Executive Summary / Key Takeaways

• Private Wealth Platform at Tipping Point: StepStone's evergreen fund platform has grown from $3.4 billion to $12 billion in under two years, with record $2.4 billion in quarterly subscriptions demonstrating product-market fit. This transformation from institutional-only to mass affluent access creates a fundamentally different growth trajectory and margin profile than traditional fund-of-funds.
• GAAP Loss Masks Underlying Profitability: A $722.8 million net loss in Q2 FY2026 was driven by $884.5 million in equity-based compensation from the StepStone Private Wealth profits interest liability, not operational deterioration. Core fee-related earnings of $78 million grew 34% year-over-year with a 36% margin, revealing the true earnings power obscured by accounting noise.
• Scale Gap Creates Opportunity and Risk: At $193 billion in AUM, StepStone remains sub-scale versus Hamilton Lane (HLNE)'s $986 billion supervision and Apollo (APO)'s $700+ billion, limiting pricing power but enabling faster product innovation. The company's data/tech platform and secondaries expertise provide differentiation, but size constraints pressure fee rates and competitive positioning.
• Industry Headwinds Are Structural Tailwinds: Three consecutive years of low distributions and fundraising pressure have created a $2.5 trillion dry powder overhang and $8+ trillion in unrealized NAV, positioning StepStone's secondary and co-investment capabilities as critical liquidity solutions for LPs facing denominator effect pressures.
• Valuation Hinges on Private Wealth Execution: Trading at 5.1x sales with negative GAAP margins but positive free cash flow, the stock price reflects investor focus on the private wealth platform's scalability rather than current earnings. The key variable is whether StepStone can maintain 30%+ organic growth in fee-earning AUM while managing the SPW profits interest dilution.

Setting the Scene: The Private Markets Liquidity Crunch

StepStone Group, founded in 2007 and headquartered in New York, built its reputation as a global private markets solutions provider for institutional investors. The company operates across four asset classes—private equity, infrastructure, private debt, and real estate—through separately managed accounts ($125 billion AUM), commingled funds ($68 billion), and advisory services ($562 billion under advisement). This structure positions StepStone as a capital allocator and liquidity provider, not just a fund manager. The business model generates revenue through management fees (0.39% on SMAs, ~1% on commingled funds), incentive fees, and carried interest allocations that capture upside from successful exits.

The private markets industry faces a structural liquidity crisis. Distributions have been muted for three consecutive years, cutting the pace of monetization to half its historical average and reaching levels not seen since the dot-com bust and 2008 financial crisis. This has created a $2.5 trillion dry powder overhang and over $8 trillion in unrealized NAV, while LPs remain over-allocated due to the denominator effect. The result is a buyer's market for secondaries, with buyout funds trading at low-to-mid-90s percent of NAV and venture capital at 70-80% discounts. StepStone's positioning as a secondary market leader and co-investment specialist transforms this industry headwind into a direct tailwind, as LPs desperately need liquidity solutions.

Competitively, StepStone occupies a middle ground between pure-play fund-of-funds managers and mega-cap alternative asset managers. Hamilton Lane dominates the institutional FoF space with $986 billion in total supervision, while Apollo ($700B+ AUM) and Ares (ARES) ($450B AUM) leverage scale for deal access and pricing power. StepStone's $193 billion AUM creates a scale disadvantage that pressures per-unit economics, but enables greater agility in product development and client customization. The company's 31 offices across 19 countries provide local sourcing capabilities that larger rivals struggle to replicate, particularly in emerging markets where StepStone allocates 5-40% of capital.

Technology, Products, and Strategic Differentiation: The Data Moat

StepStone's competitive advantage rests on its proprietary data and technology platform, not just its investment relationships. The company provides portfolio analytics and reporting on over $829 billion of client commitments through its StepStone Private Markets Intelligence (SPI) Research and SPI Reporting software. This system enables LPs to monitor pacing, assess risk, and optimize asset allocation across thousands of underlying funds. The recent launch of Kroll StepStone Private Credit benchmarks in September 2025 and FTSE StepStone Global Private Market Indices in October 2025 transforms this internal tool into a market-standard reference point.

