StepStone Group Q2 2027 Earnings Call Transcript

StepStone Group (NASDAQ:STEP) reported second-quarter financial results on Thursday. The transcript from the company’s second-quarter earnings call has been provided below.

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Summary

StepStone Group reported a GAAP net loss of $71 million for Q2 FY2027, primarily due to accounting adjustments related to the buy-in of the StepStone Private Wealth profits interest.

The company achieved fee-related earnings of $126 million, a 61% increase from the previous year, with a margin of 42%, driven by strong growth in both private equity and infrastructure funds.

StepStone raised over $11 billion in capital during the quarter, marking the strongest 12-month fundraising period in its history, and expects continued growth, particularly in U.S. retirement and insurance solutions.

During the quarter, the company hosted StepStone 360, its largest client conference to date, where it showcased the use of AI across its platform and discussed opportunities amid higher interest rates and slower capital returns.

The company is focusing on expanding its private wealth offerings, with $1.7 billion in new subscriptions this quarter, and sees potential in tapping into high net worth and mass affluent markets.

StepStone’s fee-earning assets increased by $5 billion to $158 billion, with $42 billion in undeployed fee-earning capital, and a 19% annual organic growth rate since fiscal 2022.

Looking forward, StepStone plans to retain capital to fund the buy-in of private wealth profits interest and expects continued margin improvement for the full year.

Full Transcript

OPERATOR

Welcome to the second quarter fiscal year 2027 StepStone Group earnings 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 during the session, you’ll need to press star 11 on your telephone. You’ll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Seth Weiss, Head of Investor Relations. Please go ahead.

Seth Weiss (Head of Investor Relations)

Thank you. Joining me on today’s call are Scott Hart, Chief Executive Officer, Jason Ment, President and Co-Chief Operating Officer, Mike McCabe, Head of Strategy, and David Park, Chief Financial Officer. During our prepared remarks we will be referring to a presentation which is available on our investor relations website at shareholders.stepstonegroup.com. Before we begin, I would like to remind everyone that this conference call as well as the presentation contain certain forward-looking statements regarding the company’s expected operating and financial performance for future periods. Forward-looking statements reflect management’s current plans, estimates and expectations, are inherently uncertain and are subject to various risks, uncertainties and assumptions.

Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone’s periodic filings. These forward-looking statements are made only as of today and, except as required, we undertake no obligation to update or revise any of them. Today’s presentation contains references to non-GAAP financial measures. Reconciliations 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 2027, beginning with Slide 4, we reported a GAAP net loss attributable to StepStone Group Inc. of $71 million, or $0.87 per share. As a reminder, GAAP accounting requires us to factor the change in fair value of the buy-in of the StepStone Private Wealth profits interest through our income statement, which drove the negative GAAP earnings result this quarter. Moving to Slide 6, we generated fee-related earnings of $126 million, up 61% from the prior-year quarter, and we generated an FRE margin of 42%. The quarter reflected retroactive fees of $4.2 million across our private equity co-investment fund, our two private equity secondaries funds, our infrastructure co-investment fund and our infrastructure secondaries fund. This compares to retroactive fees of $0.3 million in the second quarter of the prior fiscal year.

When excluding the impact of retroactive fees, core fee-related earnings were $122 million, up 56% relative to the prior-year quarter, and our core FRE margin improved to 42%, up 6 percentage points from a year ago. We earned $83 million in adjusted net income for the quarter, or $0.66 per share. This is up from $67 million, or $0.54 per share, in the second quarter of the last fiscal year, driven fully by growth in fee-related earnings. I’ll now hand the call over to Scott.

Scott W Hart (Chief Executive Officer)

Thank you, Seth. This was a remarkable quarter that put both the growth of our platform and the resiliency of our operating earnings on full display. I want to start by highlighting our record results. We generated fee-related earnings of $126 million, surpassing last quarter’s prior high by 20%. We generated a core FRE margin, adjusted to exclude the impact of retroactive fees, of 42%, which is 2 percentage points above our previous peak. We delivered adjusted net income per share of $0.66, our second best quarter on record, and we raised over $11 billion of capital during the quarter and $43 billion over the past year, with balanced contributions from separate accounts, drawdown commingled funds, and our private wealth evergreen funds. This represents our strongest 12-month period of fundraising in our history.

The strength of these results reflects the platform we have built over nearly 20 years. We have established significant scale and breadth across asset classes, geographies, strategies and commercial structures. We’ve made strategic investments to access new markets and, just as critically, our teams have executed extraordinarily well against these opportunities. And we’ve delivered strong investment performance, which is key to retaining and expanding existing relationships, winning new mandates and growing our balance of accrued carried interest and investments.

