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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and welcome to StepStone's Fiscal 2022 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to turn the conference over to Seth Weiss, StepStone's Head of Investor Relations. Please go ahead.
Thank you, and good afternoon, everyone. Joining today are Scott Hart, Co-Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategic Planning; and Johnny Randel, Chief Financial Officer. During our prepared remarks, we will be referring to a presentation, which is available on our Investor Relations website at shareholders.stepstonegroup.com. Before we begin, I'd like to remind everyone that this conference call as well as the presentation slides contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods. Forward-looking statements reflect management's current plans, estimates and expectations and are inherently uncertain and are subject to various risks, uncertainties and assumptions. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in the risk factors section of StepStone's most recent 10-K. Turning to our financial results on Slide 3 for the second quarter of fiscal 2022. We reported GAAP net income of $127.9 million for the quarter ended September 30, 2021. GAAP net income attributable to StepStone Group Inc. was $62.1 million. We generated fee-related earnings of $26.4 million, adjusted net income of $40.1 million and adjusted net income per share of $0.4. The quarter reflected retroactive fees resulting from additional closes of StepStone's growth equity fund that contributed $2.3 million to revenue and $2.1 million to fee-related earnings and pretax adjusted net income. For comparison, the prior year's quarter benefited from retroactive fees related to the final closing of StepStone real estate partners for, which contributed $9 million to revenue, $8.5 million to fee-related earnings and $4.4 million of pretax adjusted net income. I would now like to turn the call over to StepStone's Co-Chief Executive Officer, Scott Hart.
Thank you, Seth, and good afternoon, everyone. We took positive strides this quarter in both our organic growth and strategic advancement. We generated a strong flow of assets, significantly increased the pipeline of future expected fee earning AUM, produced robust earnings and closed on the acquisition of Greenspring Associates ahead of schedule. I will begin with the Greenspring Associates, which we closed on September 20th. The standalone Greenspring business continued its exceptional performance through closing, driven by the strength of the platform, the trusted LP relationships that have been developed over time and continued LP interest in venture capital. Despite closing well ahead of schedule, the integration is progressing well. We are beginning to operate as one team and already see evidence that our expanded capabilities in venture capital and growth equity are a clear differentiator. Our combined size, network of relationships and access to data is already yielding differentiated investment opportunities and due diligence insights. We have also received positive feedback from our clients and observed early indications that cross-selling opportunities will exist given the limited overlap in our client base. Looking at the firm more broadly, as shown on Slide 4, we now manage your advice on over $500 billion of assets across the private markets. Our increased global scale widens our moat and creates a significant competitive advantage as it yields unparalleled data, insights and deal flow, allow broad scope across private equity, real estate, infrastructure and private debt, makes us a one-stop destination to solve our clients' private market needs. Shifting to our results on Slide 5. We generated $40.1 million in adjusted net income for the quarter or $0.40 per share, up 111% from the prior fiscal year's second quarter. We generated fee-related earnings of $26.4 million, down 5% from the prior year quarter. As Seth mentioned, the prior year period included a significant retroactive fee of $9 million, which impacts the year-over-year comparison. This quarter included relatively smaller retroactive fees and 10 days of Greenspring results. Excluding these items, fee-related earnings would have been up by 20%. We finished the quarter with $121 billion of assets under management and $67 billion of Fee-Earning AUM, which includes $11 billion of earning assets from Greenspring. Excluding the acquired assets, we have organically grown Fee-Earning AUM by 25% over the last 12 months. We have been operating largely in a virtual environment for most of the last year but encouraging trends of declining COVID cases and a growing number of administered vaccinations have enabled us to resume in person activity. I am pleased to report that we have reopened the vast majority of our offices globally, allowing our teams to reunite after nearly 2 years, and in some instances, meeting face-to-face for the first time. We have grown dramatically over the last couple of years. And over that time, we have leveraged technology to onboard new employees and