The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and the related notes
included within this quarterly report on Form 10-Q and our audited financial
statements, the related notes, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our annual report on
Form 10-K for the fiscal year ended
Business Overview
We are a global private markets investment firm focused on providing customized
investment solutions and advisory, data and administrative services to our
clients. Our clients include some of the world's largest public and private
defined benefit and defined contribution pension funds, sovereign wealth funds
and insurance companies, as well as prominent endowments, foundations, family
offices and private wealth clients, which include high-net-worth and mass
affluent individuals. We partner with our clients to develop and build private
markets portfolios designed to meet their specific objectives across the private
equity, infrastructure, private debt and real estate asset classes. These
portfolios utilize several types of synergistic investment strategies with
third-party fund managers, including commitments to funds ("primaries"),
acquiring stakes in existing funds on the secondary market ("secondaries") and
investing directly into companies ("co-investments"). As of
We are a global firm and believe that our multi-asset class expertise, local
knowledge, business relationships, proprietary data and technology, and presence
are all critical to securing a competitive edge in the private markets. We
deploy a local staffing model, operating from 23 cities across 14 countries on
five continents. Our offices are staffed by investment professionals who bring
valuable regional insights and language proficiency to enhance existing client
relationships and build new client relationships. Since our inception in 2007,
we have invested heavily in our platforms to drive growth and expand our
investment solutions capabilities and service offerings, including through
opportunistic transactions that have helped accelerate the growth of our team
and capabilities. As of
We have a flexible business model whereby many of our clients engage us for solutions across multiple asset classes and investment strategies. Our solutions are typically offered in the following commercial structures:
•Separately managed accounts ("SMAs"). Owned by one client and managed according
to their specific preferences, SMAs integrate a combination of primaries,
secondaries and co-investments across one or more asset classes. SMAs are meant
to address clients' specific portfolio objectives with respect to return, risk
tolerance, diversification and liquidity. SMAs, including directly managed
assets, comprised
•Focused commingled funds. Owned by multiple clients, our focused commingled
funds deploy capital in specific asset classes with defined investment
strategies. Focused commingled funds comprised
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•Advisory, data and administrative services. These services include one or more
of the following for our clients: (i) recurring support of portfolio
construction and design; (ii) discrete or project-based due diligence, advice
and investment recommendations; (iii) detailed review of existing private
markets investments, including portfolio-level repositioning recommendations
where appropriate; (iv) consulting on investment pacing, policies, strategic
plans, and asset allocation to investment boards and committees; (v) licensed
access to our proprietary data and technology platforms, including StepStone
Private Markets Intelligence ("SPI") and our other proprietary tools, and (vi)
administrative services to unaffiliated investment advisors. Advisory
relationships comprised
•Portfolio analytics and reporting. We provide clients with tailored reporting
packages, including customized performance benchmarks as well as associated
compliance, administrative and tax capabilities. Mandates for portfolio
analytics and reporting services typically include licensed access to our
proprietary performance monitoring software, Omni. Omni tracked detailed
information on over
We generate revenues from management and advisory fees and performance fees earned pursuant to contractual arrangements with our funds and our clients. We also invest our own capital in the StepStone Funds we manage to align our interests with those of our clients. Through these investments, we earn a pro-rata share of the results of such funds and may also be entitled to an allocation of performance-based fees from the limited partners in the StepStone Funds, commonly referred to as carried interest.
Trends Affecting Our Business
Our business is affected by a variety of factors, including conditions in the financial markets and economic and political conditions. Changes in global economic conditions and regulatory or other governmental policies or actions can materially affect the values of the StepStone Funds' holdings and the ability to source attractive investments and completely utilize the capital that we have raised. However, we believe our disciplined investment philosophy across our diversified investment strategies has historically contributed to the stability of our performance throughout market cycles. Furthermore, we operate at scale across all four private markets asset classes and service clients across a broad range of geography, type, and size, which contributes to our operating resilience and mitigates against concentration risk.