Our $158 billion of fee-earning AUM, $42 billion of undeployed fee-earning capital, more than $1 billion of net accrued carry and nearly $400 million of investments provide a substantial and durable earnings base from which we will continue to grow. We are clearly optimistic about the growth of our established businesses. At the same time, we are pursuing new opportunities, including U.S. retirement and insurance solutions. And we are continuing to develop data and technology partnerships, all of which have the potential to create substantial avenues of additional growth over the coming years.

Shifting gears, we recently hosted StepStone 360, our annual flagship conference for StepStone clients. This year’s conference was our largest ever, with over 400 client participants from nearly every region of the world. The StepStone 360 conference always presents a great opportunity to connect with our clients and to showcase the strength of our data and the depth of our team. This year we were excited to announce the addition of SPI AI to our SPI suite of products and to demonstrate how we are using AI across the StepStone platform.

Not surprisingly, we also spent a significant amount of time focused on some of the headwinds facing the private markets, including higher interest rates and slower return of capital. While these do present challenges, they also create opportunities, and managing through them plays specifically to StepStone’s strengths. I’d like to share some of the insights we presented on these themes. I’ll start with interest rates, which have taken another step higher in recent months, as the 10-year U.S. Treasury yield crossed 5% for the first time in nearly 20 years. While the easy money era that characterized the 2010s is over, we believe the next decade will present attractive opportunities for private markets. However, we expect the drivers of returns to look different. Looking back at private equity investments made during the 2010s, returns benefited from a favorable and perhaps unsustainable tailwind from enterprise value multiple expansion, driven in part by low and generally declining interest rates.

That environment also contributed to relatively tight dispersion across funds, making manager performance appear more uniform than it was historically. Looking ahead, we see tremendous opportunities for fundamental value creation. Artificial intelligence, digital infrastructure, energy transformation, cybersecurity, and defense are just a few of the themes that will require significant investment across the private markets. We expect returns to be driven increasingly by revenue growth, margin expansion and operational execution, with less reliance on leverage and valuation multiple expansion.

That is an environment in which we believe underwriting and manager selection will matter more than ever, and we believe this plays directly to StepStone’s strengths. Our evaluation of GPs places a premium on identifying managers with the capabilities to drive fundamental value creation. Furthermore, our scale and data give us access to a broad range of opportunities across primary fund investments, co-investments and secondaries, and, critically, give us the ability to be highly selective among them.

The second dominant theme was return of capital. While the absolute level of distributions is improving, distribution yields relative to the amount of capital invested remain near historic lows as capital market activity has been sluggish. We believe that uncertainty on the direction of interest rates, rather than the level of interest rates, has been the primary driver of slower capital market activity. We expect that a stabilization of rates would help reopen traditional exit channels, including strategic M&A and sponsor-to-sponsor transactions.

However, with $10 trillion of private equity capital and roughly $15 trillion of private market capital that is invested but yet to be realized, the industry will increasingly need to utilize the full range of liquidity solutions available. LP-led and GP-led secondaries have already emerged as critical mechanisms for generating liquidity, and we expect that trend to persist. StepStone’s secondaries platform is a provider of liquidity across the private markets.

Our scale, investment capabilities and depth of data give us a differentiated position and, we believe, a sustainable competitive advantage as the secondaries market continues to grow across asset classes. I’ll now turn the call over to Mike to speak about fundraising and asset growth.

Michael I McCabe (Head of Strategy)

Thanks, Scott. Turning to Slide 9, we generated over $43 billion …of gross AUM additions over the last year, our best 12-month period ever. This fundraising was strong across our commercial structures with over $20 billion coming from our commingled funds and approximately $24 billion from separately managed accounts. Of the managed account additions, $9 billion, or approximately 40%, came from a combination of new accounts or the expansion of existing accounts into new asset classes or strategies. During the quarter we generated over $11 billion in gross additions, including $7.5 billion of managed account additions and nearly $4 billion of commingled fund inflows.

This was our second largest quarter ever for managed account gross additions. I want to highlight private debt and infrastructure, which were particularly strong for this quarter. While each managed account solution is unique, there are a few common themes underpinning our success across these asset classes. First, our institutional LPs place a significant value on the diversification, yield, and attractive risk-adjusted returns that these asset classes offer, and our scale allows us to help clients deploy significant capital across these asset classes. And second, our strength across the private markets allows StepStone to leverage firmwide relationships to broaden our client engagements and deliver holistic private market solutions.

Shifting to commingled funds. Notable additions to our drawdown funds included approximately $600 million in our private equity co-investment fund, $700 million in our private equity secondaries funds, $600 million in our venture capital secondaries fund, more than $300 million in ESCRED, our institutionally focused private credit BDC, and a $300 million final close in our debut Infrastructure Secondaries Fund. This fund closed with $1.5 billion of committed capital, surpassing its target and reaching the hard cap.

