Q2 2024 StepStone Group LP Earnings Call
Good day and welcome to the step Stone group second quarter of fiscal year 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you'll need to press star one one on your telephone you will then hear an automated message advising our hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Seth Weiss head of Investor Relations. Please go ahead.
Thank you.
Joining me on today's call are Scott Hall, our Chief Executive Officer.
Jason.
And co Chief operating Officer, Mike Mccabe head of strategy, and Johnny Randolph Chief Financial Officer.
During our prepared remarks, we will be referring to a presentation, which is available on our investor relations website at shareholders that steps down group Dot 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 and are inherently uncertain.
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 changes in circumstances, where a number of risks or other factors that are described in the risk factors section stepson's periodic filings.
These forward looking statements are made only as of today.
As required we undertake no obligation to update or revise any of them.
In addition, this presentation contains references to non-GAAP financial measures.
Conciliation to the most directly comparable GAAP financial measures are included in our earnings release, our presentation and our filings with the SEC.
Turning to our financial results for the second quarter of fiscal 2024.
Beginning with slide three we reported GAAP net income of $59 3 million.
GAAP net income attributable to step down group, Inc was $26 2 million or <unk> 42 per share.
Moving to slide four we generated fee related earnings of $43 $8 million up 12% from the prior year quarter and.
And we generated an FRE margin of 31%.
The quarter reflected retroactive fees, resulting from interim closings of step downs private equity Secondaries fund.
<unk> multi strategy global venture capital fund, which in total contributed $3 7 million to revenue $3 $4 million to fee related earnings and pre tax adjusted net income and 160 basis points to FRE margin.
There are no retroactive for use in the second quarter of fiscal 2023.
Finally, we earned $32 million and adjusted net income for the quarter or 26 per share.
This is down from $37 3 million or <unk> 33 per share in the second fiscal quarter of last year, driven by lower net realizations and partially offset by higher fee related earnings.
I'll now hand, the call over to step stone CEO Scott Hartz.
Thank you Seth and good afternoon, everyone.
Quite a number of continuing challenges in the macro environment, including volatility in asset prices higher for longer interest rates and heightened geopolitical risks.
So continued to generate steady results.
Also driven by the breadth of our offering specialization of our strategies and positive momentum in areas in which we've invested for growth.
Though it is a difficult operating environment for asset managers. We believe we are well positioned in the industry and that we are setting the stage for strong continued growth in the years ahead, we remain on track to at least double our fee related earnings within the next five years as we laid out at our Investor Day. This past June.
Last month, we hosted the steps two and $3 60 conference our annual event for private markets clients and investors.
During times like these our clients have a strong desire to understand the real time trends and developments that we are seeing in the market and in our portfolios.
360 conference gives us the opportunity to share our data and insights present on our full suite of products and solutions and importantly hear directly from many of our clients and prospects are clients remain extremely engaged with the private markets and continue to turn to steps down for help in meeting their long term investing goals.
Secondary to the strategy that continues to resonate with our clients in today's environment.
General slow pace of realizations has needed the near term market appetite for some private market investments demand for secondary is across asset classes remains very strong and is a key area of differentiation for steps down.
Our deep relationships with general partners to play a large pipeline of investment opportunities and our superior data and expertise allow us to identify the best of these opportunities, enabling us to buy high quality assets at attractive prices.
Beginning to see greater willingness of sellers to transact.
The new valuation environment, there's other avenues for realizations continue to lag, which should result in an acceleration of our pace of deployment.
During this most recent quarter, we executed a successful first close of approximately $1 $25 billion and our venture.
Capital Secondaries fund and.
And then interim close of nearly $400 million and our private equity secondary Scott.
We expect to activate the venture capitals Secondaries fund in the first half of our fiscal 2025, while our private equity Secondaries fund is active and currently generating fees.
Shifting to real estate, our flagship commingled product as a special situations GP led secondaries fund.
As we discussed at our Investor day in June the rise in interest rates, coupled with a significant volume of expected maturities in the coming years creates a substantial opportunity for real estate recapitalization. We were a leader in this market and have access to a significantly amount of deal flow much of which we create ourselves.