In addition to these macroeconomic trends and market factors, we believe our future performance will be influenced by the following factors:
•The extent to which clients favor private markets investments. Our ability to attract new capital is partially dependent on clients' views of private markets relative to traditional asset classes. We believe our fundraising efforts will continue to be subject to certain fundamental asset management trends, including (1) the increasing importance and market share of private markets investment strategies to clients of all types as clients focus on lower-correlated and absolute levels of return, (2) the increasing demand for private markets investments from private wealth clients, (3) shifting asset allocation policies of institutional clients and (4) increasing barriers to entry and growth for potential competitors.
•Our ability to generate strong, stable returns. Our ability to raise and retain capital is partially dependent on the investment returns we are able to generate for our clients and drives growth in our fee-earning AUM ("FEAUM") and management fees. Although our FEAUM and management fees have grown significantly since our inception, adverse market conditions or an outflow of capital in the private markets management industry in general could affect our future growth rate. In addition, market dislocations, contractions or volatility could put pressure on our returns in the future which could in turn affect our fundraising abilities.
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•Our ability to maintain our data advantage relative to competitors. Our proprietary data and technology platforms, analytical tools and deep industry knowledge allow us to provide our clients with customized investment solutions, including asset management services and tailored reporting packages, such as customized performance benchmarks as well as compliance, administration and tax capabilities. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information and our ability to grow our relationships with fund managers and clients of all types.
•Our ability to source investments with attractive risk-adjusted returns. The continued growth in our revenues is dependent on our ability to identify attractive investments and deploy the capital that we have raised. However, the capital deployed in any one quarter may vary significantly from period to period due to the availability of attractive opportunities and the long-term nature of our investment strategies. Our ability to identify attractive investments is dependent on a number of factors, including the general macroeconomic environment, valuation, transaction size, and the liquidity of an investment opportunity. A significant decrease in the quality or quantity of potential opportunities could significantly and adversely affect our ability to source investments with attractive risk-adjusted returns.
•Increased competition and clients' desire to work with fewer managers. There has been an increasing desire on the part of larger institutional investors to build deeper relationships with fewer private markets managers. At times, this has led to certain funds being oversubscribed due to the increasing flow of capital. Our ability to invest and maintain our relationships with high-performing fund managers across private markets asset classes is critical to our clients' success and our ability to maintain our competitive position and grow our revenue.
Current Events
We are continuing to closely monitor developments related to COVID-19,
inflation, rising interest rates and the
Recent Transactions Greenspring Acquisition
On
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Revolving Credit Facility
In
Equity Transactions
In
Organizational Structure
SSG is a holding company and its only business is to act as the managing member of the General Partner, and its only material assets are Class A units in the Partnership and 100% of the interests in the General Partner. In its capacity as the sole managing member of the General Partner, SSG indirectly operates and controls all of the Partnership's business and affairs. Therefore, we consolidate the financial results of the Partnership and report non-controlling interests related to the Class B units and Class C units held by partners of the Partnership in our consolidated financial statements.
Pursuant to the StepStone Limited Partnership Agreement, the Class B Exchange
Agreement and Class
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The diagram below illustrates our organizational structure as of
[[Image Removed: step-20220630_g1.jpg]]
Amounts may not sum to total due to rounding.
(1)The partners of the Partnership other thanStepStone Group Inc. are: •theGeneral Partner , which holds a 100% general partner interest and no economic interests; •certain members of management, employee owners and outside investors, all of whom own Class B units and an equivalent number of shares of Class B common stock; •certain members of management and employees who own Class B2 units; and •certain employee owners who own Class C units. (2)Each share of Class A common stock is entitled to one vote and vote together with the Class B common stock as a single class, except as set forth in SSG's amended and restated certificate of incorporation or as required by law. (3)Each share of Class B common stock is entitled to five votes prior to a Sunset (as defined below). After a Sunset becomes effective, each share of our Class B common stock will then entitle its holder to one vote. The economic rights of our Class B common stock are limited to the right to be redeemed at par value.
