Good day, and welcome to the StepStone Group Second Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] 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 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 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 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. 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 filing with the SEC. Turning to our financial results for the second quarter of fiscal 2024. Beginning with Slide 3, we reported GAAP net income of $59.3 million, GAAP net income attributable to StepStone Group Inc, was $26.2 million or $0.42 per share. Moving to Slide 4, we generated fee related earnings of $43.8 million up 12% from the prior year quarter. And we generated an FRE margin of 31%. The quarter reflected retroactive fees resulting from interim closings at StepStone private equity secondaries fund and StepStone's 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 were no retroactive fees in the second quarter of fiscal 2023. Finally, we earned $30.2 million in adjusted net income for the quarter or $0.26 per share. This is down from $37.3 million or $0.33 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 StepStone's, Chief Executive Officer, Scott Hart.

Thank you. Seth. And good afternoon, everyone. Despite a number of continuing challenges in the macro environment, including volatility in asset prices, higher for longer interest rates and heightened geopolitical risks, StepStone continued to generate steady results, these results are driven by the breadth of our offering, specialization of our strategies and positive momentum in areas in which we've invested for growth. Although 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 StepStone 360 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're seeing in the market and in our portfolios. The 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. Our clients remain extremely engaged with the private markets and continue to turn to StepStone for help in meeting their long term investing goals. Secondary is a strategy that continues to resonate with our clients in today's environment. While general slow pace of realizations has needed at near-term market appetite for some private market investments, demand for secondaries across asset classes remains very strong and is a key area of differentiation for StepStone. Our deep relationships with general partners, supply a large pipeline of investment opportunities and our superior data and expertise, allow us to identify the best…

Thanks, Scott. And I'd like to echo your words of appreciation for Johnny Randel and congratulate David Park. Turning to Slide 7, we generated $15 billion of gross AUM inflows during the last 12 months, with $6 billion coming from our commingled funds and $9 billion coming from our separately managed accounts. Slide 8, 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 impact the near term timing of our fee earning asset growth and 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 undeployed fee earning capital. First, our venture capital secondaries fund had a very successful first close of approximately $1.25 billion, which currently resides in our undeployed 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 raise 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 recapitalizations 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…

Thank you, Mike. Before speaking to the quarter. I would like to say a very, very sincere thank you to my colleagues here at StepStone. It has truly been my privilege to work alongside you and I look forward to seeing what StepStone 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 FRE margin for the quarter is 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 in the next two quarters driven by seasonal expenses associated with investor conferences. We just held our StepStone 360 private markets Conference in October. And we will host our Annual venture capital conference in early 2024. As, 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 on a fee…

[Operator Instructions] Our first question comes from Ben Budish 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 SMAs and re-ups, looking robust, but it can take some time to materialize. I wonder if you could unpack that a little, know what are you seeing kind of real time and what is sort of the reason for, I don't know, the delay or what does the pipeline look like in terms of either investor type or the type of assets they're looking to invest in? Any color around that would be helpful. Thanks.

Sure. Thanks, Ben. For the question. So 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 mandates, 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, in the last couple of quarters. So that's obviously encouraging and clearly builds the pipeline of future re-ups and potential expansion opportunities. So that's certainly one trend that we're seeing. Second, the driver to your point of perhaps slight delays and re-ups is really driven by deployment, right. It's a matter of fully investing the prior vehicle and coming back around to that re-up opportunity. We have made steady progress there and feel like we have some important re-ups in the pipeline at the moment. And given our continued re-up rate that has been quite successful again north of 90% over time, feel good that, that will convert into new commitments. The last thing I would perhaps mention is that and we made quick reference during the prepared remarks but the presence of venture opportunities, which may come as a bit of a surprise to some of you, I think it is a continued area of interest amongst clients both here in the U.S. and internationally and so we are 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 RIAs, IBD, wires and international. Where are you seeing, I guess, the most traction? What is your expectation as some of the funds. I think you mentioned the SPRIM is going to be added to another wire, SPRING will be added to its 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. Ben, 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 a broad on the dedicated private wealth team and so flows are definitely stronger here in the U.S. today. We expect that will balance out over time as we continue to invest in the distribution partners abroad. In terms of the flows between the products look, SPRIM U.S. is the most seasoned of all the products, it's the largest of all the products to date and so therefore there is a bit of size -- bigger size you're eligible for inclusion by more distribution partners and so therefore that's certainly helpful. And when I look at the kind of day zero comparison, SPRIM versus SPRING. SPRING is off to a very strong start. Clearly the performance there is definitely helpful, at 30% since inception. And so we do expect that to continue to scale nicely. STRUCTURE, it's simply too soon to tell. We're just a couple months in here, but what conversations have been positive.

