StepStone Group Inc.

Greetings, and welcome to StepStone Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Seth Price, Head of Investor Relations. Thank you, sir. You may begin.

Thank you. Joining me on the call today are Scott Hart, Chief Executive Officer, Jason Ment, President and Co-Chief Operating Officer, Mike McCabe, Head of Strategy, and Johnny Randall, 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 contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods and our plans for future dividends. 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 and actual dividends declared 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 most recent 10-K. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. In addition, 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 filings with the SEC. Turning to our financial results for the third quarter of fiscal 2023, we reported a gap net loss of $13.6 million. The gap net loss attributable to Stepstone Group Incorporated was $6.9 million. We generated fee-related earnings of $42.7 million, adjusted net income of $31.2 million, and adjusted net income per share of 27 cents. The quarter had no impact from retroactive fees. This compares to retroactive fees in the third quarter of fiscal 2022 that contributed $1.2 million to revenue and $1.1 million to fee-related earnings and pre-tax adjusted net income. Before turning to Scott, I'm excited to announce that we will hold our first Investor Day on Tuesday, June 6th in New York. We've grown and evolved since our initial public offering two and a half years ago, and we look forward to covering our progress and introducing several of our key business leaders who are instrumental in driving our growth. We will share further details as the event approaches. I'll now hand the call over to StepStone's Chief Executive Officer, Scott Hart.

