Good everyone. Thank you for joining us today. Super excited to be hosting Scott Hart, CEO, and Mike McCabe, Head of Strategy of StepStone, and welcome.
Thank you.
Thanks for having us. Good to be here. Oh, sitting down.
Let's kick it off with background on StepStone and introduction for the group. You know, what does it mean to be a solutions provider? Who are your clients, who do you serve, and how do you serve them?
Yeah. Well, first of all, thanks for having us, Bart. Great to be here at the conference. Look, starting with, you know, who is StepStone. Over the last 20 or so years, we've really grown to become one of the most active allocators of capital across the private markets. Yet today, have over $800 billion of what we call total capital responsibility. Of that, about $220 billion is discretionary assets under management. We and our clients are allocating about $75 billion into the private markets on an annual basis. Really has created a powerful, you know, flywheel effect, incredible access to managers, to data, to deal flow, all of which help inform our views as a private market solutions provider.
Mm.
To your question about what it means to be a solutions provider, look, that's evolved over time. If I think back to the very early days at StepStone, really everything we did at that time was highly customized for each individual client. Think about some of the largest asset owners and LPs in the private markets, sovereign wealth funds, public pension funds, both in the U.S. and abroad, insurance companies, endowments and foundations, and we're really working with them to build customized portfolios specifically designed to meet their specific needs. You know, over the years, we came to realize that as we built out our platform, there were opportunities to develop products that were designed to meet the needs of an entire class of investors.
You think about, you know, private wealth as maybe the best example of that, or more recently, some of the hires that we have made to lead our insurance solutions or retirement solutions businesses within StepStone. But maybe last thing I would say is as a solutions provider, it really sometimes comes down to the mindset, right? We go into an interaction with a client with a listen first mentality to really understand the challenge they face, and then think about how we can use the StepStone platform to address their needs.
Mm.
You know, in order to do that, in order to address a wide range of different challenges, we've gotta have a comprehensive private markets toolbox to draw upon. In our case, that includes, you know, our four different asset classes, private equity and venture capital, real estate, infrastructure, and private credit. There's really three main strategies we utilize. We commit capital through primary fund investments, secondary transactions, and co-investments. We need to have a flexible approach that allows us to work with our clients in whatever way works best for them. Today, that continues to include advisory relationships, separately managed accounts, commingled funds, and a series of evergreen funds really designed more for the private wealth space.
Lots to unpack there so it's very interesting. One topic that is coming up more and more these days, and it kinda segues into that is AI. As that's evolving, like, how are you working with your clients to help them out with the AI, whether it's an opportunity or risk? Like, how do you see that playing out on the ground?
Yeah. No, certainly been the topic of the day over the last month or so.
Yeah.
here. You know, it has felt over the last month like we've had to, you know, consistently remind many people that we didn't just wake up and start thinking about AI a month ago. This is something that, you know, we and obviously many others have been focused on over the last several years. Obviously the pace of change and the acceleration of that change has really picked up and has led us to be spending quite a bit of time with our clients, with our managers, with our shareholders, talking about the topic.
Mm.
Look, I think during times of disruption and market volatility, what we tend to find is our clients, you know, lean even more heavily on us at StepStone. You know, I guess for better or worse, we've probably had a number of these disruptions just in the last five years alone, whether you think back to COVID, to regional banking crises, to tariffs, to geopolitics. You know, although there are obviously differences, you know, there are certain similarities or certain steps that many of our clients wanna take in partnership with us. You know, the main two being, you know, one, what's the impact that this disruption is having on my current portfolio?
Mm.
Two, you know, how do I think about assessing the risk but also identifying the opportunities that I can invest behind on a go-forward basis? You know, I'd actually say on both of those fronts, one of the tools that we rely most heavily on is frankly, portfolio construction and diversification. I think in a world where as investors, there's so much uncertainty, there's so much that's outside of our control, the one thing that tends to be very much within our control is portfolio construction and diversification. Whether that's across vintage years, whether it's across strategies and asset classes, across sectors, or even the underlying managers and assets that we're investing alongside, you know, that diversification really serves as our first line of defense when working with our clients.
I think second, it comes down to data, and when I mentioned, you know, the level of our activities, you know, the interesting thing about the private markets is data tends to be available, not to everyone broadly, but to those who are actually participating in the asset class.
Mm.
You know, we made an important decision, you know, going on 20 years ago now, to really build out a technology platform that would allow us to capture and organize and analyze that data. Trying to determine, you know, using that data, what we can about the health of our clients' portfolios or where we think we're going to see opportunities or risks. The last thing I would say on that front is, you know, just also tapping into all of the knowledge and the insights that exist across the StepStone platform.