A "Sunset" is triggered upon the earliest to occur of the following: (i)
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Key Financial Measures
Our key financial measures are discussed below. Additional information regarding our significant accounting policies can be found in note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report.
Revenues
We generate revenues primarily from management and advisory fees, incentive fees and allocations of carried interest.
Management and Advisory Fees, Net
Management and advisory fees, net, consist of fees received from managing SMAs and focused commingled funds, advisory, data and administrative services, and portfolio analytics and reporting.
•Management fees from SMAs are generally based on a contractual rate applied to
committed capital or net invested capital under management. These fees will vary
over the life of the contract due to changes in the fee basis or contractual
rate changes or thresholds, built-in declines in applicable contractual rates,
and/or changes in net invested capital balances. The weighted-average management
fee rate from SMAs was approximately 0.40% and 0.40% of average FEAUM for the
twelve months ended
•Management fees from focused commingled funds are generally based on a
specified fee rate applied against client capital commitments during a defined
investment or commitment period. Thereafter, management fees are typically
calculated based on a contractual rate applied against net invested capital, or
a stepped-down fee rate applied against the initial commitment. The
weighted-average management fee rate from focused commingled funds was
approximately 0.92% and 0.87% of average FEAUM for the twelve months ended
•The weighted-average management fee rate across SMAs and focused commingled
funds was approximately 0.52% and 0.54% of average FEAUM for the twelve months
ended
•Fee revenues from advisory, StepStone Portfolio Analytics & Reporting ("SPAR"), SPI or administrative services are generally annual fixed fees, which vary based on the scope of services we provide. We also provide certain project-based or event-driven advisory services. The fees for these services are negotiated and typically paid upon successful delivery of services or on the execution of the event-driven service. Because advisory fees are negotiated and typically paid upon successful delivery of services or on the execution of the event-driven service, advisory fees do not necessarily correlate with the total size of our AUA.
•Management fees are reflected net of (i) certain professional and administrative services that we arrange to be performed by third parties on behalf of investment funds and (ii) certain distribution and servicing fees paid to third-party financial institutions. In both situations, we are acting as an agent because we do not control the services provided by the third parties before they are transferred to the customer.
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Performance Fees
We earn two types of performance fee revenues: incentive fees and carried
interest allocations, as described below. Incentive fees comprise fees earned
from certain client investment mandates for which we do not have a general
partnership interest in a
Incentive fees are generally calculated as a percentage of the profits (up to 10%) earned in respect of certain accounts for which we are the investment adviser, subject to the achievement of minimum return levels or performance benchmarks. Incentive fees are a form of variable consideration and represent contractual fee arrangements in our contracts with our customers. Incentive fees are typically subject to reversal until the end of a defined performance period, as these fees are affected by changes in the fair value of the assets under management or advisement over such performance period. Moreover, incentive fees that are received prior to the end of the defined performance period are typically subject to clawback, net of tax.
We recognize incentive fee revenue only when these amounts are realized and no longer subject to significant risk of reversal, which is typically at the end of a defined performance period and/or upon expiration of the associated clawback period (i.e., crystallization). However, clawback terms for incentive fees received prior to crystallization only require the return of amounts on a net of tax basis. Accordingly, the tax-related portion of incentive fees received in advance of crystallization is not subject to clawback and is therefore recognized as revenue immediately upon receipt. Incentive fees received in advance of crystallization that remain subject to clawback are recorded as deferred incentive fee revenue and included in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets.
Carried interest allocations include the allocation of performance-based fees to us from limited partners in the StepStone Funds in which we hold an equity interest. We are entitled to a carried interest allocation (typically 5% to 15%) based on cumulative fund or account performance to date, irrespective of whether such amounts have been realized. These carried interest allocations are subject to the achievement of minimum return levels (typically 5% to 10%), in accordance with the terms set forth in the respective fund's governing documents. We account for our investment balances in the StepStone Funds, including carried interest allocations, under the equity method of accounting because we are presumed to have significant influence as the general partner or managing member. Accordingly, carried interest allocations are not deemed to be within the scope of Accounting Standards Codification Topic 606 ("ASC 606"), Revenue from Contracts with Customers.