Data monetization creates a flywheel effect. As more LPs license StepStone's benchmarks, the company captures additional fee streams while reinforcing its thought leadership position. This drives inbound demand for advisory services and managed accounts, lowering client acquisition costs and improving retention. The indices also provide daily performance data based on institutional-grade inputs, a capability competitors lack. Over time, StepStone can build asset management products around these benchmarks, creating a "walk before you run" path to higher-margin, technology-driven revenue.

The private wealth platform represents StepStone's most significant product innovation. Launched in 2019, it offers evergreen funds that enable daily subscriptions through ticker symbols, a structural advantage over traditional closed-end funds. Products include SPRIM (all-private markets), SPRING (venture and growth), CredX (private credit), STRUX (infrastructure), and STPEX (pure-play private equity interval fund). The STPEX launch in September 2025 raised $700 million in its first 30 days, demonstrating pent-up demand for liquid private equity exposure. This product suite addresses the mass affluent market's need for lower minimums and periodic liquidity, a segment historically ignored by institutional-focused competitors.

The technology differentiation extends to deal sourcing and execution. StepStone commits approximately $70 billion annually across private markets, with private equity representing $35 billion including co-investments and secondaries. The company monitors deal conversion and approval rates, noting that LP secondaries approval rates remain in the very low single-digit percentage. This selectivity, powered by data analytics, improves hit rates and reduces due diligence costs. The platform's ability to identify GP-led secondaries and direct lending opportunities before competitors creates an information edge that translates into superior returns and higher fee retention.

Financial Performance & Segment Dynamics: Evidence of Platform Strength

StepStone's Q2 FY2026 results provide clear evidence of strategic execution despite GAAP accounting distortions. Total revenue increased 67% year-over-year to $454.2 million, driven by a 196% surge in unrealized carried interest to $206.7 million and a 234% jump in realized carried interest to $58.9 million. Management and advisory fees grew 17% to $215.5 million, reflecting 27% growth in average fee-earning AUM. The disconnect between GAAP net loss of $722.8 million and core operational performance stems entirely from the $884.5 million equity-based compensation charge related to the StepStone Private Wealth profits interest liability.

The accounting treatment reflects SPW's increasing value, not operational weakness. As management stated, "this quarter's GAAP loss was significantly larger than prior periods and is a direct function of the progress of our Private Wealth platform." The profits interest, issued in November 2022, becomes more valuable as SPW grows, creating a non-cash expense that obscures true earnings power. Core fee-related earnings of $78 million grew 34% year-over-year with a 36% margin, while adjusted net income per share reached $0.54, up from $0.45. These metrics reveal the underlying business health masked by GAAP noise.

Segment performance validates the platform strategy. Separately managed accounts generated $71.7 million in management fees and $124.8 million in carried interest, with a weighted-average fee rate of 0.39%. The re-up rate for existing clients exceeds 90%, with re-upped accounts growing nearly 30% in each successive vintage. This stickiness provides predictable base fees and reduces fundraising risk. Over the last 12 months, more than one-third of managed account inflows came from new and expanded relationships, indicating successful market share gains.

Commingled funds delivered $125.3 million in management fees and $81.9 million in carried interest, with fee rates around 1%. The debut infrastructure co-investment fund closed at $1.2 billion, making StepStone the largest infrastructure solutions provider globally with over $100 billion in total capital responsibility. The real estate secondaries fund finished at $3.75 billion, the largest ever raised in the industry. These milestone funds demonstrate StepStone's ability to scale new strategies and attract capital in challenging fundraising environments.

Private wealth platform metrics are staggering. New subscriptions reached a record $2.4 billion in Q2 FY2026, nearly double the previous high. SPRING generated over $800 million, while STPEX raised $700 million in its first 30 days. Platform assets grew from $3.4 billion at FY2024 end to over $12 billion in Q2 FY2026, a 250% increase in six quarters. Distribution partners expanded from roughly 300 a year ago to approximately 650, with 50% of partners selling multiple evergreen products. Ticker utilization reached nearly 80% of eligible sales, proving the technology infrastructure supports scalable distribution.