Got it. Thanks so much. Appreciate it.

One moment for 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 a daily NAV ticker for SPRIM maybe Scott or Mike, I was hoping you could flush out more on your prepared remarks and give us some progress you're making in terms of the marketing of the new structure? How is education going on the new products for the RIAs. And what is the sales cycle seems like it's developing for this new product with that sort of pre-existing customer base. Is this a three month 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.

Thanks, Ken. This is Mike. I think what I might do is invite Jason Ment to address that a bit more specifically since he looks after the private wealth channel.

Thanks, Mike. Thanks, Ken. On the ticker, I think there it's been welcomed with open arms, certainly by the RIA community in particular. It definitely makes their life materially easier, we expect IBDs to some of them at least use the ticker. I think the wires will be the last there to adopt and don't have real timeline as to when that might be. In terms of the -- let's call it the brand education cross sell. As we look at the different channels, I would kind of cite the following. If I look at the distribution syndicate for SPRIM and this will be all kind of U.S. to U.S. If I look at that syndicate, about a third of those distribution partners have also come into SPRING. And then conversely, if I look at the SPRING distribution base, over two-thirds of those are SPRIM distribution partners as well. So clearly the brand awareness helps. And there's a bit of -- if you like, the StepStone story across private markets you're going to like it in venture and growth specifically. So again STRUCTURE is too soon to tell. But, we'd expect to see a similar pattern.

But certainly relating 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, we expect to see some acceleration of growth across private wealth with this new partnership in place.

Awesome. Thank you. And then on SMAs and fee rates. We saw the elevated distributions, you attributed some of this or a bunch of it to step downs and some expirations. 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 the SMA or the fee rate in SMAs is pretty stable. Is that something that we should see in coming quarters as this trend persists?

Hi, Ken, it's John here. Just let me talk a little bit about that. I think what you'll 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 there's just so many SMAs 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 reupping. So we don't expect a 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.

All right. Thank you, and good evening. Just wanted to take a quick pulse on the Investor Day target of doubling FRE by 2028. Sounds like. the top line, as both Mike and Johnny mentioned, the top line looks to be in good shape, but the 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 '24, 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? Thanks.

Yes. And thanks for the question. This is Scott. 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 and 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 plans 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 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 fundraising, continued strong re-ups despite a tough market environment, continue to be there, really the biggest factor in the near term. And as we look at the business just for the quarter has been one of deployment, right. And so, with 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 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 arrive. But when we think about the business over a five year time frame or really the next few years, I would say no real change to what we talked about on Investor Day. And if anything, feel like with some of the positive news around the private wealth channel, the venture capital fundraising, the progress we've made on different commingled vehicles, feel quite good about the longer term trajectory. But Mike, you may want to jump in with additional thoughts there.

That's right. Thanks, Scott. So we feel really good about the way our gross AUM flown 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 AUM basis we feel really good about our progress. It's the fee earning AUM Adam that you're 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. And what we're seeing a little bit on the revenue side, as you pointed out correctly, it's still is very healthy and looks good, but there is a little bit of a delay this year which does to your point, make fiscal 2025 a really important year for StepStone across all key metrics. At the timing of activations and the timing of deployment really go live as we enter that fiscal year. I hope that addresses some of your questions here.

No.