collaborate across teams. Ultimately, there is no substitute for in person connection, and I am excited about what these interactions mean for innovating on our client solutions, the development of talent and the strengthening of our firm culture. Shifting to shareholder distributions. I am pleased to announce that we have increased the quarterly dividend to $0.15 per share, a more than doubling of our prior dividend. The increase is a result of our recent earnings growth and we are confident in the sustainability of our run rate. It is also reflective of our capital-efficient business model, which enables us to fuel a robust level of organic growth, while still paying out a healthy portion of earnings to shareholders. In September, we celebrated 1 year as a public company. Our public listing enabled us to broaden our equity ownership among our employees, provides a means to attract and retain talent, elevates our brand globally and serves as a valuable currency to help grow our business as we demonstrated with the acquisition of Greenspring. We are proud that since our IPO, our stock has delivered returns to our shareholders, well above the market's return. I want to thank the entire StepStone team for their hard work and dedication. Finally, before I hand the call over to Mike, I would like to take a moment to acknowledge the announcement that we issued earlier today that our Co-Founder and Co-CEO, Monte Brem, will be transitioning to Executive Chairman as of January 1, for remaining Chairman of our Board of Directors, and I will become sole CEO. This transition is the natural next step in a succession plan that has been carefully planned and communicated over the last several years. Nevertheless, it does provide an opportunity to look back and reflect on the successful firm that we have built over time. Monte clearly laid the foundation for our success with his vision to build a global, private markets investment firm and establish a collaborative and entrepreneurial culture. We couldn't be more excited about the opportunity to build off that foundation while continuing to benefit from Monte's vision and mentorship as Executive Chairman. With that, I will turn it over to Mike McCabe.
Thank you, Scott. On behalf of all StepStone employees and its Board of Directors, a big thank you to Monte Brem for his vision and leadership as StepStone's founding partners. And congratulations, Scott, as our new CEO. The future could not be brighter. With that said, I am pleased to report we generated $18 million of gross AUM inflows in the last 12 months, it's $2 billion coming from our commingled funds and $16 billion in separately managed accounts. Turning to Slide 7. In addition to the growth we have generated organically, consummation of the Greenspring acquisition contributed an additional $23 billion of assets under management and $11 billion of Fee-Earning AUM. These figures include interim closing for Greenspring's venture capital Secondary response, which added $1.9 billion of assets for the quarter and exceeds our expectations from when we announced the deal. Our asset growth was strong across structure and asset class. Within commingled funds, we had an initial close of our private equity co-invest fund north of $500 million. In addition, we had an interim close for the StepStone Tactical Growth Fund III and our private debt fund for the quarter. Subsequent to the end of the quarter, we had our final close for the Tactical Growth Fund III, which finished with over $690 million in commitments, well above the $214 million size of its credit session. We have generated strong growth in our separately managed accounts across asset classes. Momentum is exceptional from the international clients, which we anticipate will continue to fuel AUM growth in the considerable future. We continue to enjoy very strong re-up rates for all asset classes, which account for about 3/4 of our gross AUM and managed account additions over the last year. The strong rebates are a testament to the incredible stickiness, satisfaction and loyalty of our current clients. Furthermore, we are successfully expanding these relationships to include mandates across new strategies and asset classes while also developing new relationships for the firm. We continue to make progress in our evergreen product, CPRIM, our private market fund for accredited investors, including individuals. CPRIM hits a 1-year mark on October 1. The fund has achieved a remarkable 59% net return for investors since its conception on October 1, 2020, and has an AUM of $270 million as of November 1. We are very pleased with the near-term progress in this program and continue to be excited about the long-term leading. Moving to Slide 8. We grew Fee-Earning AUM by over $2 billion in the quarter, excluding the impact of the Greenspring acquisition. We also had a significant jump in our undeployed fee-earning capital, which is up over $4 billion in the quarter to nearly $18 billion. The growth in our dry powder reflects the simultaneous re-ups among several existing relationships and includes approximately $500 million from the Greenspring