Good afternoon ladies and gentlemen, and welcome to Stepstone’s Fiscal 2022 Second Quarter Earnings Conference Call. During the presentation all participants will be in listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] 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. Please go ahead..

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

Before we begin, I'd like to remind everyone that this conference call as well as the presentation contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods.

Forward-looking statements reflect management's current plans, estimates and expectations are inherently uncertain and are subject to various risks, uncertainties and assumptions.

Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks, or other factors that are described in the risk factors section of Stepstones most recent 10-K.

Turning to our financial results on Slide 3 for the second quarter of fiscal 2022, we reported GAAP net income of $127.9 million for the quarter ended September 30, 2021. GAAP net income attributable to Stepstone Group Incorporated was $62.1 million.

We generated fee related earnings of $26.4 million, adjusted net income of $40.1 million and adjusted net income per share of $0.40. The quarter reflected retroactive fees resulting from additional closes of Stepstones growth equity fund that contributed $2.3 million to revenue and $2.1 million to fee related earnings and pre-tax adjusted net income.

For comparison to prior years quarter benefited from retroactive fees related to the final closing of Stepstone real estate partners for which contributed $9.0 million to revenue 8.5 million for fee-related earnings and 4.4 million to pre-tax adjusted net income. I now like to turn the call over to Stepstones Co-Chief Executive Officer, Scott Hart..

Thank you, Seth, and good afternoon, everyone. We took positive strides this quarter in both our organic growth and strategic advancement. We generated a strong flow of assets significantly increased the pipeline of future expected fee-earning AUM produced robust earnings and closed on the acquisition of Greenspring associates ahead of schedule.

I'll begin with the Greenspring acquisition, which we closed on September 20. The standalone Greenspring business continue to its exceptional performance through closing, driven by the strength of the platform, the trusted LP relationships that have been developed over time, and continued LP interest in venture capital.

Despite closing well ahead of schedule, the integration is progressing well. We're beginning to operate as one team and already see evidence that our expanded capabilities and venture capital and growth equity are clear differentiator.

Our combined size, network of relationships and access to data is already yielding differentiated investment opportunities, and due diligence insights. We've also received positive feedback from our clients and observed early indications that cross-selling opportunities will exist given the limited overlap in our client base.

Looking at the firm more broadly, as shown on Slide 4, we now manager advise on over half a trillion dollars of assets across the private market.

Our increased global scale widens our moat and creates a significant competitive advantage as a yield unparalleled data, insights and deal flow, while broad scope across private equity, real estate, infrastructure and private debt make us a one-stop destination to solve our clients private market needs.

Shifting to our results on Slide 5, we generated $40.1 million in adjusted net income for the quarter or $0.40 per share up 111% from the prior fiscal year second quarter. We generated fee-related earnings of $26.4 million down 5% from the prior year quarter.

As Seth mentioned, the prior year period included a significant retroactive fee of $9 million, which impacts year-over-year comparisons. This quarter included relatively smaller retroactive fees and 10 days of Greenspring results. Excluding these items fee-related earnings would have been up by 20%.

We finished the quarter with $121 billion of assets under management and $67 billion of fee-earning AUM, which includes $11 billion of fee-earning assets from Greenspring. Excluding the acquired assets, we've organically grown fee-earning AUM by 25% over the last 12 months.

We've been operating largely in a virtual environment for most of the last year. But encouraging trends on declining COVID cases and a growing number of administered vaccinations have enabled us to resume in person activities.

I'm pleased to report that we've reopened a vast majority of our offices globally, allowing our teams to reunite after nearly two years and in some instances, meeting face-to-face for the first time.

We've grown dramatically over the last couple of years and over that time, we have leveraged technology to onboard new employees and collaborate across teams. Ultimately, there is no substitute for in-person connections.

