StepStone Group Inc.

Thanks, Mike. Turn to slide 12. We earned fee revenue of $271 million, up 27% from the prior year quarter. The increase was driven by growth in fee-earning AUM across the platform, with particularly strong growth in commingled funds across both drawdown and evergreen funds. Fee-related earnings were $106 million, up 30% from a year ago. FRA margin was 39% for the quarter, both on a reported and adjusted basis after normalizing for retroactive fees. Shifting to expenses, adjusted cash-based compensation was $117 million. This is up from last quarter's $111 million. The increase reflected the impact of our annual merit increase, which took effect April 1st, as well as headcount growth. The cash compensation ratio adjusted for retroactive fees was 43%. Adjusted equity-based compensation was $7 million. Both the cash compensation ratio and adjusted equity-based compensation are in line with the expectations we set out on our year-end earnings call and our good run rates to use for the remainder of the fiscal year, understanding there could be some variability quarter to quarter. General and administrative expenses were $42 million, up $10 million from the prior year quarter. About $3 million of the increase reflects platform distribution fees related to our private wealth funds, which are running at roughly $5 million per quarter. These expenses are charged on a trailing basis of private wealth NAV at certain distribution partners. We expect this expense to generally grow in line with private wealth assets. Gross realized performance fees were $30 million for the quarter and $16 million net of related compensation expense. As a reminder, performance fees can be episodic quarter to quarter, and we generally do not control the pace of realizations. Our investment performance continues to be strong, supporting our growing backlog of future carry. Sticking with performance fees, we are on pace for another strong year of private wealth incentive fees driven by spring returns. These incentive fees will be recognized in our fiscal third quarter, consistent with spring's annual crystallization at the end of December. Spring has delivered extraordinary results over the first half of the calendar year, generating 23% net returns, supported by several significant value creation events. While we do not view these exceptionally strong returns as typical, We believe SPRING is a durable fund that benefits from our robust sourcing efforts and broader StepStone flywheel to generate attractive performance over time. As we track SPRING's results, we may see more near-term volatility than usual from public market valuation movements. As private markets investors, we actively and prudently manage the exit of public positions in the ordinary course, subject to contractual lockups and market conditions. Importantly, because SPRING's performance fees crystallize annually at the end of December, investors in the fund are not charged performance fees based on intra-period movements and underlying valuations. Taken together, adjusted income per share was $0.48, up from $0.40 in the prior year quarter, driven by growth and fee-related earnings. Moving to key items on the balance sheet, on slide 13, Net accrued carry finished the quarter at $935 million, up 19% from a year ago. Our net accrued carry is relatively mature. Over 70% are tied to programs that are older than five years, which means that these programs are ready to harvest. Our own investment portfolio ended the quarter at $363 million. This concludes our prepared remarks. I'll now turn it back over to the operator to open the line for any questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 1-1 again. And the first question will come from Brennan Hawkin with BMO. Your line is open.

Hi, thanks for taking my question. Sorry, I couldn't find the mute button. Mike, you spoke to a bunch of the moving pieces in UFVC, but my question is, when we think about some of those moving pieces and some of those adjustments, could you walk us through what the impact would be on the fee rate here in the quarter? Given how much fundraising and how much AUM grew, the transition into base fees wasn't quite as as I would expect, and I thought maybe timing might be part of it. Thanks.

So maybe a few different comments there. Thanks, Brandon, for the question. I'll start just kind of generally talking about UFEG, how we see that converting into fee-earning AUM and the likely fee rates there. Maybe then David can kind of comment specifically on what you saw in the quarter, and maybe if you're doing sort of a point-to-point estimate there, why it may not have looked exactly as expected there. But look, as we think about, you know, UFEC, that'll continue to be a pipeline of future fear and AUM growth for us still stands at $39 billion. We mentioned there was about $3 billion of activations during the quarter with some of the additional fundraising, you know, right back up to $39 billion. And there's probably still about $3 billion that needs to be activated. The remaining $36 billion will be subject to deployment. and if we look at the average fee rate across that you know that that that UFEC number today it is generally in line with you know our overall fee rate so as that's deployed wouldn't expect you know a major change there but again maybe over to David to comment on the specific quarter and the timing of some of the commingled fund activations.