This was our largest inaugural fund ever and is indicative of the strong demand we see for infrastructure investments and of StepStone’s leadership in both infrastructure and secondaries. We remain in market with our Special Situation Real Estate Secondaries Fund and our Multi-Strategy Growth Equity Fund, with first closes expected in the new calendar year and activations to follow. Lastly, we activated our Venture Capital Secondaries Fund following the end of the quarter, which will add $1.8 billion to fee-earning AUM in our fiscal Q3.

This is an exciting period of fundraising for our firm. We have essentially every flagship drawdown fund in market this year. Taken together, our prior vintage sizes plus the addition of our Infrastructure Secondaries Fund and our GP-led Private Equity Secondaries Fund provide a baseline of roughly $20 billion from which to grow. We have already raised over $11 billion across these funds and are well on pace to exceed prior vintage sizes. Turning to our evergreen funds, we generated $1.7 billion of subscriptions in our private wealth suite of offerings, growing the platform to over $23 billion as of the end of the quarter. Looking at the last 12 months, we generated approximately $9 billion of private wealth subscriptions. The persistency of our private wealth assets remains very high, with redemptions of only 2% across the platform this past quarter. We are very excited about the long-term opportunity in private wealth.

Penetration of private markets into high net worth is in the low single digits, while mass affluent exposure to private investments is near zero. We expect to continue to market our funds to high net worth individuals, and we expect access to the mass affluent to grow through both direct subscriptions as well as through allocations from model portfolios and defined contribution retirement funds. And here we believe StepStone’s diversified, multi-asset class, multi-manager platform is ideally suited.

StepStone solutions are already part of several model portfolios and retirement solutions. Slide 10 shows our fee-earning assets by structure and asset class. For the quarter, we increased fee-earning assets by $5 billion to $158 billion, driven by healthy gross contributions of $8.5 billion. Offsetting was higher-than-normal SMA distributions, driven in part by the expiration of a large SMA mandate which we communicated last quarter. Our undeployed fee-earning capital, or UFEC, grew to over $42 billion, a new StepStone peak driven by strong managed account fundraising.

The combination of fee-earning assets plus UFEC grew to approximately $201 billion, which is up $8 billion sequentially and is up more than $38 billion from a year ago. This translates to a 19% annual organic growth rate since fiscal 2022. Slide 11 shows our evolution in our fee revenues. We generated a blended management fee rate of 67 basis points over the last 12 months, higher than our fiscal 2025 and 2026 periods, as favorable mix shift to our evergreen funds offset a moderation in retroactive fees which were elevated in 2025.

Before turning the call over to David, I wanted to provide a quick update on our plans for shareholder distributions for this year. We are now within 12 months of our call option to buy in the private wealth profits interest. As we prepare to exercise this option, we intend to build cash by retaining the capital that would otherwise fund our supplemental dividend this fiscal year. We have a number of options to fund the buy-in, including cash on hand, debt financing, and the ability to fund up to 75% of the consideration in StepStone equity.

We will determine the ultimate financing mix based on market conditions at the time of the buy-in. Building additional cash today provides us with greater flexibility to optimize that mix and maximize the accretion of this transaction. To be clear, this does not impact our regular quarterly dividend, which remains at $0.33 per share. I’ll now turn the call over to David to speak to our financial highlights.

David Park (Chief Financial Officer)

Thanks, Mike. Turning to Slide 13, we earned fee revenues of $298 million, up 37% from the prior-year quarter. The increase was driven by growth in fee-earning AUM across the platform, with particularly robust growth in commingled funds across both drawdown and evergreen funds. Strong advisory fees also contributed to the revenue strength due in part to project-based fees. Fee-related earnings were $126 million, up 61% from a year ago. FRE margin was 42% for the quarter, both on a reported basis and normalizing for retroactive fees.

As Scott mentioned, this was our best quarter ever for core margins driven by operating leverage. Shifting to expenses, total compensation was $128 million, up modestly from the $124 million last quarter. The cash compensation ratio, adjusted for retroactive fees, was 41%. We now expect our full-year cash compensation ratio to come in at roughly 42%, better than the 43% rate we previously signaled. General and administrative expenses were $44 million, up $10 million from the prior-year quarter, reflecting growth in the broader business as well as increased private wealth.

As Scott mentioned earlier, we hosted our annual 360 client conference last month and we will be hosting our annual venture capital event in February. Consistent with prior years, these conferences add seasonal expenses to our fiscal third and fourth quarters. Gross realized performance fees were $65 million for the quarter and $32 million net of related compensation expense. This is considerably stronger than the pace of performance fees from the last two quarters. While the environment for realizations remains challenging, we are still seeing high-quality deals being executed and we are seeing general partners using all available tools to harvest investments. Performance fees will continue to be episodic and will vary quarter to quarter.