This enables our investment team to be selective in deploying capital.
Encouragingly, we are seeing real estate deployment opportunities begin to accelerate we have fully committed our prior real estate Secondaries fund and our New fund is now actively investing.
This new fund will begin earning fees in the spring after a five month fee holiday for investors that were part of the first close to.
To date, we have closed on approximately $1 billion in this fund additional fund raising is progressing well as we believe investors see our special situation strategy is an attractive means to access real estate and one that is particularly well suited for today's environment.
The timing of Activations in our real estate and venture capital Secondaries funds result in relatively modest revenue and fee, earning AUM growth for this current fiscal year.
But provides clear visibility into a meaningful step up in management fees margin and fee related earnings in fiscal 2025.
We're also seeing healthy progress in our separately managed accounts the sales and closing cycle for SME. It can be long with exact timing difficult to predict but we have a large pipeline of both new SMA as well as re ups is progressing well.
Included in this quarters gross additions were commitments from separately managed accounts for which we have been engaged in discussions for over two years.
Into the deep relationship building, we engage in when partnering with clients.
Inclusion of a multi strategy venture allocation. Among these mandates is yet. Another example of the synergies from our expanded venture capital capabilities and a proof point that our strategy is to help solve our clients' portfolio goals through market cycles.
Shifting to private wealth the fiscal second quarter was our best quarter ever with over $350 million of new subscriptions.
We've invested heavily in private wealth and these investments are paying off we anticipate that this will be a significant contributor to operating leverage over time.
As we announced in July as Prime our core private markets Evergreen fund became available for subscription daily by a ticker <unk>.
This allows investment into the fund without the need for subscription documents simplifying the onboarding process and eliminating a substantial point of friction.
Particular have contributed to the acceleration of gross inflows, but encouragingly, we are seeing traction across all of our private wealth products and four pillars of distribution.
Spring, our evergreen fund for venture capital and growth equity continues to gain momentum and in September we held an initial close of structure Stepson's registered private infrastructure fund and our third evergreen private wealth family of funds.
Finally, I am pleased to announce that as prime has been improved on a second wire house and spring has been approved on its first wire house in each case with initial inflows expected in the coming months.
Another area, where we continue to invest as technology and in our data science driven portfolio management team and our software engineering team. We've spoken previously about our front end research and backend reporting platforms, we have rebranded our applications under one unified and interconnected suite, which we're calling spy by steps down.
Despite platform offers research reporting pacing and benchmarking applications.
This integrated suite is only possible because of the investment we have made in our technology, our people and our relationships with both Lps and GPS.
Before handing the call to Mike I'd like to thank our CFO Jonny Randall for more than a decade of dedication and leadership to steps then Johnny will retire at the end of this year.
Johnny joined steps down in 2010 and has been responsible for building and leading a deep and talented finance team.
We are thrilled to announce that David Park, our current Chief Accounting Officer will become Chief Financial Officer on January one.
David has already working closely with Johnny on the transition.
David has been stepped down as chief accounting officer since joining the company in 2019.
Together with Johnny and David helped guide steps down through our IPO and is a key leader of our finance team Johnny.
Johnny we thank you for your years of dedication leadership and strategic vision and we congratulate you on your retirement.
I'll now turn the call over to Mike Mccabe to speak about steps down in fund raising in fee, earning asset growth in more detail.
Thanks, Scott and I'd like to Echo your words of appreciation for Johnny Randall and congratulate David Park.
Turning to slide seven we generated $15 billion of gross AUM inflows during the last 12 months, but $6 billion coming from our commingled funds at $9 billion coming from our separately managed accounts.
Slide eight shows our fee, earning AUM by structure and asset class.
Fee, earning AUM was flat relative to the prior quarter due to a few moving pieces this quarter related to activations as well as step downs that impacted near term timing of our fee, earning asset growth in management fees, but do not disrupt our long term growth trajectory.
Johnny will provide some commentary on the financial impact, but I would like to take a few minutes to walk through the effect on our fee, earning AUM and on our unemployed fee, earning capital.
