STEPSTONE GROUP LP The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes included in Part II, Item 8 of this annual report on Form 10-K. This annual report reflects the historical results of operations and financial position ofStepStone Group LP , our predecessor for accounting purposes, prior to the Reorganization and IPO. In this annual report, references to "we," "us," "our," "StepStone" and similar terms refer to SSG and its consolidated subsidiaries, including the Partnership, following the Reorganization and IPO and to the Partnership and its consolidated subsidiaries prior to the Reorganization and IPO. Unless otherwise indicated, references in this annual report to fiscal 2021, fiscal 2020 and fiscal 2019 are to our fiscal years endedMarch 31, 2021 , 2020 and 2019, respectively. Business Overview We are a global private markets investment firm focused on providing customized investment solutions and advisory and data services to our clients. Our clients include some of the world's largest public and private defined benefit and defined contribution pension funds, sovereign wealth funds and insurance companies, as well as prominent endowments, foundations, family offices and private wealth clients, which include high-net-worth and mass affluent individuals. We partner with our clients to develop and build private markets portfolios designed to meet their specific objectives across the private equity, infrastructure, private debt and real estate asset classes. These portfolios utilize several types of synergistic investment strategies with third-party fund managers, including commitments to funds ("primaries"), acquiring stakes in existing funds on the secondary market ("secondaries") and investing directly into companies ("co-investments"). As ofMarch 31, 2021 , we oversaw approximately$427 billion of private markets allocations, including$86 billion of assets under management ("AUM") and$340 billion of assets under advisement ("AUA"). We are a global firm and believe that local knowledge, business relationships and presence are all critical to securing a competitive edge in the private markets. We deploy a local staffing model, operating from 19 offices across 13 countries across five continents. Our offices are staffed by investment professionalswho bring valuable regional insights and language proficiency to enhance existing client relationships and build new client relationships. Since our inception in 2007, we have invested heavily in our platforms to drive growth and expand our investment solutions capabilities and service offerings, including through opportunistic transactions that have helped accelerate the growth of our team and capabilities. As ofMarch 31, 2021 , we had over 570 total employees, including approximately 200 investment professionals and more than 365 employees across our operating team and implementation teams dedicated to sourcing, executing, analyzing and monitoring private markets opportunities. We have a flexible business model whereby many of our clients engage us for solutions across multiple asset classes and investment strategies. Our solutions are typically offered in the following commercial structures: •Separately managed accounts ("SMAs"). Owned by one client and managed according to their specific preferences, SMAs integrate a combination of primaries, secondaries and co-investments across one or more asset classes. SMAs are meant to address clients' specific portfolio objectives with respect to return, risk tolerance, diversification and liquidity. SMAs, including directly managed assets, comprised$65 billion of our AUM as ofMarch 31, 2021 . •Focused commingled funds. Owned by multiple clients, our focused commingled funds deploy capital in specific asset classes with defined investment strategies. Focused commingled funds comprised$15 billion of our AUM as ofMarch 31, 2021 . 75 -------------------------------------------------------------------------------- Table of Contents •Advisory and data services. These services include one or more of the following for our clients: (i) recurring support of portfolio construction and design; (ii) discrete or project-based due diligence, advice and investment recommendations; (iii) detailed review of existing private markets investments, including portfolio-level repositioning recommendations where appropriate; (iv) consulting on investment pacing, policies, strategic plans, and asset allocation to investment boards and committees; and (v) licensed access to our proprietary data and technology platforms, including StepStone Private Markets Intelligence ("SPI") and our other proprietary tools. Advisory relationships comprised$340 billion of our AUA and$7 billion of our AUM as ofMarch 31, 2021 . •Portfolio analytics and reporting. We provide clients with tailored reporting packages, including customized performance benchmarks as well as associated compliance, administrative and tax capabilities. Mandates for portfolio analytics and reporting services typically include licensed access to our proprietary performance monitoring software, Omni. Omni tracked detailed information on over$670 billion of client commitments as ofMarch 31, 2021 , inclusive of our combined AUM/AUA, previously exited investments and investments of former clients. We generate revenues from management and advisory fees and performance fees earned pursuant to contractual arrangements with our funds and our clients. We also invest our own capital in the StepStone Funds we manage to align our interests with those of our clients. Through these investments, we earn a pro-rata share of the results of such funds and may also be entitled to an allocation of performance-based fees from the limited partners in the StepStone Funds, commonly referred to as carried interest. Trends Affecting Our Business Our business is affected by a variety of factors, including conditions in the financial markets and economic and political conditions. Changes in global economic conditions and regulatory or other governmental policies or actions can materially affect the values of the StepStone Funds' holdings and the ability to source attractive investments and completely utilize the capital that we have raised. However, we believe our disciplined investment philosophy across our diversified investment strategies has historically contributed to the stability of our performance throughout market cycles. In addition to these macroeconomic trends and market factors, we believe our future performance will be influenced by the following factors: •The extent to which clients favor private markets investments. Our ability to attract new capital is partially dependent on clients' views of private markets relative to traditional asset classes. We believe our fundraising efforts will continue to be subject to certain fundamental asset management trends, including (1) the increasing importance and market share of private markets investment strategies to clients of all types as clients focus on lower-correlated and absolute levels of return, (2) the increasing demand for private markets from private wealth clients, (3) shifting asset allocation policies of institutional clients and (4) increasing barriers to entry and growth for potential competitors. •Our ability to generate strong, stable returns. Our ability to raise and retain capital is partially dependent on the investment returns we are able to generate for our clients and drives growth in our fee-earning AUM ("FEAUM") and management fees. Although our FEAUM and management fees have grown significantly since our inception, adverse market conditions or an outflow of capital in the private markets management industry in general could affect our future growth rate. In addition, market dislocations, contractions or volatility could put pressure on our returns in the future which could in turn affect our fundraising abilities. 76 -------------------------------------------------------------------------------- Table of Contents •Our ability to maintain our data advantage relative to competitors. Our proprietary data and technology platforms, analytical tools and deep industry knowledge allow us to provide our clients with customized investment solutions, including asset management services and tailored reporting packages, such as customized performance benchmarks as well as compliance, administration and tax capabilities. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information and our ability to grow our relationships with fund managers and clients of all types. •Our ability to source investments with attractive risk-adjusted returns. The continued growth in our revenues is dependent on our ability to identify attractive investments and deploy the capital that we have raised. However, the capital deployed in any one quarter may vary significantly from period to period due to the availability of attractive opportunities and the long-term nature of our investment strategies. Our ability to identify attractive investments is dependent on a number of factors, including the general macroeconomic environment, valuation, transaction size, and the liquidity of such investment opportunity. A significant decrease in the quality or quantity of potential opportunities could adversely affect our ability to source investments with attractive risk-adjusted returns. •Increased competition and clients' desire to work with fewer managers. There has been an increasing desire on the part of larger clients to build deeper relationships with fewer private markets managers. At times, this has led to certain funds being oversubscribed due to the increasing flow of capital. Our ability to invest and maintain our relationships with high-performing fund managers across private markets asset classes is critical to our clients' success and our ability to maintain our competitive position and grow our revenue. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a global pandemic. The spread of COVID-19 throughout the world has led many countries to institute a variety of measures in an effort to contain viral spread, which has led to significant disruption and uncertainty in the global financial markets. While some of the initial restrictions have been relaxed or lifted in an effort to generate more economic activity, the risk of future COVID-19 outbreaks remains and restrictions have been and may continue to be reimposed to mitigate risks to public health in jurisdictions where additional outbreaks have been detected. Moreover, even where restrictions are and remain lifted, and as vaccinations become available and more accessible, certain groups of people may continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time, potentially further delaying global economic recovery. We are closely monitoring developments related to COVID-19 and assessing any negative impacts to our business. The COVID-19 pandemic has affected, and may further affect, our business in various ways. In particular, it is possible that our future results may be adversely affected by slowdowns in fundraising activity and the pace of capital deployment, which could result in delayed or decreased management fees, or if fund managers are unable or less able to profitably exit existing investments, which could result in delayed or decreased performance fee revenues. The underlying investments in the StepStone Funds reflect valuations on a three-month lag, or as ofDecember 31, 2020 , adjusted for capital contributions and distributions during the three-month lag period endedMarch 31, 2021 . During the year endedMarch 31, 2021 , our investments in StepStone Funds and accrued carried interest allocations initially experienced significant declines during the first three months, primarily reflecting the unrealized depreciation in the fair value of certain underlying fund investments driven by the impact of COVID-19, and has subsequently seen significant increases, primarily reflecting the unrealized appreciation in the fair value of certain underlying fund investments driven by the general recovery in the financial markets. 77 -------------------------------------------------------------------------------- Table of Contents As the global response and ongoing nature of COVID-19 evolves, it is currently not possible to predict the potential scale and scope of the outbreak and its ultimate effects on the financial markets, overall economy and our consolidated financial statements. See "Risk Factors-Risks Related to Our Industry-The COVID-19 pandemic has severely disrupted the global financial markets and business climate and may adversely impact our business, financial condition and results of operations." Recent Transactions Reorganization and Initial Public Offering OnSeptember 18, 2020 , we completed an IPO pursuant to which we issued 20,125,000 shares of Class A common stock at a price of$18.00 per share. We received net proceeds from the offering of$337.8 million , net of underwriting discounts of$24.5 million and before offering costs of$9.7 million that were incurred by the Partnership. We used approximately$209.8 million of the net proceeds from the offering to acquire 12,500,000 newly issued Class A units of the Partnership and approximately$128.0 million to purchase 7,625,000 Class B units from certain of the Partnership's existing unitholders, including certain members of senior management. In connection with the IPO, we completed certain transactions as part of the Reorganization to, among other things, provide for Class A common stock and Class B common stock; appoint SSG as the sole managing member ofStepStone Group Holdings LLC , the General Partner; complete a series of merger transactions such that certain blocker entities in which certain pre-IPO institutional investors held their interests in the Partnership merged with and into SSG, with SSG surviving, resulting in the pre-IPO institutional investors acquiring 9,112,500 shares of newly issued Class A common stock of SSG; and classify the Partnership's interests acquired by SSG as Class A units and reclassify the Partnership's interests held by the continuing partners as Class B units. See "Organizational Structure" below. Debt Repayment OnSeptember 18, 2020 , we repaid in full the indebtedness outstanding on our senior secured term loan in the amount of$146.6 million and terminated the facility, including the senior secured revolving facility. In connection with the repayment, we wrote-off the unamortized debt issuance costs and discount of$3.5 million , which is included in interest expense in the consolidated statements of income for the year endedMarch 31, 2021 . As ofMarch 31, 2021 , we had no debt obligations outstanding. Equity Offering InMarch 2021 , we conducted an underwritten public offering of 9,200,000 shares of Class A common stock, including 1,200,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, sold by selling stockholders at a public offering price of$29.50 per share. In connection with the offering, we issued 9,200,000 shares of Class A common stock to the selling stockholders in exchange for 9,200,000 Class B units. A corresponding number of shares of Class B common stock were automatically redeemed at par value and canceled in connection with such exchange. We did not receive any proceeds from the sale of shares by the selling stockholders. 78
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Organizational Structure
In connection with the Reorganization and IPO, SSG became a holding company and
its only business is to act as the managing member of the General Partner, and
its only material assets are Class A units in the Partnership and 100% of the
interests in the General Partner. In its capacity as the sole managing member of
the General Partner, SSG indirectly operates and controls all of the
Partnership's business and affairs. Therefore, we consolidate the financial
results of the Partnership and report non-controlling interests ("NCI") related
to the Class B units held by partners of the Partnership in our consolidated
financial statements.