Adjusted net income per share was $0.66, up from $0.54 in the prior year’s quarter, driven by growth in fee-related earnings. Moving to key items on the balance sheet on Slide 14, net accrued carry finished the quarter at over $1 billion, our first time ever exceeding the billion-dollar mark, up 23% from a year ago. Our net accrued carry is relatively mature with 65% tied to programs that are older than five years, which means that these programs are ready to harvest. Our own investment portfolio ended the quarter at $387 million.

This concludes our prepared remarks. I’ll now turn it back over to the operator to open the line for any questions.

OPERATOR

Thank you. At this time we will conduct the question-and-answer session. As a reminder, to ask a question you’ll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question today is from Mike Brown of UBS. Your line is open.

Mike Brown (Analyst)

Hi. Great. Good afternoon, guys. I want to start on the evergreen side of the business. So the subscriptions continue to be very strong — $1.7 billion in the quarter. The growth continues to be very impressive there. What are you seeing in terms of subscriptions and the redemption activity exiting the quarter here, and then how much of the future growth as you look forward will come from continuing deepening with your existing relationships versus adding new platforms or new products to your suite?

Jason P Ment (President and Co-Chief Operating Officer)

Hi Mike, this is Jason. Thanks for the question. The good news is we’re still so early in the adoption cycle with the individual investor that the answer is both — all are going to be avenues for future growth. As we think about adding syndicate partners, that continues to be very healthy quarter over quarter. We’re over 860 different syndicate partners across the different fund families today, which is up, you know, 40 or 50 platforms over last quarter.

In terms of the level of depth of growth with individual partners, that also continues to increase quarter over quarter. If a platform’s been distributing one of our funds for at least a year, 55% of those groups are doing at least two, if not three or four funds today. Again, that’s increased over time — the average number of funds they’re distributing is now over two funds at 2.1 funds. So we’re growing with the partners and we’re growing the syndicate as well.

In terms of the product suite, today we don’t have immediate plans to expand. But as a reminder, in addition to the model portfolio fund of S Prime, we’ve got strategy-specific offerings across private equity, infrastructure, credit, and venture growth, giving platforms the ability to create their own models or incorporate these into models and dial up or down the allocations. That’s true for the individual investor and, importantly, for the defined contribution plan channel, which we expect will also be using these exact portfolios.

Mike Brown (Analyst)

Thanks, Jason, appreciate all the color there. You mentioned the defined contribution channel, and I just wanted to ask about that in light of the midterm elections earlier this week. So it’s been an emerging growth avenue — the opportunity in the 401(k) channel for StepStone and the industry. And as you guys pointed out, you’ve got a compelling product suite to address that. But with the midterm results now known and the scale of the blue wave perhaps larger than expected, is there a risk that this opportunity slows or runs into a bit more hurdles, maybe relative to what you were expecting a few months ago?

Michael I McCabe (Head of Strategy)

I don’t think our outlook has changed. We continue to believe that inclusion of private markets within the 401(k) offering suite is going to be a necessary component to solving the retirement gap that we face here in the U.S. in terms of the barriers to entry. We believe that the offerings that we’ve got available today work without any changes required from a regulatory or legislative perspective. And as a reminder, the DOL, the Department of Labor, proposed regulations that were made in March are continuing to percolate. Adoption of those regulations would not require any Congressional action before or after the new Congress is seated.

OPERATOR

Thank you for your call. Our next question is from Ken Worthington with J.P. Morgan. Your line is open.

Ken Worthington (Analyst)

Hi, good evening. Thanks for taking the questions. That was quite a quarter, maybe to begin, this is the biggest SMA contribution number we’ve seen in I think a couple years. And despite the big contributions, UFET grow further. Mike, maybe fleshing out your comments, can you give us a bit more on the business you’re winning here and maybe how does the pipeline look relative to the back book of business? Like basically, where is it different, if at all from the back book either by, I don’t know, like customer asset class, geography, like if there’s differences.

Scott W Hart (Chief Executive Officer)

Hey Ken, this is Scott. I’ll jump in there and maybe Mike will add to what I have to say here. But you know, first, you’re right to highlight it was a very strong quarter from a separate account, separately managed account standpoint that was at least partially driven by some large re-ups and quite a strong quarter in the private credit asset class in particular. If I had to sort of rank by asset class, I would say, you know, private credit followed by infrastructure and then private equity were the three main drivers, as part of the reason that Mike really highlighted the strength of private credit and infrastructure in some of the prepared remarks there.

In terms of the pipeline, look, we feel very good about the pipeline. There’s quite a bit of activity at the moment. It is a good mix of new clients, existing clients looking to expand or re-up on existing opportunities. But I wouldn’t say it looks terribly different than the existing sort of back book of business. I would say there continues to be an emphasis across our teams to focus on areas like primaries, which is an important driver of the overall flywheel.