acquisition. This is our highest undeployed balance on record and continues to provide a healthy runway for the future. Growth in assets is inherently lumpy. So we think it is most productive to look at the trends over a longer-term basis, where we have consistently delivered robust growth. Over the last 12 months, we grew Fee-Earning AUM by 25%, excluding the impact of acquisitions. And over the last 3.5 years, we have delivered an organic compounded annual growth rate of 30%. Slide 9 shows the evolution of our management and advisory fees, which have more than doubled from $140 million from fiscal 2018 to over $300 million in the last 12-months. While there is minimal impact from Greenspring in this quarter, we have started showing earnings and revenue trends on a per share basis to normalize the impact of M&A and illustrate the growth realized for shareholders. Over the last 3.5 years, we have grown fee revenue per share by a 25% CAGR. Shifting to the table on the bottom of the page, the blended fee rate of 51 basis points is relatively flat compared to the last couple of years. If you look at the individual components, you will notice a decline in the commingled fee rate. This is primarily a function of the $9 million of retroactive fee earned in our commingled real estate fund a year ago that positively impacted the fiscal 2021 fee rate. Underlying pricing by asset class and fund [ rate ] remains very stable. As a reminder, the acquired Greenspring assets are heavily weighted commingled funds, which tend to earn a higher fee rate than separately managed. As a result, we anticipate the blended fee rates will rise a few basis points as we benefit from a full period of Greenspring fees. And with that, I would like to turn the call over to Johnny Randel who discuss our financials in more detail.
Thank you, Mike. I would like to turn your attention to Slide 11 to touch on a few of our financial highlights. For the quarter, we generated fee-related earnings of $26.4 million, pre-tax adjusted net income of $51.8 million; adjusted net income of $40.1 million and ANI per share of $0.4. Included in the quarter was 10 days of contribution from Greenspring, which added $2.3 million, Management & Advisory Fees $1 million of fee-related earnings. Greenspring acquisition also resulted in an additional $1.7 million weighted average adjusted share. The Greenspring earnings were accretive, but given the short stub period, did not move the needle this quarter on EPS. Our FRE margin for the quarter, 32%, down 500 basis points year-over-year. As mentioned earlier, we benefited from significant retroactive fee in the year ago period. Normalizing for these retroactive fees and the impact from Greenspring, FRE margins would have been 29% in the current quarter, which are even with the year ago period. Gross realized performance fees were $56.1 million for the quarter, reflecting a continued positive market environment, driven by strong underlying investment performance and its sustained level of robust realization activity. Slide 24 in the appendix provides quarterly and last 12-month churns on net performance fees and illustrates a material step-up in net realizations over the last 4 quarters. The next 2 slides display underlying revenue and earnings growth year-over-year and over the longer term. We showed the numbers on both an absolute and per share basis. While there is a minimal difference in the growth rate this quarter, the absolute dollars presented in the bar will begin reflecting the benefit of the full period of the Greenspring acquisition next quarter. As we move forward, the per share measure will account for the impact of M&A and represent growth realized for shareholders. I will start with revenues on Slide 12. Adjusted revenue per share was 69% in the first half of the fiscal year and by a 32% compounded annual growth rate over the longer term. The revenue growth is driven by a strong trajectory in fee-earning assets and exceptional growth in realized performance fees. Shifting to our profitability on Slide 13, we have grown fiscal year-to-date fee-related earnings per share by 6%. This comparison includes the impact of unusually large retroactive fees in the same period in the prior year. Over the last 3.5 years, we have achieved a CAGR of 48% in fee-related earnings per share. Our long-term fee-related earnings growth rate keep ahead of our management and advisory fee, demonstrating the operating leverage in our model. We have grown adjusted net income per share by 138% year-to-date and by 46% over the longer term, reflecting the positive progression of FRE and strong realized net performance fees. Moving to the balance sheet on Slide 14. Gross accrued carry continues to increase, driven by strong underlying investment performance in the quarter at over $1.2 billion, which was up 13% from the prior quarter and was 150% over the last 12-months despite an exceptional level of realizations over the last year. As a reminder, our realized performance fees hit our income statement in the period they occur. Changes in our accrued carry balance reflects our share of the unrealized gains and losses of our client portfolio on a one quarter lag. On the bottom chart, our own investment portfolio ended the quarter at $90 million, up 8% from the prior quarter and up 56% over the same quarter in the prior year, reflecting both market appreciation and net contribution. Unfunded commitments to these programs are $72 million at quarter end. We managed a large pool of over $48 billion of performance fee-eligible capital whose capital is widely diversified across approximately 140 programs as of September 30. 