You can imagine with one of the most active venture capital businesses in the private markets, you know, there's great insights coming out of our venture team in terms of what are some of the new technologies, what are the emerging companies that may present risks or may present opportunities to our clients over time. That's really where a lot of the conversations are focused. It's a similar playbook, like I said, to past disruptions.
Maybe the one new element that comes with AI is, you know, clients asking, "Well, how should I think about implementing AI ourselves?" And you know, having probably gotten a head start on most clients on that front, you know, we're able to share some of our learnings, you know, share some of the mistakes that we probably made along the way that they can hopefully learn from, and also just highlight to them that, look, in partnering with StepStone, you are getting the benefits of the data and the AI initiatives and the insights that we have across the platform. So that's really where a lot of our time is spent with clients today.
Okay. That's very helpful, and I wanna dive in a little bit there, because you have the benefit of helping institutional and retail clients, and so are the conversations similar? Is one cohort focused on other areas than not? Like, how are those discussions evolving within those two segments, if you will?
Yeah. No, it's a slightly different approach in the sense that with some of the institutional clients, that portfolio may be very specific to them. You know, we're analyzing that portfolio on their behalf. You know, they may be the only, you know, client in our roster of clients that owns that exact portfolio, whereas on the commingled side or with our evergreen vehicles, it's a much broader communication with investors there. In some cases, we're working through not only the underlying investor, but also financial advisors and intermediaries. I think one of the consistent themes we've seen across both institutions and retail or high net worth is the need for education and for training and knowledge transfer.
One of the comments I've made, just as I've traveled the world over the last several years, met with a large number of asset owners, is that, you know, investors want more for their money today than just returns.
Yeah.
Returns are table stakes, but you've gotta be able to deliver more, to be viewed as a value-added partner, and oftentimes, this training, this education, this knowledge transfer can be a big part of that equation.
Okay. That's very helpful. Just one more on the software. Could you help us understand what your firm-wide exposure is and how you think about your software exposure with it?
Yeah. Yeah, so like what we disclosed during our last earnings call, that if you look at our software as a percentage of total AUM, that metric today is about 11% of our business. We also broke that out excluding our venture capital business, which then drops down to about 7% of our AUM.
Mm.
Probably, you know, a few reasons that we highlight that. One, it demonstrates there's large parts of our business today that have very limited, if any, software exposure. You think about our market leading infrastructure business.
Yeah.
Real estate business. Even within private credit where, you know, we've had pretty strict limitations in terms of what we do. We have tended away from recurring revenue loans. We have focused mostly on the mid-market. That's helped us to moderate our software exposure. If you look at our evergreen vehicles in private credit, it's a sort of mid to high single digit.
Yep.
Exposure number there. Again, wanted to highlight there are large parts of the business that have limited or no software exposure. Also part of the reason we break out ventures, I think where we do have software exposure, I think it's oftentimes misunderstood.
Mm.
You know, clearly wanna make the point that, like, not all software is created equal. There are going to be, as you mentioned earlier, both risks and opportunities.
Yeah.
Both winners and losers in the software world. I think maybe kinda worth stepping back a bit and thinking about our approach to venture, and as mentioned, we just hosted our large venture capital annual meeting a few weeks ago, where we gather 500 of our closest LPs and GPs and management teams and our team, and you can imagine this was a big part of the focus throughout those several days there. One of the themes you would've heard repeatedly is the fact that in venture you have sort of this power law that exists where, you know, for example, over the last 10 years, it's been roughly 100 companies that have generated close to 50% of all the exit value in the venture ecosystem.
You go into the venture asset class knowing you're going to have losses, but it's ultimately important to have exposure and access to those real return drivers in the venture space. One of the things I've admired about our venture team, much of which joined us through the acquisition of Greenspring back in 2021, is the approach that we have taken, for example, to our secondary strategy, to identify, you know, the types of venture, or not just the types, the specific venture-backed assets that we want to own.
Mm.
Really show up with a prepared mind, and then find ways to creatively get access to those companies in the most cost-effective way possible. I think that approach has served us well of late. The way we tried to really bring that to life on our earnings call was to talk about the performance, for example, of our SPRING evergreen fund, which has been one of the top performing evergreen funds in the market of late.
You know, over the last 12 months has generated returns of 46%, and even year to date is up 9%, and that's in a world where if you look at some of the cloud indices, you know, the publicly traded cloud indices which have been off 20% over a similar time period, just demonstrates the power of that approach and the strong performance we've been generating given our ability to invest behind the AI trend. Like I think that, you know, the perception, you know, may seem to be that this venture exposure a bit of a liability given software today.
