Release Date: May 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- StepStone Group Inc (STEP, Financial) reported GAAP net income of $82.5 million, with net income attributable to the company at $30.8 million or $0.48 per share.
- Fee-related earnings (FRE) increased by 35% from the prior year quarter, reaching $50.9 million, with an FRE margin of 33%.
- The company generated gross new commitments of $6 billion in the fiscal fourth quarter, maintaining strong fundraising momentum.
- StepStone Group Inc (STEP) raised $18.6 billion in new AUM commitments for the full year, doubling the pace of fundraising in the second half of the year.
- The company declared a supplemental cash dividend of $0.15 per share, in addition to the regular $0.21 per share quarterly dividend, reflecting strong capital efficiency and shareholder returns.
Negative Points
- Despite strong results, the company acknowledged that the fundraising market remains bifurcated, with challenges for those lacking a strong strategy, track record, or supportive LP base.
- Gross realized performance fees were down from $33 million in the prior quarter to $24 million in the current quarter, indicating some volatility in performance fee generation.
- Equity-based compensation expenses increased to $1.7 million from $1.4 million in the prior quarter, with further increases expected in the first fiscal quarter of 2025.
- General and administrative expenses rose to $27.2 million, up $2.7 million from the previous year, indicating rising operational costs.
- The company's tax rate for adjusted net income remained high at 22.3% for both the quarter and the full fiscal year, with similar rates expected for fiscal 2025.
Q & A Highlights
Q: I want to dig a little bit deeper into the private wealth platform, as the inflows period picked up nicely, Q-over-Q. Are you seeing inflows primarily driven by increasing the distribution RIA channel? Or are you seeing more so strength in client re-ups and client retention?
A: Hey, Nick. Jason here. Thanks for the question. In terms of the flows, it's been broad-based across the different channels. As a reminder, we kind of think about this in four different buckets, the RIA channel in the U.S., the broker dealer channel in the U.S., the wire houses in the U.S., and then non-U.S. wealth as a fourth pillar. Flows across all four have been strong. Flows across all three funds currently in market have been strong, redemption have been low across all the products. And so, we feel right now that, everything is firing pretty well.
Q: In the prepared remarks, you seem very positive in the outlook for fundraising across both, commingled and SMAs. Maybe I want to dive a little bit deeper into about the cross-selling opportunities between LPs. Maybe where are you seeing the most conversions across funds and asset classes? And maybe how are you kind of strategically thinking, and where is the investments being made in terms of putting more LPs into more step zone funds? Thanks.
A: Sure. Thanks for the question. And you certainly get the sense from our comments as well as our results that, we've seen a recovery in the fundraising market, although I don't want to necessarily suggest that, it is a universally strong fundraising market. I think it's one that you'd often hear us characterize as being bifurcated between, so the haves and the have not. The haves meaning if you've got a strategy, a track record and a supportive LP base. You can certainly get successful fundraising done. If you don't have those things, it's still a challenging environment. Fortunately for us, we do have many of those things, a well-diversified platform across asset classes and strategies. With our secondary strategies in particular, you are making significant progress. Our private wealth strategies, as you just heard from Jason, making significant progress. But as we commented on as well, in a separate account area, we continue to see a strong pipeline of both new and existing clients. If I look back over the last quarter or last year, it's probably been somewhere in the range of 20% to 25% of the AUM flows coming from new clients with the remainder coming from either re-ups or expansion of client relationships. If I look at where some of that the activity has been concentrated from a geographic standpoint, it actually falls roughly in line with our current business mix, call it, 35% or so North America with the remainder fairly balanced across the Middle East, Europe, Asia and Australia. And then from an asset class standpoint, if you look at the last quarter or the last 12 months on the separate accounts side, real estate and private equity have probably led the way whereas if I look forward a bit, I think we're seeing quite a bit of activity across our private equity infrastructure and private credit asset classes. I know a lot there in the response, but I think the good news is, there's a meaningful amount of activity across all parts of the business today.
Q: I wanted to dig in on private wealth. I was hoping maybe you could elaborate on how you are viewing the product pipeline, looking out over the next couple of years? I know you mentioned the credit product that's on its way. And then more broadly, if you could just maybe update us on the product placements for the three existing products in the market just in terms of how well distributed and placed are those products for the platforms and how do you see that evolving, as you look out over the next 12 months?
A: Thanks, Mike. Jason here. In terms of the product pipeline, I don't think we are in a position to announce another product beyond the CredEx presently. I think the same principles that I talked about before will guide any future product development, as it relates to the retail channel. And so, that's going to be one where we believe that StepStone has something to offer, both because of our in-house expertise and investment strategies, but also one where the multi-manager model makes sense. And so, these four product families for now, but certainly stay tuned and we'll continue to think about those areas where it may make sense in the future. In terms of the distribution syndicate for the existing funds, SPRIM is on two wires in the U.S. both allocating now in addition to the IBD channel and high single 100 numbers of RIA. The non-U.S. distribution is, we're spending quite a bit of time trying to build that syndicate now that the U.S. syndicate we believe is relatively mature for SPRIM. As we look at SPRING, we're on one wire in addition to probably about half the number of channels as we are with SPRIM. That syndicate will continue to get built out in the U.S. and abroad probably in parallel with the SPRIM distribution structure. The Infrastructure Fund is not on a wire currently and is on probably half of the platforms or so that maybe even a bit less than half of the ones that SPRING is on currently. Each is kind of following a pretty similar gestation. And if I look at, I think more importantly than the number of platforms or which platforms they're on, if I look at the fundraising trajectory kind of going back to zero day on each of the funds, which is probably the way we think about it most often, each of SPRING and STRUX are equal or ahead to where SPRIM was at a similar point in time. We feel good about that for sure.
Q: Just a follow-up question on the FRE margin. Just curious how you're seeing the path here on the margin profile in fiscal '25 compared to I think it was around 32% or so, that you put up in fiscal '24. Just any sort of thoughts around any sort of intra-quarter, intra-year volatility and anything on the retroactive fees that we should be keeping in mind over the next couple of quarters?
A: Sure. This is David. As you know, in any given quarter, you are going to see variability in our margins just due to retroactive fees and timing of expenses. I guide you to look at our full year margins. We feel pretty good about the trajectory of our margins and reaching the mid-30s in the medium-term. For fiscal 2025, we would expect to see continued margin improvement, generally in line with what we saw in fiscal 2024.
Q: As you mentioned, the exchange transactions are due take effect for the first time this June. I know you mentioned that, they're expected to be accretive both when speaking now and when you first announced them. Are there any other details you could provide on the level of accretions? That's the first part of my question
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
