STEPSTONE GROUP LP 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 and data 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
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•Advisory and data 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; and (v) licensed access to our proprietary
data and technology platforms, including StepStone Private Markets Intelligence
("SPI") and our other proprietary tool. Advisory relationships comprised
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.
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 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 such investment
opportunity. A significant decrease in the quality or quantity of potential
opportunities could 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.
Impact of COVID-19
In
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Recent Transactions
Reorganization and Initial Public Offering
On September 18, 2020 , we completed an IPO pursuant to which we issued
20,125,000 shares of Class A common stock at a price of $18.00 per share. We
received net proceeds from the offering of $337.8 million , net of underwriting
discounts of $24.5 million and before offering costs of $9.7 million that were
incurred by the Partnership. We used approximately $209.8 million of the net
proceeds from the offering to acquire 12,500,000 newly issued Class A units of
the Partnership and approximately $128.0 million to purchase 7,625,000 Class B
units from certain of the Partnership's existing unitholders, including certain
members of senior management.
In connection with the IPO, we completed certain transactions as part of the
Reorganization to, among other things, provide for Class A common stock and
Class B common stock; appoint SSG as the sole managing member of StepStone Group
Holdings LLC , the General Partner; complete a series of merger transactions such
that certain blocker entities in which certain pre-IPO institutional investors
held their interests in the Partnership merged with and into SSG, with SSG
surviving, resulting in the pre-IPO institutional investors acquiring 9,112,500
shares of newly issued Class A common stock of SSG; and classify the
Partnership's interests acquired by SSG as Class A units and reclassify the
Partnership's interests held by the continuing partners as Class B units.
See note 1 to our condensed consolidated financial statements included elsewhere
in this quarterly report for more information about the Reorganization and IPO.
In July 2021 , we entered into a transaction agreement to acquire 100% of
Greenspring Associates, Inc. and certain of its affiliates (collectively,
"Greenspring"), for consideration of approximately $185 million in cash,
12,643,556 shares of Class A common stock and 3,114,723 newly issued Class C
units of the Partnership. The transaction agreement also provides for the
payment of up to $75 million of additional cash consideration as an earnout
payment to the sellers, which would be payable in 2025 subject to achievement by
Greenspring of certain management fee revenue targets for calendar year 2024.
Greenspring is a leading venture capital and growth equity platform, and the
acquisition of Greenspring is expected to expand the continued growth of our
private markets capabilities across asset classes and geographies.
Equity Transactions
In March 2021 , we conducted an underwritten public offering of 9,200,000 shares
of Class A common stock, including 1,200,000 shares pursuant to the full
exercise of the underwriters' option to purchase additional shares, sold by
selling stockholders at a public offering price of $29.50 per share. In
connection with the offering, we issued 9,200,000 shares of Class A common stock
to the selling stockholders in exchange for 9,200,000 Class B units. A
corresponding number of shares of Class B common stock were automatically
redeemed at par value and canceled in connection with such exchange. We did not
receive any proceeds from the sale of shares by the selling stockholders.
In June 2021 , we issued 1,898,438 shares of Class A common stock to certain
limited partners of the Partnership in exchange for 1,898,438 Class B units. A
corresponding number of shares of Class B common stock were automatically
redeemed at par value and canceled in connection with such exchange and a
corresponding number of Class A units of the Partnership were issued to the
Company.
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.
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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 and data 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 0.39% and 0.40% of average FEAUM for the twelve months endedJune 30, 2020 and 2021, respectively. •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 0.90% and 0.92% of average FEAUM for the twelve months endedJune 30, 2020 and 2021, respectively, and primarily reflected the timing of new funds and shifts in asset class mix. •The weighted-average management fee rate across SMAs and focused commingled funds was approximately 0.52% of average FEAUM for the twelve months endedJune 30, 2020 and 2021. •Fee revenues from advisory, StepStone Portfolio Analytics & Reporting ("SPAR") or SPI 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. 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 aStepStone Fund . Carried interest allocations include the allocation of performance-based fees, commonly referred to as carried interest, from limited partners in the StepStone Funds to us. As ofJune 30, 2021 , we had over$43 billion of performance fee-eligible capital across approximately 130 programs, of which approximately 90 were in accrued carried interest positions. 38
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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 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.
We recognize revenue attributable to carried interest allocations from a
StepStone Fund based on the amount that would be due to us pursuant to the
fund's governing documents, assuming the fund was liquidated based on the
current fair value of its underlying investments as of that date. Accordingly,
the amount recognized as carried interest allocation revenue reflects our share
of the gains and losses of the associated fund's underlying investments measured
at their then-fair values, relative to the fair values as of the end of the
prior period. We record the amount of carried interest allocated to us as of
each period end as accrued carried interest allocations, which is included as a
component of investments in the condensed consolidated balance sheets.
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 June 30, 2021 and March 31, 2021 , no material
amounts for potential clawback obligations had been accrued.
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. 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 outsidethe United States . Investment income excludes carried interest allocations, which are presented as revenues as described above. Interest income consists of income earned on cash and cash equivalents, restricted cash and certificates of deposit. Interest expense primarily consisted of the interest expense on our previously outstanding debt and related amortization of deferred financing costs and amortization of original issue discount. Other income (loss) includes foreign currency transaction gains and losses and non-operating activities. 40
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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 the Partnership represent the economic interests in
the Partnership held by the Class B 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.
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.
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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 June 30, 2021
reflects final data for the prior period (March 31, 2021 ), adjusted for net new
client account activity through June 30, 2021 . NAV data for underlying
investments is as of March 31, 2021 , as reported by underlying managers up to
115 days following March 31, 2021 . When NAV data is not available by 115 days
following March 31, 2021 , such NAVs are adjusted for cash activity following the
last available reported NAV.
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 June 30, 2021 reflects final data for the prior period (March 31,
2021 ), adjusted for net new client account activity through June 30, 2021 . NAV
data for underlying investments is as of March 31, 2021 , as reported by
underlying managers up to 115 days following March 31, 2021 . When NAV data is
not available by 115 days following March 31, 2021 , such NAVs are adjusted for
cash activity following the last available reported NAV.
Beginning in the quarter ended March 31, 2021 , we modified our AUA computation
to include, with respect to our advisory clients, the portion of their portfolio
assets for which we do not directly provide recommendations, monitoring and/or
reporting services. Prior period amounts have not been recast for this change
because comparable historical data does not exist. The change resulted in an
increase to AUA of approximately $70 billion for the quarter ended March 31,
2021 .
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.
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Undeployed Fee-Earning Capital 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 active.
Key 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 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.
Adjusted Net Income Per Share
ANI per share measures our per-share earnings assuming all Class B 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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Consolidated Results of Operations
The following is a discussion of our unaudited consolidated results of operations for the periods presented. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.
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