Good afternoon, everyone. Thanks for joining the conference. This is Samantha Platt from Bank of America. In StepStone in 2010, and has been in the industry since 2005. StepStone is a global private markets investment firm with over $600 billion of... Take a few minutes to provide context for what you do as a solutions provider and how these solutions are valuable across different market backdrops.
Sure. From a strategic asset allocation perspective, they ask themselves, "Okay, how much of my portfolio can I afford to be illiquid?" Why? Because that's where the excess returns historically have come from, and there's persistence with that alpha embedded and the liquidity discount of being illiquid. What we're seeing is allocations to the private markets have been roughly growing and are now anywhere between 20%-30% of their portfolios in a diversified way, and we'll talk about managed accounts later, and in a customized way. We do it in a very geographically diversified way, dedicated investment teams in venture capital, in private equity, in real estate, in infrastructure, and in private credit. Going to the next layer down, well, which strategies should clients pursue within each asset class? Fund investments.
If it's a fund investment, which manager should At or close to wherever their targets are, and they might be growing a little bit. Outside of the U.S., what we're seeing is the strategic asset allocation models for illiquid markets, and they're at 1%, 2%, 3%, or 5%. Who are they gonna get to help access the private markets to get them to their targets? Well, the answer is StepStone. We've specifically and purposely built our platform with a footprint that is largely outside of the U.S. 70% of our management and advisory fees are coming from outside of the U.S. where they're under allocated. Nearly 75% or 80% of our growth, to your question, has come from those geographies. That's sort of the comprehensive answer to your question.
You touched on being diversified across, you know.
Was built for an all-weather cycle situation. I'll talk for a little bit about, you know, from a primary strategy standpoint, investors might say, "Huh, interest rates are going up. What asset class or what big companies are built in every cycle?" Venture capital has always been, and has stood the test of time, that way for investors to get access to great companies in good times and bad times. From a primary standpoint, we're seeing a lot of demand for infrastructure, real estate, and believe it or not, venture capital. What a way to access the private markets at an attractive entry price. They're coming in at a discount, and typically the discounts widen during periods of dislocation or stress.
There's a really interesting demand that we're seeing, and we'll talk about secondaries more, ticking up within the secondary space that have their securities. We do secondary investments for infrastructure through managed accounts, and we do secondary investments through managed accounts for private credit. We've applied the secondaries capabilities that we have across all the asset classes.
Great. maybe let's continue on with secondaries for a few minutes. you've been one of the.
Take a step back and zoom out. The secondaries business is a derivative of the primaries business. The way to think about the second private markets from a primary fundraising standpoint, some percentage of that capital will turn over in the secondary market. Let's start there. There's currently $10 trillion of net asset value in the private markets sitting there waiting for either an exit by the general partner and/or the secondary market to buy and purchase. Of that $10 billion, $7 billion is private. I think the number was something like $108 billion. If we go to the next layer down, Sam, and unpack what comprised of that $108 billion, roughly $50 billion came from GP-led transactions. The other $58 billion came from LPs selling their interests. Why is that significant?
Well, let's dial the clock back to 2016. The transaction volume in 2016. Like an asset that they wanna continue to hold. If you look at the growth between the LP component going from 25 to 50, it's roughly a double in that timeframe. If you look at the GP-led going from eight to 50, it's nearly six-fold. You're seeing the data showing how the GP-led component of the secondary market is nearly 1/2. House view at StepStone is we think that of the primary market that turns over in the secondary market.
You've been a pioneer in this space, particularly with one of the first real estate secondaries funds, the largest venture capital secondaries fund. Have you seen any demand on the infrastructure side or are there any other places that would be a natural kinda next step?
The original secondaries team in real estate that dates back to the late 1990s. What's interesting is we are talking about, and just a minute ago, how GP-led transactions in the private equity space are this new thing. Well, in the real estate market, GP-led transactions with a secondary fund as their first offering post-acquisition and, you know, it's not necessarily a big surprise, but I think we're all very pleased with raising $2.6 billion at a time like Valuations are down 50% or 60%. The $3 trillion differential of the $10 billion trillion in the ground, which is infrastructure, private credit, and real estate, allows us to put play in those markets.
I think, as I mentioned, we're likely going to continue to use our managed account structures to invest in infrastructure through secondary deals and through private credit, through managed accounts.
