StepStone Group Inc.
Q4 2021 Earnings Call Transcript

Published: 15 Jun 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to StepStone's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. As a reminder, this call will be recorded. I would now like to turn the conference over to Seth Weiss, StepStone's Head of Investor Relations.

[Seth Weiss:]

Thank you, and good afternoon, everyone. Joining me on the call today are Scott Hart, Co-Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategic; and Johnny Randel, 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.

[Scott Hart:]

Thank you, Seth and good afternoon, everyone. I hope everyone is staying healthy and well. Before I get started, please join me in welcoming Seth Weiss who recently joined us as our Head of Investor Relations. We're thrilled to have him onboard. Our last 12 month represented our busiest year ever at StepStone. Turning to Slide Four, we conducted over 4200 meeting with GPs, reviewed over 3200 investment opportunities, helped facilitate over $50 billion of private market capital allocation and added $11 billion of fee earning assets under management, marking our largest you're ever of total deployment and growth of fearing AUM. We're optimistic about the outlook as we've stepped into the new fiscal year.

[Michael McCabe:]

Right, Thanks Scott. Now turning to slide 8, as Scott mentioned our asset footprint has reached $427 billion, reflecting our ability to execute on a global growth strategy. Turning to slide 9, as we laid out during the last quarter we have six strategic priorities designed to drive growth. One, continue to grow with our existing clients; two, add new clients globally; three, continue to expand distribution for private wealth clients; four, leverage our scale to enhance operating margins; five, monetize our data and analytical capabilities and lastly, pursue accretive transactions to complement our existing platform.

[Johnny Randel:]

Thank you Mike. Moving on to Slide 14, to touch on a few of our financial highlights. Our financial performance for the quarter and the fiscal year was driven by continued strong growth in fee earning AUM, margin expansion and strong realized performances. We generated fee related earnings at $21 million in the quarter and $89.5 million for the fiscal year. Pre-tax adjusted net income of $29.2 million for the quarter and $110.03 million for the year and earnings per share with $0.25 for the quarter and $0.87 cents for the year. Our FRE margin for the quarter is 28%. Approximately 400 basis points versus the prior year quarter and our FRE needs have already margin with 31% for the fiscal year up about 500 basis points as a previously mentioned retroactive fee had a positive impact on both the current quarter and the fourth quarter fiscal 2020. Normalizing for these items that show an even greater year over year improvement in this quarter's FRE and FRE margins the expense things that then FRE including increase in cash compensation both sequentially and year over year. A portion of the increase sequentially relates to annual salary increases, which occurred at the beginning of the calendar year and increases in headcount. However the majority of the sequential quarter change in cash compensation relates to elevated bonuses in the period. The increase was driven by strong financial performance leading to higher accruals as well as the alignment of the timing of bonus payments, But then certain asset classes to our fiscal year end that change from calendar year timing. General and administrative expenses net of non-core items increased $5.9 million from the prior quarter, the increase primarily reflects ongoing investments in our infrastructure and other general operating costs. Additionally, since the IPO in September we have also seen the continued layering in of expenses associated with being a public company which also impacts prior year comparisons. Gross realized performances were $25.1 million for the quarter and $73.1 million for the year, realized performances can fluctuate significantly in any given quarters. So we believe a longer term view on performances is more appropriate. Slide 26 in the appendix, provides quarterly and last twelve month trends or net performances. Finally, a comment on the effective tax rate reflected in ANI, The current quarter's results of an effective tax rate of 15%, reflecting a true-up to a blended statutory rate of 22.6% for fiscal '21. This is the decrease in the 25% rate that had been previously used. The new blended statutory tax rate reflects our updated state apportionment of income based on our most recently filed tax return.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. . Our first question is from Ken Worthington with JPMorgan. Please proceed.

[Kenneth Worthington:]

Hi. Good afternoon. Thanks for taking my questions. Maybe first stepson deployed a lot of previously underplayed capital in the quarter in the estimate business. Is that pace of deployment continuing or likely to remain elevated here. And how much pent up demand is there to invest capital as the global economy continues to recover from COVID?