First our venture capital Secondaries Fund had a very successful first close of approximately 125 billion.
Which currently resides at our unemployed fee, earning capital balance.
This fund is still in market and we continue to see strong interest.
We anticipate further closings over the next six to nine months, we expect that the capital raised this quarter plus additional funds raised hereafter will be activated and become fee paying in the first half of fiscal 2025.
We are encouraged to see transactions pickup in real estate, particularly in the secondary recapitalization and we see significant opportunities for future deployment.
As Scott mentioned, our prior real estate fund is now fully committed to investments.
This triggered a step down in the fee base from committed capital to net invested capital near the end of the quarter.
This resulted in a reduction of fee, earning AUM of $700 million.
Which is included in the distribution line of our fee, earning AUM walk on page 18 of the presentation.
Much of the step down is temporary driven.
Driven by the fact that we are committed to but not yet fully funded several investments.
The unfunded commitments from this prior fund amount to about $400 million.
And are not yet included in the net invested capital fee base, but are instead included in the unemployed fee, earning capital.
As these investments fund through fiscal 2025, the capital we will return to our fee, earning asset line.
Pivoting to our current real estate vintage the fund is now actively investing and fees will turn on in late fiscal 2024.
We've closed on approximately $1 billion of this fund to date and anticipate future closings over the next 12 months.
We also had a $1 $5 billion worth of distributions from our separately managed accounts.
As a reminder, distributions include exit activities expiring mandates step downs in fee base.
$1 billion of this distribution relates to explorations.
Occasionally as was the case this quarter.
These are older mandates that pay on committed capital for life.
These mandates typically generate revenue at a lower or a step down fee rate.
And that exploration the full capital commitment rolls out of fee, earning assets.
In these circumstances, there is a disproportionate impact on fee, earning AUM relative to revenue.
For this past quarter the management fees that we expect to earn on the $1 billion of managed account contributions will more than offset the fees from the $1 billion $5 of distributions.
For the upcoming quarter, we expect to see explorations are similar in size to this past quarter, along with a nominal impact on revenue.
The step downs and explorations are a normal course of our business and we will let you know ahead of time, when we anticipate them to occur.
Shifting to private wealth, we have now surpassed $2 billion in assets under management.
To put our growth in context.
We first launched our private wealth platform in September of 2019, and cross the $1 billion threshold in November of 2022.
This was a great result for our product suite and distribution network that we built from the ground up.
We are thrilled to have grown the platform by another $1 billion in only 10 months doubling the net asset value and less than a third of the time it took to raise our first $1 billion.
Our success in private wealth is driven by progress across our four distribution pillars.
As independent broker dealers wire houses and international and by the launch of additional funds such as spring and structure.
Each subsequent fund launch in each expansion of our distribution syndicate is bolstered by a growing brand awareness and by our strong track record of investment performance.
As prime has generated a 25% annualized return since inception, and spring has yielded a 30% return and its first 11 months.
Structure had its initial closed in September and is actively investing.
Our unemployed fee, earning capital increased to $18 1 billion.
Its highest level ever.
Driven by a strong initial close of our <unk> Secondaries fund and the dynamics around committed but not fully invested capital in our prior real estate fund.
At least $2 billion of this capital will convert to fee, earning AUM. Once we activate the current real estate fund in VC secondaries funds in the coming quarters.
Slide nine shows the evolution of our management and advisory fees.
We generated a blended management fee rate of 57 basis points over the last 12 months higher than the 54 basis points for the last fiscal year as we benefited from a retroactive fees and some favorable mix shift over the last 12 months.
We produced over $4 70 per share in management and advisory fees over the last 12 months, representing an annual growth rate of 22% since fiscal year 2019.
I would now like to pass the call to our CFO Jonny Randall.
Thank you Mike for speaking to the quarter I would like to say a very very sincere. Thank you to my colleagues here. It steps down it has truly been my privilege to work alongside you and I look forward to seeing what steps down does next.
I want to also add my congratulations to David Park, David has been a great friend a great partner. These past four years and I know that he will be a fantastic leader of the finance organization going forward.
