world's largest public and private pension funds, sovereign wealth funds, insurance companies, endowments, foundations, family offices, and private wealth clients, including high-net-worth and mass affluent individuals.StepStone partners with its clients to develop and build private markets portfolios across the private equity, infrastructure, private debt, and real estate asset classes. The company's solutions are typically offered through separately managed accounts (SMAs), focused commingled funds, and advisory and data services. As of March 31, 2023, StepStone was responsible for approximately $678 billion of total capital, including $157 billion of assets under management.
Robust Fundraising and Fee-Earning AUM Growth
In the fourth quarter of fiscal 2023, StepStone generated gross new commitments of $6 billion, matching the strong fundraising result from the previous quarter. The company raised nearly $4 billion in managed accounts and over $2 billion in commingled funds, including a record $600 million in private wealth subscriptions.For the full fiscal year 2023, StepStone raised $18.6 billion of new AUM commitments across the firm, a strong result. The company doubled its pace of fundraising in the second half of the year and sees strong momentum continuing, with a robust pipeline of managed account re-ups and several large commingled funds in the market across its asset classes.
StepStone's fee-earning AUM (FEAUM) grew by $4.4 billion in the fourth quarter, split evenly between managed accounts and commingled funds. The company's FEAUM and undeployed fee-earning capital (UFEC) now stand at over $116 billion, up 15% year-over-year, representing a strong indicator of future earnings power.
Diversified Revenue Streams and Margin Expansion
StepStone's revenue is diversified across its various business lines. In the fourth quarter, the company generated management and advisory fees of $154 million, up 16% from the prior year quarter. This increase was driven by growth in FEAUM and a higher blended fee rate, which reached 59 basis points for the full fiscal year 2023, up from 54 basis points in the prior year.Fee-related earnings (FRE) were $51 million for the quarter, up 35% from a year ago, with an FRE margin of 33%, an expansion of 460 basis points year-over-year. Normalizing for retroactive fees, core FRE margins expanded approximately 300 basis points.
The company's management and advisory fees per share grew 17% for the full fiscal year 2023 and by an annual growth rate of 21% over the long-term period since fiscal 2019. Adjusted revenue per share was up 3% for the full year, as growth in management and advisory fees more than offset a decline in performance fees.
Profitability and Capital Allocation
StepStone's full-year FRE per share grew 21%, primarily driven by the growth in management and advisory fees. Over the long-term period, the company has generated an annual growth rate in FRE per share of 29%.Adjusted net income (ANI) per share was down 2% for the full fiscal year 2023 compared to the prior year, due to lower performance fees, but has grown at an annual rate of 24% over the long-term period.
The company's balance sheet remains strong, with net accrued carry finishing the quarter at $635 million, up 12% from the prior quarter. StepStone's own investment portfolio ended the quarter at $205 million, with unfunded commitments to its investment programs of $116 million as of March 31, 2023.
Shareholder-Friendly Capital Allocation
In addition to its regular quarterly dividend, StepStone announced a supplemental cash dividend of $0.15 per share. When combined with the quarterly dividend of $0.21 per share, the company's total dividend yield would have been 3.5% for the year using an average share price over the last 12 months.The company expects future supplemental dividends to increase as capital market activity normalizes and net realized performance fees improve. StepStone's shareholder-friendly capital allocation, coupled with its resilient earnings and strong growth profile, makes it an attractive investment proposition.
Accretive Acquisitions and Operational Efficiency
StepStone recently executed the first of a series of planned acquisitions of the non-controlling interests in its infrastructure, private debt, and real estate businesses. These transactions are expected to be accretive to earnings, as the acquired earnings are being purchased at a discount to StepStone's price-to-earnings multiple.Additionally, the company completed the sale of Greenspring Back Office Solutions, the fund administration entity acquired as part of the Greenspring acquisition. This transaction is expected to result in net savings and improved operational efficiency for StepStone.
Outlook
Looking ahead, StepStone is optimistic about its prospects for continued growth in the coming fiscal year, given the pipeline of managed account re-ups, expectations for ongoing commingled fundraising, and continued progress in the private wealth channel. The company has also broadened its fund platform with the introduction of new commingled funds and private wealth products.Risks to StepStone's business include macroeconomic conditions, volatility in financial markets, competition for investment opportunities, and regulatory changes that could impact the private markets industry. However, the company's diversified business model, strong client relationships, and proven track record of navigating market cycles provide a solid foundation for continued success.