StepStone Group Inc. (STEP) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance with record fundraising, growth in fee-related earnings, and exceptional investment returns. Despite tempered expectations for future fund sizes, the company's diversified strategy, particularly in AI and private markets, is well-received. The Q&A indicates no significant concerns about private credit and positive sentiment towards growth in key regions. The market cap suggests a moderate reaction, leading to a positive prediction of 2% to 8% stock price increase.
Key Financial Performance
GAAP net loss $123 million or $1.55 per share. The loss was driven by the change in fair value of the buy-in of the StepStone Private Wealth profits interest.
Fee-related earnings (FRE) $89 million, up 20% year-over-year. The increase was due to retroactive fees from infrastructure secondaries and multi-strategy global venture capital funds.
Core fee-related earnings $88 million, up 35% year-over-year when excluding retroactive fees. Core FRE margin remained at 37%.
Adjusted net income $80 million or $0.65 per share, up from $53 million or $0.44 per share in the prior year. The increase was driven by higher fee-related and performance-related earnings.
Gross incentive fees Over $200 million, driven by the SPRING Evergreen fund's growth and exceptional investment returns of 39%.
Gross AUM additions Over $8 billion for the quarter and $34 billion for the calendar year, marking the best 12-month period of fundraising ever.
Private wealth platform Grew to $15 billion with over $2.2 billion in new subscriptions for the quarter. The growth was driven by strong demand for private equity Evergreen funds and other offerings.
Fee revenues $241 million, up 26% year-over-year. Excluding retroactive fees, fee revenues grew by 32%, driven by strong growth in fee-earning AUM and private wealth.
Gross realized performance fees $253 million, comprising $47 million of realized carried interest and $207 million of incentive fees. The increase was driven by exceptional growth and performance in the SPRING fund.
Net accrued carry $875 million, up 4% from the previous quarter. Approximately 65% of the net accrued carry is tied to programs older than 5 years, indicating readiness for harvesting.
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Operating Highlights
SPRING Evergreen fund: Generated over $200 million of gross incentive fees with exceptional investment returns of 39% over the year.
Private equity Evergreen funds: Originated nearly $1 billion of subscriptions across SPRIM and STPEX.
Venture and growth equity fund (SPRING): Generated approximately $1 billion of subscriptions.
STRUX and CRDEX: Momentum continues to grow with a strong value proposition of income, yield, and diversification.
Fundraising: Generated gross AUM additions of over $8 billion in the quarter and over $34 billion for the calendar year, marking the best 12-month period of fundraising ever.
International fundraising: Two-thirds of inflows were from outside North America, particularly strong among institutions.
Private wealth platform: Grew to $15 billion with over $2.2 billion in new subscriptions for the quarter.
Fee-related earnings (FRE): Achieved $89 million, up 20% from the prior year quarter, with a margin of 37%.
Fee-earning AUM: Increased by nearly $6 billion for the quarter, with undeployed fee-earning capital growing to nearly $33 billion.
Adjusted net income: Earned $80 million for the quarter, up from $53 million in the prior year.
AI investment strategy: Positioned as a leading investor in AI, focusing on native AI platforms, hardware, and software companies, as well as infrastructure like data centers and power generation.
Diversified private market solutions: Investing across asset classes and capital structures to capitalize on AI-driven opportunities.
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Risk or Challenges
GAAP Net Loss: The company reported a GAAP net loss of $123 million, driven by the change in fair value of the buy-in of the StepStone Private Wealth profits interest. This accounting requirement negatively impacted earnings.
Retroactive Fees: Retroactive fees contributed significantly less to revenues this quarter ($1.1 million) compared to the prior year ($9.7 million), indicating a potential challenge in maintaining consistent revenue streams from this source.
Realizations Below Long-Term Trends: Realizations as a percentage of accrued carry remain below long-term trends, which could impact the company's ability to generate performance fees.
Fee Revenue Growth Dependency: Fee revenue growth is heavily reliant on private wealth, which carries higher average fee rates. This dependency could pose risks if private wealth growth slows.
Expense Increases: General and administrative expenses increased by $6 million due to events like the StepStone 360 conference, and are expected to remain high in the next quarter due to additional events. This could pressure margins.
AI Disruption Risks: While AI is seen as a value creator, it is also acknowledged as disruptive, potentially creating winners and losers. The company recognizes it is not immune to these risks.
SPRING Incentive Fees Volatility: Incentive fees from the SPRING fund are expected to moderate next year due to normalized investment returns, which could impact performance-related earnings.
International Fundraising Dependency: Two-thirds of inflows are from outside North America, indicating a reliance on international fundraising, which could be impacted by global economic or geopolitical uncertainties.