Now I'd like to turn your attention to slide 11 to speak to our financial highlights we earned management and advisory fees of $142 million for the quarter up 19% from the prior year, driven primarily by growth in fee, earning AUM.
Our operating margin for the quarter was 31% retroactive fees in this quarter had a positive impact on the margin of 160 basis points for the trailing 12 month period, we have reported an FRE margin of 31%.
Turning to expenses compensation was up about $5 million sequentially as we mentioned on the last earnings call. We had relatively limited hiring in our first fiscal quarter. So this quarter reflected some incremental hiring.
General and administrative expenses were flat sequentially, but we do expect an uptick the next two quarters driven by seasonal expenses associated with Investor conferences. We just held our steps down 360 private markets conference in October and we will host our annual venture capital conference in early 2024.
Scott and Mike mentioned, the timing of fund Activations and step downs impact the pace of revenue growth and margin expansion for this fiscal year the step down in our prior real estate fund will create a headwind on our management fees, while the current vintage fund is honestly holiday.
This headwind as well as the seasonal increase in G&A expense I mentioned will create some pressure on our FRE margin in the next two quarters. However.
However, we expect this to be temporary as coming of fundraisers that we've already closed but not yet activated gives us clear visibility into a step up in revenue and margin in fiscal 2025.
We currently have approximately 2 billion of capital that has been raised in our real estate <unk> secondaries funds that has not yet activated or fee earnings.
Once these funds are activated we expect this capital will contribute over $18 million in annual management fees and have a positive impact on the margin of at least 150 basis points, but Scott and Mike mentioned, the real estate fund fees from the initial close will activate in late fiscal 2024, and we anticipate da Vinci Secondaries Fund tack.
<unk> in the first half of fiscal 2025.
Additional fundraising and deployment across our commingled funds evergreen funds and separately managed accounts will further contribute to revenue growth and operating leverage in the coming periods.
We remain on pace to expand our FRE margin to the mid <unk> over the medium to long term consistent with what we outlined at our Investor day.
Gross realized performance fees were $7 million for the quarter, which was down both year over year and sequentially as.
As I mentioned last quarter, we are seeing some signs that the realization environment is improving it generally takes a few quarters for transactions towards through the pipeline. So we expect that realized performance fees will remain modest for at least the rest of this fiscal year.
As a reminder, we generally do not control the timing of exit on our investment.
Moving to slide 12, adjusted revenue per share is down for the first half of the fiscal year. We added 79% decrease in gross realized performance fees per share, partially offset by 18% growth in management and advisory fees per share.
Since fiscal 2019, we have grown adjusted revenue per share by 20% compounded annual rate.
<unk> to our profitability on slide 13, we grew fee related earnings per share by 17% and our first two quarters. The increase was primarily driven by growth in management and advisory fees.
Looking over the longer term, we have generated an annual growth rate and fee related earnings per share of <unk>, 49% since fiscal 2019.
Our year to date and I. Appreciate there is down relative to last year, driven by lower performance fees that has increased at an annual rate of 23% over the long term period.
Moving to the balance sheet on slide 14, net accrued carry finished the quarter at $634 million up 4% from the previous quarter driven by underlying valuation increases for the period ended June 30, as a reminder.
<unk>, our crude carry balances reported only one.
Quarter lag.
Our own investment portfolio ended the quarter at $188 million unfunded commitments to our investment programs were $98 million as of quarter end.
Our pool performance fee eligible capital has grown to over 67 billion and this capital is widely diversified across multiple vintage years and approximately 195 programs.
77% of our unrealized carry tied to programs with vintages of 2018 or earlier, which means that these programs are largely out of their investment periods and are in harvest mode.
59% of this unrealized carry sourced from vehicles with deal by deal waterfalls in realized carry maybe payable at the time of investment exits.
This concludes our prepared remarks, I'll now turn it back over to the operator to open the line for any questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.
Our first question comes from Ben <unk> with Barclays. Your line is open hi.
Good evening and thanks for taking the questions maybe first for Scott you talked a little bit about the pipeline of new SMA and re ups.
