StepStone Group Inc.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ Capital
|
|
Class A Common Stock
|
|
Class B Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Non-Controlling Interests in Subsidiaries
|
|
Non-Controlling Interests in the Partnership
|
|
Total Stockholders' Equity / Partners' Capital
|
Balance at June 30, 2020
|
$
|
134,907
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
306
|
|
|
$
|
20,848
|
|
|
$
|
—
|
|
|
$
|
156,061
|
|
Net income prior to Reorganization and IPO
|
101,718
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,335
|
|
|
—
|
|
|
110,053
|
|
Other comprehensive income prior to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
207
|
|
|
216
|
|
|
—
|
|
|
423
|
|
Contributed capital prior to Reorganization and IPO
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Equity-based compensation prior to Reorganization and IPO
|
240
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
242
|
|
Distributions prior to Reorganization and IPO
|
(25,235)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,044)
|
|
|
—
|
|
|
(34,279)
|
|
Equity reallocation between controlling and non-controlling interests prior to Reorganization and IPO
|
252
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(252)
|
|
|
—
|
|
|
—
|
|
Effect of Reorganization and purchase of units in the Partnership
|
(211,894)
|
|
|
9
|
|
|
73
|
|
|
23,432
|
|
|
—
|
|
|
(513)
|
|
|
—
|
|
|
188,893
|
|
|
—
|
|
Issuance of Class A common stock sold in IPO, net of underwriting discounts
|
—
|
|
|
20
|
|
|
—
|
|
|
337,778
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
337,798
|
|
Purchase of partnership interests with IPO net proceeds
|
—
|
|
|
—
|
|
|
(7)
|
|
|
(127,979)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(127,986)
|
|
Deferred IPO costs
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,981)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,686)
|
|
|
(9,667)
|
|
Equity reallocation between controlling and non-controlling interests subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
(103,063)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
103,063
|
|
|
—
|
|
Deferred tax effect resulting from purchase of Class B units, net of amounts payable under TRA
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,128)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,128)
|
|
Net income (loss) subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(790)
|
|
|
—
|
|
|
710
|
|
|
(1,604)
|
|
|
(1,684)
|
|
Other comprehensive loss subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
|
(76)
|
|
|
(50)
|
|
|
(148)
|
|
Equity-based compensation subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
489
|
|
|
710
|
|
Distributions subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
|
(12)
|
|
Balance at September 30, 2020
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
66
|
|
|
$
|
120,278
|
|
|
$
|
(790)
|
|
|
$
|
(22)
|
|
|
$
|
20,729
|
|
|
$
|
284,105
|
|
|
$
|
424,395
|
|
See accompanying notes to condensed consolidated financial statements.
|
StepStone Group Inc.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ Capital
|
|
Class A Common Stock
|
|
Class B Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Non-Controlling Interests in Subsidiaries
|
|
Non-Controlling Interests in the Partnership
|
|
Total Stockholders' Equity / Partners' Capital
|
Balance at March 31, 2020
|
$
|
216,051
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178
|
|
|
$
|
20,738
|
|
|
$
|
—
|
|
|
$
|
236,967
|
|
Net income prior to Reorganization and IPO
|
45,265
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,428
|
|
|
—
|
|
|
57,693
|
|
Other comprehensive income prior to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
335
|
|
|
350
|
|
|
—
|
|
|
685
|
|
Contributed capital prior to Reorganization and IPO
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Equity-based compensation prior to Reorganization and IPO
|
723
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
725
|
|
Sale of non-controlling interests prior to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,308
|
|
|
—
|
|
|
3,308
|
|
Purchase of non-controlling interests prior to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,308)
|
|
|
—
|
|
|
(3,308)
|
|
Distributions prior to Reorganization and IPO
|
(50,424)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,161)
|
|
|
—
|
|
|
(63,585)
|
|
Equity reallocation between controlling and non-controlling interests prior to Reorganization and IPO
|
252
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(252)
|
|
|
—
|
|
|
—
|
|
Effect of Reorganization and purchase of units in the Partnership
|
(211,894)
|
|
|
9
|
|
|
73
|
|
|
23,432
|
|
|
—
|
|
|
(513)
|
|
|
—
|
|
|
188,893
|
|
|
—
|
|
Issuance of Class A common stock sold in IPO, net of underwriting discounts
|
—
|
|
|
20
|
|
|
—
|
|
|
337,778
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
337,798
|
|
Purchase of partnership interests with IPO net proceeds
|
—
|
|
|
—
|
|
|
(7)
|
|
|
(127,979)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(127,986)
|
|
Deferred IPO costs
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,981)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,686)
|
|
|
(9,667)
|
|
Equity reallocation between controlling and non-controlling interests subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
(103,063)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
103,063
|
|
|
—
|
|
Deferred tax effect resulting from purchase of Class B units, net of amounts payable under TRA
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,128)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,128)
|
|
Net income (loss) subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(790)
|
|
|
—
|
|
|
710
|
|
|
(1,604)
|
|
|
(1,684)
|
|
Other comprehensive loss subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
|
(76)
|
|
|
(50)
|
|
|
(148)
|
|
Equity-based compensation subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
489
|
|
|
710
|
|
Distributions subsequent to Reorganization and IPO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
|
(12)
|
|
Balance at September 30, 2020
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
66
|
|
|
$
|
120,278
|
|
|
$
|
(790)
|
|
|
$
|
(22)
|
|
|
$
|
20,729
|
|
|
$
|
284,105
|
|
|
$
|
424,395
|
|
See accompanying notes to condensed consolidated financial statements.
StepStone Group Inc.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ Capital
|
|
Class A Common Stock
|
|
Class B Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Non-Controlling Interests in Subsidiaries
|
|
Non-Controlling Interests in the Partnership
|
|
Total Partners’ Capital
|
Balance at June 30, 2019
|
$
|
149,665
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377
|
|
|
$
|
17,544
|
|
|
$
|
—
|
|
|
$
|
167,586
|
|
Net income
|
44,365
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,995
|
|
|
—
|
|
|
46,360
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(118)
|
|
|
(124)
|
|
|
—
|
|
|
(242)
|
|
Contributed capital
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Equity-based compensation
|
475
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
475
|
|
Sale of partnership interests
|
110,753
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110,753
|
|
Purchase of partnership interests
|
(113,052)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(113,052)
|
|
Distributions
|
(12,628)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,430)
|
|
|
—
|
|
|
(15,058)
|
|
Balance at September 30, 2019
|
$
|
179,580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
16,985
|
|
|
$
|
—
|
|
|
$
|
196,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019
|
$
|
128,426
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
$
|
16,953
|
|
|
$
|
—
|
|
|
$
|
145,662
|
|
Net income
|
72,883
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,486
|
|
|
—
|
|
|
77,369
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24)
|
|
|
(26)
|
|
|
—
|
|
|
(50)
|
|
Contributed capital
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Equity-based compensation
|
950
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
950
|
|
Sale of partnership interests
|
110,753
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110,753
|
|
Purchase of partnership interests
|
(113,052)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(113,052)
|
|
Distributions
|
(20,387)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,428)
|
|
|
—
|
|
|
(24,815)
|
|
Balance at September 30, 2019
|
$
|
179,580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
16,985
|
|
|
$
|
—
|
|
|
$
|
196,824
|
|
See accompanying notes to condensed consolidated financial statements.