Yeah I think if you look back you know over the last year or so you've seen a steady progress increase in the average fee rate right and that was largely due to the mixed shift from SMA to commingled funds driven by not only the fundraising for commingled funds, but the growth in private wealth assets. Last quarter, we had mentioned in our prepared remarks that we did have a change in the fee structure for our PE secondaries and GP-led secondaries funds, and that the impact would result in a relatively muted growth in the average fee rate. That's exactly what you're seeing right now. As the As we raise capital and we activated the secondaries funds in June, you're going to see a little bit of fee pressure just from the lower fee rate offset by growth in private wealth assets. So I think what we had mentioned was you should expect to see the communal fund fee rate stay relatively flattish over the next few quarters to a year as the secondaries funds continue to fundraise. And once that is fully raised, then you should see the resumption of the progress in fee rates as private wealth assets grow and as the fee rate steps up for the secondaries funds.

Got it. Okay, thanks for running me through that. And then you touched on this a bit in your prepared remarks. The strength in spring is really remarkable, and you touched on some of the excitement it's tapping into, including space exploration. Now that there's a decent sized position that is public in that fund, can you walk through what we should expect as far as tracking of performance of that public equity and translation into Springs performance and how maybe a little bit of extra texture around the management of that position that you touched on briefly in your prepared remarks? Thanks.

Yeah, thanks, Brent. I'll start, and Jason may jump in here as well. But I think the first time I make is, look, I think this fund spring is not about any one company or small group of companies. There's over 2,000 positions in the fund. There's about 75 or so that drive Thank you for joining us. Thank you for joining us. with the recent trading down in that position as well as continued fundraising and markups across the portfolio. That position is now more of a mid-teens-ish position down from sort of its peak there. But to your point, as it begins to come off lockup, look, our view is as a private markets investor, it is not our job to be long-term holders of public positions. And so we will look to We will look to exit in an orderly way, but trying to manage that on behalf of the investors in the fund. And so stay tuned in future quarters here, but certainly will introduce some level of volatility into the performance as a result of the public positions, but something that can be managed going forward. Thanks for that, Keller.

Thank you, and the next question is going to come from Ken Worthington with JP Morgan. Your line's open.

Hi, good afternoon, and thanks for taking the question. Maybe first, talk about the buyout of the profit interest in the private wealth business. There were a couple of short reports this quarter expressing concern about, one, the amount of stock likely to be issued to the management team, and two, the cash portion of the raise. So how do you think about managing the lockup expirations sort of in the following three years post the buyout? Anything you're thinking about to just make sure the stock price is sort of stable if and as those shares come to market. And then on the cash side, clearly you're not concerned given the special dividend, the buyback and the increase in the regular dividend. But can you talk about what you've put into place thus far, what you're thinking about in terms of managing that cash portion? Are you going to increase the size of the revolver? Are there any things that you've done in preparation that you could share with us?