I come away, for example, from that conference we just hosted thinking it's actually one of our biggest assets, not only in terms of the ability to lean into some of the opportunities that exist, but even to have a better understanding for some of the themes and the trends coming out of the venture community which can help feed and help drive our decision-making across the broader StepStone platform.
Got it. Thanks for unpacking that, and it's a good segue that I wanna go to next in terms of private credit, 'cause I think that's another area where, like, fundamentals and headlines are not really paired up in today's environment, and you've got a unique lens into private credit, you know, given your business mix. What are you seeing in terms of private credit, in your, in the portfolio, and what's the data telling you on the ground today?
Yeah.
From that class?
Yeah, look, I do think we have a unique perspective and certainly access to great data, and maybe before I dive in, you know, a quick plug for, you know, we just released a recent white paper really focused on cutting through the noise in direct lending headlines, because to your point, I think there is a bit of a disconnect, you know, between sort of the headlines and some of the reality of what we see on the ground. Two, to your point around data, we would just highlight the recent partnership we entered into with Kroll, where, you know, we jointly are trying to bring, you know, better data, better transparency to the private credit space.
I'd really kinda tackle that question both by focusing on the broader market-level view, but also a little bit of the StepStone approach to how, you know, similar to what I just did with venture, how do we approach the market given what is currently going on. You know, if you were to read that white paper, you know, you'd see us highlight the fact that, again, there is this disconnect.
You know, there's certainly elements of truth in all of the headlines you read, but also a bit of confusion that is out there as well, and I think some of that is, you know, conflating different parts of the credit market and some of the high-profile defaults that have been reported on over the last six months, you know, that are associated with direct lending, but are actually part of the broadly syndicated loan market or the asset-backed loan market. You know, like, I think what this white paper, you know, really tries to do, and I'll touch on some of the themes there, is, you know, shed some light on how we view certain of those headlines.
You know, one of which would be around, you know, current defaults, and I think if you look at default rates today, you know, they're certainly ticking up, and I think our expectation over the coming quarters is they will continue to tick up, but tick up from very low levels in the post-COVID era of, you know, government support that helped keep, you know, default rates down during that period of time. Yes, I think you know, moving up from, you know, historic lows, but still at pretty manageable levels and probably, you know, more of a theme around coming up from historic lows than being an indicator that there's broader stress across the entirety of the private credit space.
You know, part of the way we also try to get at that is looking at some of the Kroll StepStone benchmark data that we put out there, and if you look at interest coverage ratios, as base rates have come down, but operating performance of the underlying portfolio companies has continued to be strong. We've seen interest coverage ratios improve. We've seen leverage multiples come down, again, on the back of the strong operating performance. Look, that's not to suggest that there aren't pockets of challenges with specific underperforming companies or sectors that may be under pressure. I think if you look at the industry-wide data, there's still a lot to like there.
You know, what I think is so helpful to us in seeing that data is that we can go into the private credit space eyes wide open, and if I talk a little bit about our own approach, look, we understand there are gonna be defaults. We can look at what they've been historically. We can model those into our returns. Very much unlike the venture asset class I just talked about, where you can participate in, you know, the significant upside associated with, you know, home run-type returns, in private credit, you're not rewarded for taking concentrated positions. You've got capped upside on any individual loan, and so it becomes all that much more important that you are managing your downside, and we think about doing that in a few different ways.
You know, one is investing alongside, you know, disciplined managers throughout the private credit space, layering on our own decision-making criteria, whether through our co-investment business or putting certain restrictions on the separate accounts we set up with managers, but ultimately it comes down to diversification. When you look, for example, at our evergreen private credit funds, you know, the largest position you'll find in one of those funds is a sub 1% position, so incredibly well-diversified, which we think is a key way to help limit your downside in the credit space.
Great. Thanks for that detail. That was really helpful. You know, on the back of those two themes, with the stock sort of being dislocated in my view, like, you announced a share buyback authorization program earlier this week. It's good to see. Can you walk us through the thought process around that and how the buyback fits into your broader kinda capital allocation framework and priorities?
Sure. Speaking of a disconnect, right?
Yeah.