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Legacy Greenspring carried interest allocations include the allocation of carried interest to legacy Greenspring general partner entities from limited partners in certain legacy Greenspring funds in which the legacy Greenspring general partner entities hold an equity interest. The legacy Greenspring general partner entities are entitled to a carried interest allocation (typically 5% to 20%) based on cumulative fund or account performance to date, irrespective of whether such amounts have been realized. We account for the investments and carried interest allocations under the equity method of accounting. We do not have any direct economic interests in the legacy Greenspring general partner entities and thus are not entitled to any carried interest allocation from certain legacy Greenspring funds. All of the carried interest allocations in respect of such legacy Greenspring funds are payable to employees who are considered affiliates of the Company and are therefore reflected as legacy Greenspring performance fee-related compensation in the condensed consolidated statements of income. Accordingly, legacy Greenspring carried interest allocations are not deemed to be within the scope of ASC 606.
We recognize revenue attributable to carried interest allocations from a
Carried interest is realized when an underlying investment is profitably
disposed of and the fund's cumulative returns are in excess of the specific
hurdle rates, as defined in the applicable governing documents. Carried interest
is subject to reversal to the extent that the amount received to date exceeds
the amount due to us based on cumulative results. As such, a liability is
accrued for the potential clawback obligations if amounts previously distributed
to us would require repayment to a fund if such fund were to be liquidated based
on the current fair value of their underlying investments as of the reporting
date. Actual repayment obligations generally do not become realized until the
end of a fund's life. As of
Expenses
Cash-based compensation primarily includes salaries, bonuses, employee benefits and employer-related payroll taxes.
Equity-based compensation represents grants of equity related awards or arrangements to certain employees and directors.
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Performance fee-related compensation represents the portion of carried interest allocation revenue and incentive fees that have been awarded to employees as a form of long-term incentive compensation. Performance fee-related compensation is generally tied to the investment performance of the StepStone Funds. Approximately 50% of carried interest allocation revenue is awarded to employees as part of our long-term incentive compensation plan, fostering alignment of interest with our clients and investors, and retaining key investment professionals. Carried interest-related compensation is accounted for as compensation expense in conjunction with the related carried interest allocation revenue and, until paid, is recorded as a component of accrued carried interest-related compensation in the condensed consolidated balance sheets. Carried interest-related compensation expense also includes the portion of net carried interest allocation revenue attributable to equity holders of our consolidated subsidiaries that are not 100% owned by us. Amounts presented as realized indicate the amounts paid or payable to employees based on the receipt of carried interest allocation revenue from realized investment activity. Carried interest-related compensation expense may be subject to reversal to the extent that the related carried interest allocation revenue is reversed. Carried interest-related compensation paid to employees may be subject to clawback on an after-tax basis under certain scenarios. To date, no material amounts of realized carried interest-related compensation have been reversed. Incentive fee-related compensation is accrued as compensation expense when it is probable and estimable that payment will be made.
Legacy Greenspring performance fee-related compensation represents the legacy Greenspring carried interest allocations which are entirely payable to certain employees. Legacy Greenspring carried interest-related compensation is accounted for as compensation expense in conjunction with the related legacy Greenspring carried interest allocation revenue and, until paid, is recorded as a component of legacy Greenspring accrued carried interest-related compensation in the condensed consolidated balance sheets. Legacy Greenspring carried interest-related compensation expense may be subject to reversal to the extent that the related legacy Greenspring carried interest allocation revenue is reversed. However, none of the legacy Greenspring carried interest allocation revenue is attributable to the Company.
General, administrative and other includes occupancy, travel and related costs, insurance, legal and other professional fees, depreciation, amortization of intangible assets, system-related costs, and other general costs associated with operating our business.