And I am excited about what these interactions mean for innovating on our clients' solution, the development of talent and the strengthening of our firm culture. Shifting to shareholder distributions, I'm pleased to announce that we've increased the quarterly dividend to $0.15 per share and more than doubling of our prior dividends.

The increase is a result of our recent earnings growth and our confidence in the sustainability of our run rate is also reflective of our capital efficient business model, which enabled us to fuel a robust level of organic growth, while still paying out a healthy portion of earnings to shareholders.

In September, we celebrated one year as a public company. Our public listing enabled us to broaden our equity ownership among our employees provide the means to attract and retain talent, elevates our brand globally and serves as a valuable currency to help grow our business as we demonstrated with the acquisition of Greenspring.

We're proud that since our IPO, our stock has delivered returns to our shareholders well above the market's return, I want to thank the entire Stepstone team for their hard work and dedication.

Finally, before I hand the call over to Mike, I'd like to take a moment to acknowledge the announcement that we issued earlier today, that our Co-Founder and Co-CEO, Monte Brem will be transitioning to Executive Chairman as of January 1 or remaining Chairman of our Board of Directors now become sole CEO.

This transition is the natural next step in a succession plan that has been carefully planned and communicated over the last several years. Nevertheless, it does provide an opportunity to look back and reflect on the successful firm that results over time.

Monte clearly laid the foundation for our success with his vision to build a global private markets investment firm, established a collaborative and entrepreneurial culture. We couldn't be more excited about the opportunity to build off that foundation, while continuing to benefit from Monte's vision and mentorship as Executive Chairman.

With that, I will turn it over to Mike McCabe..

Thank you, Scott. On behalf of all the Stepstone’s employees and its board of directors, a big thank you to Monte Brem for his vision and leadership as Stepstone Founding Partner and congratulations Scott as our new CEO. The future could not be brighter.

But that said, I am pleased to report, we generated $18 billion of gross AUM inflows in the last 12 months with 2 billion coming from our commingled funds, and 16 billion in separately managed accounts.

Turning to Slide 7, in addition to the growth we generated organically, consummation of a Greenspring acquisition contributed an additional $23 billion of assets under management, and $11 billion of fee-earning AUM.

These figures include interim closing for Greenspring venture capital secondary funds, which added 1.9 billion of assets for the quarter and exceeds our expectations from when we announced the deal. Our asset growth was strong across structure and asset class.

Within commingle funds, we had an initial close of a private equity coinvest fund north of $500 million. In addition, we had an interim flows for the Stepstone Tactical Growth Fund 3 and our private debt funds for the quarter.

Subsequent to the end of the quarter, we had our final close to the Tactical Growth Fund 3, which finished with over $690 million in commitments, well above the $240 million size of its predecessors. We generated strong growth in our separately managed accounts across asset classes.

Momentum is exceptional from international clients, which we anticipate will continue to fuel AUM growth for the considerable future. We continue to enjoy very strong reappraise for all asset classes, which account for about three quarters of our gross AUM and managed account additions over the last year.

Strong reappraised our testament to the incredible stickiness that of faction and loyalty of our current clients. Furthermore, we are successfully extending these relationships to include mandates across new strategies and asset classes, while also developing new relationships for the firm.

To continue to make progress in our evergreen product key prime, our private markets fund for accredited investors, including individuals. Key prime hit the one-year mark on October 1, the fund has achieved a remarkable 59% net return for investors since its inception on October 1 2020, and as an AUM is $270 million as of November 1.

We are very pleased with the near-term progress from this program and continues to be excited about the long-term. Moving to Slide eight, we grew fee earning AUM by over $2 billion in the quarter, excluding the impact of the Greenspring acquisition.

We also had a significant jump in our undeployed fee earning capital, which is up over $4 billion in the quarter nearly 18 billion. Growth in our dry powder reflects the simultaneous requests among several existing relationships and includes approximately $0.05 billion from the Greenspring acquisition.