Pursuant to the StepStone Limited Partnership Agreement and an Exchange
Agreement that SSG entered into with partners holding Class B units of the
Partnership, each Class B unit is exchangeable for one share of SSG's Class A
common stock or, at SSG's election, for cash, subject to certain restrictions
specified in the Exchange Agreement. When a Class B unit is surrendered for
exchange, it will not be available for reissuance. When a Class B unit is
exchanged for a share of SSG's Class A common stock, a corresponding share of
SSG's Class B common stock will automatically be redeemed by SSG at par value
and canceled.
The diagram below illustrates our organizational structure as of March 31, 2021 .
[[Image Removed: step-20210331_g3.jpg]]
Amounts may not sum to total due to rounding.
(1)The partners of the Partnership other than StepStone Group Inc. are:
•the General Partner , which holds a 100% general partner interest and no
economic interests;
•members of management, employee owners and outside investors, all of whom own
Class B units and an equivalent number of shares of Class B common stock; and
•certain members of management and employees who own Class B2 units.
(2)Each share of Class A common stock is entitled to one vote and vote together
with the Class B common stock as a single class, except as set forth in SSG's
amended and restated certificate of incorporation or as required by law.
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(3)Each share of Class B common stock is entitled to five votes prior to a
Sunset. After a Sunset becomes effective, each share of our Class B common stock
will then entitle its holder to one vote. The economic rights of our Class B
common stock are limited to the right to be redeemed at par value.
Ownership of Our Businesses
Certain of our consolidated subsidiaries are not wholly-owned by us. To the
extent these subsidiaries are not wholly-owned, substantially all of the other
owners are current StepStone professionals working for the related businesses.
We believe this ownership structure has benefited us by aligning our interests
with the interests of our employees. We use, and expect to continue to use, a
combination of our equity ownership, governance rights and other contractual
arrangements to control operations of these businesses. SSG consolidates all
entities that it controls due to a majority voting interest or because it is the
primary beneficiary of a variable interest entity. See note 4 to our
consolidated financial statements included elsewhere in this Form 10-K for
information on variable interest entities. The diagram below summarizes the
ownership structure of the Partnership's consolidated operations on a fully
diluted basis.
[[Image Removed: step-20210331_g4.jpg]]
SegmentsWe operate as one business, a fully-integrated private markets solutions provider. Our chief operating decision maker, which consists of our co-chief executive officers together, utilizes a consolidated approach to assess performance and allocate resources. As such, we operate in one business segment.
Key Financial Measures
Our key financial and operating measures are discussed below. Additional
information regarding our significant accounting policies can be found in note 2
to our consolidated financial statements included in Part II, Item 8 of this
annual report.
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Revenues
We generate revenues primarily from management and advisory fees, incentive fees
and allocations of carried interest.
Management and Advisory Fees, Net
Management and advisory fees, net, consist of fees received from managing SMAs
and focused commingled funds, advisory and data services, and portfolio
analytics and reporting.
•Management fees from SMAs are generally based on a contractual rate applied to
committed capital or net invested capital under management. These fees will vary
over the life of the contract due to changes in the fee basis or contractual
rate changes or thresholds, built-in declines in applicable contractual rates,
and/or changes in net invested capital balances. The weighted-average management
fee rate from SMAs was approximately 0.39% and 0.39% of average FEAUM in fiscal
2020 and 2021, respectively.
•Management fees from focused commingled funds are generally based on a
specified fee rate applied against client capital commitments during a defined
investment or commitment period. Thereafter, management fees are typically
calculated based on a contractual rate applied against net invested capital, or
a stepped-down fee rate applied against the initial commitment. The
weighted-average management fee rate from focused commingled funds was
approximately 0.89% and 0.90% of average FEAUM in fiscal 2020 and 2021,
respectively, and primarily reflected the timing of new funds and shifts in
asset class mix.
•The weighted-average management fee rate across SMAs and focused commingled
funds was approximately 0.51% and 0.52% of average FEAUM in fiscal 2020 and
2021, respectively.
•Fee revenues from advisory, SPAR or SPI services are generally annual fixed
fees, which vary based on the scope of services we provide. We also provide
certain project-based or event-driven advisory services. The fees for these
services are negotiated and typically paid upon successful delivery of services
or on the execution of the event-driven service. Because advisory fees are
negotiated and typically paid upon successful delivery of services or on the
execution of the event-driven service, advisory fees do not necessarily
correlate with the total size of our AUA.
•Management fees are reflected net of (i) certain professional and
administrative services that we arrange to be performed by third parties on
behalf of investment funds and (ii) certain distribution and servicing fees paid
to third-party financial institutions. In both situations, we are acting as an
agent because we do not control the services provided by the third parties
before they are transferred to the customer.
Performance Fees
We earn two types of performance fee revenues: incentive fees and carried
interest allocations, as described below. Incentive fees comprise fees earned
from certain client investment mandates for which we do not have a general
partnership interest in a StepStone Fund . Carried interest allocations include
the allocation of performance-based fees, commonly referred to as carried
interest, from limited partners in the StepStone Funds to us. As of March 31,
2021 , we had over $43 billion of performance fee-eligible capital across
approximately 130 programs, of which approximately 90 were in accrued carried
interest positions.
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Incentive fees are generally calculated as a percentage of the profits (up to
10%) earned in respect of certain accounts for which we are the investment
adviser, subject to the achievement of minimum return levels or performance
benchmarks. Incentive fees are a form of variable consideration and represent
contractual fee arrangements in our contracts with our customers. Incentive fees
are typically subject to reversal until the end of a defined performance period,
as these fees are affected by changes in the fair value of the assets under
management or advisement over such performance period. Moreover, incentive fees
that are received prior to the end of the defined performance period are
typically subject to clawback, net of tax.
We recognize incentive fee revenue only when these amounts are realized and no
longer subject to significant reversal, which is typically at the end of a
defined performance period and/or upon expiration of the associated clawback
period (i.e., crystallization). However, clawback terms for incentive fees
received prior to crystallization only require the return of amounts on a net of
tax basis. Accordingly, the tax-related portion of incentive fees received in
advance of crystallization is not subject to clawback and is therefore
recognized as revenue immediately upon receipt. Incentive fees received in
advance of crystallization that remain subject to clawback are recorded as
deferred incentive fee revenue and included in accounts payable, accrued
expenses and other liabilities in the consolidated balance sheets.
Carried interest allocations include the allocation of performance-based fees to
us from limited partners in the StepStone Funds in which we hold an equity
interest. We are entitled to a carried interest allocation (typically 5% to 15%)
based on cumulative fund or account performance to date, irrespective of whether
such amounts have been realized. These carried interest allocations are subject
to the achievement of minimum return levels (typically 5% to 10%), in accordance
with the terms set forth in the respective fund's governing documents. We
account for our investment balances in the StepStone Funds, including carried
interest allocations, under the equity method of accounting because we are
presumed to have significant influence as the general partner or managing
member. Accordingly, carried interest allocations are not deemed to be within
the scope of Accounting Standards Codification Topic 606 ("ASC 606"), Revenue
from Contracts with Customers.
We recognize revenue attributable to carried interest allocations from a
StepStone Fund based on the amount that would be due to us pursuant to the
fund's governing documents, assuming the fund was liquidated based on the
current fair value of its underlying investments as of that date. Accordingly,
the amount recognized as carried interest allocation revenue reflects our share
of the gains and losses of the associated fund's underlying investments measured
at their then-fair values, relative to the fair values as of the end of the
prior period. We record the amount of carried interest allocated to us as of
each period end as accrued carried interest allocations, which is included as a
component of investments in the consolidated balance sheets.
Carried interest is realized when an underlying investment is profitably
disposed of and the fund's cumulative returns are in excess of the specific
hurdle rates, as defined in the applicable governing documents. Carried interest
is subject to reversal to the extent that the amount received to date exceeds
the amount due to us based on cumulative results. As such, a liability is
accrued for the potential clawback obligations if amounts previously distributed
to us would require repayment to a fund if such fund were to be liquidated based
on the current fair value of their underlying investments as of the reporting
date. Actual repayment obligations generally do not become realized until the
end of a fund's life. As of March 31, 2021 and 2020, no material amounts for
potential clawback obligations had been accrued.
Expenses
Cash-based compensation primarily includes salaries, bonuses, employee benefits
and employer-related payroll taxes.
Equity-based compensation represents grants of equity related awards or
arrangements to certain employees and directors.
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Performance fee-related compensation represents the portion of carried interest
allocation revenue and incentive fees that have been awarded to employees as a
form of long-term incentive compensation. Performance fee-related compensation
is generally tied to the investment performance of the StepStone Funds.
Approximately 50% of carried interest allocation revenue is awarded to employees
as part of our long-term incentive compensation plan, fostering alignment of
interest with our clients and investors, and retaining key investment
professionals. Carried interest-related compensation is accounted for as
compensation expense in conjunction with the related carried interest allocation
revenue and, until paid, is recorded as a component of accrued carried
interest-related compensation in the consolidated balance sheets. Carried
interest-related compensation expense also includes the portion of net carried
interest allocation revenue attributable to equity holders of our consolidated
subsidiaries that are not 100% owned by us. Amounts presented as realized
indicate the amounts paid or payable to employees based on the receipt of
carried interest allocation revenue from realized investment activity. Carried
interest-related compensation expense may be subject to reversal to the extent
that the related carried interest allocation revenue is reversed. Carried
interest-related compensation paid to employees may be subject to clawback on an
after-tax basis under certain scenarios. To date, no material amounts of
realized carried interest-related compensation have been reversed. Incentive
fee-related compensation is accrued as compensation expense when it is probable
and estimable that payment will be made.
General, administrative and other includes occupancy, travel and related costs,
insurance, legal and other professional fees, depreciation, amortization of
intangible assets, system-related costs, and other general costs associated with
operating our business.
Other Income (Expense)
Investment income primarily represents our share of earnings from the
investments we make in our SMAs and focused commingled funds. We, either
directly or through our subsidiaries, generally have a general partner interest
in the StepStone Funds, which invest in primary funds, secondary funds and
co-investment funds, or a combination thereof. Investment income will increase
or decrease based on the earnings of the StepStone Funds, which are primarily
driven by net realized and unrealized gains (losses) on the underlying
investments held by the funds. Our co-investment funds invest in underlying
portfolio companies and therefore their valuation changes from period to period
are more influenced by individual companies than our primary and secondary
funds, which have exposures across multiple portfolio companies in underlying
private markets funds. Our SMAs and focused commingled funds invest across
various industries, strategies and geographies.
Consequently, our general partner investments do not include any significant
concentrations in a specific sector or geography outside the United States .
Investment income excludes carried interest allocations, which are presented as
revenues as described above.
Interest income consists of income earned on cash, cash equivalents, marketable
securities and certificates of deposit.
Interest expense primarily consisted of the interest expense on our previously
outstanding debt and related amortization of deferred financing costs and
amortization of original issue discount. The year ended March 31, 2021 includes
a $3.5 million charge related to the write-off of unamortized debt issuance
costs and discount in connection with the full repayment of our outstanding debt
balance.
