Business Overview and History

StepStone Group Inc. (STEP) is a global private markets investment firm that provides customized investment solutions and advisory and data services to its clients. Founded in 2007, the company has grown to become a diversified leader in the private markets industry, offering expertise across private equity, infrastructure, private debt, and real estate asset classes.

StepStone Group's origins trace back to 2007, when the company was founded by a team of investment professionals who had previously worked at large alternative asset management firms. The founders aimed to provide innovative private markets solutions to institutional investors. In its early years, StepStone focused on building expertise across private equity, infrastructure, private debt, and real estate asset classes, establishing itself as a trusted partner for institutional investors seeking to build diversified private markets portfolios.

A significant milestone in the company's history came in 2013 with the formation of its infrastructure investment business, which has since grown to become a leader in the space. In 2018, StepStone acquired Courtland Partners, further strengthening its real estate capabilities. During this period, the firm also began expanding its global presence, opening offices across North America, South America, Europe, Asia, and Australia.

In 2020, StepStone reached another major milestone by going public on the Nasdaq exchange, raising capital to support its continued growth. The company has since completed several strategic acquisitions, including the 2021 purchase of Greenspring Associates, which bolstered its venture capital and growth equity expertise.

Throughout its history, StepStone has successfully navigated various market cycles and challenges, including the global financial crisis of 2008-2009 and the COVID-19 pandemic in 2020-2021. The firm's resilience during these periods has been demonstrated through strong investment performance and continued platform growth.

Today, StepStone Group is responsible for approximately $682 billion in total capital, including $176 billion in assets under management (AUM) and $506 billion in assets under advisement (AUA). The firm operates from 26 offices across 16 countries, employing a global team of over 1,050 professionals, including approximately 360 investment professionals.

StepStone's business model is centered around offering customized investment solutions to its diverse client base, which includes some of the world's largest public and private defined benefit and defined contribution pension funds, sovereign wealth funds, insurance companies, endowments, foundations, family offices, and high-net-worth and mass affluent individuals. The firm's solutions span separately managed accounts, focused commingled funds, and advisory and data services.

Financials

In the second quarter of fiscal year 2025, StepStone reported strong financial results, with management and advisory fees of $185 million, up 30% year-over-year, and fee-related earnings (FRE) of $72.3 million, an increase of 65% compared to the same period last year. The firm's FRE margin for the quarter was 39%, reflecting the operating leverage in its business model.

The company's total revenue for the quarter reached $271.68 million, representing a 42% year-over-year growth. This increase was driven by higher management and advisory fees, net, higher carried interest allocations, and positive legacy Greenspring carried interest allocations compared to the prior year period. StepStone reported GAAP net income of $53.14 million and GAAP net income attributable to StepStone Group Inc. of $17.6 million or $0.26 per share.

Excluding the impact of retroactive fees, StepStone's fee-related revenue and fee-related earnings increased 23% and 44% year-over-year, respectively. The FRE margin, excluding the impact of retroactive fees, was 34% for both the quarter and the trailing 12 months, marking the company's best quarterly and 12-month core margin levels on record.

For the fiscal year 2024, StepStone reported revenue of $711.63 million and net income of $58.09 million. The company generated operating cash flow (OCF) of $161.52 million and free cash flow (FCF) of $141.91 million for the year.

In terms of geographic performance, for the three months ended September 30, 2024, revenue attributable to the United States was $98.05 million, while revenue attributable to non-U.S. countries was $173.62 million, highlighting the company's strong international presence.

As of September 30, 2024, StepStone had a solid liquidity position with $179.07 million in cash and cash equivalents and $763,000 in restricted cash. The company had $172.26 million in debt obligations, net of debt issuance costs, under a $300 million revolving credit facility.

Navigating Market Conditions and Liquidity Challenges

The private markets industry has faced distinct challenges in recent years, with the prolonged slowdown in realizations and monetizations creating liquidity constraints for both limited partners (LPs) and general partners (GPs). StepStone's data indicates that annual realizations have averaged just over 20% of the prior year's net asset value (NAV) over the past 25 years, but this pace has been cut in half to the lowest levels since the dot-com bubble and the global financial crisis.