StepStone Group Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
2020
|
|
2019
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
56,009
|
|
|
$
|
77,369
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
2,767
|
|
|
3,572
|
|
Unrealized carried interest allocation and investment income
|
(24,848)
|
|
|
(100,994)
|
|
Unrealized gains on marketable securities
|
—
|
|
|
(273)
|
|
Write-off / amortization of deferred financing costs
|
3,856
|
|
|
399
|
|
Equity-based compensation
|
1,435
|
|
|
950
|
|
Change in deferred income taxes
|
41
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
Fees and accounts receivable
|
(2,365)
|
|
|
(3,495)
|
|
Due from affiliates
|
4,438
|
|
|
(108)
|
|
Other assets and receivables
|
3,500
|
|
|
(275)
|
|
Accounts payable, accrued expenses and other liabilities
|
2,796
|
|
|
(1,537)
|
|
Accrued compensation and benefits
|
24,633
|
|
|
17,047
|
|
Accrued carried interest-related compensation
|
8,017
|
|
|
54,786
|
|
Due to affiliates
|
2,583
|
|
|
(790)
|
|
Net cash provided by operating activities
|
82,862
|
|
|
46,651
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Purchases of marketable securities
|
—
|
|
|
(23,000)
|
|
Proceeds from sales and maturities of marketable securities
|
—
|
|
|
22,914
|
|
Contributions to investments
|
(5,864)
|
|
|
(6,204)
|
|
Distributions received from investments
|
862
|
|
|
3,625
|
|
Purchases of property and equipment
|
(745)
|
|
|
(148)
|
|
Net cash used in investing activities
|
(5,747)
|
|
|
(2,813)
|
|
See accompanying notes to condensed consolidated financial statements.
StepStone Group Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
2020
|
|
2019
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Sale of non-controlling interests
|
$
|
3,308
|
|
|
$
|
110,753
|
|
Proceeds from capital contributions from non-controlling interests
|
27
|
|
|
7
|
|
Proceeds from IPO, net of underwriting discount
|
337,798
|
|
|
—
|
|
Purchase of non-controlling interests
|
(131,294)
|
|
|
(107,188)
|
|
Payment of deferred offering costs
|
(5,899)
|
|
|
—
|
|
Principal payments on term loan
|
(147,000)
|
|
|
(750)
|
|
Distributions to non-controlling interests
|
(63,597)
|
|
|
(24,815)
|
|
Cash paid for acquisition earn-outs
|
(526)
|
|
|
(616)
|
|
Other financing activities
|
—
|
|
|
(155)
|
|
Net cash used in financing activities
|
(7,183)
|
|
|
(22,764)
|
|
Effect of foreign currency exchange rate changes
|
(44)
|
|
|
(58)
|
|
Net increase in cash, cash equivalents and restricted cash
|
69,888
|
|
|
21,016
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
89,939
|
|
|
40,622
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
159,827
|
|
|
$
|
61,638
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash operating, investing, and financing activities:
|
|
|
|
|
|
|
|
Purchase of non-controlling partnership interests payable
|
$
|
—
|
|
|
$
|
5,864
|
|
Deferred tax effect resulting from purchase of Class B units, net of amounts payable under TRA
|
7,128
|
|
|
—
|
|
Accrued deferred offering costs
|
3,768
|
|
|
—
|
|
Reconciliation of cash, cash equivalents and restricted cash:
|
|
|
|
Cash and cash equivalents
|
$
|
156,908
|
|
|
$
|
61,638
|
|
Restricted cash
|
2,919
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
159,827
|
|
|
$
|
61,638
|
|
See accompanying notes to condensed consolidated financial statements.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
1. Organization
StepStone Group Inc. (“SSG”) was incorporated in the state of Delaware on November 20, 2019. The company was formed for the purpose of completing an initial public offering (“IPO”) in order to conduct the business of StepStone Group LP (the “Partnership”) as a publicly-traded entity. As of September 18, 2020, in connection with the Reorganization discussed below, SSG became the sole managing member of the general partner of the Partnership. Unless otherwise specified, “StepStone” or the “Company” refers 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, throughout the remainder of these notes to the condensed consolidated financial statements.
The Company is a global private markets investment firm focused on providing customized investment solutions and advisory and data services to its clients. The Company’s 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, including high-net-worth and mass affluent individuals. The Company partners with its 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”).
The Company, through its subsidiaries, acts as the investment advisor and general partner or managing member to separately managed accounts (“SMAs”) and focused commingled funds (collectively, the “StepStone Funds”).
Reorganization
In connection with the IPO, the Company completed certain transactions as part of a corporate reorganization (the “Reorganization”), which are described below:
•SSG amended and restated its certificate of incorporation to, among other things, provide for Class A common stock and Class B common stock.
•The Partnership amended its limited partnership agreement to, among other things, provide for Class A units and Class B units.
•StepStone Group Holdings LLC (the “General Partner”) amended and restated its limited liability company agreement to, among other things, appoint SSG as the sole managing member of the General Partner.
•SSG redeemed its 100 shares of common stock outstanding.
•The Partnership effectuated a series of transactions such that certain blocker entities in which certain pre-IPO institutional investors that held partnership units in the Partnership merged with and into SSG, with SSG surviving. As a result of the mergers, the 100% owners of the blocker entities acquired 9,112,500 shares of newly issued Class A common stock of SSG.
•The Partnership classified the partnership units acquired by SSG as Class A units and reclassified the partnership units held by the continuing limited partners of the Partnership as Class B units.
•SSG issued to the remaining Class B unitholders one share of Class B common stock for each Class B unit that they owned in exchange for their interests in the General Partner.
•Certain of the Class B stockholders entered into a stockholders agreement pursuant to which they agreed to vote all their shares of voting stock, including Class A common stock and Class B common stock, together and in accordance with the instructions of the Class B Committee, which comprises of certain members of senior management.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Initial Public Offering
On September 18, 2020, SSG issued 20,125,000 shares of Class A common stock in the IPO at a price of $18.00 per share. The net proceeds from the offering totaled $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. SSG 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.