This is our highest undeployed balance on record and continues to provide healthy runway for the future. Growth in assets is inherently lumpy. So we think it is most productive to look at the trends over a longer term basis, where we have consistently delivered robust growth.

Over the last 12 months, we grew fee earning AUM by 25% excluding the impact of acquisitions and over the last 3.5 years, we've delivered a new organic compounded annual growth rate of 30%.

Slide 9 shows the evolution of our management and advisory fees, which have more than doubled from $140 million for fiscal 2018 to over 300 million in the last 12 months.

While there is minimal impacts from Greenspring this quarter, we have started showing earnings and revenue trends on a per share basis to normalize the impact of M&A and illustrates the growth realized for shareholders. Over the last three and a half years, we have grown fee revenue per share by a 25% CAGR.

Switching to the table on the bottom of the page, the blended fee rate of 51 basis points is relatively flat compared to the last couple of years.

If you look at the individual components, you'll notice a decline in the 4 million fee rate which is primarily a function of the $9 million of retroactive fees, and here again commingle real estate fund a year ago, have positively impacted the fiscal 2021 fee earning. Underlying pricing by asset class and fund place remains very stable.

As a reminder, the acquired Greenspring assets are heavily weighted toward commingled funds, which tend to earn a higher fee rate and separately managed fund. As a result, we anticipate the blended fee rate will rise a few basis points, as we benefit from the full period of Greenspring fees.

And with that, I'd like to turn the call over to Johnny Randall to discuss our financials in more detail..

Thank you, Mike. I like to turn your attention to Slide 11 to touch on a few of our financial highlights. For the quarter we generated fee related earnings of 26.4 million, pre-tax adjusted net income of 51.8 million, adjusted net income of 40.1 million and A&I per share of $0.40.

Included in the quarter was 10 days of contribution from Greenspring, which added 2.3 million management and advisory fees and 1 million of fee-related earnings. Greenspring acquisition also resulted in an additional 1.7 million weighted average adjusted share.

Greenspring earnings were accretive given the short stub period did not move the needle this quarter on EPS. Our FRE margins for the quarter 32% down 500 basis points year-over-year as mentioned earlier, we benefited from significant retroactive fee in the year ago period.

Normalizing for these retroactive fees and the impact from Greenspring, FRE margins would have been 29% in the current quarter, which are even with the year go period.

Gross realized performance fees were 56.1 million for the quarter, reflecting the continued positive market environments driven by strong underlying investment performance and it's the same level of robust realization activity.

Slide 24 in the appendix provides quarterly and last 12 month trends of net performance fees and illustrate material step up in net realizations over the last four quarters. The next few slides display underlying revenue and earnings growth year-over-year and over the longer term. We show the numbers on both an absolute and per share basis.

Others minimal difference in the growth rates this quarter. The absolute dollars presented in the bar will begin reflecting the benefits of a full period of the Greenspring acquisition next quarter. As we move forward, the per share measure will account for the impact of M&A and represent growth realized for shareholders.

I'll start with revenues on Slide 12, we are growing revenue per share about 69% in the first half of the fiscal year by 32% compounded annual growth rate over the longer term. Revenue growth is driven by a strong trajectory and fee-earning assets and exceptional growth in realized performance fee.

Shifting to our profitability on Slide 13, we have grown fiscal year-to-date fee-related earnings per share about 6%. This comparison includes the impact and the unusually large retroactive fees in the same period in the prior year. Over the last three and a half years, we've achieved a CAGR of 48% in fee-related earnings per share.

Our long-term fee-related earnings growth rate [indiscernible] of our management and advisory fees, demonstrating the operating leverage in our model. We've grown adjusted net income per share by 138% year-to-date, and by 46% over the longer term, reflecting the positive progression of FRE and strong realized net performance fee.

Moving to the balance sheet on Slide 14, gross accrued carry continues to increase driven by strong underlying investment performance in the quarter at over 1.2 billion which was up 13% in the prior quarter and was 150% over the last 12 months despite an exceptional level of realizations over the last year.

