StepStone Group Earnings Call: Record Fees, GAAP Hit
Stepstone Group, Inc. ((STEP)) has held its Q3 earnings call. Read on for the main highlights of the call.
Valentine's Day Sale - 70% Off
- Unlock hedge fund-level data and powerful investing tools for smarter, sharper decisions
- Stay ahead of the market with the latest news and analysis and maximize your portfolio's potential
StepStone Group Leans on Record Fundraising and Fee Growth Despite GAAP Loss
StepStone Group’s latest earnings call painted a broadly upbeat picture, with management emphasizing powerful growth in recurring fee earnings, record fundraising, and standout performance from its Spring strategy. While the quarter included a GAAP net loss tied to one‑time accounting for a private wealth buy‑in, executives underscored that fee-related earnings, adjusted net income, and performance fees all advanced strongly, supported by rising fee-earning assets and a substantial pool of accrued carry ready to be harvested. Risks such as moderating fee rates, softer realizations versus long-term norms, and concentrated exposure to software and AI were acknowledged, but management argued these are manageable against the firm’s strong momentum.
Robust Fee-Related Earnings and Margin Expansion
StepStone’s fee-related earnings (FRE) reached $89 million in the quarter, up 20% from a year earlier, with core FRE (excluding retroactive fees) climbing 35% to $88 million. The FRE margin improved to 37%, roughly a one‑point sequential gain, underscoring operating leverage in the model as fee-earning assets scale. Management leaned heavily on FRE as the key lens for investors, positioning it as a more reliable indicator of the firm’s earnings power than GAAP figures distorted by one‑off accounting items and volatile performance fees.
Record Fundraising and AUM Drive Long-Term Growth
Fundraising was a standout, with more than $8 billion of gross AUM additions in the quarter and over $34 billion for the calendar year—StepStone’s best 12‑month stretch on record. Fee-earning assets plus undeployed fee-earning capital (UFEC) rose to more than $171 billion, expanding by over $8 billion sequentially and more than $35 billion year over year. This combination of deployed and yet-to-be-activated capital underpins an implied organic growth rate of roughly 20% annually since fiscal 2021, which management highlighted as the strongest one‑year growth in the firm’s history and a key driver of future management and performance fees.
Private Wealth Platform Becomes a Key Growth Engine
StepStone’s private wealth platform continued to gain traction, reaching $15 billion in assets with over $2.2 billion in new subscriptions during the quarter alone. Management indicated they are now comfortably generating more than $2 billion of private wealth subscriptions each quarter, turning this channel into a repeatable growth engine. The evergreen BDC, S Credex, grew to nearly $2 billion in net assets, reinforcing the firm’s strategy of offering institutional-style private market exposure to high-net-worth and mass-affluent investors.
Fee Revenues and Adjusted Net Income Surge
Fee revenues rose to $241 million, a 26% year-over-year increase—or 32% growth when stripping out retroactive fees. Adjusted net income jumped to $80 million, or $0.65 per share, up from $53 million, or $0.44 per share, a year earlier. That equates to roughly 51% growth in adjusted net income and about 48% growth on a per-share basis, reflecting strong operating performance. Management emphasized that this earnings strength comes largely from recurring fee streams rather than one‑time items, suggesting a more durable earnings base.
Spring’s Exceptional Performance Powers Incentive Fees
The firm’s Spring strategy delivered an eye-catching 39% performance for the year, with total net asset value swelling to $5.5 billion—more than tripling over the period. This exceptional performance was a major driver of more than $200 million in gross incentive fees generated by Spring this year, about $25 million of which flowed into pretax adjusted net income in the quarter. Management noted that, following the profits-interest buy-in, more than half of Spring-related incentives should accrue to pretax adjusted net income going forward, increasing the firm’s economic participation in this high-performing strategy.
Expanding Lineup of Fee-Earning Vehicles
StepStone highlighted a broad and growing pipeline of funds either in market or preparing to launch across private equity co-investments, private equity secondaries, infrastructure co-investments (second vintage), venture capital secondaries, special situation real estate secondaries, and multi-strategy growth equity. Prior vintages in these strategies represent more than $16 billion of capital, showcasing the scale of the existing franchise. The infrastructure co-investment vehicle, in particular, recorded a greater than $600 million close this quarter, pointing to continued investor appetite for StepStone’s specialized fund lineup.
Maturing Accrued Carry and Harvest Potential
Net accrued carry—a leading indicator of future performance fee realizations—rose 4% sequentially to $875 million. Notably, about 65% of this accrued carry is tied to programs older than five years, indicating a mature profile and increasing readiness for harvesting as markets and exit conditions improve. While realizations remain below long-term trends, management suggested this aging carry base positions the firm for stronger performance fee conversion when transaction activity normalizes.
Sustained Organic Growth Across Fee-Earning Assets
The combined growth in fee-earning assets and UFEC implies an annual organic growth rate of around 20% since fiscal 2021, a pace management underscored as highly attractive relative to peers. This growth is being driven by both institutional and private wealth channels, and by expansion across multiple strategies. For investors, this sustained organic growth supports a thesis of rising recurring management fees and a growing pool of capital that can generate performance-related revenues over time.