Following the Reorganization and IPO, SSG is a holding company whose principal asset is a controlling financial interest in the Partnership through its ownership of all of the Partnership’s Class A units and a 100% membership interest in the General Partner of the Partnership. While this interest represents a minority of economic interests in the Partnership, SSG acts as the sole managing member of the General Partner of the Partnership and, as a result, will indirectly operate and control all of the Partnership’s business and affairs. As a result, SSG will consolidate the financial results of the Partnership and report non-controlling interests related to the Class B units of the Partnership which are not owned by SSG. The assets and liabilities of the Partnership represent substantially all of SSG’s consolidated assets and liabilities, with the exception of certain deferred income taxes and payables due to affiliates pursuant to tax receivable agreements (see note 10). Each share of Class A common stock is entitled to one vote and each share of Class B common stock is entitled to five votes. As of September 30, 2020, SSG held approximately 30.8% of the economic interest in the Partnership. As the Partnership’s limited partners exchange their Class B units into SSG’s Class A common stock in the future, SSG’s economic interest in the Partnership will increase.
The Reorganization is considered a transaction between entities under common control. As a result, the condensed consolidated financial statements for periods prior to the Reorganization and IPO are the condensed consolidated financial statements of the Partnership as the predecessor to SSG for accounting and reporting purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the condensed consolidated financial statements are presented fairly and that estimates made in preparing the condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries and entities in which the Company is deemed to have a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended March 31, 2020 included in the Company’s prospectus dated September 15, 2020, filed with the U.S. Securities and Exchange Commission (“SEC”) on September 16, 2020.
Certain of the StepStone Funds are investment companies that follow specialized accounting rules under GAAP and reflect their investments at estimated fair value. Accordingly, the carrying value of the Company’s equity method investments in such entities retains the specialized accounting treatment.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation. Amounts relating to deferred tax assets that were previously reported within other assets and receivables have been presented separately in the condensed consolidated balance sheets as of March 31, 2020.
Consolidation
The Company consolidates all entities that it controls through a majority voting interest or as the primary beneficiary of a variable interest entity (“VIE”). Under the VIE model, management first assesses whether the Company has a variable interest in an entity. In evaluating whether the Company holds a variable interest, fees received as a decision maker or in exchange for services (including management fees, incentive fees and carried interest allocations) that are customary and commensurate with the level of services provided, and where the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, are not considered variable interests. If the Company has a variable interest in an entity, management further assesses whether that entity is a VIE, and if so, whether the Company is the primary beneficiary under the VIE model. Entities that do not qualify as VIEs are assessed for consolidation under the voting interest model. The consolidation analysis can generally be performed qualitatively; however, in certain situations a quantitative analysis may also be performed. Investments and redemptions (either by the Company, affiliates of the Company or third parties) or amendments to the governing documents of the respective StepStone Funds that are VIEs could affect the entity’s status as a VIE or the determination of the primary beneficiary.
Under the VIE model, an entity is deemed to be the primary beneficiary of a VIE if it holds a controlling financial interest. A controlling financial interest is defined as (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. Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. When assessing whether the Company is the primary beneficiary of a VIE, management evaluates whether the Company’s involvement, through holding interests directly or indirectly in an entity or contractually through other variable interests, would give the Company a controlling financial interest. This analysis includes an evaluation of the Company’s control rights, as well as the economic interests that the Company holds in the VIE, including indirectly through related parties.
The Company provides investment advisory services to the StepStone Funds, which have third-party clients. These funds are investment companies and are typically organized as limited partnerships or limited liability companies for which the Company, through its operating subsidiaries, acts as the general partner or managing member. A limited partnership or similar entity is a VIE if the unaffiliated limited partners or members do not have substantive rights to terminate or remove the general partner or substantive rights to participate. Certain StepStone Funds are VIEs because they have not granted unaffiliated limited partners or members substantive rights to terminate or remove the general partner or substantive rights to participate. The Company does not consolidate these StepStone Funds because it is not the primary beneficiary of those funds, primarily because its fee arrangements are considered customary and commensurate and thus not deemed to be variable interests, and it does not hold any other interests in those funds that are considered more than insignificant.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The Company has determined that certain of its operating subsidiaries, StepStone Group Real Assets LP (“SRA”), StepStone Group Real Estate LP (“SRE”) and Swiss Capital Alternative Investments AG (“Swiss Capital”), are VIEs, and that the Company is the primary beneficiary of each entity because it has a controlling financial interest in each entity; accordingly, the Company consolidates these entities. The assets and liabilities of the consolidated VIEs are presented gross in the condensed consolidated balance sheets. The assets of the consolidated VIEs may only be used to settle obligations of the consolidated VIEs. See note 4 for more information on both consolidated and unconsolidated VIEs.
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 the Company. Non-controlling interests are presented as separate components of stockholders’ equity on the Company’s condensed consolidated balance sheets to clearly distinguish between the Company’s interests and the economic interests of third parties and employees in those entities. Net income (loss) attributable to SSG, as reported in the condensed consolidated statements of income, is presented net of the portion of net income (loss) attributable to holders of non-controlling interests. See note 13 for more information on ownership interests in the Company.
Non-controlling interests in subsidiaries represent the economic interests in SRA, SRE, and Swiss Capital (the variable interest entities included in the Company’s condensed consolidated financial statements) 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 related to the Class B units of the Partnership which are not owned by SSG. 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. Prior to the Reorganization and IPO, all of the Company’s net income relates to the Partnership and has been presented as non-controlling interests in the Partnership.
Accounting for Differing Fiscal Periods
The StepStone Funds primarily have a fiscal year end as of December 31. The Company accounts for its investments in the StepStone Funds on a three-month lag due to the timing of receipt of financial information from the investments held by the StepStone Funds. The StepStone Funds primarily invest in private markets funds that generally require at least 90 days following the calendar year end to provide audited financial statements. As a result, the Company uses the December 31 audited financial statements of the StepStone Funds, which reflect the underlying private markets funds as of December 31, to record its investments (including any carried interest allocated by those investments) for its fiscal year-end consolidated financial statements as of March 31. The Company further adjusts the reported carrying values of its investments in the StepStone Funds for its share of capital contributions to and distributions from the StepStone Funds during the three-month lag period. For this interim period ending September 30, 2020, the Company used the June 30, 2020 unaudited financial statements of the StepStone Funds, which reflect the underlying private market funds as of June 30, 2020 to record its investments (including any carried interest allocated by those investments), as adjusted for capital contributions and distributions during the three-month lag period ended September 30, 2020.
