StepStone Group Inc. Class A Common Stock 2027 Q1 Earnings Call

Joining me on today's call are Scott Hart, Chief Executive Officer, Jason Ment, President and Co-Chief Operating Officer, Mike McCabe, Head of Strategy, and David Park, 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 would like to remind everyone that this conference call, as well as the presentation, contains 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 changes in circumstances or a number of risks or other factors that are described in the risk factor section of StepStone's periodic filings.

These forward-looking statements are made only as of today, except as required, we undertake no obligation to update or revise any of them. Today's presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation, and our filing with the SEC. Turning to our financial results for the first quarter of fiscal 2027. Beginning with slide three, we reported a GAAP net loss attributable to StepStone Group Inc. of $116 million, or $1.41 per share. As a reminder, GAAP accounting requires us to factor the change in fair value of the buy-in of the StepStone Private Wealth profits interests to our income statement, which drove the negative GAAP earnings result this quarter.

We have a put call option agreement in place with an entity composed of members of the private wealth team that enables StepStone's buy-in of these profits interests. The private wealth team entered the put period in the June quarter, StepStone will enter into the call period in the third quarter of calendar 2027. Moving to slide five, we generated fee-related earnings of $106 million, up 30% from the prior year quarter, we generated an FRE margin of 39%. The quarter reflected retroactive fees, primarily from our infrastructure secondaries fund. Retroactive fees contributed $1.1 million to revenue, which compares to retroactive fees of $2.9 million in the first quarter of the prior fiscal year. When excluding the impact of retroactive fees, core fee-related earnings were $105 million, up 33% relative to the prior year quarter. Our core FRE margin remains at 39%.

We earned $60 million in adjusted net income for the quarter, or $0.48 per share. This is up from $49 million, or $0.40 per share in the first quarter of the last fiscal year, driven primarily by higher fee-related earnings. I'll now hand the call over to Scott.

Thank you, Seth. Good evening. We kicked off our fiscal 2027 year with outstanding financial results, robust and balanced fundraising, and a healthy pipeline that gives us visibility for continued earnings growth. Beginning with results, we are comfortably generating run rate management and advisory fees of over $1 billion per year and generating run rate fee-related earnings of well over $400 million per year. These are numbers that we frankly could not have imagined just six short years ago as we were preparing for our IPO.

As I reflect on our progress, I am proud of both the magnitude of our results and the path we took to get here, driven by an unwavering commitment to investing for the long term in solutions that will best serve our clients and provide value for our shareholders, balanced growth across asset classes and geographies, and by pursuing selective, synergistic and highly strategic M&A. Looking forward, we continue to follow this playbook. First, we are generating consistent growth from our existing business. Our client-centric mission leads to enviable client retention as well as expansion and expansion opportunities across our advisory, managed account, and commingled fund investors. Second, we are investing in long-term growth initiatives, including data and technology and solutions for the U.S. defined contribution retirement market, where we see potential to replicate the success we are achieving in private wealth.

Third, we may continue to pursue opportunistic M&A with our current focus on acquiring our non-controlling interests at a material discount to our public valuation. We now own 65% of our infrastructure, private debt, and real estate asset classes, and we plan to buy in the private wealth profits interest as soon as we are contractually able. The private wealth buy-in will materially increase adjusted net income by enabling StepStone to capture the full economics of one of our highest growth businesses at a significant discount to our prevailing multiple. We expect this will provide material earnings per share accretion that should only compound into the future. Shifting to fundraising, we generated another double-digit quarter with $10 billion of gross inflows split between managed accounts and commingled funds.

Our private wealth platform generated another record quarter with $2.8 billion of subscriptions, while total private wealth assets surpassed $21 billion, more than doubling the net asset value over the last year. We continue to see a high persistency of investors within our funds, with total platform redemptions under 2% for the quarter. SPRING, our venture and growth equity fund, continues to be a standout. SPRING has tapped into the excitement of the innovation economy, investing in native artificial intelligence companies, AI infrastructure, cybersecurity, energy, aerospace and defense, and yes, even space exploration. We believe the $1.7 billion of SPRING subscriptions this quarter included an elevated level of inflows.

While the pace of subscriptions may normalize, we expect SPRING will continue to generate a healthy rate of ongoing subscriptions and that our overall private wealth platform will generate a strong level of annual inflows consistent with the pace we highlighted at the beginning of this year. I'll now turn the call over to Mike to speak about fundraising, asset growth, and shareholder distributions.

Thanks, Scott. Turning to slide eight, we generated nearly $40 billion of gross AUM additions over the last year, our best 12-month period ever. This fundraising was split evenly, with approximately $20 billion coming from each of managed accounts and commingled funds, including private wealth. Of the managed account additions, $9 billion, or 45%, came from a combination of new accounts or the expansion of existing accounts into new asset classes or strategies. During the quarter, we generated over $10 billion in gross additions, including approximately $4.5 billion of managed account additions and $5.5 billion of commingled fund inflows. Notable additions to our drawdown commingled funds included a billion-dollar first close in our newest venture capital secondaries fund, $500 million of closes in our infrastructure co-investment fund, $300 million of closes in our private equity secondaries funds, and $200 million of closes in our private equity co-investment fund.

We have also launched the next vintages of our special situations real estate secondaries fund and our multi-strategy growth equity fund, with first closes expected in the coming quarters and activations to follow. Turning to our evergreen funds, we generated $2.8 billion of subscriptions in our private wealth suite of offerings, growing the platform to over $21 billion as of the end of the quarter. As Scott mentioned, SPRING drove nearly $1.7 billion of these inflows in the quarter. S Prime, our all private markets fund, generated over $400 million of subscriptions, while the remaining inflows were split between our private equity, credit, and infrastructure evergreen funds. Additionally, we generated over $500 million of subscriptions in our evergreen non-traded BDC, S-Cred, growing the fund to $2.8 billion. We continue to make progress on expanding our syndicate, with over 800 partners selling StepStone Private Wealth funds.

Among the platforms that have been selling StepStone funds for at least a year, those distributing partners sell an average of two funds. A figure that has steadily increased over time. We view growth in the syndicate and increase in multi-fund adoption as key indicators for the health of our private wealth distribution and of the strength of our deep relationships with our partners in the wealth channel. Slide nine shows our fee-earning assets by structure and asset class. For the quarter, we increased fee-earning assets by nearly $10 billion. The drivers of our growth in fee-earning AUM included record subscriptions in private wealth, activations of commingled funds, new commitments to our drawdown funds, and healthy deployment by our managed accounts.

We activated our two PE secondaries funds in June, which was on the early side of our expected range, resulting in nearly $3 billion of additions to our fee-earning assets. Even with these large activations and steady managed account deployment, we maintain a healthy balance in our undeployed fee-earning capital, or UFEC, of over $39 billion. Strong fundraising in managed accounts and the first close of our venture capital secondaries fund helped to replenish the UFEC balance. The combination of fee-earning assets plus UFEC grew to approximately $193 billion, which is up $9 billion sequentially and is up $37 billion from a year ago. This translates to a 19% annual organic growth rate since fiscal 2022. Consistent with our commitment to communicate forthcoming distributions out of fee-earning AUM, we anticipate an expiration of a managed account of roughly $1.5 billion next quarter.