[Scott Hart:]

Sure Ken. This is Scott. Thanks for. Thanks for the question. Look I think you are correct to point out that we did have a nice increase in earnings AUM. as a result of some of the un-deployed fee-earning capital. And I think to understand what drove that know it's actually important to think back to the prior quarter where we did have quite a strong quarter for new fundraising that led to a nice increase in both AUM. and un-deployed fee-earning capital. This quarter we did see a significant portion of that convert into fee-earning AUM. It was actually a combination of both deployment and some activated accounts that were signed up in the prior quarter but not activated and therefore not be paying until the quarter ending March 31. The deployment was really driven by I would say the private debt and private equity asset classes in particular. I think we continue to see strong levels of activity there really across the different investment strategies and are also encouraged by some of the recovery that we're seeing in infrastructure activity and real estate while its track a bit it's slower is also coming back there the team is quite active in evaluating new opportunities. So that's what I would say on deployment, I would just circle back to my comment on activated as it's not something that we discussed on prior calls this is not something that we will see frequently in quarters going forward but may happen from time to time. Typically, when we've had a commingled fund, that has a first close prior to the predecessor fund being fully invested and so therefore has a delay in activating or where we have a separate account that pays on committed capital and maybe signed up in one quarter up not happened not activated until the subsequent quarter and so there was a combination of factors that drove that that jump and fee-earning AUM this quarter.

[Kenneth Worthington:]

Got it. Okay. Crystal clear. And then secondly love to hear more about C prime. How many platforms is C prime on at this point and how are the addition of the new platforms coming the product seems offer seems awesome. And I was running is anything holding back sales on these platforms like is there sort of like an education of underlying advisors that you have to go through anything else sort of preventing these just this product from being a huge and growing even more quickly than it is thus far?

[Scott Hart:]

Thank you Ken. And as we head into it guided rate. So in terms of the number of platforms we are Investment Committee approved on about 50 platforms today and so that and that growth has been pretty steady each month as we go through the process. Obviously the diligence process that each RIA, Independent Broker Dealer, Wire or international platform is a bit different. And then once we are IC approved or the related improvement depending on the platform, we usually see an education process that can last anywhere from a few weeks on the on the near term to call it two to three months on the on the long term depending on the platform from an education perspective. But no impediments that the enthusiasm has been great and to be honest has been increasing with the platforms we've been talking to and as the as the Navy has grown it makes it an easier conversation with more platforms that look for a minimum size.

[Operator:]

Thank you. Our next question is from Adam Beatty with UBS. Please proceed.

[Adam Beatty:]

Right, Good afternoon. Thank you for taking the questions. First I want to hone in a little bit on the fee rate appreciate all the disclosure and it looks like the non-PE asset classes had a nice improvement in fee rate over the past fiscal year. And just trying to pass that out a little bit more in terms of what the main driver was. Is it asset class mix or is it more about account type within the non-PE asset classes and how much of that was the retroactive fees where you did provide some additional detail?

[Scott Hart:]

Thanks, sure Adam. Thanks for the question. This is Scott, I'll start on that question I might ask Johnny Randel to just jump in with a bit of additional detail if needed but I think on your specific question around the increase in the fee rate for the real estate infrastructure and private debt asset classes, I think part of that's going to be driven by the final closing in the fund raising for our commingled product in the real estate business commingled product in the real estate business and as you can see from the chart on Page 12 of our presentation there is a different rate across commingled funds and SME, the commingled funds had a higher fee rate. So some of that is mixed shifts, but I would maybe just call it John if you jump in on that point there

[Johnny Randel:]

That is right Scott. There's nothing to add but it is that that subsequent close on the real estate coming on fund that drove that increase you're seeing.

[Adam Beatty:]

And if I could just one more on actually among the strategic priorities, one of them is monetizing the data and analytics capabilities. Forgive me if you've commented on that in the past I missed a little bit. Obviously, it’s important to the core franchise in terms of just driving additional contributions and effective deployment. But just wondering if there's anything where that you're contemplating where those capabilities might be monetized more directly to the income statement. Thank you.

[Scott Hart:]

Sure. Jason do you want to jump in again. Sure.