Other Income (Expense)
Investment income primarily represents our share of earnings from the investments we make in our SMAs and focused commingled funds. We, either directly or through our subsidiaries, generally have a general partner interest in the StepStone Funds, which invest in primary funds, secondary funds and co-investment funds, or a combination thereof. Investment income will increase or decrease based on the earnings of the StepStone Funds, which are primarily driven by net realized and unrealized gains (losses) on the underlying investments held by the funds. Our co-investment funds invest in underlying portfolio companies and therefore their valuation changes from period to period are more influenced by individual companies than our primary and secondary funds, which have exposures across multiple portfolio companies in underlying private markets funds. Our SMAs and focused commingled funds invest across various industries, strategies and geographies.
Consequently, our general partner investments do not include any significant
concentrations in a specific sector or geography outside
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Legacy Greenspring investment income represents our share of earnings from the investments we make in certain legacy Greenspring funds through the legacy Greenspring general partner entities. We have no direct economic interests in the legacy Greenspring general partner entities. As a result, all such income is reflected as non-controlling interests in legacy Greenspring entities. Legacy Greenspring investment income will increase or decrease based on the earnings of such legacy Greenspring funds, which are primarily driven by net realized and unrealized gains (losses) on the underlying investments held by the funds.
Interest income consists of income earned on cash and cash equivalents, restricted cash and certificates of deposit.
Interest expense primarily consists of the interest expense on the Revolver, as well as the related amortization of deferred financing costs.
Other income (loss) includes foreign currency transaction gains and losses and non-operating activities.
Income Tax Expense
We are a corporation for
Non-Controlling Interests
Non-controlling interests ("NCI") reflect the portion of income or loss and the corresponding equity attributable to third-party equity holders and employees in certain consolidated subsidiaries that are not 100% owned by us. Non-controlling interests are presented as separate components in our condensed consolidated statements of income to clearly distinguish between our interests and the economic interests of third parties and employees in those entities. Net income (loss) attributable to SSG, as reported in the condensed consolidated statements of income, is presented net of the portion of net income (loss) attributable to holders of non-controlling interests.
Non-controlling interests in subsidiaries represent the economic interests in the consolidated subsidiaries of the Partnership held by third parties and employees in those entities. Non-controlling interests in subsidiaries are allocated a share of income or loss in the respective consolidated subsidiary in proportion to their relative ownership interests, after consideration of contractual arrangements that govern allocations of income or loss.
Non-controlling interests in legacy Greenspring entities represent the economic interests in the legacy Greenspring general partner entities. We did not acquire any direct economic interests in the legacy Greenspring general partner entities. As a result, all of the net income related to the legacy Greenspring general partner entities is allocated to non-controlling interests in legacy Greenspring entities.
Non-controlling interests in the Partnership represent the economic interests in the Partnership held by the Class B and Class C unitholders of the Partnership. Non-controlling interests in the Partnership are allocated a share of income or loss in the Partnership in proportion to their relative ownership interests, after consideration of contractual arrangements that govern allocations of income or loss.
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Key Operating Metrics
We monitor certain operating metrics that are either common to the asset management industry or that we believe provide important data regarding our business.
Assets Under Management
AUM primarily reflects the assets associated with our SMAs and focused commingled funds. We classify assets as AUM if we have full discretion over the investment decisions in an account or have responsibility or custody of assets. Although management fees are based on a variety of factors and are not linearly correlated with AUM, we believe AUM is a useful metric for assessing the relative size and scope of our asset management business.
Our AUM is calculated as the sum of (i) the net asset value ("NAV") of client
portfolio assets, including the StepStone Funds and (ii) the unfunded
commitments of clients to the underlying investments and the StepStone Funds.