The Company does not account for management and advisory fees or incentive fees on a three-month lag.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
To the extent that management becomes aware of any material events that affect the StepStone Funds during the three-month lag period, the effect of the events would be disclosed in the notes to the condensed consolidated financial statements.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The outbreak has significantly affected the global economy and financial markets. Given the ongoing nature of the outbreak, 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 the Company’s condensed consolidated financial statements. During the six months ended September 30, 2020, the Company's investments in StepStone Funds and accrued carried interest allocations initially experienced significant declines in 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 in the next three months saw 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.
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 is 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.
•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. The Company’s 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.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors including, for example, the type of instrument, whether the instrument has recently been issued, whether the instrument is traded on an active exchange or in the secondary market, and current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for financial instruments categorized in Level III. The variability and availability of the observable inputs affected by the factors described above may result in transfers between Levels I, II and III.
The Company considers its cash, cash equivalents, restricted cash, fees and accounts receivable, accounts payable, investments, term loan and contingent consideration balances to be financial instruments. The carrying amounts of cash, cash equivalents, restricted cash, fees and accounts receivable and accounts payable equal or approximate their fair values due to their nature and/or the relatively short period over which they are held. See note 6 for additional details regarding the fair value of the Company’s contingent consideration balances.
Restricted Cash
Restricted cash consists of cash that the Company is contractually obligated to maintain to secure its letters of credit used primarily related to its office facilities and other obligations.
Investments
Investments primarily include the Company’s ownership interests in the StepStone Funds, as general partner or managing member of such funds. The Company accounts for all investments in which it has or is otherwise presumed to have significant influence, but not control, including the StepStone Funds, using the equity method of accounting. The carrying value of these equity method investments is determined based on amounts invested by the Company, adjusted for the Company’s share in the earnings or losses of each investee, after consideration of contractual arrangements that govern allocations of income or loss (including carried interest allocations), less distributions received. Investments include the Company’s cumulative accrued carried interest allocations from the StepStone Funds, which primarily represent performance-based capital allocations, assuming the StepStone Funds were liquidated as of each reporting date in accordance with the funds’ governing documents. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
Revenues
The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from Contracts with Customers. 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 the Company expects to be entitled in exchange for those goods or services. The application of ASC 606 requires an entity to identify its contract(s) with a customer, 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. The Company has elected to apply the variable consideration allocation exception for its fee arrangements with its customers.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Management and Advisory Fees, Net
The Company earns management fees for services provided to its SMAs, focused commingled funds and distribution management clients. The Company earns advisory fees for services provided to advisory clients where the Company does not have discretion over investment decisions. The Company considers its performance obligations in its customer contracts from which it earns management and advisory fees to be one or more of the following, based on the services promised: asset management services, advisory services and/or the arrangement of administrative services.
The Company recognizes revenues from asset management services and advisory services when control of the promised services is transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. SMAs are generally contractual arrangements involving an investment management agreement between StepStone and a single client, and are typically structured as a partnership or limited liability company for which a subsidiary of SSG serves as the general partner or managing member. Focused commingled funds are structured as limited partnerships or limited liability companies with multiple clients, for which a subsidiary of StepStone serves as the general partner or managing member. StepStone determined that the individual client or single limited partner or member is the customer with respect to SMAs and advisory clients, while the investment fund is generally considered to be the customer for arrangements with focused commingled funds.
When asset management services and the arrangement of administrative services are the performance obligations promised in a contract, the Company satisfies these performance obligations over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to the customer. Management fees earned from these contracts where the Company has discretion over investment decisions are generally calculated based on a percentage of unaffiliated committed capital or net invested capital, and these amounts are typically billed quarterly. For certain investment funds, management fees are initially based on committed capital during the investment period and on net invested capital through the remainder of the fund’s term. In addition, the management fee rate charged may also be reduced for certain investment funds depending on the contractual arrangement. The management fee basis is subject to factors outside of the Company’s control. Therefore, estimates of future period management fees are not included in the transaction price because those estimates would be considered constrained. Advisory fees from contracts where the Company does not have discretion over investment decisions are generally based on fixed amounts and typically billed quarterly.
Management fees generally exclude reimbursements for expenses paid by the Company on behalf of its customers, including amounts related to certain professional fees and other fund administrative expenses pursuant to the fund’s governing documents. For professional and administrative services that the Company arranges to be performed by third parties on behalf of investment funds, management has concluded that the nature of its promise is to arrange for the services to be provided and, accordingly, the Company does not control the services provided by the third parties before they are transferred to the customer. Therefore, the Company is acting as an agent, and the reimbursements for these professional fees paid on behalf of the investment funds are generally presented on a net basis.
The Company and certain investment funds that it manages have distribution and service agreements with third-party financial institutions, whereby the Company pays a portion of the fees it receives to such institutions for ongoing distribution and servicing of customer accounts. Management has concluded that the Company does not act as principal for the third-party services, as the Company does not control the services provided by the third parties before they are transferred to the customer. Therefore, the Company is acting as an agent, and the management fees are recorded net of these service fees.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The Company may incur certain costs in connection with satisfying its performance obligations for investment management services – primarily employee travel costs, organization costs and syndication costs – for which it receives reimbursements from its customers. For reimbursable travel costs, organization costs and syndication costs, the Company concluded it controls the services provided by its employees and other parties and, therefore, is acting as principal. Accordingly, the Company records the reimbursement for these costs incurred on a gross basis – that is, as revenue in management and advisory fees, net and expense in general, administrative and other expenses in the condensed consolidated statements of income. For reimbursable costs incurred in connection with satisfying its performance obligations for administration services, the Company concluded it does not control the services provided by its employees and other parties and, therefore, is acting as agent. Accordingly, the Company records the reimbursement for these costs incurred on a net basis.
Performance Fees
The Company earns 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 (up to 10%) earned in respect of certain accounts for which the Company is 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 the Company’s contracts with its 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.
The Company recognizes 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 condensed consolidated balance sheets.
Carried interest allocations include the allocation of performance-based fees, commonly referred to as carried interest, to the Company from unaffiliated limited partners in the StepStone Funds in which the Company holds an equity interest. The Company is 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 each respective fund’s governing documents. The Company accounts for its investment balances in the StepStone Funds, including carried interest allocations, under the equity method of accounting because it is 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 ASC 606.