And so many of the opportunities we’re looking at do have primaries as a key component. But again, doesn’t look terribly different than what you would see in the back book of business. There’s, geographically speaking, you know, from past conversations, continues to be a very global business. I would say in the last quarter in particular, it was really Asia and the U.S. that drove the results. But if you look over a slightly longer time period on an LTM basis, pretty balanced across Asia, Europe, Australia, Middle East and the U.S. here. And so that’s how I would expect things to continue on a go-forward basis as well.

Ken Worthington (Analyst)

Awesome. Okay. And then just maybe quickly on margins. So margins up to 42%. Even with the catch-up fees, do you expect expenses to kind of catch up here? You got a lot of funds in market. Management fees should be on the rise. So do expenses catch up here or is 42% something we should see more regularly in future quarters?

David Park (Chief Financial Officer)

Thanks for the question. This is David. Look, we’re certainly pleased to see our margins hit 42% this quarter, but I’d caution you against using that as a run rate for the rest of the year. There are a couple things to consider in this quarter. First, revenues were higher this quarter due to the closings across a number of commingled funds. And second, compensation was a bit lighter, mostly due to when we hired people. We brought on a number of new hires near the end of the quarter, so you’re only seeing part of their compensation cost show up in these results.

So both of these will turn next quarter. If you think about compensation, it will reflect the full cost of these new hires, so it will be a bit higher. We also I guess mentioned in the prepared remarks that our fiscal third and fourth quarters for G&A tend to be seasonally higher due to the two conferences. But on a full-year basis, I think it’s fair to expect to see meaningful margin improvement over last year.

Ken Worthington (Analyst)

Wonderful. Thank you so much.

OPERATOR

Thank you. Our next question is from Ben Buttish with Barclays. Your line is open.

Ben Buttish (Analyst)

Hi, good morning and thanks for taking the question. I guess maybe just following up there, I know it may be a little bit early for fiscal 28 and there’s a lot of puts and takes around the wealth platform buy-in. But in terms of thinking of ongoing leverage as more revenues come onto the platform, is this 42 a good baseline or should we be thinking about a full-year margin expansion? I think we were all a bit surprised by the step up, but just curious how to think about the next few years with that context.

David Park (Chief Financial Officer)

Yeah, thanks for the question. I think that’s fair. Looking at the remainder of fiscal 27, again, I think we should expect meaningful improvement over last year, and looking out towards fiscal 28 and beyond post buy-in, there’s no reason why not to expect margins would continue to see improvement sequentially. I think that’s a fair point.

Ben Buttish (Analyst)

Great. Then maybe just on the Spring crystallization, I think that comes up next quarter. I guess a lot can happen between now and the end of the year, but curious if you can give an update on what that is trending towards. I guess we’re only a couple days into November, but how market moves in the next two months could impact that. Thank you.

Jason P Ment (President and Co-Chief Operating Officer)

This is Jason. Thanks, Ben. Not going to comment on the exact performance fee. Obviously there is a bit of time between here and there, market moves in public stocks. Obviously there are some public positions in there. But more importantly there’s plenty of investment activity going on as well, and some of those will be driving value accretion within the fund. So probably want to refrain from speaking on exactly where performance fees will end up at 12/31.

Ben Buttish (Analyst)

All right, fair enough. Thank you very much.

OPERATOR

Thank you. Our next question is from Brennan Hawken with BMO. Your line is open.

Brennan Hawken (Analyst)

Oh hi. Thanks for taking my question. Curious. I believe Spring recently made a special distribution around the mid-threes percent of NAV that I believe hit October 1st. So just to clarify, would that be a December quarter event or was that in the last quarter? And do you have any stats on what proportion of the distribution was reinvested versus taken in cash and what kind of an impact we should expect in this quarter from that.

Jason P Ment (President and Co-Chief Operating Officer)

Yep, thanks, Brendan. The distribution, the special distribution we did out of Spring was effective 9/30. So it came out of NAV in the 9/30 quarter, and then the DRIP was about 80% and that came back in the next day into the fund. So net-net you saw about, I think it was about $70 million leave the fund from a NAV perspective due to the distribution that left in cash.

Brennan Hawken (Analyst)

Perfect. And that 80% of the 70 will be an inflow in the December quarter.

Jason P Ment (President and Co-Chief Operating Officer)

It came back. Well, we don’t report the DRIP in when we’re talking about statistics, we don’t reference the DRIP. But yes, the 80% came back in October.

Brennan Hawken (Analyst)

Perfect. Okay, thanks for that. And then thinking about like penetration here, right, with all your distribution partners. Correct me if I’m wrong, but I believe at this point it’s only about half your distribution partners that are selling one or more of your evergreen products. So as you continue to work through and work with your team, continues to work with these partners, what do you find is working to deepen these relationships and what do you expect will be able to drive that number higher?

And how long do you think that will take? Thanks.

