Q2 2022 StepStone Group Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to step stones fiscal 20 twenty-two second quarter earnings conference call. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at anytime during the conference you need to reach an operator. Please press star zero as a reminder, this call will be recorded.
I would now like to turn the conference over the Seth Weiss step stones head of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone.
Join me on the call today are Scott Hart.
Executive Officer, Jason Man, President and Chief operating Officer.
Mike Mccabe had a strategy and Johnny Randall Chief Financial Officer.
During our prepared remarks, we will be referring to a presentation, which is available on our investor Relations website at shareholders got steps down group dotcom.
Before we begin I'd like to remind everyone that this conference call as long 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 plan 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 Stepson's. Most recent 10-K.
Turning to our financial results on slide three for the second quarter of fiscal 2022.
We reported GAAP net income of $127.9 million, but.
Quarter ended September 30th 2021.
<unk> net income attributable to step some group incorporated what $62.1 million.
We generated you related earnings of $26.4 million ajar.
Adjusted net income of $40.1 million and adjusted net income per share a 40 cents.
The quarter reflected retroactive fees, resulting from additional closes.
Step stones growth equity fund that contributed $2.3 million to revenues and $2.1 million to be related earnings and pre tax suggesting that income.
For comparison, the prior year's quarter benefited from retroactive fee related to the final closing a step selling real estate partners for which contributed $9.0 million to revenue 8.5 million 50 related earnings and $4.4 million pretax adjusted net income.
I'd now like to turn the call over to Stepson's co Chief Executive Officer got hurt.
Thank you said good afternoon, everyone.
You could positive stride this quarter and both organic growth and strategic advancement.
We generated a strong flow bath it significantly increase the pipeline of future expected to be earning a U M produced robust earnings and closed on the acquisition of Green Spring Associates ahead of schedule.
I'll begin with the Green Spring acquisition, which we closed on September 20th.
The Standalone Green Spring business continued it is exceptional performance through closing driven by the strength of the platform. The trusted L. P relationships that have been developed over time and continued L. P interest in venture capital.
Despite closing well ahead of schedule. The integration is progressing well we are beginning to operate as one team and already see evidence that are expanded capabilities and venture capital and growth equity are clear differentiator.
Combined size network of relationships and act if the data is already yielding differentiated investment opportunities and due diligence inside.
We've also receive positive feedback from our clients and observed early indications that cross selling opportunities will exist given the limited overlap and our client base.
Looking at the firm more broadly as shown on slide for now manager advise on over half a trillion dollars of assets across the private market.
Or increase global scale widens, our mode and creates a significant competitive advantage of yield unparallel data inside and Dealflo, Eli broad scope across private equity real estate infrastructure in private that makes it the one stop destination to solve our clients private market need.
Shifting to a results on slide five we generated $40.1 million and adjusted net income for the quarter or 40 cents per share.
111% from the prior fiscal year second quarter.
We generate fee related Ernie to $26.4 million down 5% from the prior year quarter.
S. F mentioned the prior year period included a significant retroactive fee of $9 million, which impacts the year over year comparisons. This quarter included relatively smaller retroactive fees and 10 days of Green spring results. Excluding these items fee related earnings would have been up by 20%.
We finished the quarter with $121 billion of assets under management at $67 billion of fearing a U M, which include $11 billion, appearing assets from Green spring.
Excluding the acquired assets, we've organically grown C, earning a U M 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 in declining COVID-19 cases, and a growing number of administered vaccinations have enabled us to resume it person activities.
I am pleased to report that we've reopen the 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 leverage technology to onboard new employees and collaborate across seas.
Ultimately there is no substitute for in person connection and I'm 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 15 cents per share a more than doubling of our prior dividend.
The increase as 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 enables 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.
Public lifting 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 Green spring.
You're proud that since our I P O R stock as delivered returned to our shareholders well above the market's return I want to thank the entire steps don't team the 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 are cofounder and Coastie E. O Machi brand will be transitioning to executive chairman as of January 1st or meaning chairman of our board of directors and that will become so C E O.
The transition to the natural next step and a succession plan. It had been carefully planted communicated over the last several years.
Nevertheless, it does provide an opportunity to look back and reflect on the successful firm that we've built over time.
[noise] Mopy clearly laid the foundation for our success with his vision ability global private markets investment firm establish a collaborative and entrepreneurial culture.