Other income (loss) includes foreign currency translation gains and losses and
non-operating activities.
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Income Tax Expense
We are a corporation for U.S. federal income tax purposes and therefore are
subject to U.S. federal and state income taxes on our share of taxable income
generated by the Partnership. Prior to the Reorganization and IPO, we operated
as a partnership for U.S. federal income tax purposes and therefore were not
subject to U.S. federal and state income taxes. The Partnership is treated as a
pass-through entity for U.S. federal and state income tax purposes. As such,
income generated by the Partnership flows through to its limited partners,
including us, and is generally not subject to U.S. federal or state income tax
at the Partnership level. Our non-U.S. subsidiaries generally operate as
corporate entities in non-U.S. jurisdictions, with certain of these entities
subject to non-U.S. income taxes. Additionally, certain of our subsidiaries are
subject to local jurisdiction income taxes at the entity level. Accordingly, the
tax liability with respect to income attributable to non-controlling interests
in the Partnership is borne by the holders of such non-controlling interests.
Non-Controlling Interests
Non-controlling interests ("NCI") reflect the portion of income or loss and the
corresponding equity attributable to third-party equity holders and employees in
certain consolidated subsidiaries that are not 100% owned by us. Non-controlling
interests are presented as separate components in our consolidated statements of
income to clearly distinguish between our interests and the economic interests
of third parties and employees in those entities. Net income (loss) attributable
to SSG, as reported in the consolidated statements of income, is presented net
of the portion of net income (loss) attributable to holders of non-controlling
interests.
Non-controlling interests in subsidiaries represent the economic interests in
the consolidated subsidiaries of the Partnership held by third parties and
employees in those entities. Non-controlling interests in subsidiaries are
allocated a share of income or loss in the respective consolidated subsidiary in
proportion to their relative ownership interests, after consideration of
contractual arrangements that govern allocations of income or loss.
Non-controlling interests in the Partnership represent the economic interests in
the Partnership held by the Class B unitholders of the Partnership.
Non-controlling interests in the Partnership are allocated a share of income or
loss in the Partnership in proportion to their relative ownership interests,
after consideration of contractual arrangements that govern allocations of
income or loss.
Operating Metrics
We monitor certain operating metrics that are either common to the asset
management industry or that we believe provide important data regarding our
business.
Assets Under Management
AUM primarily reflects the assets associated with our SMAs and focused
commingled funds. We classify assets as AUM if we have full discretion over the
investment decisions in an account or have responsibility or custody of assets.
Although management fees are based on a variety of factors and are not linearly
correlated with AUM, we believe AUM is a useful metric for assessing the
relative size and scope of our asset management business.
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Our AUM is calculated as the sum of (i) the NAV of client portfolio assets,
including the StepStone Funds and (ii) the unfunded commitments of clients to
the underlying investments and the StepStone Funds. Our AUM reflects the
investment valuations in respect of the underlying investments of our funds and
accounts on a three-month lag, adjusted for new client account activity through
the period end. Our AUM does not include post-period investment valuation or
cash activity. AUM as of March 31, 2021 reflects final data for the prior period
(December 31, 2020 ), adjusted for net new client account activity through
March 31, 2021 . NAV data for underlying investments is as of December 31, 2020 ,
as reported by underlying managers up to 130 days following December 31, 2020 .
When NAV data is not available by 130 days following December 31, 2020 , such
NAVs are adjusted for cash activity following the last available reported NAV.
Assets Under Advisement
AUA consists of client assets for which we do not have full discretion to make
investment decisions but play a role in advising the client or monitoring their
investments. We generally earn revenue for advisory-related services on a
contractual fixed fee basis. Advisory-related services include asset allocation,
strategic planning, development of investment policies and guidelines, screening
and recommending investments, legal negotiations, monitoring and reporting on
investments, and investment manager review and due diligence. Advisory fees vary
by client based on the scope of services, investment activity and other factors.
Most of our advisory fees are fixed, and therefore, increases or decreases in
AUA do not necessarily lead to proportionate changes in revenue.
Our AUA is calculated as the sum of (i) the NAV of client portfolio assets for
which we do not have full discretion and (ii) the unfunded commitments of
clients to the underlying investments. Our AUA reflects the investment
valuations in respect of the underlying investments of our client accounts on a
three-month lag, adjusted for new client account activity through the period
end. Our AUA does not include post-period investment valuation or cash activity.
AUA as of March 31, 2021 reflects final data for the prior period (December 31,
2020 ), adjusted for net new client account activity through March 31, 2021 . NAV
data for underlying investments is as of December 31, 2020 , as reported by
underlying managers up to 130 days following December 31, 2020 . When NAV data is
not available by 130 days following December 31, 2020 , such NAVs are adjusted
for cash activity following the last available reported NAV. Beginning in the
quarter ended March 31, 2021 , the computation of AUA was modified to include the
portion of client portfolio assets for which we do not directly provide
recommendations, monitoring and/or reporting services. Prior period amounts have
not been recast for this change as such historical data does not exist. The
impact of the change was approximately $70 billion in the current period.
Fee-Earning AUM
FEAUM reflects the assets from which we earn management fee revenue (i.e., fee
basis) and includes assets in our SMAs, focused commingled funds and assets held
directly by our clients for which we have fiduciary oversight and are paid fees
as the manager of the assets. Our SMAs and focused commingled funds typically
pay management fees based on capital commitments, net invested capital and, in
certain cases, NAV, depending on the fee terms. Management fees are only
marginally affected by market appreciation or depreciation because substantially
all of the StepStone Funds pay management fees based on capital commitments or
net invested capital. As a result, management fees and FEAUM are not materially
affected by changes in market value.
Our calculation of FEAUM may differ from the calculations of other asset
managers and, as a result, may not be comparable to similar measures presented
by other asset managers.
Undeployed Fee-Earning Capital
Undeployed fee-earning capital represents the amount of capital commitments to
StepStone Funds that has not yet been invested or considered active but will
generate management fee revenue once this capital is invested or active.
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Non-GAAP Financial Measures
Below is a description of our non-GAAP financial measures. These measures are
presented on a basis other than GAAP and should be considered in addition to,
and not as a substitute for or superior to, financial measures calculated in
accordance with GAAP.
Adjusted Revenues and Adjusted Net Income
Adjusted net income ("ANI") is a non-GAAP performance measure that we present on
a pre-tax and after-tax basis used to evaluate profitability. ANI represents the
after-tax net realized income attributable to us. The components of revenues
used in the determination of ANI ("adjusted revenues") comprise net management
and advisory fees, incentive fees (including the deferred portion) and realized
carried interest allocations. In addition, ANI excludes: (a) unrealized carried
interest allocation revenues and related compensation, (b) unrealized investment
income, (c) equity-based compensation for awards granted prior to and in
connection with our IPO, (d) amortization of intangibles and (e) certain other
items that we believe are not indicative of our core operating performance,
including charges associated with acquisitions and corporate transactions,
contract terminations and employee severance. ANI is income before taxes fully
taxed at our blended statutory rate. We believe ANI and adjusted revenues are
useful to investors because they enable investors to evaluate the performance of
our business across reporting periods.
Fee-Related Earnings
Fee-related earnings ("FRE") is a non-GAAP performance measure used to monitor
our baseline earnings from recurring management and advisory fees. FRE is a
component of ANI and comprises net management and advisory fees, less operating
expenses other than performance fee-related compensation, equity-based
compensation for awards granted prior to and in connection with our IPO,
amortization of intangibles and other non-core operating items. FRE is presented
before income taxes. We believe FRE is useful to investors because it provides
additional insight into the operating profitability of our business and our
ability to cover direct base compensation and operating expenses from total fee
revenues.
Adjusted Net Income Per Share
ANI per share measures our per-share earnings assuming all Class B units in the
Partnership were exchanged for Class A common stock in SSG, including the
dilutive impact of outstanding equity-based awards. ANI per share is calculated
as ANI divided by adjusted shares outstanding. We believe ANI per share is
useful to investors because it enables them to better evaluate per-share
operating performance across reporting periods.
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Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the
periods presented. The information is derived from our accompanying consolidated
financial statements prepared in accordance with GAAP.