65% of our unrealized carry was tied to programs with [ binges ] since 2016 or earlier for the fees programs that entered harvesting mode. 62% of the unrealized carried allocation through the deal-by-deal waterfall being realized carry and receivables at the time of investment exit. A quick comment on the liability portion of the balance sheet. We used a small amount of debt to fund a portion of the Greenspring acquisition. As of the end of the second fiscal quarter, we had drawn a little over $110 million against our line of credit, on which we pay a 2% spread on top of LIBOR. This is a relatively modest amount of leverage and the line of credit gives the flexibility on top of our significant normal cash flow generation to support growth initiatives, including future GP commitments. This concludes our prepared remarks. I will now turn it back over to the operator to open the line for any questions.
[Operator Instructions] Our first question comes from the line of Ken Worthington with JPMorgan.
Maybe 2. First, on CPRIM. The returns are absolutely outstanding. But I am really interested in the sort of the continued build-out of distribution in the product. Now that you are above $250 million, what sort of doors are open in terms of new distribution opportunities and what do you see as the milestone in assets that would drive further access to distribution for that product, given how strong the returns are? And then what are the products that CPRIM is sort of coming up against? Like who are the intermediaries sort of stacking that product up against.?
Ken, this is Jason. Thanks for the question. So as we have spoken about before, as we have reached this size, additional doors here in the U.S. are definitely opening. We are in diligence with a couple of the wires now. So excited about that progress. The RIA community were up over 80 approved platforms on CPRIM as well as a number of IBDs here in the U.S., starting to get more material traction in some of the larger allocators outside the U.S. as well over the last month or so. And then we did have a onetime channel open up in Mexico for us with a listed vehicle in Mexico that buoyed this fundraise for this past month. In terms of the comp set, there are a number of other funds, mostly concentrated around private equity. I think that, again, 2 differentiators that we have called out before. One, this product is a credit investor eligible. Many of the other ones are not. They are focused on the qualified client or qualified purchaser here in the U.S., so a higher standard; and 2, our ability to deploy outside of private equity and really deliver an all private market solution as opposed to a private equity only solution is a pretty material differentiator relative to the peer set. But most importantly, thank you for noting the performance. That's the clear in a way differentiator. Congrats go to the wider StepStone team for what they have been able to deliver for this product.
And the undeployed fee-earning assets under management, $17.8 billion clearly continues to grow. I think you guys invested around $1.4 billion this quarter. It suggests that you would get through that pipeline in the next 3 years at this current piece of investment. It's clearly a fabulous environment. If we remain in this fabulous environment, does 3 years -- actually, is that even possible to work through this pipeline or their product -- I'm sorry, structures or contracts that would drive this pipeline to be sort of mandatory to be invested over a longer period of time, like 4 or 5 years?
Ken, this is Scott. Thanks for the question. I think we have always talked about the pipeline of undeployed fee-earning capital as being deployed really over probably a 3 to 5-year time period. And I think you are right that I think in an environment like the one that we operate in today, it would be likely that, that may be more like a 3-year time period. I would not expect it to be any faster than that, less because of structural reasons, more because from a vintage year diversification standpoint, we have continued to be quite focused on making sure that we were probably diversifying across vintage years and really liked the fact that with the flexibility to go out over 5 years means that there's no rush to invest the capital. We can be patient. We can continue to have the same selective approach that we have employed to date or even in an environment like the one that we operate in today. And hopefully, the idea is that we continue to replenish the undeployed fee earning capital over time as additional re-ups or new opportunities come about.