We couldn't be more excited about the opportunity to build off that foundation, while continuing to benefit from monkeys vision and Mentorship as executive Chairman.
With that I will turn it over to Mike again.
Thank you Scott.
That'd be half of all the steps that employees at its board of directors a big Thank you to monkey bread for his vision and leadership that step those dining partner.
And congratulations stock as our new C E O the future could not be brighter.
But that said I am pleased to report regenerated $18 billion of those in the last 12 months with 2 billion trouble with the law commingled funds.
16 billion in separately managed accounts.
For you to slide seven in addition to the grocery generated organically.
The nation of the Greensburg acquisition contributed an additional $23 billion of assets under management at $11 billion a theory.
These figures include insurance clothing for free and sprayed with venture capital secondary spot, which added $1.9 billion of assets for the quarter. It exceeds our expectations from when we announced the deal.
Our ethic growth was strong across structure and asset class.
But they will they will fun, we had an initial clothes or a private equity totally that sun north of $500 million. In addition, we had an interim clothes, but a steptoe tactical growth five three and our private that funding for the quarter.
Subsequent to the end of the quarter, we had our final clothes for the tax low growth funds. Three it's finished with over $690 million and commitment while about $240 million five and its predecessor box.
Regenerated chargrill that are separately managed accounts across asset classes.
The mental is exceptional from international fine.
Which we anticipate will continue to fuel growth with a considerable theater.
We continue to enjoy very strawberry up right for all asset class.
Which account for about three quarter burgers, a O N and that his account additions over the last year.
A strawberry up race are pessimistic incredible stickiness satisfaction and loyalty other current client.
Furthermore, we.
We are successfully extending his relationships with the mandates across new strategies at at the glasses, while also developing their relationships whatever.
To continue to make progress in our evergreen product T. Fries are private market fun for accredited investors, including individuals.
The prime hit the one year Mark on October 1st.
If I, let the cheese the remarkable 59% net return for investors infection on October 1st 2020, and as an a O L is $270 million as of November one.
We are very pleased with the near term progress in this program.
Can you be excited about the long hair.
Moving to slide eight regroup be earning a U N by over $2 billion in the quarter, excluding the impact of the Greensburg acquisition.
We also had a significant job and are unemployed C or any capital, which is up over $4 billion and a quarter nearly 18 billion.
The growth that are dry powder reflects the simultaneous ria among several existing relationships and it.
Includes approximately half a billion dollars from the Greensburg acquisition.
This is our highest unemployed balance on record and continues to provide it helps us healthy runway for the future.
Frozen assets is inherently lumpy. So you think it is most productive to look at the trends over a longer term basis, where we have consistently deliver a robust growth.
Over the last 12 months.
Be earning a U N by 25%, excluding the impact of acquisition and over the last three and a half year is delivered and you'll get a compounded annual growth rate of 30%.
Five nine shows the evolution of our management advisory fee, which have more than doubled from $140 million 2018 to over 300 million in the last 12 months.
While there is minimal impact some green sprayed in this quarter, we have started showing earnings and revenue trends on it per share basis to normalize the impact of any day and illustrate the growth July for shareholders.
Over the last three and a half years, we have grows the revenue for sure.
Five per cent theater.
Getting to the table on the bottom of the page of legacy rate of 51 basis point is relatively flat compared to the last couple of years.
If you look at the individual components, you'll notice that findings for later theory.
Is primarily a function of the $9 million of retroactivity, we hear that are coming though real estate five a year ago.
Siblings, and pack of the fiscal 2021 theory.
Underlying pricing by acid Bath, and Bun fight remains very stable.
As a reminder, the acquired Greensburg outfits are heavily weighted toward commitment fun, which tend to earn a higher fee rate and Saturday night.
As a result, we anticipate that blended fee rates will rise a few basis points as he better benefit from a full period of Green Crazy.
And with that I'd like to share the call over to Johnny ran over to discuss our financial the mortgage.
Thank you Mike I'd like to turn your attention to slide 11 to touch on a few of our financial highlight.
For the quarter, we generated C related or need to $26 for a million dollars pretax adjusted net income of 51.8 million.
Adjusted net income of $41 million and and I for sure and 40 cents.
Included in the quarter was 10 days with contributions from Green Spring, which added 2.3 million management and advisors eaten 1 million a fee related earnings.