Michael I McCabe (Head of Strategy)

Yeah. So as I noted earlier, about 55% of firms that have been with us for at least a year are doing more than one fund today. That number has increased over time. The trust that we build with our distribution partners through not only the investment performance but the service alpha that we bring to them, the perspective that we’re able to share not only about the markets but around other funds that they’re investing in, I think is very well valued.

We also try to bring education out to the field. We run StepStone Academies for advisors in addition to regular roadshows that we do for diligence purposes. During our 360 week we had a number of people in town for StepStone Academies and we run these throughout the year. Lastly, a recent announcement: we made available the allocation tool free on our website for advisors to be able to go on, plug in their clients’ portfolio composition, and see what would happen from a risk and return perspective by adding private markets exposure.

So those are just some examples of the ways that we build a value-added relationship for advisors beyond simply investing with us.

Brennan Hawken (Analyst)

Great, thanks for taking my questions.

OPERATOR

Thank you. The next question is from Michael Cypress from Morgan Stanley. Your line is open.

Michael Cypress (Analyst)

Great, thanks so much for taking the question. I was hoping you could elaborate a bit on some of the newer initiatives across insurance, retirement and the data and technology partnerships, hoping you could talk to some of the traction you’re seeing and the steps that you’re planning to take as you look out to 27 and how meaningful might these contribute to StepStone as you look out over the next several years.

Jason P Ment (President and Co-Chief Operating Officer)

Thanks. Thanks, Mike. I’ll start on the insurance and retirement front and then kick it over to Mike to talk about data and technology. So starting with the retirement opportunity, this is a huge pool of capital that, as everyone knows, is asymptotically approaching 0% allocated to private markets. And given the savings gap that we’ve got in this country in particular, we think that private markets are going to play a meaningful component of being able to help solve for that. We also believe that private markets will be included generally in fiduciary-managed portfolios. So that means target date funds, that means advisor-managed accounts.

And the conversations that we’ve been having with those kind of ecosystem partners has been very encouraging. We are starting to see small drips and drabs coming through into the funds directly through our normal-way sales motion to advisers. And in the coming weeks and months you should expect to see announcements, including StepStone as part of the private market solution for 401(k) solutions. Now, in terms of how that’s going to affect flows in general, we expect that private markets are going to be included in new portfolios, right? A new series of a target date fund, as opposed to being allocated within an existing pool of capital. And so there will be an adoption curve. I don’t know that I would expect it to take as long for the retirement space as it’s taking for the individual investor to adopt. There are a smaller number of deciders overall, and so that should lead to a faster adoption curve.

Obviously, there have been impediments to adoption heretofore, but those are definitely melting away. From the insurance perspective here, you know, insurance already represents a meaningful portion of our revenue. And so what we’ve been focused on is how do we adapt the packaging, the structuring of our investment engine to better align with the insurance investor. And that changes depending on what geography you’re talking about. But here in the U.S. and other similarly regulated geographies, optimizing for regulatory capital treatment is something that’s clearly of import to insurers, in addition to ensuring that the underlying exposures are the right kinds of exposures that they’re looking to allocate to from an ALM perspective or otherwise.

We’ve spent quite a bit of time on CFOs. We’ve issued a couple over time; expect that to continue. We’ve issued rated notes in our private credit space; expect that to continue. And Aaron Driscoll, our Head of Insurance Solutions, is spending a lot of time with U.S. and island insurers today to figure out the best solutions that we can bring to bear. The multi-manager nature of our platform is certainly something that’s appealing, and the fact that we can bring collateral packages across asset classes is definitely differentiated.

With that I’ll turn it to Mike to talk about data and tech.

Michael I McCabe (Head of Strategy)

Thanks, Jason. Mike, we view the recent activity in this space with data partnerships as validation on the opportunity, and as you know, we’ve taken a bit of a differentiated approach here by partnering with FTSE Russell, PitchBook, and Kroll across distinct fund, deal, and loan-level applications. We’ve deliberately chosen three specialist partners rather than a single broad-based financial data platform. With FTSE Russell, they provide world-class index construction, and we are currently in market with a half a dozen indices. PitchBook provides deep private capital workflows and the distribution of those workflows. Lastly, Kroll contributes independent, timely private credit data. When we combine all of those capabilities with SPY by StepStone along with the information generated through our investment and advisory activities, I think that pretty much puts us in a leadership position across data partnerships.

And I would say, lastly, at the end of the day we don’t think about this as having the biggest headline number in terms of funds, deals, or other sources of data. Counts in raw databases don’t necessarily tell you whether the information is decision-useful. Our objective isn’t to aggregate the most number of records; it’s really to build the most relevant private markets intelligence ecosystem we can. And it’s about the depth and quality of the data and whether or not it actually helps clients make better investment decisions.