[Jason Ment:]

So in terms of how we think about monetizing the technology platform, today licensing access to Spy which is our front end investment decision tool or Omni which is the back end portfolio monitoring tool or other value added tools that we've built on top of those things, think about things like ESD dashboards for clients, these are still newer initiatives today but certainly active. In terms of the tools that we built and the technologies that we've built on top of the data, some of those are able to attract differentiation in our solutions or to drive differentiation in our solutions. So for example the interaction of our pacing tool and our daily valuation engine and cash management optimization tools enable us to deliver better risk adjusted returns and deliver on the promise of liquidity for something like sea prime and the mass affluence space or for the potential target date opportunity when that arises here in the U.S. Or as another example, very data-driven analysis to put together capital efficient rate of note structures for insurance companies.

[Scott Hart:]

The next I would say is that by granting access to the technology solutions as a value added service, we're able to secure and retain asset management opportunities whether that be in the commingled or SMA arena and then obviously because of the homegrown technology stack that we've built and own ourselves and it's not purely outsourced, there'll be future embedded options in how we use that technology in the future and how that will adapt.

[Operator:]

Our next question is from Alex Blostein with Goldman Sachs. Please proceed Greg.

[Alex Blostein:]

I was hoping to build a little bit on Ken's question around deployment. So seems like you guys are obviously able to replenish the deployed -- the unemployed capital that had yet to turn on feet spread fairly quickly. As you look out over the next couple of quarters and years and I guess Scott given your comments around pretty robust deployment activity, can you help us think about how quickly you expect some of that and deploy capital to come into the management fee run rate. And I guess in addition what's the fee rate associated with that sort of $14 billion future opportunity of deployment.

[Scott Hart:]

I'll start there and then maybe Johnny you can come in on the final question around the fee rate on the remaining $14 billion there. But I think the reality is the answer to that question hasn't changed much. I think the investment period across many of the accounts that are embedded in that $14 going of undeployed capital tend to have a three to five year investment period that is the time period that we would expect to invest the capital over. I think that gives us sufficient flexibility to make sure that we are being patient and disciplined. Looking in a market environment that has been very active but is also one that is characterized as having full valuation. So I think one of the things that that we are spending a lot of time talking about today and year is rather cheap as well as really kind of picking your spot where you want to be deploying and oftentimes that is in areas that you feel are in your core areas expertise or where you have a competitive advantage and certainly for StepStone, we talk a lot about the fact that our advantages are in the sourcing as a result of the platform that we've built and the amount of capital that we are allocating into the private markets as well as the due diligence benefits as a result of the data and the network of relations that we have. So I think we'll continue to look for those spots where we can really leverage the interesting deal flow coming on the platform as well as the differentiated insights that we have. Maybe John if you want to finish up on the question around the fee right there.

[Johnny Randel:]

Yeah. Thanks Scott. I think given that that undeployed amount is across a number different strategies and different asset classes, when you sort of look at the blended rate it's not meaningfully different than what we're seeing overall. So the impact on the fee rate will depend on which of those strategies and asset classes deploy. But generally speaking it's not materially different than what we're seeing at a consolidated rate now.

[Alex Blostein:]

That makes sense. And then maybe shifting gears to operating leverage which again, when you guys went public a big part of the story was obviously expansion of the fee-related margin over the next couple of years given where some of your peers are in the space maybe just a quick update on how you expect fee related margin to evolve over the next year to two years given the fact you're quite busy obviously fund raising deploying the economy is opening up so presumably there'll be a little bit more travel and things like that.

[Michael McCabe:]

Hey Alex this is Mike here. Thanks for the question. It is it's an area of focus and something we continue to look at very carefully as we've talked about in prior quarters. We are striving to balance this growth versus profitability scale. And as Scott mentioned in his opening remarks we enjoy quite a bit of operating leverage over the last year as we had record fundraising year across the board. And so we expect to see the operating leverage of the organization continue to tick up in the short medium and certainly long term. But we always caveat that with a reservation to continue to focus on opportunities to invest in growth but we're pleased that we were able to drive margins north while having an exceptional year from a development standpoint as well.