Green Spring acquisition also resulted in an additional 1.7 million weighted average adjusted shares the Green Spring earnings were accretive given the short period does not move the needle this quarter.
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R F R. A margin for the quarter, 32% down 500 base orange year over year.
And earlier than a visit from significant retroactivity and the year ago period.
Normalising for these retroactive fees and the impact some green spring.
For any margins would've been 29% in the current quarter, which or even the year ago period.
Gross realized performance each with $56.1 million for the quarter.
Lucky me continued positive market environment, driven by strong underlying investment performance and it's the same level of robust realisation activity.
524, and the appendix provides quarterly and last 12 insurance on their performance fees and illustrate material setup and nevertheless nations over the last four quarters the.
The next two slides display underlying revenue and earnings growth year over year and over the longer term we show the numbers on both an absolute in for a share basis, others minimal difference in the <unk> quarter.
Absolute dollars presented in the bars will begin.
If it.
Period of the Green screen acquisition next quarter.
As the mood board the first year measure will account for the effective emanate and represent growth realize for shareholders.
I'll start with revenues on slide 12.
Revenue for sure, but 69% in the first half of the fiscal year.
32% compounded annual growth rate over the longer term.
Revenue growth is driven by a strong trajectory and seeing earning asset an exceptional growth and realized performance cheese.
Sifting through our profitability on flight 13, we've grown fiscal year to date and related earnings per share about six per cent. Let's comparison includes the impact an unusually large retroactive fees in the same period in the prior year.
Over the last three and a half years, we the cheese, they can't you're at 48% view related or needs to share our longterm fee related earnings growth rate.
Set of our management and advisor D demonstrating operating leverage in our model.
We've grown adjusted net income for sure, but 138% year to date and by 46% of the longer term, reflecting the positive progression of that alright, and strong realizing that performance.
Moving to the balance sheet on slide 14, grocer crude Cherry continues to increase driven by strong underlying investment performance needing a quarter and over 1.2 billion, which.
Which is up 13% in the prior quarter and 150% over the last 12 months, despite an exceptional level realizations over the last year.
As a reminder, while realized performance fees that are income statements and the period. They occurred changes in our crude carry balance reflect our share of the unrealized gains and losses of our clients.
Alright, one quarter lag.
From the bottom chart, our own investment portfolio amid the quarter at 90 million of 8% from the prior quarter and that 66% of the same quarter in the prior year, reflecting both market appreciation and net contribution.
I'm trying to commitment to these programs are 72 million a quarter in.
We manage a large pool of over 48 billion in performance the eligible capital capital widely diversified across approximately 140 program.
Remember 30th.
65% of our Unrealised carry with tied to programs with benches in 2016 or earlier.
These programs administered harvest.
62% of the time he was cured Unfortunately vehicles would do by the a waterfall, meaning realise kerry and be payable at the time of investment.
A quick comment on the liability portion of the balance sheet use a small amount of debt to fund a portion of the green during acquisition as of the end of the second fiscal quarter withdrawn a little over $110 million against our line of credit on which we pay a 2% spread on top of the line or.
This is a relatively modest amount of leverage in the line of credit gives us flexibility on top of our significant normal cash flow generation support growth initiatives, including future GB connect.
This concludes our prepared remarks, I'll now turn it back over to the operator to open the lines for any questions.
Thank you.
If you'd like to register a question. Please press the one followed by four on your telephone you will hear a three tone prompt to acknowledge a request is your question has been answered and you would like to live <unk>. Your registration. Please press. The one followed by the three one moment. Please for the first question.
Our first question comes from the line of Ken Worthington like J P. Morgan. Please proceed with your question.
Hi, Good evening. Thank you for taking my question.
Maybe two first on <unk>. The returns are absolutely outstanding, but I'm really interested in that sort of the continued build out of distribution and the product now that you're above 250 million what sort of doors are open in terms of new distribution opportunities.
And what do you see as the milestone an asset.
That would drive further access to distribution for that product.
And you know how.
No strong the returns are and then what are the products that she premise sort of coming up against like who are the intermediaries sort of stacking that product up against.
Anyway. Thank you.
Hi, This is Jason thanks for the question.
So as we've spoken about before as we reached the size additional doors here in the U S are definitely opening were in diligence with a couple of the wires now so excited about that progress B R. A community where up over 80 approve platforms.
On on C prime as well as a number of I B D. As 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 open up in Mexico for Us with a list of vehicle in Mexico.