Looking robust, but it can take some time to materialize I am wondering if you could unpack that a little bit what are you seeing kind of real time, and what is sort of the reason for I don't know if the delay or what is what does the pipeline look like in terms of either investor type or the type of assets. We're looking to invest in any color around that would be helpful. Thanks.
Sure. Thanks, Ben for the question so yeah as I mentioned in the prepared remarks.
Pipeline is building and developing nicely I think one of the changes that we've seen relative to.
Covid and a couple of years since when much of the SMA activity was really driven by re ups and expansion of existing client mandate is there has been a very healthy mix of new relationships and new mandates of late as well, particularly when you look at this current quarter and in the last in the lab.
A couple of quarters, so thats obviously.
Encouraging and clearly builds the pipeline of future re ups.
And potential expansion opportunities. So thats certainly one trend that we're seeing.
The driver to your point of perhaps slight delay then re ups is really driven by deployment right. It's a matter of fully investing the prior vehicle on coming back around to that rehab opportunity.
We have made steady progress there and then feel like we have some important rehabs in the pipeline at the moment and given our continued at rehab rate that has been quite successful again north of 90% over time and feel good that that will convert into into new commitments. The last thing I would I would perhaps mention is.
That.
And we made quick reference during the prepared remarks, but.
The presence of <unk>.
Venture opportunities, which may come as a bit of a surprise to some of you I mean I think it is a continued area of interest amongst.
Clients both here in the U S and internationally and so we were excited to have a multi strategy venture mandate in the mix there as well so again given the number of opportunities that we're pursuing sometimes hard to generalize, but feel good that there is quite a bit of activity and a building pipeline of both new and existing clients in the SMA pipeline.
Great very helpful. Maybe one follow up on the retail side.
It seems like things keep trending in the right direction. There you talked about the four kind of channels <unk> IBD wireless international where are you seeing I guess the most traction what is your expectation as some of the funds I think he mentioned as prime is going to be added to another way our spring will be attitudes first what do you think the potential size from those new kind of distribution relationships could add and.
What is sort of the mix right now between those various channels. Thank you.
Sure and this is Jason Thank you for the question.
In terms of.
I guess first geographic areas in terms of the most traction the team is by far more built out in the U S relative to abroad on dedicated.
Wealth team and so flows are definitely stronger here in the U S. Today.
We expect that well.
Balance out over time as we continue to invest in the.
The distribution partners abroad.
In terms of the.
Those between the products as Prime you asses.
The most seasoned of all of the products. That's the largest of all the products to date and so therefore, there's a bit of seismic <unk> size.
You're eligible for <unk>.
Inclusion by more.
Distribution partners and so therefore thats certainly helpful.
<unk>.
When I look at the kind of zero comparison.
I'm versus spring spring is off to a very strong start.
Clearly the performance there is definitely helpful.
30% since inception.
And so we do expect that to continue to scale nicely structure.
It's simply too soon to tell where just a couple of months and here but.
Our conversations have been positive.
Got it thanks, so much I appreciate it.
One moment our next question.
Our next question comes from Ken Worthington with Jpmorgan. Your line is open.
Hi, good evening, Thanks for taking the question so probably along the same lines. So you announced the release of the daily.
<unk>.
Tucker for S Prime maybe.
Maybe Scott or Mike I was hoping you could flush out more on your prepared remarks, and give us some progress youre, making in terms of.
The marketing of the new structure, how is education going on to new products for the <unk> and what is the sales cycle seem like it's developing for this this new product with that sort of pre existing customer.
Customer base is this.
Three months sales cycle is it a year how long do you think it will take for.
The fruits of your labor to really become more apparent in the numbers.
Yeah. Thanks, Kevin This is Mike I think what I might do is invite Jason to address that a bit more specifically since he looks after the private wealth channel.
Thanks, Mike Thanks, Ken.
<unk> on the ticker.
I think there it's been welcomed with open arms.
Certainly by the <unk> community.
In particular, it definitely makes their life materially easier.
We expect Ibd's too.
Some of them at least use the tanker I think the wires will be the last the last minute or two to adopt.
And don't have a real timeline as to when that might be.
In terms of the kind of.