Year Ended March 31,
(in thousands) 2021 2020 2019
Revenues
Management and advisory fees, net $ 285,462 $ 235,205 $ 190,826
Performance fees:
Incentive fees 5,474 3,410 1,540
Carried interest allocation:
Realized allocation 62,953 46,177 36,648
Unrealized allocation 433,827 161,819 27,254
Total carried interest allocation 496,780 207,996 63,902
Total revenues 787,716 446,611 256,268
Expenses
Compensation and benefits:
Cash-based compensation 157,123 130,730 108,340
Equity-based compensation 7,899 1,915 1,725
Performance fee-related compensation:
Realized 30,532 26,958 20,259
Unrealized 215,508 82,701 11,219
Total performance fee-related compensation 246,040 109,659 31,478
Total compensation and benefits 411,062 242,304 141,543
General, administrative and other 48,485 52,363 48,304
Total expenses 459,547 294,667 189,847
Other income (expense)
Investment income 16,407 6,926 4,126
Interest income 413 1,436 1,507
Interest expense (7,360) (10,211) (10,261)
Other income (loss) 220 (1,355) (194)
Total other income (expense) 9,680 (3,204) (4,822)
Income before income tax 337,849 148,740 61,599
Income tax expense 23,256 3,955 1,640
Net income 314,593 144,785 59,959
Less: Net income attributable to non-controlling
interests in subsidiaries 23,176 12,869 5,763
Less: Net income attributable to non-controlling
interests in the Partnership 228,783 131,916 54,196
Net income attributable to
Revenues
Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 Total revenues increased$341.1 million , or 76%, to$787.7 million for fiscal 2021 as compared to fiscal 2020, due to higher carried interest allocation, net management and advisory fees and incentive fees. 87 -------------------------------------------------------------------------------- Table of Contents Net management and advisory fees increased$50.3 million , or 21%, to$285.5 million for fiscal 2021 as compared to fiscal 2020. This increase was driven by new client activity and a 26% growth in FEAUM across the platform, including retroactive fees of$9.0 million from StepStone Real Estate Partners IV ("SREP IV"), which had its final close inSeptember 2020 . The increases were partially offset by a$1.5 million decline in revenues associated with liquidating portfolios for which StepStone serves as the replacement manager. For new investors, fees relating to periods prior to the closing date are considered retroactive. Incentive fees increased$2.1 million , or 61%, to$5.5 million for fiscal 2021 as compared to fiscal 2020, reflecting higher realization activity. Realized carried interest allocation revenues increased$16.8 million , or 36%, to$63.0 million for fiscal 2021, reflecting higher realization activity within our private equity funds. Unrealized carried interest allocation revenues include the reversal of realized carried interest allocation revenues. Excluding the reversal, unrealized carried interest allocation revenues increased$288.8 million , or 139%, to$496.8 million for fiscal 2021 compared to fiscal 2020. The increase in unrealized carried interest allocation for fiscal 2021 was primarily attributable to a larger increase in the cumulative allocation of gains associated with the underlying portfolios within our private equity funds primarily driven by the continued recovery in global financial markets despite the ongoing economic impacts of COVID-19. For fiscal 2021, our investments in StepStone Funds and accrued carried interest allocations initially experienced a$128.5 million decline during the first three months, primarily reflecting the unrealized depreciation in the fair value of certain underlying fund investments driven by the impact of COVID-19, and have subsequently seen a significant increase of$625.3 million , primarily reflecting the unrealized appreciation in the fair value of certain underlying fund investments primarily driven by the continued recovery in global financial markets. Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 Total revenues increased$190.3 million , or 74%, to$446.6 million for fiscal 2020 as compared to fiscal 2019, due to higher net management and advisory fees, carried interest allocation and incentive fees. Net management and advisory fees increased$44.4 million , or 23%, to$235.2 million for fiscal 2020 as compared to fiscal 2019. The increase was driven by new client activity and a 28% growth in FEAUM across the platform, including$17.1 million from StepStone Secondary Opportunities IV, which held its final close inMarch 2020 and$4.2 million from SREP IV for which fees were initiated inJune 2019 . These increases were offset by a$7.6 million decline in revenues associated with liquidating portfolios for which we serve as the replacement manager. Incentive fees increased$1.9 million , or 121%, to$3.4 million for fiscal 2020 as compared to fiscal 2019, reflecting higher realization activity. Realized carried interest allocation revenues increased$9.5 million , or 26%, to$46.2 million for fiscal 2020, reflecting higher realization activity within our private equity funds. Unrealized carried interest allocation revenues include the reversal of realized carried interest allocation revenues. Excluding the reversal, unrealized carried interest allocation revenues increased$144.1 million , or 225%, to$208.0 million for fiscal 2020 compared to fiscal 2019, primarily reflecting a larger increase in the cumulative allocation of gains associated with underlying portfolios within our private equity funds. 88 -------------------------------------------------------------------------------- Table of Contents Expenses Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 Total expenses increased$164.9 million , or 56%, to$459.5 million for fiscal 2021 as compared to fiscal 2020, due to increases in performance fee-related compensation, cash-based compensation and equity-based compensation, partially offset by decreases in general, administrative and other expenses. Cash-based compensation increased$26.4 million , or 20%, to$157.1 million for fiscal 2021 as compared to fiscal 2020, due to increased staffing and compensation levels. Our full-time headcount increased 12% fromMarch 31, 2020 toMarch 31, 2021 . Equity-based compensation increased$6.0 million , or 312%, to$7.9 million for fiscal 2021 as compared to fiscal 2020. The increase was primarily attributable to RSU grants made to certain employees and directors in connection with our IPO inSeptember 2020 . Performance fee-related compensation expense increased$136.4 million , or 124%, to$246.0 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting the increase in carried interest allocation revenue. Realized performance fee-related compensation increased$3.6 million , or 13%, to$30.5 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting higher realization activity. General, administrative and other expenses decreased$3.9 million , or 7%, to$48.5 million for fiscal 2021 as compared to fiscal 2020. The decrease primarily reflected declines of$7.0 million in travel and associated costs for investment evaluation and client service,$2.5 million in marketing expenses, and$1.7 million in amortization expense for intangibles, and other general operating expenses, partially offset by an increase of$2.8 million in insurance costs,$2.3 million in legal and professional fees, and$2.0 million in information and technology expenses. We anticipate travel and other expenses will return to prior levels as the COVID-19 situation improves, and that the full-year impact of costs associated with being a public company will be reflected in our expenses going forward. Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 Total expenses increased$104.8 million , or 55%, to$294.7 million for fiscal 2020 as compared to fiscal 2019, reflecting increases in cash-based compensation, equity-based compensation, performance fee-related compensation and general, administrative and other expenses. Cash-based compensation increased$22.4 million , or 21%, to$130.7 million for fiscal 2020 as compared to fiscal 2019, due to increased staffing and compensation levels. Our full-time headcount increased 24% fromMarch 31, 2019 toMarch 31, 2020 . Equity-based compensation increased$0.2 million , or 11%, to$1.9 million for fiscal 2020 as compared to fiscal 2019. Performance fee-related compensation expense increased$78.2 million , or 248%, to$109.7 million for fiscal 2020 as compared to fiscal 2019. The increase primarily reflected the increase in carried interest allocation revenue. Realized performance fee-related compensation increased$6.7 million , or 33%, to$27.0 million for fiscal 2020 as compared to fiscal 2019, reflecting higher realization activity. 89 -------------------------------------------------------------------------------- Table of Contents General, administrative and other expenses increased$4.1 million , or 8%, to$52.4 million for fiscal 2020 as compared to fiscal 2019. The increase primarily reflected$3.0 million in professional services expense,$0.5 million in depreciation expense, and other general operating expenses. These increases were partially offset by a decrease of$1.5 million in amortization expense for intangibles. Other Income (Expense) Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 Investment income increased$9.5 million , or 137%, to$16.4 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting overall changes in the valuations of the underlying investments in the StepStone Funds. Interest income decreased$1.0 million , or 71%, to$0.4 million for fiscal 2021 as compared to fiscal 2020. Interest expense decreased$2.9 million , or 28%, to$7.4 million for fiscal 2021 as compared to fiscal 2020. The decrease was primarily due to the full repayment of our previously outstanding senior secured term loan ("Term Loan B") in connection with the IPO inSeptember 2020 , partially offset by the write-off of$3.5 million in unamortized debt issuance costs and discount with the full repayment of our Term Loan B. Other income (loss) increased$1.6 million to income of$0.2 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting favorable foreign currency translation. Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 Investment income increased$2.8 million , or 68%, to$6.9 million for fiscal 2020 as compared to fiscal 2019, primarily reflecting overall changes in the valuations of the underlying investments in the StepStone Funds. Interest income decreased$0.1 million , or 5%, to$1.4 million for fiscal 2020 as compared to fiscal 2019. Interest expense decreased$0.1 million , to$10.2 million for fiscal 2020 as compared to fiscal 2019. The decrease primarily reflected changes in interest rates on average outstanding debt balances for fiscal 2020 as compared with fiscal 2019. Income Tax Expense Income tax expense primarily reflectsU.S. federal and state income taxes on our share of taxable income generated by the Partnership, as well as local and foreign income taxes of certain of the Partnership's subsidiaries. Prior to the Reorganization and IPO, income tax expense consisted of local income taxes and foreign income taxes for subsidiaries that have operations outside ofthe United States as the Partnership is treated as a flow-through entity and is not subject to federal income taxes. Our effective income tax rate was 6.9%, 2.6%, and 2.7% for fiscal 2021, 2020 and 2019, respectively. Our overall effective tax rate is less than the statutory rate primarily because (a) we were not subject toU.S. federal taxes prior to the Reorganization and IPO and (b) a portion of income is allocated to non-controlling interests, as the tax liability on such income is borne by the holders of such non-controlling interests. Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 Income tax expense increased$19.3 million , or 488%, to$23.3 million for fiscal 2021 as compared to fiscal 2020. The increase was primarily related toU.S. federal and state income taxes recognized on our share of taxable income generated by the Partnership for fiscal 2021 and a general increase in taxes paid in non-U.S. subsidiaries. For the period prior to the Reorganization and IPO, we were not subject toU.S. federal income taxes. 90 -------------------------------------------------------------------------------- Table of Contents Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 Income tax expense increased$2.3 million , or 141%, to$4.0 million for fiscal 2020 as compared to fiscal 2019. The increase was primarily related to a general increase in taxes paid in non-U.S. subsidiaries. Net Income Attributable to Non-Controlling Interests in Subsidiaries Net income attributable to non-controlling interests in subsidiaries increased$10.3 million , or 80%, to$23.2 million for fiscal 2021 as compared to fiscal 2020. The increase was primarily attributable to an increase in income generated by our consolidated subsidiaries not wholly-owned by us. Net income attributable to non-controlling interests in subsidiaries increased$7.1 million , or 123%, to$12.9 million for fiscal 2020 as compared to fiscal 2019. The increase was primarily attributable to an increase in income generated by our consolidated subsidiaries not wholly-owned by us. Net Income Attributable to Non-Controlling Interests in the Partnership Net income attributable to non-controlling interests in the Partnership represents the portion of net income or loss attributable to the interests held by the Class B unitholders of the Partnership subsequent to the Reorganization and IPO. Net income attributable to non-controlling interests in the Partnership was$228.8 million ,$131.9 million and$54.2 million for fiscal 2021, 2020 and 2019, respectively. Prior to the Reorganization and IPO, all of our income or loss relates to the Partnership and has been presented as non-controlling interests in the Partnership. Operating Metrics Assets Under Management Our AUM has grown from approximately$53 billion as ofMarch 31, 2019 to approximately$86 billion as ofMarch 31, 2021 . Assets Under Advisement Assets related to our advisory accounts have increased from approximately$213 billion as ofMarch 31, 2019 to approximately$340 billion as ofMarch 31, 2021 . The increase reflects approximately$70 billion related to the inclusion of the portion of client portfolio assets for which we do not directly provide recommendations, monitoring and/or reporting services. Prior period amounts have not been recast for this change as such historical data does not exist. Fee-Earning AUM Year EndedMarch 31, 2021 FEAUM increased$11 billion , or 26%, to approximately$52 billion as ofMarch 31, 2021 as compared to approximately$41 billion as ofMarch 31, 2020 . Of the increase, approximately$9 billion was from SMAs and approximately$1 billion was from focused commingled funds. Year EndedMarch 31, 2020 FEAUM increased$9 billion , or 28%, to approximately$41 billion as ofMarch 31, 2020 as compared to approximately$32 billion as ofMarch 31, 2019 . Of the increase, approximately$7 billion was from SMAs and approximately$2 billion was from focused commingled funds. 91