And most importantly, the partnerships that we’ve created now deal with fund level and deal level and are available through a number of different commercial channels that serve not just our clients, asset owners, but also managers, GPs, service providers, and wealth platforms. So we’re really looking at data partnerships as addressing the entire ecosystem within the private markets and from a revenue generation standpoint. It’s going to be a slower build; it’s a much longer-term revenue opportunity, but we’ve put certain stakes in the ground that we think will bode well for us in the future, in a number of different ways.

Jason P Ment (President and Co-Chief Operating Officer)

Sure. So from a penetration perspective, whether it be from sheer number, it’s obviously a very small number relative to the total number of wealth managers either domestically or internationally. In terms of the large partners, we’re on with two wires; that leaves others there. We’re on with a number of the IBDs, but not all by any stretch. And in the RIA community we’ve got a healthy mix of some of the largest but also a very strong number across the mid and smaller size.

There continue to be a number of the larger RIA platforms that we are not on with today and continue to focus on. It could be education, it could be value-added services or otherwise to help crack into those groups, and we feel very good about the progress that we make. And add a mix of partners each quarter, right? We’re not adding only small platforms each quarter. Sometimes it’s a mix each quarter and a mix of new and cross-sell as well. So it just takes a ground game, and we’ve got a 120-person-strong private wealth team across the externals, internals, and dedicated finops folks that support that sales motion, and we just keep at it every day.

OPERATOR

Thank you. Our next question is from Dan. Please go ahead.

Dan

Hi, good evening. I was wondering, on the topic of the AI build-out, how do you look through the underlying managers to assess your aggregate exposure to the theme across venture, private credit, infrastructure? And then how do you advise your customers on the same topic of any concentration risk, whether it’s there or elsewhere?

Scott W Hart (Chief Executive Officer)

Yeah, look, it’s a great question and obviously one of the big questions of the day here just given how prevalent the AI trade has become and the various different touch points across different asset classes. And so, look, we do a few different things. One, we focus on some of the direct exposure that we have. We focus on, to your point, looking through to the underlying managers. This again is where our data and technology platform that you heard Mike and others comment on becomes very helpful for trying to assess that type of exposure across client portfolios.

So, look, I think if you step back, I think here at StepStone, we’re of the view that the AI trend is driving really a multi-year investment opportunity and one that we continue to be excited about, albeit in any long-term growth opportunity. We’re of the view that things won’t always happen in a straight line. There will be road bumps along the way, whether driven by capex cycles, by valuation multiples, or, as we’ve seen in recent days, by shifting political winds here.

But I often, you know, and we sometimes feel like a broken record when we talk about this here at StepStone, that anytime there’s some major disruption, we kind of fall back on the diversification of the platform — not only across asset classes, but underlying managers, geographies, vintage years, for example. And so, you know, I think that’s one of the greatest things that will provide us a good defense. I mean, across each of our asset classes today and the managers that we look to invest alongside, there’s a tremendous amount of focus on trying to maintain discipline and be very selective about the new investments we’re making. There’s a lot of focus on the partners that we are investing alongside, the way that they think about portfolio construction, as well as the way that we think about portfolio construction. And, look, we don’t pretend to have all of the answers in terms of where things are headed.

I think our private credit team, in particular, does a good job of thinking about various different scenarios that have the potential to play out and then thinking about how those scenarios might impact our portfolios over time. But, look, it’s certainly an ongoing effort. The reality is that with diversified portfolios like ours, there will be assets that are not impacted at all by what’s going on in AI. There are others that will benefit, others that will be impacted, and that’ll be really an ongoing effort to try to monitor over time here.

Dan

Great, thanks for all that color.

OPERATOR

Thank you. Our next question. One moment. Our next question is from Bart Jazarsky with RBC Capital Markets. Your line is open.

Bart Jazarsky (Analyst at RBC Capital Markets)

Great, thanks for taking the question. I wanted to ask around the unrealized carry. So you had mentioned around two-thirds of that is from 2021 or prior vintages, you know, ready to harvest. So just help us think through the cadence of when we should expect that maybe those more mature assets to be monetized. Thanks.

Scott W Hart (Chief Executive Officer)

Yeah, maybe I’ll start and David might jump in here as well. But look, it’s hard to predict given, you know, particularly the fact that we don’t fully control the timing of those exits. We have certainly tried to set up a portfolio that will benefit from exit optionality in the sense that we can exit through a variety of different routes. I mean if I look at the quarter that we just announced here today, some of the drivers of the realized performance fees and realized carry were really across private equity, particularly in some of our co-investment vehicles, venture capital, and infrastructure.

But again, it is a diversified pool of accrued carry that we have today. And also to give you a sense, if I look at, you know, we’ve been looking over time at how the different exit routes evolve and, you know, what we’ve seen in more recent years—and you heard David, I think, make the comment during the prepared remarks—I mean GPs really are tapping into all of the different potential exit routes. And so today, if we look over really kind of the last two years of exits, it has been very balanced across IPO or secondary sales, sales to strategics, sales to financial buyers, sales through continuation vehicles, dividend recaps.