As a reminder, our realized performance fees that our income statement in the period they occur, changes in our crude carry balance reflects our share of the unrealized gains or losses of our clients portfolios on our one quarter lag.

On the bottom chart, our own investment portfolio ended the quarter at 90 million up 8% from the prior quarter and 66% of the same quarter in the prior year reflecting both market appreciation and net contribution. Unfunded commitments to these programs are 72 million at the quarter end.

We managed a large pool of over 48 billion and performance fee eligible capital as capital is widely diversified across approximately 140 programs as of September 30. 65% of our unrealized carry of [indiscernible] programs with benches of 2016 or earlier.

Assuming that these programs are harvesting model, 62% of the sunrise carry source from vehicle to deal by the waterfall being realized carry will be payable at the time of investment exit. A quick comment on the liability portion of the balance sheet, we used a small amount of debt to fund the portion of the Greenspring acquisition.

As of the end of the second fiscal quarter, we have drawn a little over 110 million against our line of credit on which we pay a 2% spread on top of LIBOR.

This is a relatively modest amount of leverage and the line of credit gives us flexibility on top of our significant normal cash flow generation to support growth initiatives, including future GP commitment. This concludes our prepared remarks and I will now turn it back over to the operator, open the line for any questions..

Thank you. [Operator Instructions] Our first question comes from the line of Ken Worthington with JPMorgan..

Maybe two. First on C-prime, the returns are absolutely outstanding. But I'm really interested in the sort of the continued build out of distribution in the product.

Now that you're above 250 million, what sort of doors are open in terms of new distribution opportunities? And do you see as the milestone in assets that would drive further access to distribution for that product given how strong the returns are? And then, what are the products that C-prime is sort of coming up against like who are the intermediaries sort of stacking that product up against.

Anyway, thank you..

Hi, Ken. This is Jason. Thanks for the question. So, as we've spoken about before, as we reach the size, additional doors here in the U.S. are definitely opening we're in diligence with a couple of the wires now. So excited about that progress.

The RAA community were up over 80 approved platforms on C-prime, as well as a number of IBDs here in the U.S., starting to get more material traction and some of the larger allocators outside the U.S. as well, over the last month or so.

And then, we did have a one-time channel opened up in Mexico for us with a list of vehicle in Mexico, that buoyed this fundraise for this past month. In terms of the comp set, there are a number of other funds, mostly concentrated around private equity.

I think that, again, two differentiators that we've called out before, one, this product is accredited investor eligible, many of the other ones are not they are focused on the qualified client or qualified purchaser here in the U.S.

So higher standard and two our ability to deploy outside of private equity and really deliver an all private market solution, as opposed to a private equity only solution is a pretty material differentiator relative to the peer set. But most importantly, thank you for noting the performance. That's the clear and away differentiator.

Congrats go to the wider stepstone team for what they've been able to deliver for this product..

Great. Thank you. And the undeployed fee earning management 17.8 billion clearly continues to grow. I think you guys invested around 1.4 billion this quarter, it suggests that you would get through that pipeline in the next three years at this current pace of investment.

It's clearly a fabulous environment, if we remain in this fabulous environment does three years actually -- is that even possible to work through this pipeline or their products, I'm sorry, structures or contracts that would drive this pipeline to be sort of mandatory to be invested over a longer period of time, like four or five years?.

Again, this is Scott, thanks for the question. I think we've always talked about the pipeline of undeployed fee-earning capital as being deployed really over probably three to five years time period.

And I think you're right and I think in an environment like the one that we operate in today, it would be likely that that may be more like a three year time period.

I would not expect it to be any faster than that you're less so are structural reasons more, because from a vintage geo diversification standpoint, we have continued to be quite focused on making sure that we were properly diversifying across vintage years.

And really liked the fact that the flexibility to go out over five years means that there's no rush to invest the capital, we can be patient, we can continue to have the same selective approach that we have employed to-date even in an environment like the one that we operate in into this.