The Company recognizes revenue attributable to carried interest allocations from a fund based on the amount that would be due to the Company 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 the Company’s 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. The Company records the amount of carried interest allocated to the Company as of each period end as accrued carried interest allocations receivable, which is included as a component of investments in the condensed consolidated balance sheets.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
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 the Company based on cumulative results. As such, a liability is accrued for potential clawback obligations if amounts previously distributed to the Company 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 September 30, 2020 and March 31, 2020, no amounts for potential clawback obligations had been accrued.
Equity-based Compensation
The Company accounts for grants of equity-based awards, including restricted stock units (“RSUs”), at fair value as of the grant date. The Company recognizes 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 condensed 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. See note 9 for additional information regarding the Company’s accounting for equity-based awards.
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 local or non-U.S. income taxes. Additionally, certain subsidiaries are subject to local jurisdiction taxes at the entity level, with the related tax provision reflected in the condensed 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.
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.
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 the Company’s 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.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The Company is 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 condensed consolidated financial statements. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as general, administrative and other expenses in the condensed consolidated statements of income. See note 10 for more information.
Tax Receivable Agreements
SSG has entered into an Exchanges Tax Receivable Agreement with the continuing partners of the Partnership 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 such 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 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.
Accumulated Other Comprehensive Income (Loss)
The Company's accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains and losses on the defined benefit plan sponsored by one of its subsidiaries. The components of accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2020
|
|
March 31, 2020
|
Foreign currency translation adjustments
|
$
|
(22)
|
|
|
$
|
502
|
|
Unrealized loss on defined benefit plan, net
|
—
|
|
|
(324)
|
|
Accumulated other comprehensive income (loss)
|
$
|
(22)
|
|
|
$
|
178
|
|
Segments
The Company operates as one business, a fully-integrated private markets solution provider. The Company’s chief operating decision maker, which consists of the Company’s co-chief executive officers together, utilizes a consolidated approach to assess the performance of and allocate resources to the business. Accordingly, management has concluded that the Company consists of a single operating segment and single reportable segment for accounting and financial reporting purposes.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet for all leases and to disclose certain information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public business entities, ASU 2016-02 was effective for annual reporting periods beginning after December 15, 2018. On June 3, 2020, the FASB extended the adoption date for all other entities, including emerging growth companies (“EGCs”), as defined by the SEC, that have elected to defer adoption until the standard is effective for non-public business entities, to annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, with early adoption permitted. The Company currently qualifies as an EGC and has elected to take advantage of the extended transition period afforded to EGCs as it applies to the adoption of new accounting standards. The adoption of this guidance is expected to materially impact the Company’s condensed consolidated balance sheets due to the requirement to record right-of-use assets and liabilities related to leases that are currently reported as operating leases. However, the Company does not expect the adoption to materially impact its condensed consolidated statements of income because substantially all of its leases are classified as operating leases, which will continue to be recognized as expense on a straight-line basis under the new guidance. See note 14 for more information related to the Company’s minimum lease payments as of September 30, 2020.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under this guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The guidance also modifies the impairment models for available-for-sale debt securities and purchased financial assets with credit deterioration since their origination. This guidance is effective for annual and interim periods beginning after December 15, 2019 for SEC filers, December 15, 2020 for public business entities that are not SEC filers, and December 15, 2021 for all other entities, including EGCs that have elected to defer adoption until the guidance becomes effective for non-public entities, with early adoption permitted. The Company adopted this guidance as of its fiscal year beginning April 1, 2020. Adoption of this guidance did not have a material effect on the condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies ASC 740 to simplify the accounting for income taxes. The guidance, among other changes, (i) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and (ii) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. This guidance is effective for annual periods beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on the condensed consolidated financial statements.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
3. Revenues
The following presents revenues disaggregated by product offering, which aligns with the Company's performance obligations and the basis for calculating each amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
Management and Advisory Fees, Net
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Focused commingled funds
|
$
|
30,821
|
|
|
$
|
17,433
|
|
|
$
|
50,674
|
|
|
$
|
32,606
|
|
SMAs
|
31,229
|
|
|
25,680
|
|
|
61,951
|
|
|
50,140
|
|
Advisory and other services
|
13,602
|
|
|
10,452
|
|
|
26,465
|
|
|
21,564
|
|
Fund reimbursement revenues
|
—
|
|
|
228
|
|
|
62
|
|
|
451
|
|
Total management and advisory fees, net
|
$
|
75,652
|
|
|
$
|
53,793
|
|
|
$
|
139,152
|
|
|
$
|
104,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
Incentive Fees
|
2020
|
|
2019
|
|
2020
|
|
2019
|
SMAs
|
$
|
1,168
|
|
|
$
|
775
|
|
|
$
|
4,757
|
|
|
$
|
2,397
|
|
Focused commingled funds
|
28
|
|
|
—
|
|
|
28
|
|
|
—
|
|
Total incentive fees
|
$
|
1,196
|
|
|
$
|
775
|
|
|
$
|
4,785
|
|
|
$
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
Carried Interest Allocation
|
2020
|
|
2019
|
|
2020
|
|
2019
|
SMAs
|
$
|
127,227
|
|
|
$
|
57,906
|
|
|
$
|
21,459
|
|
|
$
|
94,500
|
|
Focused commingled funds
|
38,838
|
|
|
19,398
|
|
|
16,104
|
|
|
29,793
|
|
Total carried interest allocation
|
$
|
166,065
|
|
|
$
|
77,304
|
|
|
$
|
37,563
|
|
|
$
|
124,293
|
|
The increase or decrease in carried interest allocation for the three and six months ended September 30, 2020 as compared to the prior year periods are primarily attributable to net unrealized appreciation or depreciation in the fair value of certain underlying fund investments. See note 2 for a discussion of the Company's accounting policy for investments on a three-month lag.
The Company derives revenues from clients located in both the United States and other countries. The table below presents the Company’s revenues by geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
Revenues(1)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
United States
|
$
|
46,551
|
|
|
$
|
28,536
|
|
|
$
|
51,961
|
|
|
$
|
52,960
|
|
Non-U.S. countries
|
196,362
|
|
|
103,336
|
|
|
129,539
|
|
|
178,491
|
|
|
|
|
|
|
|
|
|
_______________________________
(1)Revenues are attributed to countries based on client location for SMAs and advisory and other services, or location of investment vehicle for focused commingled funds.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
For the three and six months ended September 30, 2020 and 2019, no individual client represented 10% or more of the Company’s management and advisory fees.
As of September 30, 2020 and March 31, 2020, the Company had $13.6 million and $8.5 million, respectively, of deferred revenues, which is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets. During the six months ended September 30, 2020, the Company had recognized $0.5 million as revenue from amounts included in the deferred revenue balance as of March 31, 2020.
