2023-07-21 16:47:19 ET
Summary
- StepStone Group Inc. provides access to private asset markets.
- The firm has been hard hit by a rapidly rising cost-of-capital environment.
- With leading economic indicators flashing recession ahead, though, the firm appears well positioned to take advantage of private market opportunities.
- While I'm Neutral [Hold] on StepStone Group stock here, it is worth putting on a watch list for the end of the rate tightening cycle.
A Quick Take On StepStone Group
StepStone Group Inc. ( STEP ) provides custom investment solutions for clients interested in private market asset exposure.
I previously wrote about StepStone with a Buy outlook before record U.S. Federal Reserve interest rate hikes in 2022 and 2023.
With leading economic indicators pointing to at least a mild recession in the quarters ahead, interest rate hikes may be coming to an end.
If so, STEP will be a buy, but for now, I’m Neutral [Hold] on the stock until we see a change in fundamentals.
StepStone Group’s Overview
New York, New York-based StepStone Group Inc. was founded to develop private market asset expertise and provide customized portfolio construction advisory services to clients worldwide.
Management is headed by co-founder, Chief Executive Officer Scott Hart, who has been with the company since 2007 and was previously an Associate at private equity firm TPG Capital and an Analyst at Morgan Stanley.
The firm counts a variety of institutional and family offices as clients, as the chart breakdown from its IPO filing in 2020 shows below:
The company’s primary offerings include:
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StepStone Private Markets Intelligence
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Omni Database
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Multi-Asset class expertise - private equity, infrastructure, private debt and real estate.
The firm operates across almost all major regions worldwide, with most of its AUM/AUA coming from the Americas region, as the chart shows below:
The company pursues new institutional and retail clients through a direct business development & marketing approach, as well as through fund distributors.
A significant portion of the firm's AUM/AUA comes from regions outside the Americas, so management retains offices in Dublin, Hong Kong, Lima, London, Rome, Sao Paulo, Seoul, Tokyo, Toronto and Zurich.
Market & Competition
According to a 2022 market research report by Bain & Company, the global market for wealth management services was an estimated $255 billion in 2021 and is forecasted to reach $509 billion by 2030.
This represents a forecast CAGR of 8% from 2023 to 2030.
The main drivers for this expected growth are an increasing retiree population, growing wealth of high net worth individuals, and increasing demand for alternative investments providing adequate yield opportunities.
Also, aspects that could negatively impact the wealth management industry include continued dampening effects from the Covid-19 pandemic, the rise of Fintech firms seeking to automate services and increasing usage of passage investing techniques.
The expansion of wealth on a global basis will provide demand for services, and ‘an estimated 250 million Generation Y and Generation Z customers (born between 1981 and 2012) will have an annual income of over $100,000 by 2030.
The Americas and Asia Pacific regions will account for a majority of these new customers, with the Americas representing 110 million and the Asia Pacific region representing 90 million.
Younger customers will demand greater sophistication in digital channels and will prefer hybrid engagement models combining digital with human interaction for larger decisions.
StepStone’s Recent Financial Trends
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Total revenue by quarter has seen a trough period in 2022 and recently rebounded strongly; Operating income by quarter has also risen sharply recently.
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Gross profit margin by quarter has been trending lower; Selling, G&A expenses as a percentage of total revenue by quarter have been low.
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Earnings per share (Diluted) have returned to positive results in the most recent quarter.
(All data in the above charts is GAAP.)
In the past 12 months, STEP’s stock price has risen only 11.27% versus that of Apollo Global’s rise of $48.75%, as the chart indicates below.
For the balance sheet , the firm ended the quarter with $128.6 million in cash and equivalents and $98.4 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $145.6 million, during which capital expenditures were $5.6 million. The company paid $24.9 million in stock-based compensation ("SBC") in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For StepStone
Below is a table of relevant capitalization and valuation figures for the company.
Measure [TTM] | Amount |
Enterprise Value / Sales [FWD] | 4.2 |
Enterprise Value / EBITDA [FWD] | 10.6 |
Revenue Growth Rate [FWD] | 10.6% |
Net Income Margin | NM |
EBITDA % | NM |
Net Debt To Annual EBITDA | -0.5 |
Market Capitalization | $3,080,000,000 |
Enterprise Value | $2,710,000,000 |
Operating Cash Flow | $151,180,000 |
Earnings Per Share (Fully Diluted) | -$0.33 |
(Source - Seeking Alpha.)
Commentary On StepStone
In its last earnings call ( Source - Seeking Alpha ), covering FQ4 2023’s results , management highlighted the difficult" operating environment for the company, but said it grew fee-related assets under management [AUM] by 14%, with gross AUM additions in the quarter of $5 billion.
Leadership also noted the company's diversified platform "that’s designed to thrive across market cycles."
While the company is subject to near-term headwinds as the cost of capital remains elevated with its negative pressure on valuations, management sees structural tailwinds for growth opportunities in the private markets "well into the future."
Notably, the collapse of Silicon Valley Bank has had limited impact on the firm’s venture capital activities.
Total revenue for FQ4 2023 dropped 52.7% YoY, and gross profit margin was 26.9% higher during the same period.
Selling, G&A expenses as a percentage of revenue increased 15.6 percentage points year-over-year and operating income fell 35.5% from the prior year’s same period.
The company's financial position is good, with plenty of liquidity, some long-term debt but substantial free cash flow.
Looking ahead, management sees strong demand for VC secondary funds, which is not uncommon during periods of stress.
Additionally, recent caution by banks reducing lending opens up opportunities for the firm in the private debt market.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Challeng[es][ing]" three times, "Macro" two times, "Drop" once and "Volatil[e][ity]" once.
A potential upside catalyst to the stock could include a tapering of interest rate hikes as the macroeconomic environment warrants a more stable interest rate regime.
I’m in the camp that believes interest rates are going to reach their terminal state in the near future as leading economic indicators continue to flash a mild recession ahead.
If so, companies such as StepStone Group Inc. may be in a position to benefit as a result of the increased demand for non-bank funding.
Still, I’m Neutral [Hold] on StepStone Group Inc. stock for the near term. Should an interest rate pause occur, the stock may be ready for a Buy.
For further details see:
StepStone Group Appears Positioned For Private Fund Market Opportunities