There’s been no one single thing that has jumped out to drive those; exits have been very balanced across those routes, partially driven by the portfolio that we have set up. But again, predicting the exact timing is a bit more challenging. We’ve often encouraged people to look at sort of a rolling 12-month basis, knowing that any individual quarter can be quite lumpy as we’ve seen over time.

David Park (Chief Financial Officer)

Thanks for the question. Yeah, some of that is drawdown commingled funds. You have the infrastructure funds that have recently launched their co-investment and secondary funds, which carry a higher fee rate, so that is lifting a bit more in recent periods. You also have wealth in there, so in structures that is lifting that as well. So I think to the extent, again, we continue to raise funds and grow assets in the private wealth channel structures, you should continue to see that similar mix shift towards a higher fee rate.

OPERATOR

Thank you. As a reminder, to ask a question you should press star 11 on your phone and wait for your name to be announced. Our next question is from John Dunn with Evercore ISI. Your line is open.

John Dunn (Analyst)

Thank you. The institutional side is doing well and you mentioned re-ups, but I wanted to ask, are you seeing any changes in institutional client types, market share gains, or new relationships that you’re optimistic about on that side, and then maybe just an update on the temperature of those conversations.

Scott W Hart (Chief Executive Officer)

Yeah, so thanks, John, for the question. I mean, in terms of institution types, I wouldn’t say any major changes. I think what’s interesting is maybe just where they are at in terms of the build-out of certain parts of their portfolio. Again, to keep coming back to some of the strength that we’ve seen in private credit and infrastructure, it may be the same institution that we’re speaking to that’s got a very well-established program in private equity, probably a very well-established program in real estate, but might just now be launching an infrastructure allocation or just launching a private credit allocation.

And so I think we have found that we’ve been in the right place at the right time for many of those conversations. And, you know, given some of the success that we’ve had in building client relationships and then expanding those across other asset classes, I think getting that foot in the door and then creating the pipeline of future re-ups or future expansion opportunities continues to be key to what we do. I would also say that there continue to be, in some cases, quite large asset owners that are still just launching private markets programs. I think given our experience, being involved with the launch or relaunch of a number of large-scale allocations and portfolios over time positions us well to play a role there as well. So no major change to the types of institutions, but where we’re finding opportunities to have interesting conversations.

And again, the focus on, I would say, partnerships—I mean, you’ve heard me say it in different ways over the last couple of years—but this observation that clients want more for their money than just returns, and oftentimes it comes down to a value-added partnership and the additional services that you can provide, which again, I think sets up nicely for StepStone.

John Dunn (Analyst)

Got it. And then you talked about the composition of the pipeline, but could you talk about how you’re thinking about the timing of deployment and the fee rate that comes along with that, and then maybe just if you could box out how much you think gets activated over the next 12 to 24 months.

Scott W Hart (Chief Executive Officer)

Yeah, so if I just think about the $42 billion of undeployed fee-earning capital, there’s about $3 billion of that that is subject to activation. The rest is subject to being deployed. And I’ll maybe let David comment in a minute on what’s subject to activation or what that might look like. But if you look, for example, on page 17 of the earnings presentation, we talk about the $3.6 billion of undeployed fee-earning capital that was either activated or deployed during the last quarter.

About $2.8 billion of that was deployment, and so if you think about that on an annualized basis, you know, we’re kind of running—it’s the highest it’s been over the last couple of years. It implies sort of an $11 billion run rate, which would put us right at the kind of three-and-a-half-year mark from a deployment standpoint, and so very comfortably in that three- to five-year range that we’ve always talked about when thinking about our UFEC. Again, historically the fee rates on the UFEC have tended to be generally in line with the fee rates on the rest of the business over time, recognizing this tends to be heavier on the separate account side than the commingled fund side. But David, anything you’d add on just what’s subject to activation in the coming quarters?

David Park (Chief Financial Officer)

Yeah, I think so. Just if you look at the funds in market, we do have our PE Co-Investment Fund that has already been activated, Infrastructure Co-Investment Fund that is also activated. Our PE Secondaries Fund—both funds activated last quarter. We do have our VC Secondaries Fund, which has activated post quarter-end. Real Estate Secondaries Fund is while in market; no closings yet, so future activation likely in the next calendar year. We also have our Multi-Strategy Growth Equity Fund—similar to that, likely to activate in the next calendar year.

John Dunn (Analyst)

Great, thank you.

OPERATOR

Thank you for your question. I’m showing no further questions at this time, so I would now like to turn it back to Scott Hart for closing remarks.

Scott W Hart (Chief Executive Officer)

Great. Well, thanks everyone as always for your time and interest in StepStone. We’ll look forward to connecting with you again next quarter. Thank you.

OPERATOR

This does conclude the conference. You may now disconnect.

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