4. Variable Interest Entities
Consolidated VIEs
The Company consolidates certain VIEs for which it is the primary beneficiary. VIEs consist of certain operating entities not wholly-owned by the Company and include Swiss Capital, SRA and SRE. See note 2 for more information on the Company’s accounting policies related to the consolidation of VIEs. The assets of the consolidated VIEs totaled $52.4 million and $49.2 million as of September 30, 2020 and March 31, 2020, respectively. The liabilities of the consolidated VIEs totaled $26.2 million and $13.5 million as of September 30, 2020 and March 31, 2020, respectively. The assets of the consolidated VIEs may only be used to settle obligations of the same VIE. In addition, there is no recourse to the Company for the consolidated VIEs’ liabilities, except for certain entities in which there could be a clawback of previously distributed carried interest. As of September 30, 2020, no amounts previously distributed have been accrued for clawback liabilities.
Unconsolidated VIEs
The Company holds variable interests in the form of direct equity interests in certain VIEs that are not consolidated because the Company is not the primary beneficiary. The Company’s maximum exposure to loss is limited to the potential loss of assets recognized by the Company relating to these unconsolidated entities. The carrying value of the assets and liabilities recognized in the condensed consolidated balance sheets with respect to the Company’s interests in VIEs that were not consolidated is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2020
|
|
March 31, 2020
|
Investments in funds
|
$
|
57,870
|
|
|
$
|
53,386
|
|
Due from affiliates, net
|
2,405
|
|
|
6,116
|
|
Less: Amounts attributable to non-controlling interests in subsidiaries
|
5,793
|
|
|
6,641
|
|
Maximum exposure to loss
|
$
|
54,482
|
|
|
$
|
52,861
|
|
5. Investments
The Company’s investments consist of equity method investments primarily related to investments in the StepStone Funds for which it serves as general partner or managing member but does not have a controlling financial interest. The Company’s equity interest typically does not exceed 1% in each fund. The Company’s share of the underlying net income or loss attributable to its equity interest in the funds is recorded in investment income in the condensed consolidated statements of income.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The Company’s equity method investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2020
|
|
March 31, 2020
|
Investments in funds
|
$
|
57,870
|
|
|
$
|
53,386
|
|
Accrued carried interest allocations
|
486,206
|
|
|
460,837
|
|
Total investments
|
$
|
544,076
|
|
|
$
|
514,223
|
|
The Company recognized equity method income of $170.4 million and $79.2 million for the three months ended September 30, 2020 and 2019, respectively, of which $166.1 million and $77.3 million, respectively, related to carried interest allocations. The Company recognized equity method income of $38.7 million and $127.5 million for the six months ended September 30, 2020 and 2019, respectively, of which $37.6 million and $124.3 million, respectively, related to carried interest allocations.
As of September 30, 2020, the Company’s investments in two SMAs each individually represented 10% or more of the total accrued carried interest allocations balance, and in the aggregate represented approximately 25% of the total accrued carried interest allocations balance as of that date. As of March 31, 2020, the Company’s investments in three SMAs each individually represented 10% or more of the total accrued carried interest allocations balance, and in the aggregate represented approximately 37% of the total accrued carried interest allocations balance as of that date.
Of the total accrued carried interest allocations balance as of September 30, 2020 and March 31, 2020, respectively, $245.8 million and $237.7 million were payable to affiliates and is included in accrued carried interest-related compensation in the condensed consolidated balance sheets.
The Company evaluates each of its equity method investments to determine if any are considered significant as defined by the SEC. As of September 30, 2020 and March 31, 2020 and for the three and six months ended September 30, 2020 and 2019, no individual equity method investment held by the Company met the significance criteria. As a result, the Company is not required to provide separate financial statements for any of its equity method investments.
6. Fair Value Measurements
The Company measures its liabilities at fair value on a recurring basis. The following tables provide details regarding the classification of these liabilities within the fair value hierarchy as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
474
|
|
|
$
|
474
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
474
|
|
|
$
|
474
|
|
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
|
$
|
1,035
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
|
$
|
1,035
|
|
For the liabilities presented in the tables above, there were no changes in fair value hierarchy levels during the three and six months ended September 30, 2020 and 2019.
The changes in the fair value of Level III financial instruments is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Contingent Consideration Liability
|
|
|
|
|
|
|
|
Balance, beginning of period:
|
$
|
745
|
|
|
$
|
2,154
|
|
|
$
|
1,035
|
|
|
$
|
2,485
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain (loss) on change in fair value
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
(271)
|
|
|
(306)
|
|
|
(561)
|
|
|
(637)
|
|
Balance, end of period:
|
$
|
474
|
|
|
$
|
1,848
|
|
|
$
|
474
|
|
|
$
|
1,848
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) included in earnings related to financial liabilities still held at the reporting date
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The amount of the contingent consideration liability is based on the achievement of certain performance targets. The fair value of the contingent consideration liability is based on a discounted cash flow analysis using a probability-weighted average estimate of certain performance targets, including revenue levels. The assumptions used in the analysis are inherently subjective; therefore, the ultimate amount of the contingent consideration liability may differ materially from the current estimate. The significant unobservable inputs required to value the contingent consideration liability primarily relate to the discount rates applied to the expected future payments of obligations, which ranged from 8.0% to 13.0% as of September 30, 2020. The contingent consideration liability is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets. Changes in the fair value of the liability are included in general, administrative and other expenses in the condensed consolidated statements of income.
7. Intangibles and Goodwill
Intangible assets primarily consist of certain management contracts providing economic rights to management and advisory fees, as obtained through the Company’s acquisitions of other businesses.
Intangible assets, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2020
|
|
March 31, 2020
|
Management contracts
|
$
|
41,058
|
|
|
$
|
41,058
|
|
Less: Accumulated amortization
|
(33,898)
|
|
|
(32,228)
|
|
Intangible assets, net
|
$
|
7,160
|
|
|
$
|
8,830
|
|
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Amortization expense related to intangible assets was $0.8 million and $1.3 million for the three months ended September 30, 2020 and 2019, respectively, and $1.7 million and $2.7 million for the six months ended September 30, 2020 and 2019, respectively. These amounts are included in general, administrative and other expenses in the condensed consolidated statements of income.
At September 30, 2020, the expected future amortization of finite-lived intangible assets is as follows:
|
|
|
|
|
|
Remainder of FY2021
|
$
|
1,669
|
|
FY2022
|
2,481
|
|
FY2023
|
1,768
|
|
FY2024
|
932
|
|
FY2025
|
242
|
|
Thereafter
|
68
|
|
Total
|
$
|
7,160
|
|
The carrying value of goodwill was $6.8 million as of September 30, 2020 and March 31, 2020. The Company determined there was no indication of goodwill impairment as of September 30, 2020 and March 31, 2020.