Thank you, Seth, and good afternoon, everyone. We delivered strong performance in the calendar year 2022. That is true whether you look at the investment performance we generated for clients, which continued to outperform the public market equivalents, or the solid financial results we delivered for our shareholders. Turning to those financial results on slide five, we earned $31 million in adjusted net income for the quarter, or 27 cents per share. This is down from $49 million, or 42 cents per share, in the third quarter of last year, driven entirely by lower performance fees, for which realizations are dependent on capital market activity. Importantly, our fee-related earnings continue to grow at a strong and steady pace, reflecting the durability of our core business, while our balances of accrued carry and investments remain strong. For the quarter, we generated $43 million of fee-related earnings, up 16% versus the prior year's quarter. This earnings growth is driven by strong capital formation and continued deployment across asset classes, geographies, and commercial structures. We finished the quarter with $134 billion of assets under management and $83 billion of fee-earning assets. The diversification of our platform and the specialized nature of our offerings give us a critical edge, particularly in today's environment. Given our position as one of the largest investors in the private markets, I would like to take a moment to speak to the market environment and how we are positioned. As we are all aware, 2022 was a challenging year for capital markets. While private assets are not immune to broader market pressures, they have generally fared significantly better than their public equivalents. Examining major events that spurred past cycles, including the dot-com bubble, the global financial crisis, and COVID, private markets experienced only a fraction of the peak-to-trough public market drawdown. Yet, in each of these cases, private markets captured 100% or more of the subsequent recovery. This asymmetric risk capture is a key feature that drives private assets' outperformance, and StepStone is well-positioned to take advantage of opportunities in any market environment. Specifically, our extensive toolbox across primaries, co-investments, and secondaries enables us to play offense or defense by partnering with the best managers in the highest quality investments. Dividing back to the current environment, we are observing softer fundraising compared to the elevated activity over the last several years. However, demand for secondaries as a means to capture discounts and co-investments as a cost-effective access point remains robust. In secondaries, industry-wide deal activity topped $100 billion in 2022, trailing only the record volumes from 2021. We anticipate the coming year's volumes to remain strong. As a reminder, StepStone is a leader in secondaries with active commingled funds and managed accounts in private equity, venture capital, infrastructure, private debt, and real estate. Our capabilities and secondaries are critical in delivering strong returns, particularly in challenging markets, and have been key to our ability to launch private wealth products. Secondary volume naturally lags primary capital raises and is also a function of investments currently in the ground. Private market fundraising has averaged well over a trillion dollars a year since 2016, which compares to an average of just over $500 billion in the six years prior. while unrealized private asset values stand at approximately $10 trillion, or roughly double the value from just three years ago. With more assets available to trade, the backdrop for secondaries is very promising. On LP-led deals, the accelerated fundraising cycle from the last several years, combined with a slower pace of distributions and declines in public market valuations, have resulted in some being over-allocated to private markets. We expect this will lead investors to utilize the secondary market to rebalance their portfolios. On GP-led deals, secondaries are no longer just a mechanism for managers to restructure legacy funds. Top quartile managers are increasingly looking to the secondary market and continuation vehicles to capture future value from high conviction assets. Moving to co-investments, this remains one of the few ways to mitigate fees in the private markets without sacrificing quality. As a result, LP demand continues to be very high. The key to success is a strong, high-quality sourcing funnel to allow for discriminating asset selection combined with our superior data, due diligence insights, and underwriting capabilities to drive better investment decisions. Shifting to trends by asset class, in private equity we expect to see a growing divergence between those who have maintained discipline and those that have simply been riding the market tailwinds. Tougher capital market conditions have led to a moderation in deployment and a less favorable exit environment. We are starting to see evaluation correction across certain sectors, coupled with slowing buyout transaction activity in response to market uncertainty and wide bid-ask spreads. Given the historical relative outperformance of down-market vintages, we believe private equity investments made in the coming years will prove to reward those with available capital. Furthermore, we expect that the denominator effect may catalyze a pickup in LP secondary buying opportunities with favorable discounts, while general partners may look to generate liquidity in a challenging exit environment through GP-led secondary transactions. In venture capital, performance of public technology stocks has been among the worst in the market, and headlines of tech layoffs appear to be a daily occurrence. Despite the day-to-day volatility of the public tech sector, venture capital has proven to be a durable sector given its ability to capitalize on long-term structural growth trends. Great companies are created in all market cycles. The best vintages of venture capital performance came during the aftermath of the global financial crisis in the early 2010s and after the recession of the 1990s. We believe the next few years will provide a highly attractive entry point. Furthermore, the venture capital secondaries market is becoming much more active. There are well over a trillion dollars of unrealized venture assets and vintages from 2018 and earlier, which we anticipate will spur an acceleration in VC secondary deal flow. We have the largest venture secondaries fund in the market today, and we believe we are well positioned to continue to benefit with future funds. This interest in venture and growth equity is shared by our clients. Last week, we hosted our Venture Capital Annual Meeting, where we had nearly 400 clients attend. While venture portfolios have been impacted, there is growing optimism about the go-forward investment opportunity. Moving to private debt, we generated positive returns in 2022, and the environment remains favorable. The defensive characteristics such as cash income, senior positioning the capital structure, and conservative underwriting makes the asset class an all-weather investment strategy. Further, given primarily floating rate payments, our private debt offering provides protection against rising interest rates. We expect industry-wide deployment opportunities may moderate as less M&A volume and a slower pace of refinancing impact volumes. But our ability to dynamically pivot allocations among sponsors allows for consistent deployment, thereby reducing the cash drag and improving total returns. Real assets have proven to be resilient through market cycles. Many infrastructure and real estate cash flows are linked to inflation, providing a hedge against one of the biggest market risks today. We have products in both asset classes that are purpose-built for the current environment. Infrastructure has been our fastest growing asset class in the last 12 months, and that growth has come without the benefit of a flagship commingled product. We are now in market with our first infrastructure commingled co-investment fund, for which demand has been very healthy. In real estate, manager-led secondaries present a unique opportunity in today's environment. As debt matures, equity gaps are likely to catalyze recapitalizations of high-quality assets. This is an area in which we thrive. We are currently in market with our flagship real estate product, which is a special situation manager-led secondaries fund. We expect attractive opportunities to deploy capital from this fund in the current environment. I'll now turn the call over to Mike McCabe to speak about StepStone's fundraising and fee-earning asset growth in more detail.