Let's call it the brand education cross sell.
Yes.
We look at the different channels.
I would kind of cite the following if I look at the distribution syndicate for S. Prime and this will be all kind of U S to U S. If I look at that as indicated about a third of those distribution partners have also come in to spring.
And then Conversely, if I look at the spring distribution base over two thirds of those.
S Prime.
Distribution partners as well, so clearly the brand awareness helps and theres a bit of.
If you like the steps done story across private markets Youre going to like an adventure in growth specifically so.
Instructions to too soon to tell.
But we would expect to see a similar pattern, but certainly adding that second wire something you've been asking about for some quarters now and we were delighted to be able to announce that this quarter and we expect to see some acceleration of growth across private wealth with this new partnership in place.
Awesome. Thank you.
And then on estimation fee rates.
We saw the elevated distributions you attributed some of this or a bunch of it to step downs and some explorations.
As you see this migration from.
Of these committed capital contracts should we start to see the fee rate on the SMA side also step up and I don't think we saw this quarter.
SMA or the fee rate in SMA is pretty stable is that something that we should see in coming quarters as this trend persists.
Hey, Ken it's Jamie.
Just let me talk little bit about that I think what youll see over time is.
Anyone.
Fund Rolling off won't have much of an impact if we had a series of these over a short period of time, perhaps but the reality of it is theres just so many SMA flowing through there a mixture of rates it might move a little bit, but we don't expect a dramatic change over time, just given the kind of ongoing pricing of what's in the pipeline and what has been re upping. So we don't expect them.
Material change.
Okay, great. Thank you.
One moment for our next question.
Our next question comes from Adam Beatty with UBS. Your line is open.
Alright, Thank you and good evening, just wanted to take a quick pulse on the Investor day target of doubling if already by 2028.
Sounds like the top line as both Mike and Johnny mentioned, the top line looks to be in good shape.
AUM has some puts and takes that seem like they're going to maybe even out over the coming quarters. So I guess my question is over the longer term say post calendar 'twenty four should we look for kind of AUM growth and fee growth to converge maybe in the high teens, given the target for margin expansion.
And if so what areas do you look to to be the primary drivers of that through 2028.
Yes. Thanks for the question, maybe I'll start and Mike May jump in here as well obviously he spent quite a bit of time on this topic during the investor day, but a few things I mean, you referenced some of the.
Step downs in distribution activity that took place this quarter, obviously that didn't come as a surprise to us it doesn't really have an impact on our five year plan that we laid out and one of the things that we talked about during the Investor Day was the fact that there are multiple ways for us for us to get there and to achieve those targets and so as we think.
About.
What we're seeing in the business and really the fact that all of the key building blocks for continued growth as it relates to fund raising continued strong re ups. Despite a tough market environment continue to be there really really the the.
The biggest factor in the near term and as we look at the business just for the for the.
The quarter has been one of deployment right and so the slower deployment really driven by overall market activity M&A activity et cetera being down.
Has resulted in some of the funds that we've now raised or had first closes for not yet activating some of the accounts that pay on invested capital.
Investing in line with the three to five year pace that we've always talked about but maybe a slower pace than what we had seen over the last few years and some of those re ups, taking a bit longer to two <unk>.
Right, but when we think about the business over a five year timeframe are really the next few years I would say no real change to what we talked about in Investor day, and if anything feel like with some of the positive news around the private wealth channel the venture capital fund raising the progress we've made on different co mingled vehicles.
We feel quite good about the longer term trajectory, but Mike you may want to jump in with additional thoughts there.
Alright, Thanks, Scott, we feel really good about the way our gross AUM flow for the first half of this year has developed and we have six more months left in this fiscal year to continue to deploy as well as form new capital. So on a gross basis, we feel really good about our progress it's the fee earning AUM.
Adam that that Youre, pointing to where there are certainly some puts and takes as certain mandates either expire or roll off as we bring new mandates onto the platform.
What we're seeing a little bit on the revenue side as you pointed out correctly, it's still a very healthy and looks good but there is a little bit of a delay this year, which does to your point make fiscal 2025 are really important year for step stone across all key metrics.
