Business Overview: A Storied History of Growth and Innovation
StepStone Group Inc. (STEP) is a global private markets investment firm that has established itself as a leading provider of customized investment solutions and advisory services to a diverse clientele. With a comprehensive suite of offerings spanning private equity, infrastructure, private debt, and real estate, StepStone has carved out a prominent position in the alternative investment landscape.
StepStone Group Inc. was incorporated in the state of Delaware in November 2019 and went public in September 2020. The company acts as a holding company for StepStone Group LP, which was founded in 2007. Since its inception, StepStone has grown to become a global private markets investment firm, providing customized investment solutions and advisory and data services to a wide range of clients, including 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 company's growth trajectory has been marked by strategic acquisitions and partnerships that have bolstered its capabilities and expanded its global reach. A significant milestone in StepStone's history was the acquisition of Greenspring Associates, Inc. and certain of its affiliates in September 2021. This move accelerated the growth of StepStone's team and capabilities, particularly in the venture capital space. More recently, in February 2024, StepStone entered into agreements to acquire equity interests in its infrastructure, real estate, and private debt subsidiaries over a multi-year period, further consolidating these businesses under the StepStone platform.
Throughout its history, StepStone has demonstrated resilience and adaptability in the face of various challenges, including the global financial crisis and the COVID-19 pandemic. The company's diversified platform across asset classes, commercial structures, and geographies has played a crucial role in mitigating concentration risk and contributing to the stability of its performance throughout market cycles.
Financial Performance: Robust Growth and Diversification
StepStone's financial performance has been equally impressive, with the company reporting strong growth in key metrics over the past several years. For the fiscal year ended March 31, 2024, the firm reported total revenues of $711.63 million, a 35% increase compared to the prior fiscal year. Net income for the same period stood at $58.09 million, highlighting the company's ability to translate top-line growth into profitability. The company also generated strong cash flows, with operating cash flow of $161.52 million and free cash flow of $141.91 million for the fiscal year.
The diversification of StepStone's business model is reflected in the composition of its revenues. In the most recent fiscal year, management and advisory fees accounted for 57.6% of total revenues, while performance fees, including carried interest allocations and incentive fees, contributed the remaining 42.4%. This balanced revenue stream provides the company with a degree of stability and resilience, as it is not overly reliant on any single revenue source.
Furthermore, StepStone has demonstrated impressive growth in its fee-earning assets under management (FEAUM), which stood at $114.17 billion as of December 31, 2024, up 28% from the prior year. This growth has been driven by robust fundraising across the firm's various investment strategies, as well as the successful deployment of capital into new opportunities.
In the most recent quarter (Q3 FY2025), StepStone reported revenue of $339.02 million. While the company reported a net loss of $192.02 million for the quarter, this was primarily driven by a $483.5 million charge related to the change in fair value of the company's potential future buyout of the StepStone Private Wealth profits interests. Excluding this item, the company generated $52.7 million in adjusted net income, up 25% year-over-year.
StepStone's financial performance in Q3 FY2025 was particularly strong, with fee-related earnings (FRE) of $74.1 million, up 46% from the prior year quarter. The FRE margin improved to 39%, up over 500 basis points from the prior year quarter. Adjusted net income per share reached $0.44, up 19% from the prior year quarter.
The company's revenue is geographically diverse, with 42% of Q3 FY2025 revenue coming from the United States and 58% from non-US countries.
Liquidity
StepStone maintains a strong liquidity position, which supports its ongoing operations and growth initiatives. As of December 31, 2024, the company had $223.8 million in cash, cash equivalents and restricted cash. StepStone's debt-to-equity ratio stood at a conservative 0.12, and the company had no amounts outstanding under its $300 million revolving credit facility. The current ratio and quick ratio were both 0.98, indicating a healthy short-term liquidity position.
Product Segments and Business Model
StepStone operates through two main product segments:
1. Separately Managed Accounts (SMAs): These are contractual arrangements involving an investment management agreement between StepStone and a single client. SMAs are typically structured as partnerships or limited liability companies, with a StepStone subsidiary serving as the general partner or managing member. As of December 31, 2024, SMAs comprised $109 billion of the company's $179 billion in Assets Under Management (AUM).
2. Focused Commingled Funds: These are funds structured as limited partnerships or limited liability companies with multiple clients, for which a StepStone subsidiary serves as the general partner or managing member. As of December 31, 2024, focused commingled funds comprised $55 billion of the company's $179 billion in AUM.