That that buoyed this fund raise for this this past month in terms of the.
The the comp set there are a number of other funds, mostly concentrated around private equity I think that again to 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 a higher standard and to our ability to deploy outside of private equity and really deliver on all private market solution as opposed to a private equity only solution is a pretty material differentiator relative to the pier set but most importantly, thank you for your for noting the performance that.
The clearing away differentiator congrats go to the wider steps don't team for what they've been able to deliver for this product.
Great. Thank you and the Undeployed fee, earning Uhm Ash Center management 17.8 billion. Currently 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.
<unk>, 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 product I'm sorry structures are contracts that would drive you know this pipeline to be.
<unk> sort of you know mandatory to be invested over a longer period of time like four or five years.
Again this is Scott thanks for the for the question I think we've always talked about the pipeline of unemployed for you or any capital is being deployed really over probably three to five year time period, and I think you're right that in an environment like the one that we operate in today.
It would be likely that may be more like a three year time period.
Would not expect it to be any faster than that you'd let leftover structural reasons more because for me. Thank you for your diversification stanfill, we are going to need to be quite focused on making sure that we were probably diversifying across across <unk> years, and really liked it Baghdad with the flexibility to see you go out over five years me is 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.
An employee to date, you're even in an environment like one that we operate an internet and hopefully the idea that we continue to replenish and unemployed guarantee capital overtimes additional re ups or or new opportunities come come about.
Great great. Thank you very much.
Our next question comes from the line of Alex <unk> with Goldman Sachs. Please proceed with your question.
Hey, guys. Good evening, thanks for the question.
Congrats Scott I was hoping we could start maybe with a with a question wrong Green Spring you know Scott you mentioned that you're you're integration Uhm continues to unfold really nicely. Despite up to the fact that the deal closed a little bit at a schedule. So can you give us a sense of maybe some recent trends the green screen, you're seeing their stand alone.
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 as you look at the you know the two companies together what is the main focus here from a distribution perspective <unk>, how how do you expect to sort of accelerate uhm, they're Standalone Grove, which obviously has been pretty strong.
First of all thanks, Thanks, Alex I appreciate that and on Green spring.
A couple of David again ear to say that we continue to be very encouraged by the performance even on a standalone basis between signing and closing.
You heard reference to that fund raising progress across the debenture capital at Secondaries bond and so in particular I think we've been encouraged by just the continued interest not only in in venture capital and in general, but I think particularly some of the strategies that green spring sort of have been active in and it really established the leadership.
Physician and I think when you combine that with the really the combination with Steph soon be enhanced flywheel effect.
Clearly the fact that you're interested in those.
Funds that are in market continued.
Through the announcements during the closing of the merger suggest that new investors really understand the combination and the benefits.
I think it is weekday.
Out the distribution channels going forward.
I think there's a real opportunity there in the sense that have you heard of solving prior calls about that there's not a tremendous amount of overlap between R. L. PS today are you, particularly some of the very large relationships the steps doing being able to develop.
With pension fund sovereign wealth on international investors, and we think digit further expand need a toolbox, allowing us to create even more innovative solution and solve more problems for those for those slides I think really happy into one another's investor base as we as we move forward here.
Okay got it. Thanks, and then my second question really is around the cash flows and the the kind of a volunteer nature of carried interest that's running through the P&L now we've seen multiple quarters now where <unk>.
Incentive fees performance fees continue to come in well ahead of expectations occurred carries growing and obviously you know given the environment, presumably there'll be more and more to come on that show as you thinking about uses of cash from here dividend inquiries have some very nice, but what are your thoughts around either more acquisitions or opportunities to buy a minority stakes from the real estate in front.
[noise] where credit team.
Okay. Thanks.
Sure.
Yep.
I I think your question and thanks for it is abroad kind of capital management question that I think we can unpack I had a couple of different ways. Yeah first and foremost we are highly focused on maintaining.
Capital efficient business model, which is supported by a flexible and capital effective cost effective capital structure. So at the moment. We're basically we're looking at a number of priorities <unk>.
<unk> first is Johnnie mentioned, we drew down a little over $110 million from a revolver to help fund the acquisition of Green Spring now even though this represents a modest leverage ratio our intention is to pay down the revolver overtime. So that is a source of of of cash going forward, but this in turn creates a very flexible.