Thanks, Ken. It's Mike here. Maybe I'll start with the cash portion. Maybe ask Scott to talk a little bit about your first part of the question with respect to the potential overhang as the lockups expire on the equity portion of the buy-in. But in terms of capital management priorities, clearly our near-term focus is preparing for the buy-in of the profits interest. associated with the private wealth platform. And as a reminder, the structure provides a lot of flexibility, including the ability to fund up to 75% of the consideration in stepstone equity with a balance, as you point out, Ken, being funded in cash. I think also it's worth revisiting more broadly that from a philosophical standpoint, our capital management approach remains unchanged. And yet we operate a capital A business and our first priority is to invest in growth. Beyond that, we look to returning capital to shareholders while maintaining flexibility for strategic initiatives like this one. I think given the upcoming cash requirement associated with the buy-in, we have a couple of options available to us. You know, beginning with cash on hand and cash generating from the business. And as part of that, we will certainly continue to evaluate what the appropriate level is and timing of discretionary choices like the capital return and including future share repurchases. We did certainly signal strength in the prepared remarks here with the buybacks that we have completed so far. We're going to certainly revisit that as we prepare for the buy-in of the private wealth platform, as well as we'll revisit all options are on the table here with respect to discretionary spend, including the annual supplemental dividend, as you know, is tied to performance fees. And lastly, I think we also have a very strong track record in the capital markets. and currently maintain an investment grade rating from Kroll, which is supported by the debt private placement and revolver we put in place a couple of years ago. And you can expect that we will certainly reaccess the capital markets to fund the additional cash portion that is required above and beyond what we have on hand and what we can extract from our operating cash flows. and then I would just say historically we've taken a pretty conservative approach to leverage and you can expect that to continue. The incremental earnings associated with a private wealth buy-in should provide meaningful capacity for us to fund a decent portion of the cash consideration with debt while maintaining conservative leverage ratios. But with that, I'll maybe ask Scott to touch on how the lockups will expire and some of the thoughts around there.

Ken, as you mentioned, we have the ability to fund up to 75% of the purchase price in the form of step stock or units there, 30% of which are tradable immediately, the remainder of which is locked up over a three-year period. Look, in a lot of ways, it resembles the same types of lockups that the management team had at the time of the IPO, resembles the types of lockups that that the management team had post the Greenspring acquisition, similar to some of the lockups that our asset class teams have as we continue the buy-in of the asset class interest. So something that has been part of our playbook, both in terms of making sure to generate alignment of incentives, but also to help in terms of the orderly potential sell-down of those interests over time. Obviously, this one has the potential to be sizable, but I think that past experience gives you a sense for the orderly fashion in which we will look to manage it going forward.

Great. And maybe just as a follow-up, Mike, You mentioned a couple of times wanting to maintain sort of a conservative leverage position. What does that mean? Like how conservative? Clearly, the more debt you use to finance this, the more creative the buyback or the buy-in becomes. What's your comfort zone in terms of what is a conservative leverage position?

I think the bellwether that we're looking to inform that decision really revolves around the rating that we receive. We're currently, as I mentioned, enjoying an investment grade rating A+. And I think we're going to start that as our opening position and see how far we can go in the debt capital markets while maintaining that strong investment grade rating. And I think that's really our starting point, Ken.

Perfect. Thank you.

Thank you. and the next question will come from Ben Budish with Barclays. Your line is open.

Hi, good evening and thanks for taking my question. David, in your prepared remarks you talked a bit about distribution fees coming in from the Wealth Channel. As I recall in the past when this sort of became a bigger narrative for some of the bigger public peers, you were sort of It didn't impact you guys as much, I think, for a variety of reasons. So I'm curious, it doesn't sound like it's anything that's accelerating, but just curious if anything has changed recently, if the mix of distribution between RIAs and wires or U.S. versus international has changed, or any other implications we should think about as we think about your longer-term margin profile. Again, sounds like you've indicated that 5 million should grow with the Wealth Platform, but any other things we should be thinking about from that perspective?

Yeah, happy to answer that. Look, like we said, these trail fees are largely tied to private wealth assets. We're not concentrated in any single channel. We're nicely distributed between wires, RAs, and IBDs. So again, it's going to depend on any given period on which channel raises the assets. Some carry a higher fee than others. Some carry no fees. So it's really going to depend. But generally speaking, I think it's fully baked into our run rate, that $5 million we had disclosed in the prepared remarks. And so I think the best assumption is as the wealth assets grow, you can assume that $5 million will continue to grow along with it.

All right, helpful. And then maybe just curious if we could check in on some of the newer kind of tech and index initiatives to partnership with Footsie Russell and Kroll and PitchBook. I think some of this you started monetizing around the end of last year, but just curious if you could give us an update, you know, receptivity and update from clients, anything like that. Thank you. Thanks, Ben.