In addition to these investment vehicles, StepStone provides advisory and data services to its clients. These services include portfolio construction and design, due diligence and investment recommendations, review of existing private markets investments, and access to the company's proprietary data and technology platforms. As of December 31, 2024, advisory relationships comprised $519 billion of the company's total $698 billion in total capital responsibility (AUM plus Assets Under Advisement).
StepStone generates revenues primarily from management and advisory fees, as well as performance fees in the form of incentive fees and carried interest allocations. For the nine months ended December 31, 2024, the company reported $553.61 million in management and advisory fees, net, $26.36 million in incentive fees, and $204.09 million in carried interest allocations.
The company's SMAs generally pay management fees based on committed capital or net invested capital, while focused commingled funds typically pay management fees based on a specified fee rate applied against client capital commitments during a defined investment or commitment period. The weighted-average management fee rate across SMAs and focused commingled funds was approximately 0.64% of average Fee-Earning AUM for the twelve months ended December 31, 2024.
StepStone's performance fee revenues, including incentive fees and carried interest allocations, are more variable in nature, as they are dependent on the investment performance of the StepStone Funds. As of December 31, 2024, the company had over $90 billion of performance fee-eligible capital across its various investment programs.
Navigating Evolving Landscapes: Adapting to Changing Market Conditions
The private markets industry has faced its share of challenges in recent years, with factors such as rising interest rates, geopolitical tensions, and the COVID-19 pandemic presenting headwinds for many players. However, StepStone has proven adept at navigating these evolving landscapes, leveraging its diversified business model and strong relationships with clients to maintain its competitive edge.
During the COVID-19 pandemic, for instance, the firm's adaptability was on full display. While certain segments of the private markets experienced temporary disruptions, StepStone's broad exposure across asset classes and its ability to pivot quickly allowed it to continue delivering value to its clients. The company's willingness to innovate and adopt new technologies also played a crucial role in its pandemic response, enabling it to maintain seamless operations and provide enhanced service to its stakeholders.
Looking ahead, StepStone remains well-positioned to capitalize on emerging opportunities in the private markets. The firm's deep industry expertise, global footprint, and commitment to client-centric solutions position it as a trusted partner for investors seeking exposure to alternative asset classes. Additionally, the company's ongoing investment in data and technology infrastructure positions it to stay ahead of the curve in an increasingly data-driven industry.
The company has demonstrated impressive growth despite broader industry headwinds. While the private markets industry has seen moderating fundraising activity in recent years, with total private capital commitments declining from 2021 to 2024, StepStone has been able to grow its fee-earning AUM by 70% since late 2021. This growth reflects the strength of its diversified business model and investment strategies.
StepStone's recent performance has been particularly strong, with the company reporting robust fundraising and AUM growth. In the most recent quarter, fee-earning AUM increased by nearly $10 billion, marking the strongest organic growth in StepStone's history. The company has seen strong fundraising across its commingled funds, private wealth platform, and separately managed accounts. Additionally, StepStone has successfully deployed and activated a significant portion of its undeployed fee-earning capital during the quarter.
Risks and Challenges
Despite its impressive track record, StepStone is not without its risks and challenges. As a global alternative asset manager, the firm is exposed to a variety of macroeconomic and industry-specific factors that could impact its performance. These include volatile market conditions, increased competition, regulatory changes, and the potential for disruption within the private markets ecosystem.
Moreover, the success of StepStone's business model is heavily reliant on its ability to continue attracting and retaining top talent. The alternative investment industry is known for its intense competition for skilled professionals, and the firm's ability to maintain its competitive edge will largely depend on its human capital management strategies.
Outlook and Conclusion
Despite the challenges facing the industry, StepStone remains well-positioned for continued growth and success. The firm's diversified business model, strong client relationships, and innovative approach to private markets investing have been key drivers of its performance, and there is ample reason to believe that these strengths will continue to serve the company well in the years to come.
The company's recent financial performance and operational metrics paint a picture of a robust and growing business. StepStone's ability to grow its fee-earning AUM, improve its fee-related earnings, and maintain strong margins in a challenging market environment demonstrates the resilience and effectiveness of its business model.
StepStone's continued growth and momentum in newer product offerings like infrastructure, private credit, and venture capital provide additional avenues for expansion and diversification. These newer segments complement the company's established strengths in private equity and real estate, positioning StepStone to capture opportunities across a broad spectrum of private market investments.
As StepStone navigates the evolving landscape of the private markets, investors will no doubt closely monitor the firm's ability to adapt, innovate, and capitalize on new opportunities. With its deep expertise, global scale, and client-centric focus, StepStone appears poised to maintain its position as a leading player in the alternative investment space, well-equipped to deliver value to both its clients and shareholders in the years to come.