Management fees. Does this approach change how you think about inorganic M&A opportunities in the future?
Well, thanks for asking us this question 'cause it's really important. We were very excited to announce last year a change in our capital management approach. If we look at how cash is flowing into our business, it's coming from two sources. It's coming from dollars, call it $500 million of net performance fees sitting as an accrual on our balance sheet that is nothing more than a backlog of future revenue. It will convert into revenue over some period of time. It's just a little more episodic. How do you deal with an episodic cash flow and a stable cash flow and come up with a capital management approach? Well, we just took a step back, and we made some calls. We called sell side analysts. With a supplemental dividend each year in June.
Our fiscal year ends 3/31 of March. In June, we're going to announce and issue a dividend that is gonna be recurring, and it's supplemental. It's not a special, it's not a one-time bodging. It does not impede our M&A capabilities whatsoever. We have a very capital-efficient business, and we have a very flexible capital structure. We have a revolver. We use this revolver to flex up and down. We have an incredibly valuable source of equity. If you look back at the Greenspring transaction, it was largely financed out of issuing StepStone equity. We combined that StepStone equity with an earn-out. Why? That is essential for StepStone to maintain some sort of alignment with whatever acquisition we do.
The capital management decision that we made on dividends really has no effect whatsoever on our ability to continue to grow the business through M&A.
Great. You've been pretty successful with M&As.
As a private company, pre-IPO, and what the world was like for StepStone as a public company, post-IPO. These are different. It gave us a track record, and it really enhanced our private equity capabilities. We used M&A to acquire real estate abilities we want. Post-IPO, now how do we think about M&A? Well, we think about it through the lens of accelerating something we're currently doing or augmenting something we're currently doing, rather than adding or trying to think about something that we want that we don't have and do something different. What we've done is we've delivered a platform to our shareholders that is purpose-built to augment or accelerate something with an M&A strategy. Not at all. We will be opportunistic.
If an M&A opportunity presents itself, and there's a good cultural fit, and we can get the structure right, and we can get the right alignment, and it augments something we're currently doing or accelerates something we're currently doing, I think we have a fantastic track record at.
Let's move to fundraising. Starting with commingled funds, can you give some color on which of your larger funds will be back in market both this year and next year?
Sure. Well, we had a great quarter, as all of you know. That quarter was largely driven by the activation of two flagship funds. It was a clean quarter. There were no retroactive fees creating noise in the numbers. We activated our flagship private equity secondaries fund. We're very excited about the timing of this fund, as I mentioned. Very excited about that. We're also in market with our first commingled fund for infrastructure. We have our first infrastructure available. We're currently in market, and we're excited to have some more closings this quarter and closings throughout the year across all of our commingled funds. Oh, by the way, commingled funds that are also in market, which we'll talk about I'm sure in a minute, are our retail products.
We have S PRIM, which is our retail product for the private markets, and we have SPRING, which is our retail product for venture capital and growth equity. That's basically our fundraising list, if you will, of activities.
Raising, I believe it's 4 x what you were raising last year, at a moment when retail demand has, you know, come to almost a halt here.
Investor adopting illiquid strategies and illiquid securities. StepStone is very much a long-term, very large senior team on board with Conversus. We put the cart way before the horse on this one. We thought, well, if we had the right team, and we build the right distribution capabilities, we have the capabilities, the manufacturing capabilities, if you will, to create products that are suitable. Retail investors understand they could pick manager X, Y, and Z, but there are idiosyncratic risks with manager X, Y, and Z. Is there a product out there that gives investors a more diversified approach? What we led with was a product called S PRIM, which is a multi-manager product. To get access to the entire market in a very efficient way. What do you mean by efficient?
It's a 1.4% management fee with no carried interest. So there isn't any performance fee eating into the net returns. We said, let's make this product available to the widest part of the market. Most of the products out there are for qualified investors. We designed this product to apply all the way down to the accredited investor. That's how we led. Like a core satellite approach, where an investor could have a core holding in S PRIM in a very diversified way across the private markets and pivot.
Great. The third fundraising bucket here is gonna be your separately managed accounts. You have a 90% re-up rate and a 30% average rate of increase here, which gives a pretty visible, you know, steady source of growth. I wanna dig a little more here. Can you discuss what the average SMA looks like and what the typical duration is?