Our next question comes from the line of Alex Blostein with Goldman Sachs.
I was hoping we could start maybe with a question around Greenspring. Scott, you mentioned that your integration continues to unfold really nicely, despite obviously the fact that the deal closed a little bit out of schedule. So can you give us a sense of maybe some recent trends that Greenspring is seeing in their stand alone business? So maybe flows in the September quarter or anything they have in the hopper kind of coming up from a product perspective. And then combined, if you look at the 2 companies together, what is the main focus here from a distribution perspective? How do you expect to sort of accelerate their stand-alone growth, which obviously has been pretty strong?
Well, first of all, thanks, Alex. Appreciate that. And on Greenspring, a couple of things. Again, you heard us say that we continue to be very encouraged by the performance, even on a stand-alone basis between signing and closing, you heard reference to the fundraising progress across debenture capital, secondary fund. And so in particular, I think we have been encouraged by just the continued interest, not only in venture capital in general, but I think particularly some of the strategies that Greenspring has sort of been active in and has really established a leadership position. And I think when you combine that with the -- really the combination with StepStone, the enhanced flywheel effect, clearly, the fact that the interest in those funds that are in market continued through the announcement, through the closing of the merger suggest that investors really understand the combination and the benefits that they are. I think as we think about the distribution channels going forward, look, I think there's a real opportunity there in the sense that you have heard us talk on prior calls about that there's not a tremendous amount of overlap between our LPs today, particularly some of the very large relationships that StepStone has been able to develop with pension funds, sovereign wealth fund, international investors. We think this just further expands the toolbox, allowing us to create even more innovative solutions and solve more problems for those clients. I think really tapping into one another investor base as we move forward here.
And then my second question really is around the cash flows and the kind of evolving nature of carried interest that's running through the P&L now. We have seen multiple quarters now where incentive fees, performance fees continue to come in well ahead of expectations. Accrued carry is growing. And obviously, given the environment, presumably, there will be more to come on that. So as you are thinking about uses of cash from here, dividend increase, obviously very nice. But what are your thoughts around either more acquisitions or opportunities to buy minority stakes from the real estate, infra or credit team?
Yes. Thanks. It's Mike. I think your question, and thanks for it as a broad kind of capital management question that I think we can unpack in a couple of different ways. First and foremost, we are highly focused on maintaining a capital-efficient business model. Which is supported by a flexible and capital effective, cost-effective capital structure. So at the moment, we are basically looking at a number of priorities. First, as Johnny mentioned, we drew down a little over $110 million from our revolver to help fund the acquisition of Greenspring even though this represents a modest leverage ratio, our intention is to pay down the revolver over time. So that is a source of cash going forward. But this, in turn, creates a very flexible capital structure that allows us to be nimble and opportunistic in what appears to be a very healthy M&A environment while managing our working capital needs. I think the third use really is to continue to fund the general partner. We are currently in market. As I mentioned on the call, with the co-investment fund, we will be coming back to market shortly with some other larger funds in addition to layering on all of the Greenspring funds. So being sure we have the capital available to fund the GP adequately as a priority. Fourth, as you mentioned, we have doubled our dividend, which reflects a payout ratio largely in line with our peers. And lastly, we plan to continue to invest in the business for growth, whether it's data, technology, distribution, product development, we feel we have created this optimal flexibility with our revolver, with our capital structure, with our payout ratio. And I think you can expect us to do more of the same going forward. From a capital management standpoint, our priority is to maintain a very efficient business model and a very cost-effective capital structure.
[Operator Instructions] Our next question comes from the line of Michael Cyprys with Morgan Stanley.