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Guidance & Outlook
Earnings Trajectory: The company is confident in its earnings trajectory as core fee-related earnings (FRE) continue to grow. An improving capital market environment may potentially yield stronger realizations over the coming year.
Fundraising Outlook: The company expects continued growth in fundraising, with a strong pipeline of commingled funds and managed accounts. They anticipate executing most of the fundraising for their private equity co-investment fund, private equity secondaries funds, and infrastructure co-investment fund over the coming calendar year.
AI Investment Strategy: StepStone is positioned to capitalize on the evolution of artificial intelligence, investing across asset classes and capital structures in areas like data centers, power generation, and AI platforms. They expect AI to drive significant value creation for clients and the firm.
Private Wealth Growth: The company is generating over $2 billion in private wealth subscriptions each quarter and expects to continue growing this base with five fund families in the market and increasing international efforts.
Fee-Earning Capital Activation: The infrastructure co-investment fund and private equity co-investment fund are expected to activate by the end of the first fiscal quarter of 2027. The flagship private equity secondaries fund and GP-led private equity secondaries fund are expected to have first closes in the coming two quarters, with activation shortly thereafter.
Performance Fee Projections: Incentive fees from the SPRING fund are expected to moderate slightly next year, assuming mid-teens investment performance, as growth in asset balances offsets more normalized investment returns.
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Shareholder Return Plan
Supplemental Dividend: Consistent with past practice, the company plans to pay out a supplemental dividend at the end of each fiscal year, subject to Board approval. This dividend is based on performance-related revenues, net of compensation, noncontrolling interest, and profits interest. Through the first three quarters of this fiscal year, the net performance-related earnings have already exceeded the total from all of fiscal year 2025.
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Key Q&A
Q:What is the exposure to software companies across the portfolio, specifically in SPRING and other retail vehicles?
A:StepStone has a diversified approach to private markets investing. Approximately 11% of the total AUM is in software investments, which drops to 7% if venture is excluded. SPRING has leaned into AI opportunities, cybersecurity, and other areas, achieving a 39% performance in a year when public cloud software indices were down close to 30%.
Q:How is StepStone planning to scale its private wealth business and expand distribution?
A:StepStone is in the early stages of building syndicates for funds like STPEX, CRDEX, and STRUX. They expect growth in distribution over the next year but have no announced plans for new product offerings in the next 12 months, aside from feeder funds and specialized funds.
Q:How is StepStone managing inflows into SPRING given its strong performance?
A:StepStone has not faced issues managing inflows into SPRING. The venture and growth team continues to see strong opportunities across the innovation economy, leveraging multiple avenues for deployment such as primary fund investments, co-investments, directs, and secondaries.
Q:Why are expectations for the next vintages of funds tempered despite strong performance?
A:StepStone aims for modest growth in fund sizes to match fundraising with the size of the opportunity. They expect strong re-up activity and growth from new and expanding clients but recognize the competitive fundraising environment.
Q:What is driving SPRING's performance, and how is it structured?
A:SPRING's performance is driven by direct secondaries and primary directs, with 64% of the portfolio in secondaries (mostly direct secondaries) and 34% in primary directs. This approach allows StepStone to target major value drivers in the venture space.
Q:What are StepStone's insights and strategies regarding AI disruption risk in private markets?
A:StepStone has been assessing AI disruption risk and opportunities for years. They focus on portfolio construction, diligence, and working with GPs to develop AI strategies. They also analyze market data to understand exposure and risks, particularly in software.
Q:What regions are driving fundraising subscriptions, and what strategies are popular?
A:Asia, Europe, and the Middle East are key regions driving fundraising subscriptions. Infrastructure is popular in Europe, private credit in Asia and the Middle East, and private equity in Asia and the Middle East.
Q:Has there been any change in discussions or concerns about private credit exposures in the wealth channel?
A:StepStone has not seen significant concerns about private credit exposures. Their multi-manager approach and highly diversified portfolios, with largest positions being sub-1%, have driven interest in their private credit strategies.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on how GPs can minimize AI disruption risk in their portfolios, offering only broad categories like managing existing portfolios and investment selection. Additionally, they did not provide an exact breakdown of SPRING's continuation vehicles versus LP-led investments.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI
AUM
Director
Evergreen fund
FRE
Head
Investor Relations
Officer
SPRING
Slide
StepStone
account addition
account ups
asset class
basis
co fund
company
core
equity co
expansion account
fee incentive
foundation
fund equity
fund vintage
fundraising
incentive fee
inflow
infrastructure co
market solution
markup
point
secondary fund
structure geography
subscription
vintage infrastructure
wealth
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STEP Slides
STEP Report
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