GAAP Net Loss Masked by Accounting for Buy-In
Despite strong underlying performance, StepStone reported a GAAP net loss attributable to the company of $123 million, or $1.55 per share. The loss was primarily due to the accounting treatment of the buy-in of the StepStone Private Wealth profits interest, which was marked through the income statement. Management stressed that this is largely a non-cash, technical item and does not reflect the health of the operating business, which they argue is better captured by FRE and adjusted net income metrics.
Retroactive Fee Decline and Fee Rate Moderation
Retroactive fees—lump-sum fees often associated with backdated capital commitments—fell sharply to roughly $1.0–$1.1 million in the quarter, down from $9.7 million in the same period last year. This decline contributed to a moderation in the blended management fee rate, which moved to 63 basis points from 65 basis points in fiscal 2025, partly due to the mix effect of lower retroactive fees. While still healthy, the slightly lower fee rate signals a more competitive environment and a shift in the timing and structure of fees as the firm scales.
Realizations Lag Historical Levels Despite Recent Pickup
Management noted that realizations, measured as a percentage of accrued carry, remain below long-term norms even though the last two quarters have seen some improvement in activity. That lag reflects a still-recovering exit environment across private markets, particularly in private equity, where IPO and M&A volumes remain uneven. While this creates near-term pressure on realized carry, the growing and aging accrued carry base provides a cushion for future performance fees as deal markets open up further.
Incentive Fees Likely to Normalize from Spring Highs
Executives cautioned that incentive fees tied to the Spring strategy may moderate next year if performance reverts to more normal levels. They framed this year’s 39% return as exceptional, and suggested that a mid-teens return assumption would naturally produce lower incentive fees than the outsized figures seen this year. This guidance is aimed at calibrating investor expectations, underscoring that current incentive fee levels, while impressive, should not be extrapolated indefinitely.
Seasonally Elevated and Higher G&A Expenses
General and administrative expenses rose to $40 million, up $6 million from the prior quarter, largely due to costs associated with the StepStone 360 conference. Management also flagged that G&A will remain seasonally high in the next fiscal quarter as the firm hosts a venture capital conference. While these events support client engagement and fundraising, they temporarily pressure margins, a factor investors will likely monitor alongside the firm’s FRE margin trajectory.
Fundraising Discipline Amid Competitive Environment
Even as the firm posts record fundraising, management struck a deliberately cautious tone on the sizing of future fund vintages. They signaled modest growth targets for upcoming funds and stressed a desire to align fund size with the opportunity set rather than aggressively scaling every vehicle. The backdrop is a competitive fundraising environment, where investors are more selective and managers must demonstrate differentiated access and performance. This measured stance aims to preserve performance and maintain long-term franchise value.
Software and AI Concentration: Risk and Opportunity
StepStone estimated that software represents about 11% of total AUM, and roughly 7% when excluding venture exposure. However, that exposure is more concentrated in larger market segments, with software accounting for approximately 24% of large/global private equity portfolios versus about 13% in small/mid-market strategies. Management acknowledged that rapid advances in AI pose both opportunity and disruption risk, particularly for software-heavy holdings, implying that certain parts of the portfolio could be more vulnerable to technological change even as others benefit from it.
Private Credit Perception Risk in the Wealth Channel
While the firm reported limited redemption pressure in its private credit evergreen products and no material outflows, management recognized that industry headlines around private credit and private wealth structures could add perception and fundraising risk. They emphasized heightened vigilance in managing these products and investor communications. For now, flows remain resilient, but the team is clearly aware that sentiment can shift quickly in this segment if broader industry concerns escalate.
Guidance Highlights: Continued Fee Momentum and Harvest Optionality
Looking ahead, StepStone guided to continued momentum in core FRE growth, supported by its expanding base of fee-earning assets and UFEC. Management pointed to the current quarter’s FRE of $89 million (core FRE $88 million ex roughly $1.1 million of retroactive fees) and 37% FRE margin, alongside fee revenues of $241 million and adjusted net income of $80 million, as a baseline for future performance. They expect improving market conditions to gradually support higher realizations, backed by gross realized performance fees this quarter of $253 million and net accrued carry of $875 million—about 65% of which sits in programs older than five years. On fundraising, they forecast modest growth across new vintages, with prior vintages totaling more than $16 billion and key funds—such as infrastructure and private equity co-investments—expected to fully activate by the end of 2027, and flagship private equity secondaries and GP-led strategies targeting first closes in the coming two quarters. Management also highlighted potential shareholder upside from a planned year-end supplemental dividend, subject to board approval, and reiterated that, after the private wealth profit-interest buy-in, more than half of Spring-related incentive fees should accrue to pretax adjusted net income.
In sum, StepStone’s earnings call showcased a business riding record fundraising and robust fee-related earnings, even as headline GAAP results were pulled into the red by a one-time accounting hit. The firm’s expanding private wealth platform, maturing accrued carry, and broad product pipeline position it well for future growth, though investors will need to watch for normalization in incentive fees, continued recovery in realizations, and how the portfolio navigates concentrated software and AI exposure. Overall sentiment from management was confident, with an emphasis on durable, recurring earnings and disciplined growth in a competitive private markets landscape.