The balance sheet provides strategic flexibility. As of September 30, 2025, StepStone held $230.4 million in cash ($366.7 million including Consolidated Funds) against $269.9 million in debt. Investments in StepStone Funds totaled $1,944.1 million, including $1,733.9 million of accrued carried interest allocations. The company issued $175 million of 5.52% Series A senior notes in October 2024, using proceeds to pay down revolver balances and reduce interest costs by over $3 million annually. Net accrued carry reached $842 million, up 8% sequentially, with approximately 70% tied to programs older than five years that are "ready to harvest."

Outlook, Management Guidance, and Execution Risk

Management's commentary reveals confidence tempered by macro realism. The company expects private wealth subscriptions to moderate after the STPEX launch surge but remain a significant inflow source. Sustainable growth rather than a one-time pop signals long-term potential. The put-call agreement for SPW, exercisable in 2027, is structured at a discount to StepStone's prevailing multiple and is expected to be accretive to net income per share. This provides a clear path to eliminate the equity-based compensation overhang that currently distorts GAAP earnings.

The pipeline for separately managed accounts remains strong, with management highlighting "nearly two decades of investment and relationship building" as the driver of consistent fundraising. The company anticipates activating over $4 billion of managed account capital by calendar year-end 2025, which will be reflected in fee-earning AUM in the December quarter. This conversion of undeployed fee-earning capital (UFEC) to fee-paying AUM is critical for margin expansion, as management expects deployment over a normal three-to-five-year cycle.

Commingled fund fundraising is progressing, with first closes expected for the PE co-investment fund and PE secondaries fund by fiscal year-end. The GP-led dedicated secondaries fund will be smaller than the flagship but the combination is expected to exceed the prior vintage's $4.8 billion size. StepStone can raise larger funds despite industry headwinds, leveraging its secondary market leadership and data advantages.

Management expects core FRE margin to remain in the mid-30s, with quarterly variability from retroactive fees and project-based advisory work. The cash compensation ratio, after adjusting for retroactive fees, should remain around current levels. General and administrative expenses will see a seasonal step-up in coming quarters due to the StepStone 360 conference and VC conference costs, but these are predictable investments in client retention and deal sourcing.

The key execution variable is the pace of realizations. While private market returns have stayed strong, distributions have been low for three consecutive years, shifting client focus from IRR to DPI (distributions to paid-in capital). Management acknowledges that "the muted pace of realizations is similar to those periods, but the duration has been more protracted." However, they see signs of improvement: bid-ask spreads are narrowing, IPO activity is increasing, and sponsors are leveraging alternative exit methods like continuation vehicles. If realizations accelerate, carried interest revenue could surge beyond current guidance, creating meaningful upside.

Risks and Asymmetries: What Can Break the Thesis

The primary risk is execution failure in private wealth scaling. While STPEX's $700 million launch was impressive, management explicitly stated that "subscriptions will moderate after this initial surge." If growth decelerates faster than expected or if product cannibalization from SPRIM to STPEX reduces net inflows, the private wealth narrative weakens. The 50% cross-sell rate among existing partners is encouraging, but the platform's reliance on ticker-based distribution creates regulatory and operational complexity that could limit expansion.

The SPW profits interest liability presents a structural risk. While the put-call agreement provides a path to acquisition in 2027, the equity-based compensation expense will continue growing as SPW becomes more profitable. This creates a persistent GAAP headwind that may confuse investors and pressure the stock. The maximum cash payable to settle the liability is estimated at $1.7 billion, a significant obligation that requires future financing. If StepStone cannot fund this accretively, dilution or debt issuance could harm shareholders.

Scale disadvantage remains a competitive vulnerability. Hamilton Lane's $986 billion supervision provides institutional clients with greater diversification and bargaining power. Apollo's $700+ billion AUM and integrated insurance platform (Athene) offer stable, low-cost capital that StepStone cannot match. If larger competitors replicate StepStone's evergreen fund structure or data platform, the company's differentiation erodes. The risk is particularly acute in private wealth, where iCapital and other fintech platforms are democratizing access with lower fees.

Market risk is material despite StepStone's defensive positioning. A 10% decline in fund investment values would reduce annual management fees by approximately $15 million and investment income by $21 million. While management fees are based on committed capital (providing downside protection), prolonged market stress could slow fundraising and delay carried interest realizations. The ongoing U.S. government shutdown creates uncertainty around regulatory approvals and capital markets access, though management currently expects minimal impact.