And hopefully, the idea is that we continue to replenish that undeployed fee-earning capital over time as additional re-ups or new opportunities come about..

Our next question comes from the line of Alex Folstein with Goldman Sachs..

Congrats, Scott. I was hoping we could start maybe with a question around Greenspring. Scott, you mentioned that your integration continues to unfold really nicely, despite obviously, the fact that the deal closed a little bit out of schedule.

So can you give us a sense of maybe some recent trends that Greenspring is seeing in their standalone business, so maybe, flows in the September quarter, and anything they have in the hopper kind of coming up from a product perspective.

And then combined, if you look at the two companies together, what is the main focus here from a distribution perspective? How do you expect to sort of accelerate their standalone growth, which obviously has been pretty strong?.

First of all, thanks, Alex. Appreciate that. And on Greenspring, a couple of things. Again, you heard it say that we continue to be very encouraged by the performance even on a standalone basis between signing and closing. You heard reference to the fundraising progress across the venture capital secondaries fund.

And so in particular, I think we've been encouraged by just the continued interest, not only in venture capital in general, but I think particularly some of the strategies at Greenspring has sort of been active in and it's really established the leadership position.

And I think when you combine knew that with the -- really the combination with stepstone, the enhanced flywheel effect, clearly the fact that the interest in those funds that are in market continued through the announcement through the closing of the merger suggests that, investors really understand the combination and the benefits that there off.

I think as we think about the distribution channels going forward, look, I think there's a real opportunity there in the sense that you've heard us talk on prior calls about the tech, there's not a tremendous amount of overlap between our LPs today, particularly some of the very large relationships that StepStone has been able to develop with pension funds, sovereign wealth fund international investors, we think that just further expands the toolbox, allowing us to create even more innovative solutions and solve more problems for those clients.

I think really tapping into one another's investor base as we move forward here..

Okay, got it. Thanks. And then my second question really, is around the cash flows and the kind of evolving nature of carried interest that's running through the P&L.

Now, we've seen multiple quarters now where incentive fees, performance fees continue to come in well out of expectations [indiscernible] growing and obviously, given the environment, presumably, there will be more and more to come on that.

So, as you thinking about uses of cash from here, dividend increase helps very nice, but what are your thoughts around either more acquisitions or opportunities to buy minority stakes from the real estate and for our credit team?.

Yes, I think your question, and thanks for it. It is a broad kind of capital management question that I think we can unpack in a couple of different ways. First and foremost, we are highly focused on maintaining a capital efficient business model, which is supported by a flexible and capital effective -- cost effective capital structure.

So at the moment, we're basically looking at a number of priorities. First as Johnny mentioned, we threw down a little over $110 million from our revolver to help fund the acquisition of Greenspring. Now, even though this represents a modest leverage ratio, our intention is to pay down the revolver overtime. So that is a source of cash going forward.

But this in turn creates a very flexible capital structure that allows us to be nimble and opportunistic in what appears to be a very healthy M&A environment, while managing our working capital needs. I think the third use really is to continue to fund the general partner.

We are currently in market as I mentioned in the call with the co-investment fund will be coming back to market shortly with some other larger funds, in addition to layering on all of the Greenspring funds. So being sure we have the capital available to fund the GP adequately is a priority.

For us, as you mentioned, we've doubled our dividend, which reflects a payout ratio largely aligned with our peers.

And lastly, we plan to continue to invest in the business for growth, whether it's data, technology, distribution, product development, we feel we've created this optimal flexibility with our revolver, with our capital structure, with our payout ratio. And I think you'd expect us to do more of the same going forward.

From a capital management standpoint, our priority is to maintain a very efficient business model, and a very cost effective capital structure..

[Operator Instructions] Our next question comes from a line of Michael Cyprys with Morgan Stanley..