Sure. SMAs are really how we led and built the business. We led our offering to the market through SMAs. As a result, as we're sitting here today, we are managing roughly $80 billion. Of the $80 billion of fee-paying AUM, roughly $50 billion is managed accounts. It is a very significant part of our business. The duration of the managed accounts is no different than the duration of our commingled funds. Typically happens toward the end of the investment period. Call it year three or four , we begin the re-up conversations. It's a single investor. It's not like they're marketing to thousands of LPs. It's a one-on-one relationship. It's incredibly sticky, and it's quite perpetual in nature.
Technology and how data has evolved in the private markets is incredibly important. Unlike the private markets, where data is available to everyone, in the private markets, data is only available to those who invest in all strategies. SPI was an in-house technology that we created on an Excel spreadsheet back in 2008, and it is a large contributor to our successful track record. As time evolved, we started realizing the importance and the impact of this, and the more value we were extracting from the data that we were inputting into SPI. We decided to build our own data science and engineering team to code up the software and move it from Excel to something that was a bit more versatile.
Call it 2017, 2018, we started realizing this software is in SPI with our clients to help them work through their own investment decisioning processes. It's typically with existing clients, whether they've managed. We use it as a way to develop business. Now, what we will eventually do is figure out a way to monetize it. Now, we don't know what the enterprise value of that might look like, but there is a lot of blue sky, and we're very excited about it. What happens after an investor makes the decision to invest, and now they have that commitment on their balance sheet. Drill down into everything that you need to know. We've created the private market equivalent to what you see in the public markets when it comes to transparency and analytics.
Lean into or back off of, it then feeds back to SPI into the investment decisioning tools. There is a virtuous circle between SPI and Omni pre- the portfolios that they currently own. Now, if it's okay with you, Sam, I want to expand on technology beyond SPI and Omni.
Sure.
Talk about other technologies that we've created. One of them that's really important is called the Daily Value Engine. That must be a pretty interesting concept the quarter and only audited once a year. What StepStone has done is through all the data that we have coming in through SPI and Omni, we have collected.
I was interested to see how you get in contact with those 140 RIAs. Okay. Sorry. I was interested to see how you got in contact with those 140 RIs that are now your clients. You know, is that effort different than the IBD channel and the wire house channel? Like, what does your distribution effort look like across those three kinda retail segments?
Sure. Thanks, Craig. As I mentioned, in 2019, we brought on- team within a couple of years that had decades of experience in the RIA channels, in the IBDs, and in the wires. What we did, Craig, was we hired a very large whole business development team isn't being repurposed, thinking that they know what they're doing in the retail space. No, we went out and hired a very, very large senior team, and that team is now 50 people strong and growing. I think close to 60 or 70 now. Really it's about having a dedicated team as opposed to re-
Given your seat, you get to view the market from kind of a bird's eye view. I was curious, what are the tones in conversation like with LPs today in terms of allocation amounts and asset classes?
When it comes to allocations as such, most LPs and investors in the private markets today have been around- 2021 were incredible years of fundraising. GPs were coming back to market at light warping speed. What was happening was LPs were burning through their annual budgets in six months. Come July, they were already done. Fundraising at the rate at which GPs were coming back to market was so fast and furious that LPs were burning through their allocations in six months. LPs are very healthy, and the allocations are healthy. What we expect are LPs to pace themselves and a little bit slower. We see the budget for 2023 being spread out over Q1, Q2, Q3, and Q4, rather than burning through the entire budget in the first three months.
Part of your question, Craig, was where are they sort of allocating their capital? As I mentioned earlier, we're seeing an increased demand in secondaries. Yeah, StepStone.
One more quick one for me. Thank you. You said a few things on VC earlier I was interested in, but, you know, corporate private equity, U.S. buyout-
There was very little the VC market could do but sort of recognize that and take the adjustments that they needed to take. Many of them took the adjustments they needed to take. 2023, what we're seeing is LPs recognizing this is the time that they've been waiting for. 2018, 2019, 2020, 2021, the valuations and the multiples on revenue without any earnings were off the charts. Here you have an environment where valuations have come in, Craig, and LPs are now saying, "This is the moment to enter the venture capital space that I've been waiting for.