There's no material update across the partnerships, although I'm pleased to report that we are starting to see adoption rates starting to tick up across the three partnerships we have in place with Footsie Russell, PitchBook, and Kroll. We're not at a certain scale yet where you'll start seeing a specific line item flow through the P&L under advisory revenue, but we're pleased with the way Okay, great. Thank you, Mike.

Thank you, and our next question will come from Mike Brown with UBS. Your line is open.

Okay, great. Good afternoon. You guys recently adjusted the fee structure on the Flagship PE Secondaries Fund, as you mentioned earlier. Just curious a little bit about what you're seeing in terms of feedback from LPs as you've kind of gone out there with the newer terms. have you noticed any maybe broadening in terms of participation levels in this first close relative to prior vintages when you've been out fundraising in that fund?

Yeah, thanks for the question. This is Scott. So, look, it's hard to point to any one thing in terms of what is driving the activity and the fundraise, but would say that we are off to a very strong start there, probably ahead of expectations, certainly ahead of where we were last time around with this commingled fund. So again, whether you point to the fee rate, whether you point to the performance, the quality of the platform or the overall market opportunity, and there does continue to be significant interest in the secondaries market more broadly, hard to point to any one thing, but it is resulting in a and a successful fundraise for us here. You heard Mike talk during the prepared remarks about the fact that we had activated the fund ahead of schedule and that's across both of the flagship private equity secondaries fund as well as our GP-led secondaries fund as well here. So again, good receptivity, continued good interest. If you've seen some of the first half, Statistics come out about the secondaries, Mark. The first half was another record first half and on pace for what very much looks to be another record year. Yet at the same time, there's not a tremendous amount of dry powder, only about a year's worth of dry powder that's available in the market there. We think very well positioned there. Just to put a couple of additional numbers on it, with Some smaller closings that we had during the quarter, that took the private equity secondaries fund to somewhere in the $2.5 billion range. The GP-led fund, around $300 based on what had been raised to date, and with incremental closings post-quarter end, continued progress there, so making very good progress.

Okay, great. Thanks for the color on that. Want to ask a little bit about the accrued carry here. So it's reached roughly $935 million. And I know that nobody has a kind of crystal ball in the near term, but over 70% tied to programs older than five years. So any color about maybe how investors should think about the pace of how that will convert into realized performance revenue near term would be very helpful. But, you know, maybe just over the next couple of years would also be helpful. Thank you.

Yeah, so look, maybe I'll step back and just spend, you know, a few seconds on the broader realization, you know, activity that we're seeing across the market, which obviously then plays into the performance-related earnings and realized carry over time here. You know, Thank you for joining us. But there have been some positive signs of life there. Certainly, GPs are looking to generate liquidity on behalf of their LPs, but are also trying to optimize their exits. And so one of the comments you've heard me make really probably over the last couple years at this point is that a lot of the realization activity that you do see is results in partial realizations as opposed to full realizations. And so whether that's through a continuation vehicle, a minority sale, the divestiture of a division, selling to a strategic but receiving stock in return that needs to be exited over time, there have been a number of different forms of partial realizations that we've seen. and, you know, what that can mean in some cases is that it may not always translate into carrier performance fees if, you know, those funds that have a European, you know, have not returned cost plus preferred return on that individual company. And so I think we're seeing a little bit of a disconnect right now between some of the improving realization activity that hasn't yet flown through in terms of carry. We do think that is starting to improve. We've seen a number of announced full exits, some of which will come through in the coming quarters. I think there's a strong pipeline of that activity as well. But as you say, difficult to predict. We don't have a crystal ball, and we don't control the exits in a lot of cases. I think as you move forward a couple of years and certain vehicles that have a European waterfall move into carry-paying mode, that's when you may see a more consistent flow of realized performance earnings over time.

Okay, got it. Thank you so much for the call.

Thank you. And the next question will come from Alexander Blosene with Goldman Sachs. Your line's open.