And congratulations, Scott on the expanded role. I just wanted to circle back to retail topic here.

I guess what catalysts do you think or kind of think about on the horizon that can help accelerate growth for the product, just given the strong performance that it's put up? Is it more of a three-year tracker that you need but rather than a one-year track record? And maybe you could talk about some of the resources from a sales and distribution team that you're putting to work here and how you're thinking about expanding those sales resources?.

Thanks, Mike. So from an existing team perspective, the team is about 20 strong, largely focused in the U.S. over the foreseeable future. We'll see some expansion here in the U.S. but also starting to build out the European footprint a bit more as well, as we look to expand European capital raising for the C-prime parallel vehicles.

In terms of a catalyst, I think to be honest, I think we've probably crossed the requisite in business for long enough threshold with the one-year worth of activity. I think the size, crossing over the 250 mark and now 275, even, I think also checks the box necessary for most of the platforms out there.

And so as we get through the diligence process with a few more groups, I think you'll start to see the increased rate of raise for this product flow through. So I'm not looking for anything that's outside of our control presently. That's really required for the C-prime product.

And of course, this is our first product, but it won't be our last in the channel. And we'll seek to roll out additional solutions based on channel feedback over time..

Great, and just a follow up question on the undeployed pent up fee earning capital of 17 billion or so that's up about looks like about 3 billion excluding Greenspring here.

Can you just talk about some of the biggest contributors to that increase sequentially? And probably talk about some of the initiatives to expand this top of the funnel? I think you mentioned you're starting to travel again, maybe you could talk about the opportunity to bring new customers in the door..

Sure, thanks, Mike. This is Scott again.

So look, the good news there is, really contribution to the undeployed fee-earning capital, across all four asset classes, across all three strategies and really, through a combination of re-ups expansion of existing client relationships, in whether across asset classes or strategies, as well as some new accounts, but just in order of magnitude and the larger drivers, and we've never provided an exact breakdown, but I'd say this quarter infrastructure and private equity, we're particularly strong contributors there.

And the re-up activity, in particular has been quite strong, I think, just driven by the continued strong performance and appetite from our clients. Yes, this is a particularly strong re-up quarter for us.

In terms of broadening the top of the funnel activities, yes, clearly, our business development team has continued to be active throughout the COVID period. But yet now beginning to travel a bit more internationally, or even on the domestic front, again, with 21 offices around the world feel like we are well positioned.

Even if travel is only taking place on a domestic basis, I'd say there's quite a bit of activity on the new LP new clients front, some of that may not be on the separate account side. I think that is true across our commingled funds, as well.

But we are encouraged by some of the new commitments and new relations we started to establish, especially when you think about the way we've been able to grow those relationships, whether through re-ups or expansion of capital -- expansion relationship over time.

I think with our expanded toolbox, again, now not only across the four asset classes, but with significantly enhanced venture and growth capabilities of late here. I think we have a lot to talk about with our clients..

And if I could just on the re-ups that you mentioned, I guess how much scaling are you seeing from those customers that are coming back and re-upping? Are they scaling in magnitudes of 20%, 30%, 50%? Any help there?.

It’s hard to generalize. I think we see some clients that look at their separate account allegation is something that's just going to be very steady. And so they re-up at the same size, fairly consistently, others may be looking to prove out the concept and once it's proven, may look to double the allocation over time.

So there's no -- it's difficult to generalize in terms of what the growth is, separate account over separate accounts. But they certainly are double-digit growth rate.

And I think we continue to use it to work on the best way to disclose some of the details you're both about, the sketch of it, the re-ups as well as the growth in this account over time..

Thank you..

There are no further questions at this time. I will now turn the call over to Scott Hart. Please go ahead..

Well, great. Thanks everyone for dialing in for your continued interest in StepStone and for the questions and we look forward to continue to keep you updated in future course. Thank you..

That does conclude the conference call for today we thank you for your participation and ask that you please disconnect your lines..