Look, ours is a capital-light business, and we have every intention to maintain a capital-light business because it gives us enormous flexibility, and the flexibility allows us to invest the first dollar of after-tax earnings back into the business. As a result, we have over 1,200 employees spread out across 30+ offices in close to 17 countries, and we're gonna continue to use our after-tax cash flow to fund our growth as a business. After we've satisfied our growth needs, the next dollar goes back to our shareholders. As you're aware, we have two dividends that are based on a quarterly dividend tied to our fee-related earnings, and an annual dividend that is supplementing the quarterly dividend based on our performance-related earnings.
We felt that given having just reported our strongest 12-month period ever in the history of the company and our strongest quarter this past February, by every metric, you know, we've been growing at 20%-30% year-over-year. As we look around the corner into fiscal year 2027, there's a lot to be excited about.
Yeah.
Yet our stock is down 30%-40%. What we felt that we had the flexibility to announce a permanent program to initiate a stock buyback, and I expect to be active with that program given where we're trading, having just come off a record year and having some visibility into an exciting year ahead of us. We announced a stock buyback program that is open-ended, and that's sending a message to the market that it's a structural capital allocation tool that we intend to use.
I think it's the right thing to do and the fact that structural is super important. Scott, you talked about Evergreen, and so another area where you have unique lens into the market. You know, BDC, we had a panel earlier today, it was super busy, lots of interest. Wanna tie that in with what you're seeing, like, in terms of subscriptions and redemptions in the BDC channel within the Evergreen product set.
Yeah. Look, I think where we have the best insight there is into our own, you know, products, and today have a suite of products really covering essentially all of the asset classes in which we operate. Look, there, I would say, you know, the headlines and some of the noise around BDCs has not had any kind of immediate impact on our fundraising abilities. Just to, you know, share some of the latest, you know, numbers, Mike just talked about the last earnings report that we completed in February.
At that time, we talked about the fact that in the quarter ended December 31st, we had about $2.2 billion of net subscriptions across our evergreen funds, which was a record quarter for ourselves, and that we, you know, really felt like we would continue to be on a pace to raise something in that $2+ billion range. As we sit here now with February behind us, we are essentially right on pace for those types of numbers. January was a strong month with $700 million of new subscriptions. February, and obviously much of the, you know, the disruption started in early February.
Yeah.
February was an even stronger month with $725 million of new subscriptions. There was particular strength in SPRING, our venture capital-focused fund, where we raised over $400 million in our strongest single month ever. Strength in our STRUX product, which is our infrastructure fund, where we raised close to $100 million, again, strongest month ever. With continued strength across each of SPRIM, STPEX, and CRDEX, which are all private markets, private equity, and private credit funds. As it relates to, you know, new subscriptions, again, feel like we are right on pace for the level that we highlighted and communicated during the last earnings call.
You know, where we don't have complete insight, you know, today is on, you know, the redemption side of things. Where we've got the best color at the moment is on SPRING, where the first quarter redemptions came in at a very low level. As a reminder, whereas most of our funds have 5% quarterly.
Yeah.
Quarterly liquidity, SPRING has 2.5%, and it came in at a small fraction of that. That's the latest sort of indicator we have at the moment. You know, for some of the other evergreen funds, it'll be later this month that we have better insight into any redemption trends, but feel good about the continued progress we're making across our suite of evergreen funds.
Do you think that highlights the benefits of diversification in the sense of, you know, you talk about venture infrastructure seeing the benefits, and so do you think that's, that advantage accelerates in this kind of, period of dislocation or, like, strengthened if you will?
I think it has the potential to, and I think those are two products in particular where we really think we've built, you know, N of one, you know, products, where if you wanna play as an individual investor the venture capital opportunity or the long-term infrastructure opportunity.
Mm.
We think these are two of really the, you know, the best and most differentiated ways to tap into the broader StepStone platform and the expertise across that exists across those types of funds. I think it. Look, I think it shows a continued interest in gaining high quality exposure to those strategies and asset classes, and I think demonstrates our market leading position in those areas.
Okay, got it. I wanted to move to the institutional side of the business. You know, talking about your commingled funds, what's the pipeline looking at there in terms of the next 12-18 months as you look at the business plan?
As I mentioned, we have some visibility into the next year, and it's pretty exciting.
Mm.
We have a forward calendar of all of StepStone's flagship commingled funds back in market at roughly the same time over the next 12-18 months. If you just take a look at the prior year vintages of each of those funds, that adds up to $16 billion.
Mm.
Add a little bit of modest growth to that number, and now you're approaching $20 billion of net new money flowing into StepStone across all of its asset classes. Starting with venture capital, we have our secondary fund back in market. Private equity, we have two secondary funds in market, our LP secondaries market fund, as well as our GP-led secondaries fund, and our flagship co-investment fund. We are also in market with our infrastructure co-investment fund, which is doing very well, our secondary fund as well. We have our real estate fund, which is coming back soon with its secondaries fund. We have all of our flagships coming back at the same time. Again, having just come off a record year, the question is, are we gonna be able to repeat, you know, the same level of success in the following year?