Maybe last -- Adam last thought I would share is I mean look in our view,, right. Our continued ability to meet those longer-term goals. It's 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, 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 a phrase that kind of caught my attention and congrats, by the way, on the Wealth Management Channel getting on the new platforms. It seems like a lot of the work there is coming to fruition. You 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, needing a fair bit of education effort. I don't think of it as like high leverage, but maybe there's something I'm missing that you can help me with? Thanks.

Sure. Look -- while that is certainly true. One of the things that we are also offering to clients in that channel is the ability to invest alongside and with the same 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 and institutional funds. And that's really where some of the leverage comes into play given how much of the sort of fees drop to the bottom line on the investment side, there?

Perfect. Got it. Now. Thanks, Scott.

One moment for our next question. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Good evening guys. Just maybe I'll piggyback on Adam's question around 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, look on a net basis, sort of like net of minority interest and are we already there and kind of how do you expect that to scale and actually add to the kind of net of minority interest or non-controlling interest, FRE.

Yes, I'll start and then others can add. The reality of it is kind of varies. I mean, I think we are getting there given the scale we've seen and the team we've got attached to it as Scott mentioned there is the investment process, which is a big part of what's we think driving the success in terms of the returns that are being produced that's helped driving the scale. And so when you kind of think about it from a 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. And if that continues, then obviously we do think it can have an impact over time.

Got it. Okay. We can follow up, my other question or maybe should have been my first question. I wanted to talk a little bit about the secondaries business with you guys. And Scott, sounds like you're seeing an increased opportunity for deployment there. You mentioned the urgency maybe on part of the sellers to come to market is great 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 in dry powder you guys currently have across your secondaries business, perhaps even including the funds that are currently fundraising. How quickly do 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 if the opportunities have to continue to improve.

Yes, thanks, Alex. So, look, I don't think we've 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 commingled vehicles with some of the incremental closings on the private equity secondaries fund. That fund has now raised nearly $2.5 billion. It has 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 at $1.25 billion, 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 $2.6 billion venture fund that we raise shortly after the green SPRING acquisition. In real-estate, we've 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 commingled vehicles and obviously there's separate account capital both within the private debt and infrastructure businesses that I hadn't referenced as well as in private equity that as that dry powder number. And I think in terms of the pace of deployment, look 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 is portfolio construction is one of the few things that is completely within our control and so we have taken approach of wanting to build diversified portfolios across a number of different metrics, including across vintage years. And so I would generally expect that these funds are deployed over a roughly three year period in order to achieve that vintage year diversification. So I think that's 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, that's great, thanks so much.

[Operator Instructions] Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Good evening. Thanks for taking the question. I just want 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. Which of your strategies would you say are best positioned here and which strategies might be able to raise meaningful capital as you look out over the next 12 to 24 months in private credit and I think you have a retail vehicle launching in the credit space as well so maybe you can provide an update on that too? Thank you.

Yes. So Mike, thanks for the question. 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 as our private debt team travels the world has continued to grow. We clearly view it as a very attractive risk reward when you can think about not only have base rates increased, but spreads have remained fairly consistent. And when you're talking about 12% type gross asset yields investing at the highest part of the capital structure. And when you look at 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 like I've talked about across the business of deployment with M&A activity down, 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 methods, that has in some cases meant looking beyond corporate direct lending to areas like real-estate and infrastructure where we think there'll 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 is one of the leading limited partners and one of the leading primary capital allocators positions us very well as a replacement LP or someone to participate 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 is starting to create liquidity challenges on their side. Are you starting to hear 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 you're seeing this all sort of play out here as you kind of look out over the next twelve months or so.

Sure, I think so much of what we've talked about over the last -- call it 18 months has been the denominator effect and the fact that it was really more of an issue of being over allocated. But as the slowdown in distributions 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, most LPs are experiencing more capital calls than distributions. And I think you're right that for some, it will start to create some liquidity pressure leading LPs to either tap the secondaries market themselves as a source of liquidity, and as a source of realizations or certainly actively talking to their GPs 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 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 StepStone 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.