Hey, good afternoon. This is Anthony on for Alex. Maybe just on spring, just given the high concentration of SpaceX, how is this kind of affecting how clients and advisors are thinking about the product today? And what are your expectations on gross flows and redemptions over the next few months?

Thanks, Anthony. Jason here. So as Scott noted earlier, concentration SpaceX actually has muted a bit over the last quarter or so down to a mid-teens position. So clearly demonstrating our confidence in the power law where venture-backed companies, you know, a select few drive the majority of the returns, but no longer what we would think of as, you know, an outsized position by any stretch. In terms of the go-to market, as we talk about spring, whether that's two quarters ago, a quarter ago, a year ago, or tomorrow, we've never sold it as access to a single company or even a select group of companies. It's designed to be access to a diversified portfolio of venture assets. obviously with, again, a focus on the power law. And as Scott mentioned earlier, 75 companies driving 75% of the NAV. In terms of the redemption activity, obviously, heretofore, it's been very, very low. And as we talk to the channel partners that are actively allocating to Spring, have allocated in the past or are contemplating onboarding it now, We continue to hear a lot of excitement not about the names everybody knows but really about the names that are going to be the companies of tomorrow that people are talking about. And that's consistent with the venture and growth sector for as long as we've been active in it. It's always about the companies of tomorrow not the companies of today. In terms of future redemption activity, we're not hearing any pent-up demand for redemption. We always, with all of the evergreen funds, plan for and manage the portfolio in anticipation of maximum redemption per quarter or biannually, depending on which fund we're talking about, so that we're prepared from a liquidity perspective. and in terms of future flows, we continue to see high activity at the top of the funnel and spring in particular adoption into additional model portfolios. So continue to be very bullish on what we'll see going forward. Again, as we mentioned in the prepared remarks, last couple of quarters were definitely outsized. Again, we weren't marketing it as access to one or even a handful of specific companies, but you can't control activity out in the market. But interest continues to be quite strong.

Got it. That's helpful. Maybe staying on the evergreen topic, I believe the international exposure in your evergreen funds is fairly low. So how are you thinking about expanding distribution overseas?

Yeah. So we have added dedicated personnel within territories that are fully focused on the wealth channel, and we've built that out over a half a dozen plus territories internationally today. The vast majority of their activity is around getting on platform as opposed to calling on advisors, right? And so as that kind of activity level balances out toward calling on advisors, rather than calling to get on platforms, we'll start to see a much more material uptake in terms of the funds. The second point that I'd make is we have really focused on enhancing brand awareness in different markets internationally through targeted outreach, not just calling campaigns but advertising and the like.

Got it. Thanks, guys.

Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. The next question comes from Michael Cypress with Morgan Stanley. Your line is now open.

Great. Thank you. Good afternoon. Thanks for taking the question. Maybe just staying with private wealth. Clearly, this has become arguably one of the biggest growth engines for StepStone. So as you think out three to five years Curious what becomes the limiting factor in your view to sustaining this multi-billion dollar quarterly inflows that you've been putting up?

We don't see a limiting factor to being able to keep that multi-billion pace up into the future. The TAM is quite high. Penetration is very low. and these funds, in addition to being well-tuned for the high net worth and mass affluent markets, are also very likely going to be component parts of our solution for 401 , which represents an equally large and less tapped market today.

Great. And then, just as a follow-up question, Historically, you've monetized your investment expertise through management fees and carry. But as you brought in the business with data analytics technology through some of the various partnerships, FTSE, Kroll, PitchBook that you mentioned earlier, I guess to what extent do you envision those becoming more meaningful business lines? Maybe you can help frame what success looks like. for these data businesses, and maybe you could speak to some of your initiatives and steps you're looking to take there to help drive an inflection over the next 12, 24 months.

