Welcome to the StepStone Fiscal First Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. Later we will conduct question-and-answer session. [Operator Instructions] I will now turn the call over to your host, Seth Weiss, Head of Investor Relations. Mr. Weiss, you may begin.

Thank you, and good afternoon, everyone. Joining me on the call today are Scott Hart, Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategy; and Johnny Randel 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'd 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 and are inherently uncertain and are subject to various risks, uncertainties and assumptions. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in the Risk Factors section of StepStone's most recent 10-K. 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. In addition, 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 first quarter of fiscal 2023. We reported a GAAP net loss of $21.5 million for the quarter ended June 30, 2022. The GAAP net loss attributable to StepStone Group Inc. was $11.0 million. We generated fee-related earnings of $36.6 million, adjusted net income of $47.1 million and adjusted net income per share of $0.41. The quarter reflected retroactive fees resulting from the final closing of StepStone's private equity co-investment fund that contributed $2.4 million to revenue and $2.2 million to fee related earnings and pretax adjusted net income. This compares to retroactive fees in the first quarter of fiscal 2022 that contributed $0.9 million to revenue and $0.8 million to fee-related earnings and pretax adjusted net income. I'd now like to turn the call over to StepStone's Chief Executive Officer, Scott Hart.

Thank you, Seth, and good afternoon everyone. We delivered another robust quarter of earnings, fundraising and growth in fee earning assets as we kicked off our 2023 fiscal year. Our strong performance comes despite what was one of the most challenging periods for public equity and fixed income markets in the last two decades. These results exemplify the strength of StepStone's platform and the resilience of our business model. As I think back to our September 2020 IPO road show, which took place just six months into the pandemic, the resilience of our business model was a major focal point. While there are notable differences between the current environment and the COVID driven market correction, the stability of our model remains relevant and is largely driven by three factors; one, our exclusive focus on the private markets with a dedication to customized offerings; two, our diversification; and three, our visibility into future earnings and growth. I'd like to touch on each of these topics. First, we are exclusively focused on the private markets, which have historically generated stronger performance and weathered volatility better than their public equivalents. As a result, private market allocations have continued to grow over time, representing a larger percentage of the overall portfolio for experienced investors while also attracting new LPs. While we and our clients have benefited from the favorable market conditions in recent years, the value of our service has become especially apparent during times of stress. Over the last several years we operated in an environment in which investors were often rewarded simply for deploying capital into a rising market. Going forward, there will be more differentiation in performance and we believe that disciplined portfolio and risk management, data-driven manager and investment selection and access to cost effective private market strategies will be…

Thanks Scott. Turning to slide 7, we generated $24 billion of gross AUM inflows in the last 12 months with $7 billion coming from our commingled funds and $17 billion in separately managed accounts. Slide 8 shows our fee-earning AUM by structure and asset class. For the quarter, we grew fee-earning assets by over $3 billion. We are well positioned to grow through market cycles and this quarter's results, serves as a continued proof point of our business model. While individual managers may experience fundraising pressures a multi-manager platform like ours diversified by geography, asset class and strategy casts a much wider net. This was a balanced quarter for growth in fee-earning assets with approximately 60% of the growth coming from infrastructure, real estate and private debt. Demand for real assets continues to be extremely robust as the inflation protection embedded in the underlying investments are driving strong capital formation and generating positive absolute investment performance. This was our best period for growth in real estate, since the fiscal second quarter of 2021 driven by significant re-up activity. As Scott mentioned, secondaries investments are a particularly compelling strategy in today's market. As a leader in the secondaries space, we can play both offense and defense for our clients as we help them navigate these challenging markets. We have a multibillion-dollar arsenal of dry powder in our newly raised venture secondaries fund, our private equity secondaries fund and our real estate secondaries fund and within separately managed accounts across all four asset classes that we will deploy as investors look to reposition their portfolios or seek liquidity. The prospect for continued growth remains strong as investors look to the secondaries market as both a viable entry and exit point. Moving to growth by commercial structure, commingled funds contributed about $800 million…