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Year Ended March 31, 2021
(in millions) SMAs Focused Commingled Funds Total
Beginning balance $ 31,089 $ 10,104 $ 41,193
Contributions(1) 9,567 1,843 11,410
Distributions(2) (570) (370) (940)
Market value, FX and other(3) 475 (130) 345
Ending balance $ 40,561 $ 11,447 $ 52,008
Year Ended March 31, 2020
(in millions) SMAs Focused Commingled Funds Total
Beginning balance $ 24,197 $ 8,026 $ 32,223
Contributions(1) 8,917 3,412 12,329
Distributions(2) (2,047) (1,224) (3,271)
Market value, FX and other(3) 22 (110) (88)
Ending balance $ 31,089 $ 10,104 $ 41,193 _______________________________
(1)Contributions consist of new capital commitments that earn fees on committed capital and capital contributions to funds and accounts that earn fees on net invested capital or NAV. (2)Distributions consist of returns of capital from funds and accounts that pay fees on net invested capital or NAV. (3)Market value, FX and other primarily consist of changes in market value appreciation (depreciation) for funds that pay on NAV, the effect of foreign exchange rate changes on non-U.S. dollar denominated commitments and reductions in fee-earning AUM from funds that moved from a committed capital to net invested capital fee basis or from funds and accounts that no longer pay fees. The following tables set forth FEAUM by asset class and selected weighted-average management fee rate data: As of March 31, (in millions) 2021 2020 2019 FEAUM Private equity$ 24,533 $ 19,929 $ 16,223 Infrastructure 12,605 11,424 8,358 Private debt 10,483 6,328 4,597 Real estate 4,387 3,512 3,045 Total$ 52,008 $ 41,193 $ 32,223 92
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As of March 31,
2021 2020
Weighted-average fee rate(1)
Private equity(2) 0.62 % 0.66 %
Real estate, infrastructure and private debt asset classes(3) 0.42 % 0.37 %
Total 0.52 % 0.51 %
_______________________________
(1)Weighted-average fee rates reflect the applicable management fees for the last 12 months ending on each period presented. (2)The change in weighted-average fee rates primarily reflected the timing of new funds. (3)The change in weighted-average fee rates primarily reflected shifts in asset class mix.Undeployed Fee-Earning Capital As ofMarch 31, 2021 , we had$14.0 billion of undeployed fee-earning capital, which will generate management fee revenue once this capital is invested or active. Non-GAAP Financial Measures
The following table presents the components of FRE and ANI:
Year Ended March 31,
(in thousands) 2021 2020 2019
Management and advisory fees, net $ 285,462 $ 235,205 $ 190,826
Less:
Cash-based compensation 157,123 130,730 108,340
Equity-based compensation(1) 51 - -
General, administrative and other(2) 48,485 52,363 48,304
Plus:
Amortization of intangibles 3,339 5,028 6,487 Non-core items(3) 6,342 4,419 4,673 Fee-related earnings(2) 89,484 61,559 45,342 Plus: Realized carried interest allocations 62,953 46,177 36,648 Incentive fees 5,474 3,410 1,540 Deferred incentive fees 4,700 799 964 Realized investment income 5,341 4,053 3,448 Interest income 413 1,436 1,507 Write-off of unamortized deferred financing costs 3,526 - - Other income (loss)(2) 220 (1,355) (194)
Less:
Realized performance fee-related compensation 30,532 26,958 20,259 Interest expense 7,360 10,211 10,261 Income attributable to non-controlling interests in 23,952 12,052 5,678
subsidiaries(4)
Pre-tax adjusted net income 110,267 66,858 53,057 Less: Income taxes(5) 24,865 16,715 13,265 Adjusted net income$ 85,402 $ 50,143 $ 39,792 93
-------------------------------------------------------------------------------- Table of Contents _______________________________ (1)Reflects equity-based compensation for awards granted subsequent to the IPO. (2)Beginning in the quarter endedDecember 31, 2020 , foreign currency translation gains and losses have been reclassified from general, administrative and other expenses to other income (loss) in our consolidated income statements. We have revised prior periods presented to reflect this reclassification ($1.0 million and$0.9 million in fiscal 2020 and 2019, respectively). (3)Includes compensation paid to certain equity holders as part of an acquisition earn-out ($1.4 million in fiscal 2020 and$2.9 million in fiscal 2019), transaction costs ($0.4 million in fiscal 2021,$1.2 million in fiscal 2020, and$1.8 million in fiscal 2019), severance costs ($4.2 million in fiscal 2021,$1.0 million in fiscal 2020, and$0.1 million in fiscal 2019), loss on change in fair value for contingent consideration obligation ($1.6 million in fiscal 2021) and other non-core operating income and expenses. (4)Includes income attributable to non-controlling interests in subsidiaries, net of non-controlling interest portion of unrealized investment income (loss)($(0.1) million in fiscal 2021,$0.8 million in fiscal 2020, and$0.1 million in fiscal 2019) and non-controlling interest portion of loss on change in fair value for contingent consideration obligation($(0.7) million in fiscal 2021). (5)Represents corporate income taxes at a blended statutory rate of 22.6% applied to pre-tax adjusted net income for fiscal 2021. The 22.6% rate for fiscal 2021 is based on a federal statutory rate of 21.0% and a combined state, local and foreign rate net of federal benefits of 1.6%. As we were not subject toU.S. federal and state income taxes prior to the Reorganization and IPO, a blended statutory rate of 25.0% has been applied to all prior periods presented for comparability purposes. The decline in the blended statutory rate was due to updates in our state apportionment based on our most recently filed tax returns and is our best estimate of our blended statutory tax rate moving forward. Adjusted Revenues and Adjusted Net Income Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 Adjusted revenues increased$73.0 million , or 26%, to$358.6 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting increases in net management and advisory fees, realized carried interest allocation revenues and incentive fees (including the deferred portion). ANI increased$35.3 million , or 70%, to$85.4 million for fiscal 2021 as compared to fiscal 2020, primarily due to increases in FRE as discussed below, as well as higher net realized performance fee-related earnings (incentive fees, including the deferred portion, plus realized carried interest allocation revenues, less realized performance fee-related compensation). These increases were partially offset by a higher allocation of income to non-controlling interests. Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 Adjusted revenues increased$55.6 million , or 24%, to$285.6 million for fiscal 2020 as compared to fiscal 2019, primarily reflecting increases in net management and advisory fees and realized carried interest allocation revenues. ANI increased$10.4 million , or 26%, to$50.1 million for fiscal 2020 as compared to fiscal 2019, largely due to increases in FRE as discussed below as well as higher net realized performance fee-related earnings. Adjusted Net Income Per Share The following table shows a reconciliation of diluted weighted-average shares of Class A common stock outstanding to adjusted shares outstanding used in the computation of ANI per share for fiscal 2021, 2020 and 2019. As Class A common stock did not exist prior to the Reorganization and IPO, the number of adjusted shares outstanding used in the computation of ANI per share for all prior year periods presented reflect the number of adjusted shares for the period from the IPO date toSeptember 30, 2020 for comparability purposes. 94
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Year Ended March 31,
2021 2020 2019(in thousands, except share and per share amounts) Adjusted net income
$ 85,402 $
50,143
Weighted-average shares of Class A common stock outstanding - Basic(1) 29,657,805 29,237,500 29,237,500 Assumed vesting of RSUs(1) 1,151,579 745,347 745,347 Assumed vesting and exchange of Class B2 units(1) 2,465,420 2,411,318 2,411,318 Exchange of Class B units in the Partnership(1)(2) 65,158,526 65,578,831 65,578,831 Adjusted shares(1) 98,433,330 97,972,996 97,972,996 Adjusted net income per share$ 0.87 $
0.51
_______________________________
(1)Our Class A common stock did not exist prior to the Reorganization and IPO inSeptember 2020 . As a result, the number of adjusted shares outstanding used in the computation of ANI per share for all prior year periods presented reflect the number of adjusted shares for the period from the IPO date toSeptember 30, 2020 for comparability purposes. (2)Assumes the full exchange of Class B units in thePartnership for Class A common stock of SSG pursuant to the exchange agreement. Fee-Related Earnings Year EndedMarch 31, 2021 Compared to Year EndedMarch 31, 2020 FRE increased$27.9 million , or 45%, to$89.5 million for fiscal 2021 as compared to fiscal 2020, primarily reflecting higher net management and advisory fees and lower general, administrative and other expenses, partially offset by higher cash-based compensation. Year EndedMarch 31, 2020 Compared to Year EndedMarch 31, 2019 FRE increased$16.2 million , or 36%, to$61.6 million for fiscal 2020 as compared to fiscal 2019, primarily reflecting higher net management and advisory fees, partially offset by higher cash-based compensation and general, administrative and other expenses. The table below shows a reconciliation of revenues to adjusted revenues. Year Ended March 31, (in thousands) 2021 2020 2019 Total revenues$ 787,716 $ 446,611 $ 256,268 Unrealized carried interest allocations (433,827) (161,819) (27,254) Deferred incentive fees 4,700 799 964 Adjusted revenues$ 358,589 $ 285,591 $ 229,978 95
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The table below shows a reconciliation of income before income tax to ANI and
FRE.
Year Ended March 31,
(in thousands) 2021 2020 2019
Income before income tax $ 337,849 $ 148,740 $ 61,599
Net income attributable to non-controlling interests in (23,952) (12,052) (5,678)
subsidiaries(1)
Unrealized carried interest allocation revenue (433,827) (161,819) (27,254) Unrealized performance fee-related compensation 215,508 82,701 11,219 Unrealized investment income (11,066) (2,873) (678) Deferred incentive fees 4,700 799 964 Equity-based compensation(2) 7,848 1,915 1,725 Amortization of intangibles 3,339 5,028 6,487 Write-off of unamortized deferred financing costs 3,526 - - Non-core items(3) 6,342 4,419 4,673 Pre-tax adjusted net income 110,267 66,858 53,057 Income taxes(4) (24,865) (16,715) (13,265) Adjusted net income 85,402 50,143 39,792 Income taxes(4) 24,865 16,715 13,265 Realized carried interest allocation revenue (62,953) (46,177) (36,648) Realized performance fee-related compensation 30,532 26,958 20,259 Realized investment income (5,341) (4,053) (3,448) Incentive fees (5,474) (3,410) (1,540) Deferred incentive fees (4,700) (799) (964) Interest income (413) (1,436) (1,507) Interest expense 7,360 10,211 10,261 Other (income) loss(5) (220) 1,355 194 Write-off of unamortized deferred financing costs (3,526) - -
Net income attributable to non-controlling interests in 23,952
12,052 5,678
subsidiaries(1)
Fee-related earnings $ 89,484 $ 61,559 $ 45,342 _______________________________
(1)Includes income attributable to non-controlling interests in subsidiaries, net of non-controlling interest portion of unrealized investment income (loss)($(0.1) million in fiscal 2021,$0.8 million in fiscal 2020, and$0.1 million in fiscal 2019) and non-controlling interest portion of loss on change in fair value for contingent consideration obligation($(0.7) million in fiscal 2021). (2)Reflects equity-based compensation for awards granted prior to and in connection with the IPO. (3)Includes compensation paid to certain equity holders as part of an acquisition earn-out ($1.4 million in fiscal 2020 and$2.9 million in fiscal 2019), transaction costs ($0.4 million in fiscal 2021,$1.2 million in fiscal 2020, and$1.8 million in fiscal 2019), severance costs ($4.2 million in fiscal 2021,$1.0 million in fiscal 2020, and$0.1 million in fiscal 2019), loss on change in fair value for contingent consideration obligation ($1.6 million in fiscal 2021) and other non-core operating income and expenses. (4)Represents corporate income taxes at a blended statutory rate of 22.6% applied to pre-tax adjusted net income for fiscal 2021. The 22.6% rate for fiscal 2021 is based on a federal statutory rate of 21.0% and a combined state, local and foreign rate net of federal benefits of 1.6%. As we were not subject toU.S. federal and state income taxes prior to the Reorganization and IPO, a blended statutory rate of 25.0% has been applied to all prior periods presented for comparability purposes. The decline in the blended statutory rate was due to updates in our state apportionment based on our most recently filed tax returns and is our best estimate of our blended statutory tax rate moving forward. 