Congratulations, Scott, on the expanded role. I just wanted to circle back to retail topic to jure here. I guess, what catalysts do you think or kind of think about on the horizon that could help accelerate growth for the product, just given the strong performance that is put off? Is it more of a 3-year track record that you need rather than a 1 year track record? And maybe you could talk about some of the resources from a sales and distribution team that you are putting to work here and how you are thinking about expanding those sales resources?
Mike, so from an existing team perspective, the team is about 20 strong, largely focused in the U.S. over the foreseeable future, we will see some expansion here in the U.S., but also starting to build out the European footprint a bit more as well as we look to expand European capital raising for the CPRIM parallel vehicles. In terms of a catalyst, I think, to be honest, I think we have probably crossed the requisite in business for long enough threshold with the 1-year worth of activity. I think the size crossing over the $250 million mark and now 275%, even I think also checks the box necessary for most of the platforms out there. And so as we get through the diligence process with a few more groups, I think you will start to see the increased rate of raise for this product flow through. So I am not looking for anything that's outside of our control presently that's really required for the CPRIM product. And of course, we are -- this is our first product, but it won't be our last in the channel, and we will seek to roll out additional solutions based on channel feedback over time.
And just a follow-up question on the undeployed pent-up fee-earning capital, $17 billion or so, that's up about -- looks like about $3 billion, excluding Greenspring here. Can you just talk about some of the biggest contributors to that increase sequentially? And broadly talk about some of the initiatives to expand this top of the funnel. I think you mentioned you are starting to travel again. Maybe you could talk about the opportunity to bring new customers in the door?
Sure. Thanks, Mike. This is Scott again. So look, the good news there is we -- there are really contribution to the unemployed fee-earning capital across all 4 asset classes across all 3 strategies and really through a combination of re-ups, expansion of existing client relationships, whether across asset classes or strategies as well as some new accounts. But just sort of order of magnitude, one of the larger drivers, we have never provided an exact breakdown, but I'd say this quarter, infrastructure and private equity were particularly strong contributors there and the re-up activity, in particular, has been quite strong, I think, just driven by the continued strong performance and appetite from our clients. This is a particularly strong re-up quarter for us. In terms of broadening the top of the funnel activities, yes, clearly, our business development team has continued to be active throughout the COVID period, but yes, now beginning to travel a bit more internationally or even on the domestic front, again, with 21 offices around the world, I feel like we are well positioned even if travel is only taking place on a domestic basis. I would say there's quite a bit of activity on the new LP, new client front. Some of that may not be on the separate account side. I think that is true across our commingled funds as well, but we are encouraged by some of the new commitments, the new relationships we have started to establish, especially when you think about the way we have been able to grow those relations, whether through re-ups or expansion of capital over -- or sorry, expansion of relationship over time. And I think with our expanded toolbox, again, now not only across the 4 asset classes, that would significantly enhanced venture and growth capabilities of late here. I think we have a lot to talk about with our clients.
And if I could, just on the re-ups that you mentioned, I guess, how much scaling are you seeing from those customers that are coming back and are re-upping. Are they scaling in magnitudes of 20%, 30%, 50%. Any help there?
It's hard to generalize. I think we see some clients that look at their separate account allocation is something that's just going to be very steady and so they re-up at the same size, fairly consistently. Others may be looking to prove out the concept. And once it's proven, may look to double the allocation over time. So there's no -- it's difficult to generalize in terms of what the growth is, it's a separate account over a separate account. But there's certainly sort of double-digit growth rate. And I think we continue to work on the best way to disclose some of the details here in both the balances, the excess of the re-ups growth in those accounts over time.
There are no further questions at this time. I will now turn the call over to Scott Hart. Please go ahead.
Well, great. Well, thanks, everyone, for dialing in. For your continued interest and StepStone and for the questions, and we look forward to continuing to keep you updated in future quarters. Thank you.
That does conclude the conference call for today. We thank you for your participation. Now you can please disconnect your lines.