Thank you, Mike. I'd like to turn your attention to Slide 11 to speak to a few of our financial highlights. For the quarter we earned management and advisory fees of $117 million. The strength in revenue was driven primarily by continued growth in fee-earning assets. Profitability remains strong as our FRE margin expanded to 31% for the quarter up approximately 200 basis points year-over-year but down slightly versus the prior quarter. We benefited from retroactive fees in the quarter which contributed 130 basis points to the FRE margin. For comparison, retroactive fees contributed 70 basis points to the FRE margin in the year ago quarter and contributed 170 basis points last quarter. Excluding the impact from retro fees our margin was up over 100 basis points year-over-year and was essentially flat to the prior quarter. Shifting to expenses compensation was up versus the prior quarter as we continued to invest in our teams. We have also seen sequential increases in travel and marketing driving increases in our G&A expense. As we think about the near-term trajectory of expenses, we expect further increases driven by higher compensation and occupancy costs as we grow our team. We see a pathway for continued long-term sustainable growth and we are investing to position ourselves accordingly. Over the last few quarters, we have commented that we view a near-term FRE margin of about 30% as reasonable with some variability quarter-to-quarter based on the timing of expenses and the cadence of large commingled fund closings and activation of fees. This might mean that we dip below 30% in certain individual quarters but we still expect that we will generate an FRE margin of about 30% for this full fiscal year. We anticipate expanding our margins to the mid-30s over the longer term as we balance…

[Operator Instructions] And first question comes from Michael Cyprys from Morgan Stanley. Please go ahead, Michael.

Great. Thanks, so much for taking the question. I hope you guys are doing well. Maybe just start off on secondaries. You mentioned in the prepared remarks that there's an opportunity to help LPs in the marketplace reposition portfolios. So, I guess the question is how would you characterize the level of activity that you see there today and the level of dialogue? How do you see that relative to the opportunity set that you think may emerge? And maybe you could talk a little bit about, how you expect and see this playing out as you look forward over the next 12 months in other -- maybe remind us if there are certain parts of the secondaries marketplace where you tend to play versus others and other places where you tend to maybe shy a little bit away from.

Sure. Thanks, Mike for the question. This is Scott. So, look, as we started to hint at even last quarter, we do see the secondaries opportunity emerging as an important one from both an investment standpoint, but also as a portfolio construction tool for our clients. I think we really have seen that play out over the last couple of quarters. If you look at some of the market statistics for the first half of 2022, depending on which stats you're looking at deal volume was up anywhere from 10% to 20%. And unlike the last couple of years, the key driver of that was LP secondaries as opposed to GP-led secondaries which as we've all talked about has been a key driver of growth over the last several years. I would say, we saw a similar trend in our own deal flow in the first half of the year. Volume in both the LP secondary and the GP-led secondary market was up pretty significantly in terms of what we saw. But obviously just given the quality or perhaps the uncertainty that exists ahead of June 30 valuations coming out you can imagine that we were very selective and as a result had an even lower completion rate than what we would have seen over the last several years. And I think that sort of characterizes the type of environment that we're in here. I think there is this uncertainty that exists until we have further visibility into June 30 valuations. And I think at that point is when we would expect to see activity pick up to an even greater extent. In terms of where we play as Mike mentioned during the prepared remarks, we're active across all four of the asset classes today. We think that's a differentiator. If you think back to some of our prior commentary, our real estate team was really some of the pioneers in the real estate secondaries market. We pursued infrastructure secondaries through separate accounts. And as we've talked quite a bit about, both this quarter and last quarter, have now the largest venture secondaries fund in the market and have just held the first close on our next private equity secondaries market. But our activity crosses both the GP-led and the LP part of the secondary market. In both areas, we think that the StepStone platform brings with it pretty significant advantages from both a sourcing as well as a due diligence and an information standpoint.

Great. Thanks. And maybe just a follow-up question. More broadly growing concerns around sticky inflation, potential recession, geopolitical risk, all of that still remains here a risk. I'm just curious, when you think about the broader private markets, what's sort of top of your wall of worry? What tail risks do you see out there? And ultimately, what sort of deployment opportunities could that lead to, or where do you think you might become most excited?

Look, I mean, I think as you listed a number of the different concerns that are out there, I mean it's probably hard to pick exactly one but I do certainly think that the recession risk continues to be high on everyone's mind. If I use for an example, as we started to see rates rise our private debt team, in particular, was doing quite a bit of stress testing and scenario planning across portfolios to understand the impact, for example, of rising rates on credit quality, on interest coverage, on ratings, et cetera and found that, look, the rise in rates on its own would have somewhat limited impact. But it's the potential risk for recession and certainly those tend to be scenarios where you could then see a decline in earnings and cash flow generation, and that's certainly where you start to see more of an impact on portfolios. If we step back and think about our portfolios today, the operating performance has continued to be quite strong, strong top line growth, partially offset by inflation and margin pressure, but still resulting in growth in earnings and cash flow. It's really been more of a valuation reset that we've experienced. But if you were to experience a recession, obviously, different sectors will respond in different ways. I think that's where some of the concern lies. From a deployment standpoint, again, this is the point that we made during the prepared remarks. Many of our most experienced investors understand that, with that kind of correction comes new investment opportunities. And when you have the chance to buy companies at trough earnings and trough multiples and benefit from both, growth from the bottom as well as potential multiple expansion, yes, that's where we've seen some of the best returns historically in the private markets.