96 -------------------------------------------------------------------------------- Table of Contents (5)Beginning in the quarter endedDecember 31, 2020 , foreign currency translation gains and losses have been reclassified from general, administrative and other expenses to other income (loss) in our consolidated income statements. We have revised prior periods presented to reflect this reclassification ($1.0 million and$0.9 million in fiscal 2020 and 2019, respectively). Investment Performance The following tables present information relating to the performance of all the investments that StepStone recommends and subsequently tracks across asset classes and investment strategies, except as set forth in greater detail below. The data for these investments is generally presented from the inception date of each strategy and asset class throughDecember 31, 2020 and have not been adjusted to reflect acquisitions or disposals of investments subsequent to that date. The historical results of our investments are not indicative of future results to be expected of existing or new investment funds, and are not a proxy for the performance of our Class A common stock, including because: •market conditions and investment opportunities may differ from those in the past; •the performance of our funds is largely based on the NAV of the funds' investments, including unrealized gains, which may never be realized; •newly-established funds may generate lower investment returns during the period that they initially deploy their capital; •changes in the global tax and regulatory environment may impact both the investment preferences of our clients and the financing strategies employed by businesses in which particular funds invest, which may reduce the overall capital available for investment and the availability of suitable investments, thereby reducing investment returns in the future; •competition for investment opportunities, resulting from the increasing amount of capital invested in private markets alternatives, may increase the cost and reduce the availability of suitable investments, thereby reducing investment returns in the future; and •the industries and businesses in which particular funds invest will vary. Historical and future returns of investments included in our track record are not directly correlated to potential returns on our Class A common stock. For the purposes of the following tables: •"Invested capital" refers to the total amount of all investments made by a fund, including commitment-reducing and non-commitment-reducing capital calls; •"NAV" refers to the estimated fair value of unrealized investments plus any net assets or liabilities associated with the investment as ofDecember 31, 2020 ; •"Multiple ofInvested Capital " refers to (a) the sum of Realized Distributions from underlying investments to the fund plus the fund's NAV, divided by (b)Cumulative Invested Capital . Multiple ofInvested Capital is presented net of management fees, carried interest and expenses charged by underlying fund managers, but gross of StepStone's management fees, performance fees and expenses; 97 -------------------------------------------------------------------------------- Table of Contents •"IRR" refers to the annualized internal rate of return for all investments within the relevant investment strategy on an inception-to-date basis as ofDecember 31, 2020 (except as noted otherwise, below), based on contributions, distributions and unrealized value; •"Gross IRR" refers to IRR net of management fees, performance fees and expenses charged by the underlying fund managers, but gross of StepStone's management fees, performance fees and expenses; •"Net IRR" refers to IRR net of fees and expenses charged by both the underlying fund managers and StepStone; •"MSCI ACWI PME+" refers to the MSCI World Index, calculated on a Public Market Equivalent Plus basis, the benchmark index used for comparison below. The MSCI World Index is a free float-adjusted market capitalization-weighted index of over 2,900 world stocks that is designed to measure the equity market performance of developed markets. We believe the MSCI World Index is commonly used by private markets investors to evaluate performance. The PME+ calculation methodology allows private markets investment performance to be evaluated against a public index and assumes that capital is being invested in the index on the days the capital was called by the underlying fund managers. The distributions are rescaled by a factor lambda so that the final PME NAV is the same as the final fund NAV; and •"Net TVM" refers to the total value to paid-in capital or invested capital expressed as a multiple, and is calculated as distributions plus unrealized valuations divided by invested capital (including all capitalized costs). StepStone Performance Summary by Investment Strategy(1),(2) (in billions except percentages and multiples) Committed Cumulative Realized Multiple of Gross IRR versus Strategy(3) Capital Invested Capital Distributions NAV Total Invested Capital Gross IRR NetIRR(4) Benchmark(5) Primaries$ 179.4 $ 114.9 $ 71.4$ 89.9 $ 161.3 1.4x 11.8 % 11.5 % 1.3 % Secondaries 8.3 6.8 4.3 6.3 10.6 1.5x 22.5 % 18.3 % 10.3 % Co-investments 19.5 18.9 5.8 23.6 29.4 1.6x 19.7 % 17.3 % 6.4 % Total$ 207.2 $ 140.6 $ 81.5$ 119.8 $ 201.3 1.4x 12.8 % 12.2 % 2.0 %
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(1)Performance data shown in the table above is on an inception-to-date basis as ofDecember 31, 2020 . Overall performance includes all investments StepStone recommends and subsequently tracks, including advisory co-investments and infrastructure investments made prior toJanuary 1, 2015 , as well as the performance summary of Courtland, for which the track record dates back toSeptember 1994 . Overall performance excludes (i) client-direct investments totaling$16.3 billion of capital commitments, (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment, (iii) syndicated loan portfolio totaling$0.8 billion , and (iv) investments made by legacy private equity acquired businesses. USD returns are calculated on a Constant Currency-Adjusted USD reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client's first cash flow date. (2)Investments of former clients are included in performance summary past the client termination date until such time as StepStone stops receiving current investment data (quarterly valuations and cash flows) for the investment. At that point, StepStone will then 'liquidate' the fund by entering a distribution amount equal to the last reported NAV, thus ending its contribution to the track record as of that date. Historical performance contribution will be maintained up until the 'liquidation' date. (3)Inception date reflects date of the first investment:September 1994 for primaries,May 2009 for secondaries andApril 2008 for co-investments. 98 -------------------------------------------------------------------------------- Table of Contents (4)Net IRRs are presented solely for illustrative purposes and do not represent actual returns received by any investor in any of the StepStone Funds represented above. StepStone fees and expenses are based on the following assumptions (management fees represent an annual rate): i.Primaries: 25 basis points of net invested capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. ii.Secondaries: 125 basis points (60 basis points for Infrastructure) on capital commitments in years 1 through 4 for management fee. In year 5, management fees step down to 90% of the previous year's fee. Secondaries also include 5 basis points of capital commitments for fund expenses and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Secondaries also include 12.5% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle. iii.Co-investments: 100 basis points on net committed capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Co-investments also include 10.0% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle. iv.Investment returns reflect NAV data for underlying investments as ofDecember 31, 2020 , as reported by underlying managers up to 130 days followingDecember 31, 2020 . For investment returns where NAV data is not available by 130 days followingDecember 31, 2020 , such NAVs are adjusted for cash activity following the last available reported NAV. (5)Reflects total returns for MSCI ACWI PME+ performance benchmark of 10.5%, 12.3%, 13.3% and 10.8% for primaries, secondaries, co-investments and total, respectively. StepStone Performance Summary by Asset Class PRIVATE EQUITY REAL ESTATE INFRASTRUCTURE PRIVATE DEBT INVESTMENT STRATEGY(1,3)NET IRR (2) NET TVM(2) INVESTMENT STRATEGY(3,4)NET IRR (2) NET TVM(2) INVESTMENT STRATEGY(3,5)NET IRR (2) INVESTMENT STRATEGY(3,7)IRR(7) Primaries 16.9% 1.5x Core/Core+ fund investments 8.0% 1.4x Primaries 8.7% Direct lending (Gross)(8) 6.5% Value-add/opportunistic fund Secondaries 19.3% 1.5x investments 8.9% 1.3x Secondaries 13.9% Distressed debt (Gross)(8) 8.6% Co-investments 22.4% 1.7x Real estate debt fund investments 5.3% 1.1x Co-investments(6) 8.0% Other (Gross)(8,9) 8.8% Value-add/opportunistic secondaries Private debt gross track & co-investments 16.0% 1.3x record(8) 7.5% Private debt net track record 6.8%
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(1)Private Equity includes 1,088 investments totaling$102.9 billion of capital commitments and excludes (i) two advisory co-investments and 115 client-directed investments, totaling$100.0 million and$10.3 billion , respectively, of capital commitments, (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client's first cash flow date. (2)Net IRR and Net TVM are presented solely for illustrative purposes and do not represent actual returns received by any investor in any of the StepStone Funds represented above. StepStone fees and expenses are based on the following assumptions (management fees represent an annual rate): i.Primaries: 25 basis points of net invested capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. 99 -------------------------------------------------------------------------------- Table of Contents ii.Secondaries: 125 basis points (60 basis points for Infrastructure) on capital commitments in years 1 through 4 for management fee. In year 5, management fees step down to 90% of the previous year's fee. Secondaries also include 5 basis points of capital commitments for fund expenses and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Secondaries also include 12.5% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle. iii.Co-investments: 100 basis points on net committed capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Co-investments also include 10.0% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle. Net IRR and Net TVM for certain investments may have been impacted by StepStone's or the underlying fund manager's use of subscription backed credit facilities by such vehicles. Reinvested/recycled amounts increase contributed capital. Investment returns reflect NAV data for underlying investments as ofDecember 31, 2020 , as reported by underlying managers up to 130 days followingDecember 31, 2020 . For investment returns where NAV data is not available by 130 days followingDecember 31, 2020 , such NAVs are adjusted for cash activity following the last available reported NAV. (3)Investments of former clients are included in performance summary past the client termination date until such time as StepStone stops receiving current investment data (quarterly valuations and cash flows) for the investment. At that point, StepStone will then 'liquidate' the fund by entering a distribution amount equal to the last reported NAV, thus ending its contribution to the track record as of that date. Historical performance contribution will be maintained up until the 'liquidation' date. (4)Real Estate includes 383 investments totaling$57.0 billion of capital commitments and excludes (i) 32 client-directed investments, totaling$3.9 billion of capital commitments, (ii) three secondary core/core+ investments, totaling$170.2 million , and (iii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client's first cash flow date. Includes the discretionary track record ofCourtland Partners, Ltd. , which StepStone acquired onApril 1, 2018 (the "Courtland acquisition"). (5)Infrastructure includes 129 investments totaling$24.1 billion of capital commitments and excludes (i) approximately 11 infrastructure investments made by the Partnership prior to the formation of the Infrastructure subsidiary in 2013 or made prior to the Courtland acquisition, and nine client-directed investments, totaling$501.9 million and$636.6 million , respectively, of capital commitments, and (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client's first cash flow date. (6)Includes asset management investments. (7)Private Debt includes 499 investments totaling$23.4 billion of capital commitments and excludes (i) 22 client-directed investments, totaling$1.4 billion of capital commitments, and (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client's first cash flow date. IRR is presented solely for illustrative purposes and does not represent actual returns received by any investor in any of the StepStone Funds represented above. StepStone fees and expenses are based on the following assumptions (management fees represent an annual rate): Private Debt fund investments include 65 basis points on the quarterly NAV for management fee. Net IRR for certain investments may have been impacted by StepStone's or the underlying fund manager's use of subscription backed credit facilities by such vehicles. Reinvested/recycled amounts increase contributed capital. Investment returns reflect NAV data for underlying investments as ofDecember 31, 2020 , as reported by underlying managers up to 130 days followingDecember 31, 2020 . For investment returns where NAV data is not available by 130 days followingDecember 31, 2020 , such NAVs are adjusted for cash activity following the last available reported NAV. (8)Subset performance is presented net of fees and expenses charged by the underlying fund manager only (performance results do not reflect StepStone fees and expenses). (9)Other includes mezzanine debt, infrastructure debt, collateralized loan obligations, private performing debt, senior debt, fund of funds, leasing, regulatory capital, trade finance and intellectual property/royalty. 100
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Liquidity and Capital Resources
Sources and Uses of Liquidity
We generate cash primarily from management and advisory fees and realized
carried interest allocations. We have historically managed our liquidity and
capital resource needs through (a) cash generated from our operating activities,
(b) realizations from investment activities, (c) borrowings, interest payments
and repayments under credit agreements and other borrowing arrangements, (d)
funding capital commitments to our funds, and funding our growth initiatives,
including capital expenditures and acquisitions to expand into new businesses.
As of March 31, 2021 , we had $183.9 million of cash, cash equivalents and
restricted cash and $970.9 million of investments in StepStone Funds, including
$896.5 million of accrued carried interest allocations, against $465.6 million
in accrued carried interest-related compensation payable. On September 18, 2020 ,
we repaid in full the indebtedness outstanding on the Term Loan B in the amount
of $146.6 million . As of March 31, 2021 , we had no debt obligations outstanding.