Certainly, the commingled fund business on the StepStone platform certainly suggests that that will be the case.
Okay. That's helpful. Can we talk about the SMA, so separately managed accounts as well? It's a major portion of your AUM. What are you seeing in that part of the business?
We just came off a $21 billion record year in managed accounts as well. I mean, it kinda gets back to the comment about why we announced the stock buyback. We have all these cylinders firing at the same time.
Mm.
What's really exciting about the managed account business at StepStone is it's very sticky money, and that's evidenced by the fact that we enjoy a 90% re-up rate every time we get through the investment period of a managed account. Not only are we enjoying a 90% re-up rate, whenever a client does re-up, on average, they expand or they increase the mandate by as much as 30%.
Mm.
That's a lot of growth right there embedded in the institutional managed account business. What was really exciting about our earnings release last quarter was the fact that half of our managed account business growth in this past fiscal year or 12 months I should say, came from new relationships as well as expanded relationships.
Mm.
The power of a new relationship is really important because every new relationship is the beginning of a re-up cycle at that 90% and 1.3x the prior size. It's really the combination of the re-up rate, the fact that we have new accounts coming on board, and the earnings power from our managed account business is really seen when we report each quarter this acronym that we call UFEC. This is our undeployed fee earning capital, which has amassed to $30 billion.
Mm.
That $30 billion of undeployed fee-earning capital will be deployed over the next 3-5 years, largely coming from our managed account business. It provides a little bit of you know, predictive power into what our earnings looks like going forward.
On the new accounts, it's an interesting stat you gave, like why are they choosing StepStone? Like, why are you winning? Help us understand, 'cause that's a pretty powerful data point.
There's a variety of reasons why our managed account business is enjoying so much growth, and maybe I can unpack it in a couple of different ways. First, a lot of our managed account growth is coming from outside of the U.S.
Okay.
These are markets that are under-allocated to the private markets and a managed account is a flexible way and a customized way for a large scale asset owner to deploy into the private markets in a very unique, customized way. They're not having to pick A, B, or C, they're saying, "StepStone, can you create A, B, and C together within our portfolio over the next 3-5 years, or 10 years," or whatever the time horizon might be. Geographic footprint is one reason. The other is the fact that we're diversified across venture capital, private equity, private credit, infrastructure and real estate, creates this one-stop solution.
It's a holistic approach to saying, "Okay, if we're an asset owner that's looking to allocate to the private markets, they're not having to pick, well, I can have this group solve a problem for me in real estate and this group." StepStone can solve all of their private markets needs in a single account. It's that diversification flexibility that has driven a lot of our growth.
Got it. Data and technology. Scott, you mentioned it earlier in our conversation. Does that represent an opportunity for potential monetization for StepStone, or help us understand that component?
Well, when I think about one of StepStone's greatest moats and competitive advantages, it's data. You know, we're tracking 20,000 unique general partners.
Mm.
We're tracking 50,000 unique funds, which translates to over 150,000 companies. Now, the power of this data is important to note that it comes from the simple fact that in order to get this data, you have to be a participant in the market.
Yeah.
It sits outside of FOIA. Being one of the largest participants in the market, we have access to this data across the metrics that I just offered. What we've been using this data for historically has been to drive our investment decisions, our business development capabilities, and our evergreen products. More recently, as Scott mentioned a minute ago, we've been using this data to forge partnerships outside of StepStone to help monetize that data and build our brand, and the first was Kroll. At the end of last year, we announced a partnership to create a series of credit benchmarks. We could not have timed that any better.
Yeah.
Given what's going on in the credit markets. Shortly after the Kroll announcement, we announced a partnership with FTSE Russell to launch a series of indices in the private markets. We couldn't think of a better partner to launch a series of indices with than FTSE Russell. We started with a global private markets benchmark and index. We now have a private equity index, an infrastructure index, a real estate index, and you can expect to see StepStone use its data to power a series of indices in partnership with both Kroll and FTSE Russell in the coming years. The monetization and the economic model behind that will be seen, you know, in the future years, but it's an exciting way to use our data as a monetization strategy.
Great. Well, with that, we're coming up on time. We covered lots of ground. Scott, Mike, thank you for joining us, and to the investors, thank you for spending time with us, this afternoon.
Thank you.
Appreciate it.