8. Debt Obligations
On September 18, 2020, the Company repaid in full the indebtedness outstanding on a senior secured term loan (“Term Loan B”) in the amount of $146.6 million and effectively terminated the facility, including the senior secured revolving facility. In connection with the repayment, the Company wrote-off the unamortized debt issuance costs and discount of $3.5 million, which is included in interest expense in the condensed consolidated statements of income for the quarter ended September 30, 2020. As of September 30, 2020, the Company had no debt obligations outstanding. As of March 31, 2020, the Company had $143.1 million of debt obligations outstanding.
9. Equity-based Compensation
2020 Long-Term Incentive Plan
In connection with the IPO, the Company adopted the 2020 Long-Term Incentive Plan (“LTIP”), which allows for the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance stock awards to employees, directors and consultants. As of September 30, 2020, there were 2,490,555 shares of Class A common stock available to grant under the LTIP.
Restricted Stock Units
On September 18, 2020, the Company granted 2,509,445 RSUs to certain employees and directors with an aggregate grant date fair value of $45.2 million. RSUs represent the right to receive payment on the date of vesting in the form of one share of Class A common stock for each RSU. Holders of unvested RSUs do not have the right to vote with the underlying shares of Class A common stock, but are entitled to accrue dividend equivalents which are generally paid in cash when such RSUs vest. The RSUs granted generally vest over four years in equal annual installments. Upon vesting, the Company will typically withhold the number of shares to satisfy the statutory withholding tax obligation and deliver the net number of resulting shares vested.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The change in unvested RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted-Average Grant-Date Fair Value Per RSU
|
Balance as of March 31, 2020
|
—
|
|
|
$
|
—
|
|
Granted
|
2,509,445
|
|
|
$
|
18.03
|
|
Vested
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
Balance as of September 30, 2020
|
2,509,445
|
|
|
$
|
18.03
|
|
Unvested Partnership Units
As part of the reorganization, previously granted awards of Class A2 unvested partnership units were reclassified as Class B2 units, which will vest periodically through 2024. Upon the final vesting date, all of the Class B2 units will automatically convert into Class B units and unitholders will be entitled to purchase from the Company one share of Class B common stock for each Class B unit at its par value. Prior to vesting, holders of Class B2 units do not have the right to receive any distributions from the Partnership, other than tax-related distributions.
As of September 30, 2020, there were 2,591,352 unvested Class B2 units outstanding. During the six months ended September 30, 2020, none of the outstanding Class B2 units were forfeited. As of September 30, 2020, none of the outstanding Class B2 units were vested.
As of September 30, 2020, $51.9 million of unrecognized non-cash compensation expense in respect of RSUs and Class B2 units remained to be recognized over a weighted-average period of approximately 4.0 years.
10. Income Taxes
Prior to the Reorganization and IPO, the Company operated as a partnership for U.S. federal income tax purposes and therefore was not subject to U.S. federal and state income taxes. Subsequent to the Reorganization and IPO, all income attributable to the Company is subject to U.S. corporate income taxes.
The Reorganization and IPO resulted in a step-up in the tax basis of certain assets that will be recovered as those assets are sold or the basis is amortized. As a result, the Company recognized a deferred tax asset in the amount of $81.3 million as of September 30, 2020, associated with the increase in tax basis from the Reorganization and IPO, as well as the basis difference in SSG’s investment in the Partnership. A portion of the total basis difference will only reverse upon a sale of SSG’s interest in the Partnership, which is not expected to occur in the foreseeable future. Therefore, the Company has recognized a valuation allowance in the amount of $37.8 million against the deferred tax asset (resulting in a net deferred tax asset of $43.5 million) which is considered capital in nature as it was not more-likely-than-not that this portion of deferred tax assets would be realized. Concurrently with the Reorganization, IPO and recording of the deferred tax asset, the Company recorded a payable pursuant to the Tax Receivable Agreements within due to affiliates in the condensed consolidated balance sheets of $50.7 million.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The Company’s effective tax rate was 0.8% and 2.2% for the three months ended September 30, 2020 and 2019, respectively, and 3.5% and 2.1% for the six months ended September 30, 2020 and 2019, respectively. The Company’s effective tax rate is dependent on many factors, including the estimated amount of income subject to tax. Consequently, the effective tax rate can vary from period to period. The Company’s overall effective tax rate in each of the periods described above is less than the statutory rate primarily because (a) the Company was not subject to U.S. federal taxes prior to the Reorganization and IPO and (b) a portion of income is allocated to non-controlling interests, and the tax liability on such income is borne by the holders of such non-controlling interests.
The Company evaluates the realizability of its deferred tax asset on a quarterly basis and adjusts the valuation allowance when it is more-likely-than-not that all or a portion of the deferred tax asset may not be realized.
As of September 30, 2020, the Company has not recorded any unrecognized tax benefits and does not expect there to be any material changes to uncertain tax positions within the next 12 months.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by U.S. federal, state, local and foreign tax authorities. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s condensed consolidated financial statements.
11. Earnings Per Share
Basic and diluted earnings per share of Class A common stock is presented for the period from September 16, 2020 through September 30, 2020, the period following the Reorganization and IPO. There were no shares of Class A common stock outstanding prior to September 16, 2020, therefore no earnings per share information has been presented for any period prior to that date.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
|
|
|
|
|
|
|
September 16, 2020 through September 30, 2020
|
|
|
Net loss attributable to StepStone Group Inc. – Basic and Diluted
|
$
|
(790)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of Class A common stock outstanding – Basic and Diluted
|
29,237,500
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of Class A common stock – Basic and Diluted
|
$
|
(0.03)
|
|
|
|
Diluted earnings per share of Class A common stock is computed by dividing net income (loss) attributable to SSG, giving consideration to the reallocation of net income between holders of Class A common stock and non-controlling interests, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities, if any.
The calculation of diluted earnings per share excludes 2,509,445 shares of Class A common stock, 2,591,352 Class B2 units and 94,574 Class B units issuable pursuant to anti-dilution rights in connection with the vesting of Class B2 units that are convertible into Class A common stock under the if-converted method as the inclusion of such shares would be anti-dilutive.
Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to SSG and therefore are not participating securities. As a result, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been included.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The calculation of diluted earnings per share excludes 65,578,831 shares of Class B units of the Partnership, which are exchangeable into Class A common stock under the if-converted method, as the inclusion of such shares would be anti-dilutive.