Ongoing sources of cash include (a) management and advisory fees, which are
collected monthly or quarterly, (b) carried interest allocations and incentive
fees, which are volatile and largely unpredictable as to amount and timing; and
(c) distributions from our investments in the StepStone Funds. We use cash flow
from operations and distributions from our investments in the StepStone Funds to
pay compensation and related expenses, general and administrative expenses,
income taxes, capital expenditures, dividends to our stockholders and
distributions to holders of Partnership units, and to make investments in the
StepStone Funds. We believe we will have sufficient cash to meet our obligations
for the next 12 months.
Cash Flows
The following table summarizes our cash flows attributable to operating,
investing and financing activities:
Year Ended March 31,
(in thousands) 2021 2020 2019
Net cash provided by operating activities $ 149,299 $ 65,930 $ 51,451
Net cash provided by (used in) investing activities (11,166) 35,809 (61,891)
Net cash used in financing activities (45,306) (52,170) (55,522)
Effect of exchange rate changes 1,097 (252) 288
Net increase (decrease) in cash, cash equivalents and
Operating Activities Operating activities provided$149.3 million ,$65.9 million and$51.5 million of cash for fiscal 2021, 2020 and 2019, respectively. For fiscal 2021, 2020 and 2019, respectively, these amounts primarily consisted of the following: •net income, after adjustments for non-cash items (including unrealized carried interest allocation, unrealized performance fee-related compensation, and unrealized investment income), of$118.4 million ,$72.3 million and$53.1 million ; and •net change in operating assets and liabilities of$30.9 million ,$(6.4) million and$(1.7) million . 101 -------------------------------------------------------------------------------- Table of Contents Investing Activities Investing activities provided (used)$(11.2) million ,$35.8 million and$(61.9) million of cash for fiscal 2021, 2020 and 2019, respectively, and primarily consisted of the following amounts: •net contributions to investments of$9.9 million ,$7.0 million and$7.0 million ; •purchases of fixed assets of$1.3 million ,$0.8 million and$3.0 million ; •net sales and maturities (purchases) of marketable securities of$0 million ,$43.7 million and$(42.9) million ; and •cash payments for acquisitions of$0 million ,$0 million and$9.0 million . Financing Activities Financing activities used$45.3 million ,$52.2 million and$55.5 million for fiscal 2021, 2020 and 2019, respectively, and primarily consisted of the following: •sale of non-controlling interests of$3.3 million ,$110.8 million and$0 million ; •proceeds from capital contributions from non-controlling interests$2.8 million ,$0.0 million and$0.2 million ; •proceeds from IPO, net of underwriting discounts of$337.8 million ,$0 million and$0 million ; •purchase of non-controlling interests of$131.3 million ,$107.2 million and$0 million ; •payment of deferred offering costs of$10.1 million ,$0 million and$0 million ; •payments on term loan of$147.0 million ,$1.5 million and$1.5 million ; •distributions to non-controlling interests of$97.7 million ,$52.9 million and$52.6 million ; and •dividends paid to common stockholders of$2.0 million ,$0 million and$0 million . Prior Credit Agreement InMarch 2018 , we entered into a credit and guaranty agreement ("Credit Agreement") with various lenders. The Credit Agreement was arranged byJPMorgan Chase Bank, N.A . ("JPMorgan"), as the administrative agent, and provided for the Term Loan B with an aggregate principal of$150.0 million and a senior secured revolving facility ("LOC") with an aggregate borrowing capacity of$10.0 million . Net proceeds from the Term Loan B were$145.7 million , net of arrangement fees and other expenses. A portion of the proceeds were used to repay the outstanding balances on a prior credit facility. OnSeptember 18, 2020 , we repaid in full the indebtedness outstanding on the Term Loan B in the amount of$146.6 million and terminated the LOC. In connection with the repayment, we wrote-off the unamortized debt issuance costs and discount of$3.5 million , which is included in interest expense in the consolidated statements of income for the year endedMarch 31, 2021 . As ofMarch 31, 2021 , we had no debt obligations outstanding. 102 -------------------------------------------------------------------------------- Table of Contents Equity Transactions InAugust 2019 , we completed a series of transactions resulting in the unitization of our equity and the combination of certain classes of our equity to facilitate the sale of newly issued equity interests in us to certain institutional investors (the "2019 Transaction"). We received approximately$110.8 million in net proceeds from the sale of equity to institutional investors and used all of the proceeds to repurchase an equal number of equity interests from certain of our existing equity holders. In addition, we repurchased additional Class D partnership interests from a former employee for$2.3 million , which will be paid to the former employee at such time as carried interest allocations are realized by us. In connection with the 2019 Transaction, the previously existing Class A1, Class B, Class C and Class D partnership units were canceled and combined with and into the existing Class A partnership interests of the Company as a single class with equal value (without substantive changes to economic rights associated therewith), with each partner participating ratably in all distributions, including carried interest. InJune 2020 , one of our consolidated subsidiaries completed a transaction to repurchase partnership interests in the subsidiary from a former partner for approximately$3.3 million , and subsequently sold an equal number of partnership interests to certain employees of the subsidiary for approximately$3.3 million , resulting in no net proceeds to the subsidiary. In connection with the consummation of the IPO, we issued new partnership interests to certain StepStone professionals in the Infrastructure subsidiary in exchange for their partnership interests in the Infrastructure subsidiary, which increased our interest in the Infrastructure subsidiary to approximately 49% and decreased the interest of the StepStone professionals in the Infrastructure subsidiary to approximately 51%. InMarch 2021 , we conducted an underwritten public offering of 9,200,000 shares of Class A common stock, including 1,200,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, sold by selling stockholders at a public offering price of$29.50 per share. In connection with the offering, we issued 9,200,000 shares of Class A common stock to the selling stockholders in exchange for 9,200,000 Class B units. A corresponding number of shares of Class B common stock were automatically redeemed at par value and canceled in connection with such exchange. We did not receive any proceeds from the sale of shares by the selling stockholders. Future Sources and Uses of Liquidity In the future, we may issue additional equity or debt with the objective of increasing our available capital. We believe that we will be able to continue to meet our current and long-term liquidity and capital requirements through our cash flows from operating activities, existing cash and cash equivalents, and our ability to obtain future financing. Dividend and Distribution Policy OnFebruary 9, 2021 , we announced a dividend of$0.07 per share of Class A common stock, which was paid onMarch 12, 2021 to holders of record at the close of business onFebruary 26, 2021 . OnJune 15, 2021 , we announced a dividend of$0.07 per share of Class A common stock, which is payable onJuly 15, 2021 to holders of record at the close of business onJune 30, 2021 . 103 -------------------------------------------------------------------------------- Table of Contents We may pay additional dividends to holders of our Class A common stock in the future. The declaration and payment by us of any future dividends to Class A stockholders is at the sole discretion of our board of directors. Subject to funds being legally available, we will cause the Partnership to make pro rata distributions to its limited partners, including us, in amounts sufficient to make payment of applicable income and other taxes, to make payment under the Tax Receivable Agreements, and to make payment for corporate and other general expenses. Because our board of directors may determine to pay or not pay dividends to our Class A stockholders, our Class A stockholders may not necessarily receive dividend distributions relating to our excess distributions, even if the Partnership makes excess distributions to us. Tax Receivable Agreements We have entered into an Exchanges Tax Receivable Agreement with the partners of the Partnership as of the date of the IPO and a Reorganization Tax Receivable Agreement with certain pre-IPO institutional investors (collectively, the "Tax Receivable Agreements"). The Tax Receivable Agreements provide for payment by SSG to these continuing partners and pre-IPO institutional investors of the Partnership of 85% of the amount of the net cash tax savings, if any, that SSG realizes (or, under certain circumstances, is deemed to realize) as a result of increases in tax basis (and utilization of certain other tax benefits) resulting from (i) SSG's acquisition of such continuing partner's and institutional investor's Partnership units in connection with the Reorganization and IPO and (ii) in the case of the Exchanges Tax Receivable Agreement, any payments SSG makes under the Exchanges Tax Receivable Agreement (including tax benefits related to imputed interest). SSG will retain the benefit of the remaining 15% of these net cash tax savings under both Tax Receivable Agreements. Capital Requirements of Regulated Entities We are required to maintain minimum net capital balances for regulatory purposes inthe United States and certain non-U.S. jurisdictions in which we do business. These net capital requirements are met by retaining cash and cash equivalents in those jurisdictions. As a result, we may be restricted in our ability to transfer cash between different operating entities and jurisdictions. As ofMarch 31, 2021 , we were required to maintain approximately$6.3 million in net capital at these subsidiaries and were in compliance with all regulatory minimum net capital requirements. Contractual Obligations and Commitments In the ordinary course of business, we enter into contractual arrangements that require future cash payments. The following table sets forth information regarding our anticipated future cash payments under our contractual obligations as ofMarch 31, 2021 : Less than 1 Total year Years 1-3 Years 3-5 Thereafter Operating lease obligations(1)$ 86,811 $ 10,090
1,541 832 678 31 -
Capital commitments(2) 60,523 60,523 - - -
Total $ 148,875 $ 71,445 $ 20,695 $ 19,910 $ 36,825 _______________________________
(1)We lease office space and certain office equipment under agreements that
expire periodically through 2031. The table only includes guaranteed minimum
lease payments under these agreements and does not project other lease-related
payments. These leases are classified as operating leases for financial
reporting purposes and, accordingly, are not recorded as liabilities in our
consolidated financial statements.
(2)Capital commitments represent our obligations to provide general partner
capital funding to the StepStone Funds. These amounts are generally due on
demand, and accordingly, have been presented as obligations payable in the less
than 1 year column. Capital commitments are expected to be called over a period
of several years.
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The payments that we are required to make under the Tax Receivable Agreement are
expected to be substantial and are not reflected in the contractual obligations
table set forth above as they are dependent upon future taxable income.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that would expose us to any
liability or require us to fund losses or guarantee target returns to clients in
our funds that are not reflected in our consolidated financial statements. See
notes 4 and 16, respectively, to our consolidated financial statements included
in Part II, Item 8 of this annual report for information on variable interest
entities and commitments and contingencies.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. In
applying many of these accounting principles, we need to make assumptions,
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses in our consolidated financial statements. We base our
estimates and judgments on historical experience and other assumptions that we
believe are reasonable under the circumstances. These assumptions, estimates and
judgments, however, are both subjective and subject to change, and actual
amounts may differ from our assumptions and estimates. If actual amounts are
ultimately different from our estimates, the revisions are included in our
results of operations for the period in which the actual amounts become known.
We believe the following critical accounting policies could potentially produce
materially different results if we were to change underlying assumptions,
estimates or judgments. See note 2 to our consolidated financial statements
included in Part II, Item 8 of this annual report for a summary of our
significant accounting policies.
Consolidation
We consolidate all entities that we control through a majority voting interest
or as the primary beneficiary of a variable interest entity ("VIE"). We use, and
expect to continue to use, a combination of our equity ownership, governance
rights and other contractual arrangements to control operations of these
entities. However, these arrangements may not be as effective in providing us
with control over these operations as would wholly owning these entities. See
note 4 to our consolidated financial statements included in Part II, Item 8 of
this annual report for information on variable interest entities.