As the timing of Activations in the timing of deployment.
Really go live as we enter that fiscal year.
I hope that addresses some of your questions here.
Sure.
Adam last thought I would share is I mean look in our view right. Our continued ability to meet those longer term.
Gold is going to have a lot more to do with how successfully we invest on behalf of our clients and the great level of client service that we provide more so than whether a fund gets activated this quarter versus next quarter and so we're going to maintain that very selective approach in that client that client first approach that has served us so well over the last.
15 years here.
Yes back to the Touchstone makes sense Scott thanks.
And then just one follow up Scott actually you said just to phrase that kind of caught my attention and congrats by the way on the wealth management channel getting onto new platforms. It seems like a lot of the work there is coming to fruition.
Talked about it contributing to operating leverage and I guess, maybe I have a prejudice in my mind, but I always think of the wealth management channel as needing a fair bit of sales effort, meaning a fair bit of education effort.
Think of it as like high leverage, but maybe there's something I'm missing.
That you can help me right.
Sure.
It is certainly true.
One of the things that we are also offering to clients and that channel has the ability to invest alongside.
With the same high.
High degree of quality with our institutional clients and so when you really think about what we're doing from an investment team and from an investment standpoint. It is really participating alongside of our institutional clients institutional funds and that's really where some of the leverage.
If it comes it comes into play.
Given how much of the fees dropped to the bottom line on the investment side there.
Perfect got it now thanks, Doug.
One moment our next question.
Our next question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Hey, good evening guys.
Just maybe I'll piggyback on Adams question.
The operating leverage when it comes to the wealth channel I believe there is a revenue share or kind of equity ownership share agreement within the channel as you sort of build it out.
Can you give us a sense at what level of assets.
Or revenue base does it start to sort of break profitability and contribute more to the bottom line kind of like on a net basis sort of like a net of minority interest in <unk>.
Already there and kind of how do you expect that to scale and actually add to the kind of net of minority interest or noncontrolling interest at heart.
Yes.
I'll start and then others can add.
The reality of it is the kind of areas I mean, I think we are getting there given the scale we have seen in the team we've got attached to it as Scott mentioned there is the investment process, which is a big part of what we.
We think driving the success in terms of the returns that are being produced that has helped driving the scale and so when you kind of think about it from a consolidated consolidated business perspective.
We haven't given specific numbers, but we're kind of in the range.
And then from here that's when you start thinking about kind of that sharing you mentioned so.
The scale and as Mike talked about doubling it in 10 months.
That continues then obviously, we do think it can have an impact over time.
Got it okay, alright, we can pause.
My other question or maybe it shouldn't be my first question I wanted to talk a little bit about the secondaries business with you guys and Scott. It sounds like you are seeing an increased opportunity for deployment. There you mentioned the urgency maybe on.
Part of the sellers to come to market as Greg today than it's been in the past given that there's not a lot of exits in the primary market. So help us maybe frame how much dry powder you guys currently have across your secondaries business, perhaps even including the funds that are currently fundraising how.
How quickly you expect to put that to work given the opportunity set.
And maybe just help us think about maybe the frequency at which you could start coming back to markets.
With subsequent vintages.
<unk> continues to improve.
Yeah, Thanks, Alex so.
So look I don't think we put out there an exact number in terms of dry powder that we have across the secondaries business, but if I just kind of break it down and I'll, maybe stick with some of the co mingled.
Vehicles with some of the incremental closings on the private equity.
<unk> fund.
That fund has now raised nearly $2 $5 billion. It had started to invest but still obviously much of that available in terms of dry powder and has some overage accounts that sit alongside of it when you think about the venture business. We mentioned the first close that one in a quarter billion dollars, which will all be dry powder.
But part of the reason, we won't activate that fund until next fiscal year. As we mentioned there is still some remaining dry powder in the at $2 $6 billion venture fund that we raised shortly after the Green spring acquisition in real estate.
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Had closings on about $1 billion for the current fund and as we mentioned during the prepared remarks. The prior vehicle is now fully committed and so that kind of gives you a sense across some of our main dedicated co mingled vehicles and obviously their separate account capital.