The concentration in advisory fees creates earnings volatility. Advisory and data services generated $16.3 million in Q2 FY2026, down from elevated $20 million levels in prior quarters that benefited from project-based fees. This revenue is less predictable than management fees and can swing quarterly results. While the data platform's licensing opportunity provides long-term upside, near-term revenue may be lumpy, creating earnings unpredictability.

Valuation Context: Pricing the Platform Transition

At $62.85 per share, StepStone trades at a $7.82 billion market capitalization and $7.85 billion enterprise value. The valuation metrics reflect a company in transition: 5.1x enterprise value to revenue and 5.1x price to sales, pricing in expectations of continued private wealth scaling rather than current profitability. These multiples are in line with asset managers experiencing rapid AUM growth but below pure-play technology platforms.

The GAAP margins are deeply negative—gross margin of -63.33%, operating margin of -159.09%, and profit margin of -40.06%—but these reflect the SPW equity-based compensation distortion, not economic reality. The more relevant metrics are free cash flow and fee-related earnings.

StepStone generated $59.8 million in free cash flow over the trailing twelve months, implying a price-to-free-cash-flow ratio of 412.9x. While elevated, this is less meaningful given the growth trajectory and non-cash nature of the primary expense.

Comparing to direct competitors provides context. Hamilton Lane trades at 9.8x sales with 41.8% operating margins and 33.8% ROE, reflecting its scale and institutional focus. Apollo trades at 2.9x sales with 29.9% operating margins, benefiting from its diversified model. Ares trades at 10.1x sales with 24.1% operating margins. StepStone's 5.1x sales multiple suggests the market is pricing it as a traditional asset manager rather than a technology-enabled platform, creating potential upside if the private wealth narrative gains traction.

The balance sheet strength supports valuation. With $230.4 million in cash and only $269.9 million in debt, net leverage is minimal. The company holds $1.94 billion in StepStone Fund investments, including $1.73 billion of accrued carried interest that will convert to cash as underlying funds realize gains. This asset base provides downside protection and funding capacity for the SPW acquisition. The 1.79% dividend yield, while modest, signals management's confidence in sustainable cash generation.

The key valuation driver is fee-earning AUM growth. StepStone added a record $27.5 billion in FY2025 (29% organic growth) and continues to scale in FY2026. If the company maintains 20-25% organic growth while expanding private wealth margins, revenue could double within three years, making the current 5.1x multiple look attractive. Conversely, if fundraising stalls or realization activity remains muted, the multiple compresses as growth expectations reset.

Conclusion: The Private Wealth Pivot as Decisive Variable

StepStone's investment thesis hinges on the successful scaling of its private wealth platform while navigating the accounting distortion from the SPW profits interest. The record $2.4 billion in quarterly subscriptions and STPEX's explosive launch demonstrate that the company has solved product-market fit for mass affluent access to private markets. This transformation from institutional gatekeeper to retail enabler creates a fundamentally larger addressable market and more durable fee streams.

The core tension is scale versus agility. StepStone's $193 billion AUM provides sufficient heft to compete in secondaries and co-investments, but remains sub-scale versus Hamilton Lane and Apollo, limiting pricing power and deal access. The company's data platform and global network provide differentiation, but these moats require continuous investment to maintain. The Greenspring acquisition proved StepStone can integrate capabilities and double venture exposure; the SPW platform proves it can build new businesses from scratch.

Financially, the business is healthier than GAAP metrics suggest. Core fee-related earnings growing at 34% with 36% margins indicates strong operational leverage. The carried interest pipeline, with 70% tied to programs older than five years, provides near-term realization potential that could drive performance fees higher. Free cash flow generation, while modest, is positive and supported by a stable base of management fees on committed capital.

The decisive variables are private wealth growth sustainability and realization pace. If StepStone can maintain $2+ billion quarterly subscriptions while moderating equity-based compensation expense, the stock re-rates toward asset manager peers. If realizations accelerate as bid-ask spreads narrow and IPO activity resumes, carried interest could surge beyond expectations. Conversely, execution missteps in private wealth or prolonged market stress could expose the scale disadvantage and compress multiples. The next 12-18 months will determine whether StepStone's platform pivot creates a durable competitive advantage or proves to be a well-timed but ultimately marginal product extension.