While the slowdown in monetizations is similar to past periods, the current environment is fundamentally different, as private market asset values broadly remain higher than they were a couple of years ago. Factors such as shifting interest rates and wide bid-ask spreads have contributed to the muted realization activity, but some of these headwinds are starting to ease.

StepStone's extensive data and analytics capabilities have proven invaluable in this environment, as the firm leverages its insights to help clients model the likelihood of various outcomes and plan for their capital and cash needs. The company's experience in the secondaries market, in particular, has positioned it well to assist LPs and GPs in managing liquidity through tools such as partial asset sales, dividend recapitalizations, and the use of continuation vehicles.

Diversified Platform and Growth Opportunities

While the private equity secondaries business has been a significant driver of StepStone's recent growth, the firm is also focused on expanding its presence in other private markets asset classes. In the second quarter, the company highlighted the continued momentum in its infrastructure, real estate, and private debt strategies, all of which are nearing critical mass and poised for accelerated growth in the coming years.

Moreover, StepStone's private wealth platform has continued to deliver impressive results, surpassing $5 billion in net asset value during the quarter. The firm's ability to provide sophisticated private markets exposure through evergreen and retail-focused vehicles has resonated with high-net-worth and mass affluent investors, contributing to the platform's rapid growth. In the second quarter alone, StepStone generated nearly $850 million in private wealth subscriptions.

StepStone's diverse product offerings include Separately Managed Accounts (SMAs), which comprised $107 billion of the company's AUM as of September 30, 2024. These customized solutions integrate primaries, secondaries, and co-investments across multiple asset classes to meet clients' specific portfolio objectives. Additionally, the firm's focused commingled funds, which deploy capital in specific asset classes with defined investment strategies, accounted for $54 billion of AUM.

The company's advisory and data services, including portfolio construction, due diligence, and investment recommendations, have also been a significant driver of growth. As of September 30, 2024, advisory relationships comprised $506 billion of StepStone's AUA and $15 billion of its AUM. The firm's proprietary performance monitoring software, SPI Reporting, tracked detailed information on over $730 billion of client commitments as of the same date.

Looking ahead, StepStone remains well-positioned to navigate the evolving private markets landscape. The company's diversified platform, data-driven insights, and strong client relationships position it to capitalize on a range of growth opportunities, both in its traditional institutional business and in the rapidly expanding private wealth channel.

Recent Achievements and Future Outlook

StepStone achieved several notable milestones in the second quarter of fiscal year 2025. The company closed a $4.8 billion private equity secondaries fund, its largest commingled fund to date. Additionally, StepStone grew fee-earning AUM by $4 billion and produced another strong quarter of gross AUM inflows of nearly $6 billion across its platform.

Looking forward, StepStone expects to generate seasonal incentive fees in its upcoming fiscal third quarter, primarily related to its SPRING Private Wealth Fund. These incentive fees are anticipated to be larger than last year's private wealth incentive fees, reflecting the significant growth in the fund.

Risks and Challenges

While StepStone has demonstrated resilience in the face of market challenges, the firm is not immune to the broader risks facing the private markets industry. Factors such as continued volatility in financial markets, regulatory changes, and increased competition for attractive investment opportunities could impact the company's financial performance and growth trajectory.

Additionally, the firm's reliance on performance-based fees, such as carried interest and incentive fees, introduces a degree of volatility and uncertainty into its revenue stream. Significant declines in the valuations of the underlying investments in the StepStone Funds could lead to a reduction in these performance-based revenues.

StepStone also faces the ongoing challenge of managing its rapid growth and expansion while maintaining its culture of excellence and client-centric approach. Effectively integrating new talent and capabilities, as well as ensuring seamless execution across its global platform, will be critical to the firm's continued success.

Conclusion

StepStone Group has established itself as a diversified leader in the private markets industry, offering a comprehensive suite of investment solutions and advisory services to a global client base. The firm's robust data and analytics capabilities, coupled with its deep expertise across multiple asset classes, have enabled it to navigate the complex and evolving private markets landscape.

Despite the liquidity challenges facing the industry, StepStone has demonstrated the resilience of its business model, as evidenced by its strong financial performance in the second quarter of fiscal year 2025. As the firm continues to expand its platform and leverage its growth opportunities, particularly in the private wealth space, investors will be closely watching to see how StepStone navigates the road ahead and capitalizes on its diverse product offerings and global reach.