Thanks, Mike. This is certainly playing the long game in many ways, but the data that StepStone is sitting on is probably the deepest, broadest, and largest data set in the industry across all the asset classes and strategies The partnerships that we've put in place have really been done so with a very long-term view. Starting with Footsie Russell, in many ways, to Jason's point, as we start migrating into defined contribution, whether it's 401k or Scott pointed out model portfolios as another channel for us, we think benchmarking tools and analytical tools are going to be table stakes. for accessing some of these markets. And we believe the FTSE STEP suite of indices will become into focus and a priority for asset allocators, particularly in that segment of the market as you think about how to figure out transparency and governance and benchmarking returns, particularly in the retirement market. You know, the industry has relied heavily over the years on this quarterly lagged and benchmarking tools that we don't think are sustainable over the long term. So I think what we're creating with FTSE Russell is very long term. But I think the big economic model that I think we're all curious to see whether or not we can unlock is if some of these indices that we're creating with FTSE Russell could have an asset management solution wrapped or attached to it. So stay tuned for more thoughts there. certainly the PitchBook partnership is an exciting one for us that will enable Jumbo Partners and other members of the asset class to analyze performance at the deal level, not just at the fund level. So how managers can start benchmarking their returns by portfolio company in a specific GIX code or sector or geography, enterprise value or entry multiple, all of those deal level data points are now going to be available to the general partner community and other service providers to really assess how performance can be measured with transparency in the marketplace. And last but not least, given all of the attention that private credit has received over the last year or so, the partnership that we've created with Kroll provides a variety of users in the industry how to better understand measuring risk at the loan level, not at the fund level data points. So all three we think set StepStone up to be the leading source of truth when it comes to data and technology in the private markets.

Great. Thank you.

Thank you. And the next question will come from John Dunn with Evercore. Your line is open.

Thank you. Maybe just thinking about some of the newer strategies you guys have in private wealth. Can you talk about how your early experiences are tracking towards your prior experiences and maybe kind of openness to acceptance and potential for platform expansion domestically?

Thanks, John. I think that if you look at the adoption curve, we kind of call it the day zero asset raise curve with S prime going first. If I look at each of the successive funds, every single one of them is at or above the S prime adoption curve today. and really has been from inception of each of those funds. So there is no doubt that there is a benefit in this channel of having built the brand and the trust relationship starting with S Prime that has helped us with each of the successive funds. If I look at our lived experience from a cross-sell perspective, multi-fund adoption perspective, Mike touched on it in the prepared remarks that we now average two funds per platform if the platform's been with us for at least a year. That number has definitely crept up over the last number of quarters. So we're very happy with the evidence of the relationship that we've built, that trust relationship we've built with each of our partners as evidenced by that. and if we look at the number of platforms, again, looking at that seasoned universe of they've been with us for more than a year, we're now over 50% of those platforms have adopted at least two funds with a growing number of platforms adopting three, four and even five funds with us.

Got it. And then maybe on the institutional side, Any geographies you kind of point to seeing accelerating demand or any shifts in strategy preference?

Thanks, John. Yeah, so I think if you look at it over either the last quarter or the last 12 months, a couple things. One, U.S. stands out as an area of strength, but some of that is driven by private wealth, which we've touched on. So if I exclude private wealth and focus on what you asked about institutional, the three broad geographies that stand out over both the last quarter and the last 12 months are the U.S., Thank you for joining us. It's a namely private credit and infrastructure, both some very strong separate account re-ups, but also strong fundraising across certain of our commingled vehicles there, things like infrastructure co-investments, things like our S-CRED fund. And then if I think about Asia and Australia, there has probably been a bit more of a mix. Some of it is commingled fundraising, particularly in private equity across both co-investments and secondaries. And then in Australia, in particular, continued growth in separate accounts in areas like infrastructure. So, again, no one geography driving anything. Different drivers that are resulting in those three broad geographic regions standing out over the last 12 months, but hopefully some of that color is helpful there.

Thank you.

Thank you. I am showing no further questions at this time. I would now like to turn the call back over to Scott for closing remarks.

Well, great. Well, thank you for your time today. I hope everyone enjoys the rest of their summer, and we'll look forward to updating you again next quarter. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.