Under the VIE model, we are required to perform an analysis as to whether we
have a variable interest in an entity and whether the entity is a VIE. In
evaluating whether we hold a variable interest, we review all of our financial
relationships to determine whether we are exposed to the risks and rewards
created and distributed by an entity. We hold variable interests in certain
operating subsidiaries not wholly-owned by us and in the StepStone Funds in
which we serve as the general partner or managing member. We also assess whether
the fees charged to the StepStone Funds are customary and commensurate with the
level of effort required to provide the services. We consider all economic
interests, including indirect interests, to determine if a fee is considered a
variable interest. We determined our fee arrangements with the StepStone Funds
are not considered to be variable interests.
If we have a variable interest in an entity, we further assess whether the
entity is a VIE and, if so, whether we are the primary beneficiary. The
assessment of whether an entity is a VIE requires an evaluation of qualitative
factors and, where applicable, quantitative factors. These judgments include:
(a) determining whether the entity has sufficient equity at risk, (b) evaluating
whether the equity holders, as a group, lack the ability to make decisions that
significantly affect the economic performance of the entity and (c) determining
whether the entity is structured with disproportionate voting rights in relation
to their equity interests.
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For entities that are determined to be VIEs, we are required to consolidate
those entities where we have concluded that we are the primary beneficiary. The
primary beneficiary is defined as the variable interest holder with (a) the
power to direct the activities of a VIE that most significantly affect the
entity's economic performance and (b) the obligation to absorb losses of the
entity or the right to receive benefits from the entity that could potentially
be significant to the VIE. In evaluating whether we are the primary beneficiary,
we evaluate our economic interests in the entity held either directly or
indirectly by us. At each reporting date, we determine whether any
reconsideration events have occurred that require us to revisit the primary
beneficiary analysis, and we will consolidate or deconsolidate accordingly.
We provide investment advisory services to the StepStone Funds, which have
third-party investors. Certain StepStone Funds are VIEs because they have not
granted the third-party investors substantive rights to terminate or remove the
general partner or participating rights. We do not consolidate these StepStone
Funds because we are not the primary beneficiary of those funds, primarily
because our fee arrangements are considered customary and commensurate and thus
not deemed to be variable interests, and we do not hold any other interests in
those funds that are considered more than insignificant. We consolidate certain
of our operating subsidiaries that are VIEs because we are the primary
beneficiary.
Revenues
We recognize revenue in accordance with ASC 606. Revenue is recognized in a
manner that depicts the transfer of promised goods or services to customers and
for an amount that reflects the consideration to which we expect to be entitled
in exchange for those goods or services. We are required to identify our
contracts with customers, identify the performance obligations in a contract,
determine the transaction price, allocate the transaction price to the
performance obligations in the contract and recognize revenue when (or as) the
entity satisfies a performance obligation. In determining the transaction price,
variable consideration is included only to the extent that it is probable that a
significant reversal in the amount of cumulative revenue recognized would not
occur when the uncertainty associated with the variable consideration is
resolved.
Management and Advisory Fees, Net
We recognize management and advisory fee revenues when control of the promised
services is transferred to customers, in an amount that reflects the
consideration that we expect to receive in exchange for those services. For
asset management services and the arrangement of administrative services, we
satisfy these performance obligations over time because the customer
simultaneously receives and consumes the benefits of the services as they are
performed. Advisory fees from contracts under which we do not have discretion
over investment decisions are generally based on fixed amounts and typically
billed quarterly. Management fees are reflected net of certain professional and
administrative services and distribution and servicing fees paid to third
parties for which we are acting as an agent.
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Performance Fees
We earn two types of performance fee revenues: incentive fees and carried
interest allocations, as described below.
Incentive fees are generally calculated as a percentage of the profits earned in
respect of certain accounts for which we are the investment adviser, subject to
the achievement of minimum return levels or performance benchmarks. Incentive
fees are typically subject to reversal until the end of a defined performance
period, as these fees are affected by changes in the fair value of the assets
under management or advisement over such performance period. Moreover, incentive
fees that are received prior to the end of the defined performance period are
typically subject to clawback, net of tax. We recognize incentive fee revenue
only when these amounts are realized and no longer subject to significant
reversal, which is typically at the end of a defined performance period and/or
upon expiration of the associated clawback period.
Carried interest allocations refer to the allocation of performance fees
(typically 5% to 15%) from limited partners in certain StepStone Funds. We
account for our investment balances in the StepStone Funds, including carried
interest allocations, under the equity method of accounting. Certain funds will
allocate carried interest to us, based on cumulative fund performance to date,
irrespective of whether such amounts have been realized. These carried interest
allocations are subject to the achievement of minimum return levels (typically
5% to 10%), in accordance with the terms set forth in each respective fund's
governing documents. We recognize revenue attributable to carried interest
allocations from a fund based on the amount that would be due to us pursuant to
the fund's governing documents, assuming the fund was liquidated based on the
current fair value of its underlying investments as of that date. Accordingly,
the amount recognized as carried interest allocation revenue reflects our share
of the gains and losses of the associated fund's underlying investments measured
at their then-fair values, relative to the fair values as of the end of the
prior period. Carried interest is generally realized when an underlying
investment is profitably disposed of and the fund's cumulative returns are in
excess of the specific hurdle rates, as defined in the applicable governing
documents. Carried interest is generally subject to reversal to the extent that
the amount received to date exceeds the amount due to us based on cumulative
results.
Fair Value Measurements
GAAP establishes a hierarchical disclosure framework, which prioritizes and
ranks the level of market price observability used in measuring financial
instruments at fair value. Market price observability is affected by a number of
factors, including the type of financial instrument, the characteristics
specific to the financial instrument and the state of the marketplace -
including the existence and transparency of transactions between market
participants. Financial instruments with readily available quoted prices in
active markets generally will have a higher degree of market price observability
and therefore a lesser degree of judgment used in measuring their fair value.
Financial instruments measured and reported at fair value are classified and
disclosed based on the observability of inputs used in the determination of
their fair values, as follows:
•Level I - Pricing inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities as of the measurement date.
•Level II - Pricing inputs are other than quoted prices in active markets, which
are either directly or indirectly observable as of the measurement date, and
fair value is determined through the use of models or other valuation
methodologies. The types of financial instruments classified in this category
include less liquid securities traded in active markets and securities traded in
other than active markets.
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•Level III - Pricing inputs are unobservable for the financial instruments and
include situations where there is little, if any, market activity for the
financial instrument. The inputs into the determination of fair value require
significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in the fair value
hierarchy within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and
consideration of factors specific to the financial instrument.
Equity-Based Compensation
We account for grants of equity-based awards, including restricted stock units
("RSUs"), at fair value as of the grant date. We recognize non-cash compensation
expense attributable to these grants on a straight-line basis over the requisite
service period, which is generally the vesting period. Expense related to grants
of equity-based awards is recognized as equity-based compensation in the
consolidated statements of income. The fair value of RSUs is determined by the
closing stock price on the grant date. Forfeitures of equity-based awards are
recognized as they occur.
Performance Fee-Related Compensation
A portion of the carried interest allocations we earn is awarded to employees
and other carry participants in the form of award letters ("carry awards").
Carry awards to employees and other participants are accounted for as a
component of compensation and benefits expense contemporaneously with our
recognition of the related realized and unrealized carried interest allocation
revenue and, until paid, is included in accrued carried interest-related
compensation in the consolidated balance sheets. Carried interest-related
compensation expense also includes the portion of net carried interest
allocation revenue attributable to equity holders of our consolidated
subsidiaries that are not 100% owned by us. Upon a reversal of carried interest
allocation revenue, the related compensation expense, if any, is also reversed.
Liabilities recognized for carried interest amounts due to affiliates are not
paid until the related carried interest allocation revenue is realized. We
record incentive fee compensation when it is probable that a liability has been
incurred and the amount is reasonably estimable. The incentive fee compensation
accrual is based on a number of factors, including the cumulative activity for
the period and the distribution of the net proceeds in accordance with the
applicable governing agreement.
Income Taxes
SSG is a corporation for U.S. federal income tax purposes and therefore is
subject to U.S. federal and state income taxes on its share of taxable income
generated by the Partnership. The Partnership is treated as a pass-through
entity for U.S. federal and state income tax purposes. As such, income generated
by the Partnership flows through to its limited partners, including SSG, and is
generally not subject to U.S. federal or state income tax at the Partnership
level. The Partnership's non-U.S. subsidiaries generally operate as corporate
entities in non-U.S. jurisdictions, with certain of these entities subject to
non-U.S. income taxes. Additionally, certain subsidiaries are subject to local
jurisdiction taxes at the entity level, which are reflected within income tax
expense in the consolidated statements of income. As a result, the Partnership
does not record U.S. federal and state income taxes on income in the Partnership
or its subsidiaries, except for certain local and foreign income taxes discussed
above.
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Taxes are accounted for using the asset and liability method of accounting.
Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases, using tax rates in effect
for the year in which the differences are expected to reverse. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in
income in the period when the change is enacted. The principal items giving rise
to temporary differences are certain basis differences resulting from exchanges
of Partnership units. See Tax Receivable Agreements below.
Deferred tax assets are reduced by a valuation allowance when it is
more-likely-than-not that some portion or all of the deferred tax assets will
not be realized. The realization of deferred tax assets is dependent on the
amount, timing and character of our future taxable income. When evaluating the
realizability of deferred tax assets, all evidence - both positive and negative
- is considered. This evidence includes, but is not limited to, expectations
regarding future earnings, future reversals of existing temporary tax
differences and tax planning strategies.
We are subject to the provisions of ASC Subtopic 740-10, Accounting for
Uncertainty in Income Taxes. This standard establishes consistent thresholds as
it relates to accounting for income taxes. It defines the threshold for
recognizing the benefits of tax return positions in the financial statements as
more-likely-than-not to be sustained by the relevant taxing authority and
requires measurement of a tax position meeting the more-likely-than-not
criterion, based on the largest benefit that is more than 50 percent likely to
be realized. If upon performance of an assessment pursuant to this subtopic,
management determines that uncertainties in tax positions exist that do not meet
the minimum threshold for recognition of the related tax benefit, a liability is
recorded in the consolidated financial statements. We recognize interest and
penalties, if any, related to unrecognized tax benefits as general,
administrative and other expenses in the consolidated statements of income. See
note 11 to our consolidated financial statements included in Part II, Item 8 of
this annual report for more information.
Tax laws are complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant judgment is required
in determining tax expense and in evaluating tax positions, including evaluating
uncertainties under GAAP. We review our tax positions quarterly and adjust our
tax balances as new information becomes available.
Tax Receivable Agreements
The Tax Receivable Agreements provide for payment by SSG to such partners and
pre-IPO institutional investors of the Partnership of 85% of the amount of the
net cash tax savings, if any, that SSG realizes (or, under certain
circumstances, is deemed to realize) as a result of increases in tax basis (and
utilization of certain other tax benefits) resulting from (i) SSG's acquisition
of such partners' and institutional investors' Partnership units and (ii) in the
case of the Exchanges Tax Receivable Agreement, any payments SSG makes under the
Exchanges Tax Receivable Agreement (including tax benefits related to imputed
interest). SSG will retain the benefit of the remaining 15% of these net cash
tax savings under both Tax Receivable Agreements.
Recent Accounting Developments
Information regarding recent accounting developments and their effects to us can
be found in note 2 to our consolidated financial statements included in Part II,
Item 8 of this annual report.
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