Great. Thank you.

Our next question comes from Ken Worthington from JPMorgan. Please, go ahead, Ken.

Hi. Good afternoon. So you guys were very busy again fundraising on the SMA front. So it's been a very good second half of the year. What is sentiment like for your LPs, given the macro environment and other factors? And ultimately, what I'm looking for is, how do we think about combining your view of sentiment versus your pipeline in terms of what it means for the fundraising outlook for StepStone in the second half of the year for SMAs. Like how -- again, first half was very, very strong. How should we think about this sort of coming together in the second half of the calendar year?

Sure. I'll start Ken, this is Scott, again, and maybe others will jump in. But, look, you can imagine -- and you'll recall, during our last earnings call, just over two months ago, I think, we struck a pretty cautious tone or we think, a realistic tone on the fundraising environment and sentiment. Look, with the benefit of two additional months and many, many conversations with clients and prospects, we would say a couple of things. One, we would reiterate the comment that we've made which is that, even as you do come up against the denominator effect, it seems to us that for every conversation we're having about the denominator effect, we seem to be having another one about launching a new private markets program or accelerating deployment into a private markets program. And that certainly gives us some level of confidence. The other thing, I would say is that, even for those clients or prospects that are dealing with the denominator effect issues, after they mention the denominator effect, the next words out of their mouth tend to be. But we remember what happened after the dot-com bubble or the GFC, when we pulled back and missed out on some great opportunities. And we're not going to make that same mistake again. And so, what you see is, you've seen LPs react in a few different ways. Some have actually increased their allocations to the private markets asset class. Some, as we just talked about, in response to Mike's question, have looked to the secondaries market. And others have maybe reduced, but have certainly not stopped making new commitments. And there's a couple of different ways you can do that. You can make smaller commitments to the same number of managers, or maybe you're a bit more selective and you invest with a select group of managers. As we think about where our separate accounts lie, right, they're in areas like secondaries, like co-investments. And oftentimes what we find with clients, who have really partnered with us to launch these programs, is the last thing that you want to do is now find yourselves out of the market after you spent this time and effort establishing this program. And so, it's part of the reason that we shared some of the re-up statistics across our separate accounts, which is a key driver of that separate account fundraising activity for us.

So if I can sort of paraphrase and give you my impression back to you, it seems like -- you were definitely cautious last quarter, but you seem to be less cautious, given the two months and the dialogue you're having right now. Is that a fair interpretation, or am I sort of off the reservation?

No, not off the -- look, we continue to be cautious. I think part of what got lost maybe in some of the messaging historically was, the fact that we think we've got a platform that's well suited even for the current environment. And again, that I think was behind some of the key messages in some of our prepared remarks here around the stability of the business, the strength of the re-ups and the continued growth with existing clients.

Okay. Great Thanks, very much.

Our next question comes from Alex Blostein from Goldman Sachs. Please, go ahead, Alex.

Hey, everybody. Good afternoon, as well. Thanks for the question. So I was hoping to go back to some of the points you made around the secondary business; again, something we've been talking about for a while. Maybe just put a little bit more meat around the bones on what that actually means for StepStone's P&L and kind of how it all comes together. So the $17 billion of sort of dry powder or sort of shadow AUM that will turn on fees once deployed, can you help us frame how much of that is the secondaries business I guess outside of the commingled funds? Because I guess those will turn on fees once the investment period begins. So it feels like the deployment base in secondaries will be accelerated here. So I'm just trying to better understand how that impacts the revenue base.

Thanks Alex. This is Scott again. So look, we've never disclosed the exact breakdown either by asset class or strategy of the $17 billion of undeployed fee-earning capital. I would say that it's probably more heavily weighted towards co-investments than secondaries. More of the secondaries programs do tend to pay on committed capital. So the main part of that $17 billion that will convert into fee-earning AUM is the first closing on the private equity secondaries fund once it's activated.

Got it. Okay. And you guys plan to activate it in the back half of the year? I think I heard in the prepared remarks Q4 right? Is that still the case?

That's our current plan yes.

Got it. Okay. And then separately just zoning in on Greenspring for a second we obviously had some questions on that last quarter. We've seen another quarter of sort of more challenging marks in some of the growthier kind of venture-based investments. How did the marks look across Greenspring's portfolio now that we're halfway through the year? To what extent do you think that could impact capital fundraising efforts for that business?