12. Related Party Transactions
The Company considers its senior executives, employees and equity method investments to be related parties. A substantial portion of the Company’s management and advisory fees and carried interest allocations is earned from various StepStone Funds that are considered equity method investments. The Company earned net management and advisory fees from the StepStone Funds of $47.8 million and $30.7 million for the three months ended September 30, 2020 and 2019, respectively, and $85.1 million and $57.8 million for the six months ended September 30, 2020 and 2019, respectively. Carried interest allocation revenues earned from the StepStone Funds totaled $166.1 million and $77.3 million for the three months ended September 30, 2020 and 2019, respectively, and $37.6 million and $124.3 million for the six months ended September 30, 2020 and 2019, respectively.
Due from affiliates in the condensed consolidated balance sheets consists primarily of fees and accounts receivable from the StepStone Funds, advances made on behalf of the StepStone Funds for the payment of certain organization and operating costs and expenses for which the Company is subsequently reimbursed, and amounts due from employees.
Due to affiliates in the condensed consolidated balance sheets consists primarily of amounts payable to certain non-controlling interest holders in connection with the Tax Receivable Agreements, amounts payable to StepStone Funds and distributions payable to certain employee equity holders of consolidated subsidiaries, as set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2020
|
|
March 31, 2020
|
Amounts payable to non-controlling interest holders in connection with Tax Receivable Agreements
|
$
|
50,720
|
|
|
$
|
—
|
|
Amounts payable to StepStone Funds
|
2,563
|
|
|
6
|
|
Distributions payable to certain employee equity holders of consolidated subsidiaries
|
3,594
|
|
|
3,568
|
|
Total due to affiliates
|
$
|
56,877
|
|
|
$
|
3,574
|
|
13. Stockholders’ Equity
The Company has two classes of common stock outstanding, Class A common stock and Class B common stock. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the Company's stockholders for their vote or approval. Holders of Class A common stock are entitled to receive dividends when and if declared by the board of directors. Holders of the Class B common stock are not entitled to dividends in respect of their shares of Class B common stock.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
The following table shows a rollforward of the Company's shares of common stock outstanding since the IPO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
Class B Common Stock
|
September 15, 2020
|
—
|
|
|
—
|
|
Issued to public holders in the IPO
|
20,125,000
|
|
|
—
|
|
Issued to Class B unitholders in the Reorganization
|
—
|
|
|
65,578,831
|
|
Class A partnership units exchanged in the Reorganization
|
9,112,500
|
|
|
—
|
|
September 30, 2020
|
29,237,500
|
|
|
65,578,831
|
|
In connection with the consummation of the IPO, the Partnership issued new partnership interests to certain StepStone professionals in the Infrastructure subsidiary in exchange for their partnership interests in the Infrastructure subsidiary, which increased the interest of the Partnership in the Infrastructure subsidiary to approximately 49% and decreased the interest of the StepStone professionals in the Infrastructure subsidiary to approximately 51%.
The reallocation adjustment between SSG stockholders’ equity, non-controlling interests in the Partnership and non-controlling interests in subsidiaries relates to the impact of changes in economic ownership percentages during the period and adjusting previously recorded equity transactions to the economic ownership percentage as of the end of each reporting period.
In June 2020, one of the Company’s 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.
Dividends and distributions are reflected in the condensed consolidated statements of stockholders' equity when declared by the board of directors. Dividends are made to Class A common stockholders and distributions are made to limited partners of the Partnership and holders of non-controlling interests in subsidiaries.
14. Commitments and Contingencies
Litigation
In the ordinary course of business, and from time to time, the Company may be subject to various legal, regulatory and/or administrative proceedings. The Company accrues a liability for legal proceedings only when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. Although there can be no assurance of the outcome of such proceedings, based on information known by management, the Company does not have a potential liability related to any current legal proceedings or claims that would individually or in the aggregate materially affect its condensed consolidated financial statements as of September 30, 2020.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Lease Commitments
The Company leases offices in 19 cities in the United States, Canada, South America, Europe, Asia and Australia, and office equipment subject to operating lease agreements expiring through 2031. The Company accounts for its operating leases on a straight-line basis and includes the related expense in general, administrative and other expenses in the condensed consolidated statements of income. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Occupancy expense related to office facility operating leases totaled $2.3 million and $2.2 million for the three months ended September 30, 2020 and 2019, respectively, and $4.6 million and $4.5 million for the six months ended September 30, 2020 and 2019, respectively.
Future minimum lease payments related to the Company’s operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
Remainder of FY2021
|
$
|
4,880
|
|
FY2022
|
8,992
|
|
FY2023
|
8,412
|
|
FY2024
|
9,187
|
|
FY2025
|
9,169
|
|
Thereafter
|
40,485
|
|
Total
|
$
|
81,125
|
|
The Company has entered into non-cancelable sublease arrangements with terms extending through 2026, pursuant to which the Company expects to receive total minimum rental payments of $8.1 million. Minimum operating lease payments presented in the table above have not been reduced by these minimum sublease rental payments.
Unfunded Capital Commitments
As of September 30, 2020 and March 31, 2020, the Company, generally in its capacity as general partner or managing member of the StepStone Funds, had unfunded commitments totaling $61.4 million and $57.9 million, respectively.
Carried Interest Allocations
Carried interest allocations are subject to reversal in the event of future losses, to the extent of the cumulative revenues recognized by the Company in income to date. Additionally, if the Company has received net profits over the life of the fund in excess of its allocable share under the applicable partnership agreement, the Company may be obligated to repay previously distributed carried interest that exceeds the amounts to which the Company is ultimately entitled. In these situations, a liability is accrued for the potential clawback obligation if amounts previously distributed to the Company 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 September 30, 2020 and March 31, 2020, there were no amounts for potential clawback obligations accrued. This contingent obligation is normally reduced by income taxes that the Company has paid related to the carried interest allocations. As of September 30, 2020, the maximum amount of carried interest allocation subject to contingent repayment was an estimated $79.9 million, net of tax, assuming the fair value of all investments was zero, a possibility that the Company views as remote.
StepStone Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except share and per share amounts and where noted)
Indemnification Arrangements
In the normal course of business and consistent with standard business practices, the Company has provided general indemnifications to its limited partners, officers and directors when they act in good faith in the performance of their duties for the Company. The terms of these indemnities vary from contract to contract. The Company’s maximum exposure under these arrangements cannot be determined as these indemnities relate to future claims that may be made against the Company or related parties, but which have not yet occurred. No liability related to these indemnities has been recorded in the condensed consolidated balance sheets as of September 30, 2020 and March 31, 2020. Based on past experience, management believes that the risk of loss related to these indemnities is remote.
15. Subsequent Events
No events have occurred subsequent to the date of the condensed consolidated financial statements that would require disclosure.