[Operator:]

Thank you. Our next question is from Michael Cyprus with Morgan Stanley. Please proceed.

[Michael Cyprus:]

Thanks for taking the question. Maybe just coming back to the base capital deployment just given the rapid pace that you guys are putting capital to work maybe you could just talk a little bit about how that informs your outlook for fundraising. How is that top of the funnel progressing? And can you just elaborate a bit more on the fundraising outlook.

[Scott Hart:]

I think in terms of how the top of the funnel is progressing I think exactly to you to the prior point I made around the deal flow and interesting opportunities that are coming across the platform I think we continue to see a number of interesting opportunities that is across that strategy. I think if I look for example in the private equity business each of the primary fund invest in business secondary business and co-invest in business have been particularly active over the last couple of quarters maybe driven by different reasons. But again no shortage of deal flow. We're really focused is again maintaining discipline and being very selective about which opportunities we ultimately pursue. It probably has resulted in certain cases in an inability to come back to market for certain for certain either separate accounts or commingled funds on a slightly accelerated basis. But I think we remain much focused on maintaining vintage advantage year diversification. I think frankly one of the things that we've seen across the private markets are a number of managers returning to market quite quickly. I think we are mindful of wanting to build portfolios that are diversified from a vintage year standpoint. And really even early in the Coben crisis as we were communicating with the management teams and looking at which portfolios were most heavily impacted they were those that had concentrated positions in the wrong company industry or vintage year. So again I think particularly coming out of that go a crisis here we remain quite focused on making sure that we are disciplined from a vintage year standpoint. That being said I think on the fundraising side we continue to be in market with our venture and growth fund as well as for our private debt vehicles and have also earlier this year launched our private equity co-investment type vehicle as well. All generally according to plan from a timing standpoint great and just maybe on performance fees you have nearly 900 million or so in accrued incentives there yet to be recognized. How should we think about the timeframe of those coming through the panel and realization and what sort of magnitude could one expect over the next one to three years.

[Michael Cyprus:]

Would you say?

[Scott Hart:]

Sure. I mean I'll start then I might just ask Johnny to jump in as well because in addition to the accrued performance fees and you've also seen a bit of an uptick in some of the realized performance fees and that that's largely driven by some of the same factors that we've mentioned in prior quarters we've really seen an environment where all exit routes are open whether the public markets strategic gaming activities certainly financial buyers activity amount of dry powder in the market as well as some new exit rules that have emerged. And so are you seeing a pickup in realized performance fees. But Johnny out of you look we certainly in terms of the go forward is difficult to predict quarter to quarter but maybe John if you want to point to some of the aging of those vehicles and how we think about the performance fees on a go forward basis.

[Johnny Randel:]

Yeah I think what we've tried to do on some of the pages 17 18 in the deck is to give you some sense of how that program's how the programs are diversified and then the accrued amounts what's tied to programs that are in harvesting mode. So on page 18 we talk about the 7% of that accrued amount is tied to programs of 2015 vintages or earlier. So those are the ones that we're largely seeing the exits out of and Scott mentioned we don't control that so quarter to quarter is certainly hard to predict but we are seeing a good performing portfolios start to mature on exit as we would expect. We've got track record detail in the back seat and kind of see how that performance has trended but we’re going to be dependent on the markets the ability to exit and we’re doing our best to try and disclose at least some sense of where we think is likely to occur more recently than not and I think you mentioned that roughly was a two thirds or American style or so waterfalls. Is that similar sort of mix applied to that 2015 and earlier vintages as well so we haven't put that number out there but because we have had thankfully strong performance on some of our more recent vintages but we're still trying to settle the right disclosure. That's helpful but we don't have a number out there that ties to 64 percent of that kind of American style waterfall to the vintage but we'll give that some thought okay.

[Operator:]

Thank you. This concludes the question and answer session and I'd like to turn the call back to Scott Hart for closing remarks.

[Johnny Randel:]

Great. I would just thank everyone for participating in the call today and for your continued interest in StepStone and we look forward to keeping you updated in future quarters.

[Operator:]

Thank you. John. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation. Have a great day.