Yes. So I mean look, one as a reminder as we talked about last quarter, I would say that, again we did not acquire some of the legacy Greenspring carried interest. So in terms of how those valuations impact the realized carry we'll have limited impact there. But I think to your point the question is how does that impact track record future fundraising, et cetera? Rather than get into the Greenspring portfolio, specifically I would say across the portfolios that we manage and if we look at how venture marks came in as of March 31 and again still limited visibility on where June 30 comes out, look I'd say we generally saw sort of mid-single-digit type declines across venture more broadly. But even if you break that down by individual subsector you saw a pretty wide range of activity. Early-stage was less impacted. Late-stage, which is more tied to the public markets and public market valuations was probably down more like high single digits. And growth equity was somewhere in between. And so again recall we've got a very diversified portfolio in venture ranging from early-stage to late-stage in growth equity and everything in between and ranging across primary, secondaries and direct investments. But look the portfolio is holding up well. From a – to your question around fundraising activity continue to see quite a bit of strength there. We talked in the prepared remarks about not only the secondaries fund but the direct fund, the micro fund and are now in market with sort of the flagship global venture multistrategy fund as well. So a lot of good activity taking place across the venture and growth portfolio.

Great. Thanks very much.

Our next question comes from Adam Beatty from UBS. Please go ahead, Adam.

Hi, good afternoon, thank you. I wanted to ask about the resilience of flows. Scott, you talked about the kind of strength of new clients continuing to initiate or expand private markets programs and also about some learned experience of LPs around attractive vintages that may be in times of disruption. One thing that I didn't hear you mention forgive me if you did was the geographic footprint of StepStone. It seems to me that with some of the US maybe public pension, LPs in particular being more constrained that your more global presence might have helped with resilience of flows. Is that the case? And if you could give some details around that I'd appreciate it.

Yes. So Adam, we did make brief mention of the international mix during our prepared remarks, mentioned that really over the last 12-month period and this is consistent with the last few years, something like 80% of the AUM inflows have come from outside of the US closer to 20% from the US or North America. Look, I would step back and say – and I do think that is a source of strength for us. I would say, I'm not sure, I always totally agree with the narrative that has emerged around it just being US public pension funds, that are impacted. And I say that for a couple of reasons, one of which is, we've had some good performance here in the US, over the last couple of quarters as well including US public pension fund clients of ours, that have re-upped or expanded relationships. So again, I often find it, somewhat difficult to generalize on these topics. And I think, look the same is true, I mean outside of the US. There are certainly some investors, that are impacted by the denominator effect as well. But look we do think, that will be a continued source of strength for us. If I think about some of the legacy Greenspring funds, they've probably been more heavily weighted towards the US historically. And so certainly, one of the opportunities here is for us to introduce our global client base to our expanded venture and growth capability.

Thank you. It's a good perspective straighten out, my thinking a little bit. And then just moving on, I wanted to ask about the realized carry acknowledging that StepStone, doesn't really control that. Johnny's comments sounded like, at this point from what you can see a slowdown is ahead. So I guess the question is, how quickly could a rebound in conditions, whatever that maybe it's deal-making activity or what have you or valuations, how quickly could that kind of turn around that outlook? Would it take a quarter or two, or could it be longer than that? Thanks

Look, I think it probably does take a quarter or two, because if you even just think about the time lag between transactions, being signed and then being completed, that does tend to take a couple of quarters. And as Johnny mentioned during the prepared remarks, part of the reason that we saw continued strength this quarter, was just the pipeline of exits that had been signed up, in late 2021 and ultimately closed during this last quarter here. So I think it does take some time. I wouldn't -- I mean look, I don't necessarily expect that realizations rebound immediately to 2021, activity levels. And part of the reason I say that, as you've heard me say on past calls, really we were operating in an environment last year, when all exit routes were open: IPOs, strategic M&A, certainly financial buyers. As I think about the current environment, clearly the IPO window is largely closed. I'd say, strategic M&A has slowed. And really, if we look over the last couple of quarters it has been almost entirely sales to other private equity firms, or GP-led secondaries that have driven our exit activity. Good news, there is there's a tremendous amount of dry powder. So I expect some of that to continue, but perhaps not at elevated 2021 levels.

Got it. Makes sense. Thank you, Scott.

And at this time there appears, to be no further questions. I'd like to turn the call back to Scott, for closing remarks.

Well, great. As always, we appreciate the time and the interest in the StepStone story and we'll look forward to keeping you updated in future quarters. Thank you.

This concludes today's conference call. Thank you for attending.