Capital structure that allows us to be nimble and opportunistic I had what appears to be a very healthy M&A environment, while managing are 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 the call with a call investment fund will be coming back to market. Shortly with some other larger funds. In addition to layering on all of the Green spring fun, So being sure we have the capital available to find the G. P. A.
Adequately as a priority fourth as you mentioned, we have doubled our dividend.
Which reflects the payout ratio largely aligned with our with our peers.
Lastly, we.
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 this optimal flexibility with a revolver with our capital structure with our payout ratio and I think you can expect us to do more of the same going forward.
From a capital of Madras standpoint, you know our our priority is to maintain a very efficient business model had a very cost effective capital structure.
Great. Thank you very much.
Thanks.
As a reminder to register for a question press the one four.
Our next question comes from the line of Michael's He first with Morgan Stanley. Please proceed with your question.
Hey, good afternoon. Thanks for taking my question and congratulations Scott on the expanded role I just wanted to go back to a retail topic does your here I guess, what catalyst G. You think or kind of think about on the horizon that can help accelerate growth for the product just given the strong performance.
That has put up is it more of a three year tracker that you need that 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 were thinking about expanding those Ah sales resources.
Thanks, Mike So.
You know from an existing team perspective, the the teams 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 the European footprint a bit more as well as we looked.
To expand European capital raising for the seat prime parallel vehicles.
In terms of a catalyst I think you know to be honest I think we've probably crossed the the requisite in business for long enough.
Threshold with <unk> with the one year worth of activity I think the size crossing over the 250, Mark and now 275, even I think also check the box necessary for 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 be increased rate of raise for this product flipped through so.
So I'm I'm not looking for any.
Think that's outside of our control presently that that's really required for the sea prime product and of course. We're you know this is our first product, but but it won't be our last in the channel and and will seek to roll out additional solutions based on channel feedback over time.
Great and just a follow up question on the on deployed pent up fearing capital 17 billion or so that's up about it looks like about 3 billion. Excluding green spring here can you just talk about some of the biggest contributors to that increase sequentially and abroad.
Talk about some of the initiatives to expand this this top of the funnel I think you mentioned you were starting to travel again, maybe you could talk about the opportunity to break new customers in the door.
Sure. Thanks, Mike you just got again.
So look into getting.
There is.
They were really contribution to the unemployed being in capital across all four asset classes.
All three strategies and really you do a combination of rehabs expansion of existing client relationships, whether across asset glassdoor strategies as well assume some new account, but an order of magnitude in the larger drivers and we've never provided any that breakdown, but I'd say it is order infrastructure.
You're in private equity you were particularly strong contributors there and re up activity in particular has been quite strong I think just driven by the continued strong outperformance an appetite from from our clients. You. This is a particularly.
Re a quarter for us.
In terms of broadening.
Off of the funnel activities, yes, clearly.
The only team has been can you to be.
Active throughout the Covid period, but yet now navigate to travel.
More internationally or or even on the domestic front again with 21 all around the world.
Well positioned even if travel is always date and placement domesticated I'd say, there's quite a bit of active.
Activity on the new L. P new clients, Brian some of that may not be on the separate account side I think that is true across our commingled bond.
Well, but we are encouraged by some of the new commitment the new relationship restart establish especially when you think about the way we were able to grow those relationship whether through rehab fashion capital over Oh, sorry expansion of the relationship over time, and I think with our expanded tool again now not only across the the four.
The classes, though was significantly enhanced venture and growth capability of late here I think we have a lot to talk about with our lives.
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 in a real thing or are they scaling and magnitude of 2030, 50% of any help there.
It's hard to generalize guessing we'd be some climbed that look at their separate account allegation is something that is going to be very steady into a rehab at the same size fairly consistently others may be looking to through out the contest and wanted it proven may looked at double reallocation.
Overtime. So there is no it's difficult to generalize.
In terms of what the growth is separate account over separate account, but it certainly is a a double digit growth growth rate and I think we can can you get.
You said to work on the best way to disclose some of the details you both about this as well.
Well the growth and this account or not.
[laughter]. Thank you.
There are no further questions at this time I will now turn the call over to Scott hard. Please go ahead.
[noise] well, great well, thanks, everyone for for down in for your continued interest is definitely the questions and we look forward to continue to keep you updated.
<unk>. Thank you.
That does conclude the conference call for today, we thank you for your participation I thought he plays disconnect July.
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