Within the private debt and infrastructure businesses that I hadn't hadn't referenced as well as in private equity that adds that dry powder number now I think in terms of the pace of deployment.
One of the things, particularly in this type of market environment with some of the risks that exist that we continue to be very focused on his portfolio. Construction is one of the few things that is completely within our control and so we have taken the approach of wanting to build diversified portfolio across a number of different metrics, including across vintage years.
And so I would generally expect that these funds are deployed over roughly a three year period in order to achieve that vintage your diversification.
I think thats, probably the right way to think about it recognizing that certain separate accounts may have a shorter or a longer investment period, and maybe last point I would make given how much time, we've talked about the private wealth business clearly some of what we're doing in those vehicles is secondary focus as well, which would further add to that dry powder number.
Okay.
Okay. That's great. Thanks, so much.
One moment our next question.
Remainder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Our next question comes from Michael Cyprus with Morgan Stanley. Your line is open.
Good evening. Thanks for taking the question I just wanted to ask about private credit I was hoping you could talk about the opportunity set that you see in private credit today, particularly as banks are pulling back.
Your strategies would you say are best position here, and which strategies might be able to raise meaningful capital as you look out over the next 12 to 24 months and private credit I think you also have a retail vehicle launching in the credit space as well. So maybe you could provide an update on that too. Thank you.
Yes, so Mike Thanks for the question I mean, I think in the private credit space, we continue to see and hear about quite a bit of interest amongst our existing and prospective clients. Even during the course of this year I think the interest is our private debt team travels the world has continued and continued.
To grow we clearly view it as a very attractive risk reward. When you can think about not only have base rates increase but spreads have remained fairly consistent when you are talking about 12% type gross asset yields investing in the highest part of the capital structure.
And when you look at the.
The performance in past downturns, it's clearly a part of the business and a strategy that we think is quite attractive in today's market. The challenge has been one.
I talked about across the business of deployment with M&A activity.
Down quite quite meaningfully deployment has been slower than we otherwise would have liked which has meant that we've had to continue to look for alternative deployment method that has in some cases cases men looking beyond.
Corporate direct lending to areas like real estate and infrastructure, where we think there will be an opportunity, but also similar to the other asset classes looking to strategies like secondaries, which is one where similar to private equity and venture capital, we think that our position as one of the leading.
Limited partners and one of the leading primary capital allocators positions us very well as a replacement LP or its that wanted to participate in in secondary transactions. So that continues to be an active area for our private debt colleagues as well.
Okay. Thanks, and maybe just a follow up question on realization backdrop continues to remain soft as you mentioned, we've been hearing anecdotes from Lps that.
It's starting to create liquidity challenges on their side and are you starting to hear of any sort of pressure points that Lps are pushing GPS to want to find liquidity events, maybe even selling assets at prices that GPS may not otherwise.
Necessarily want to pursue an exit just curious how youre seeing this all sort of play.
Play out here as you kind of look out over the next 12 months or so.
Sure I mean, I think so much of what we've talked about over the last call. It 18 months as being the denominator effect and the fact that it is it really more of an issue of being over allocated but as the slowdown in distributions has has continued now for roughly 18 or so months and you had a.
Period of time, which is still true today, where both capital calls and distributions are down relative to where they had been over the last several years. However, I would say that distributions are down meaningfully more meaning that in most of the Lps are experiencing more capital calls then distributions and I think youre right that for some it.
We'll start to create some liquidity pressure, leading Lps do either tap the secondaries market themselves as a source of liquidity and as a source of realizations.
Or certainly actively talking to their GP is maybe not so much putting pressure to sell but letting them know that before they can commit to new funds they need to start to see some liquidity coming off of their of their portfolio.
And so I think that is a dynamic that is starting to take place in the market place for sure.
Thank you.
Thank you that concludes the question and answer session. At this time I would like to turn the call back to Scott Hart CEO for closing remarks.
Great well, thanks, everyone for joining the call today and for your continued interest in the steps known story, we look forward to continue the conversation in the quarters ahead. Thank you.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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