Our AUM reflects the investment valuations in respect of the underlying
investments of our funds and accounts on a three-month lag, adjusted for new
client account activity through the period end. Our AUM does not include
post-period investment valuation or cash activity. AUM as of
Assets Under Advisement
AUA consists of client assets for which we do not have full discretion to make investment decisions but play a role in advising the client or monitoring their investments. We generally earn revenue for advisory-related services on a contractual fixed fee basis. Advisory-related services include asset allocation, strategic planning, development of investment policies and guidelines, screening and recommending investments, legal negotiations, monitoring and reporting on investments, and investment manager review and due diligence. Advisory fees vary by client based on the scope of services, investment activity and other factors. Most of our advisory fees are fixed, and therefore, increases or decreases in AUA do not necessarily lead to proportionate changes in revenue.
Our AUA is calculated as the sum of (i) the NAV of client portfolio assets for
which we do not have full discretion and (ii) the unfunded commitments of
clients to the underlying investments. Our AUA reflects the investment
valuations in respect of the underlying investments of our client accounts on a
three-month lag, adjusted for new client account activity through the period
end. Our AUA does not include post-period investment valuation or cash activity.
AUA as of
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Fee-Earning AUM
FEAUM reflects the assets from which we earn management fee revenue (i.e., fee basis) and includes assets in our SMAs, focused commingled funds and assets held directly by our clients for which we have fiduciary oversight and are paid fees as the manager of the assets. Our SMAs and focused commingled funds typically pay management fees based on capital commitments, net invested capital and, in certain cases, NAV, depending on the fee terms. Management fees are only marginally affected by market appreciation or depreciation because substantially all of the StepStone Funds pay management fees based on capital commitments or net invested capital. As a result, management fees and FEAUM are not materially affected by changes in market value.
Our calculation of FEAUM may differ from the calculations of other asset managers and, as a result, may not be comparable to similar measures presented by other asset managers.
Undeployed fee-earning capital represents the amount of capital commitments to StepStone Funds that has not yet been invested or considered active but will generate management fee revenue once this capital is invested or activated.
Non-GAAP Financial Measures
Below is a description of our non-GAAP financial measures. These measures are presented on a basis other than GAAP and should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP.
Adjusted Revenues and Adjusted Net Income
Adjusted net income ("ANI") is a non-GAAP performance measure that we present on a pre-tax and after-tax basis used to evaluate profitability. ANI represents the after-tax net realized income attributable to us. The components of revenues used in the determination of ANI ("adjusted revenues") comprise net management and advisory fees, incentive fees (including the deferred portion) and realized carried interest allocations. In addition, ANI excludes: (a) unrealized carried interest allocation revenues and related compensation, (b) unrealized investment income, (c) equity-based compensation for awards granted prior to and in connection with our IPO, (d) amortization of intangibles and (e) certain other items that we believe are not indicative of our core operating performance, including charges associated with acquisitions and corporate transactions, contract terminations and employee severance. ANI does not reflect legacy Greenspring carried interest allocation revenues, legacy Greenspring carried interest-related compensation and legacy Greenspring investment income as none of the economics are attributable to us. ANI is income before taxes fully taxed at our blended statutory rate. We believe ANI and adjusted revenues are useful to investors because they enable investors to evaluate the performance of our business across reporting periods.
Fee-Related Earnings
Fee-related earnings ("FRE") is a non-GAAP performance measure used to monitor our baseline earnings from recurring management and advisory fees. FRE is a component of ANI and comprises net management and advisory fees, less operating expenses other than performance fee-related compensation, equity-based compensation for awards granted prior to and in connection with our IPO, amortization of intangibles and other non-core operating items. FRE is presented before income taxes. We believe FRE is useful to investors because it provides additional insight into the operating profitability of our business and our ability to cover direct base compensation and operating expenses from total fee revenues.
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Adjusted Net Income Per Share
ANI per share measures our per-share earnings assuming all Class B units and Class C units in the Partnership are exchanged for Class A common stock in SSG, including the dilutive impact of outstanding equity-based awards. ANI per share is calculated as ANI divided by adjusted shares outstanding. We believe ANI per share is useful to investors because it enables them to better evaluate per-share operating performance across reporting periods.
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