StepStone Group Inc

NASDAQ:STEP

Earnings Call Analysis

Strong Fundraising and Fee Growth Drive Record Performance

During the first quarter of fiscal 2025, StepStone achieved record performance across several key metrics. They experienced their highest ever fundraising period, adding a record $12.6 billion in gross AUM, driven by strong contributions from separately managed accounts and commingled funds. Total fee-earning assets surpassed $100 billion, and undeployed fee-earning capital reached $27.6 billion. Management and advisory fees surged 29% year-over-year to $179 million, while fee-related earnings climbed 61% to $72 million. The firm reported a 40% FRE margin, reflecting strong retroactive fees, and increased their dividend to $0.24 per share, showcasing confidence in sustained growth.

Strong Fundraising and Capital Growth

StepStone Group's first fiscal quarter of 2025 saw robust fundraising and significant additions to fee-earning assets. The company recorded its strongest period for fundraising, net contributions to fee-earning assets surpassing $100 billion, and net additions to undeployed fee-earning capital, reaching a record $27.6 billion【4:2†source】【4:3†source】. Total assets under management (AUM) inflows during the quarter were nearly $28 billion, primarily driven by managed accounts and commingled funds【4:7†source】.

Fee-Related Earnings and Margin Expansion

The quarter exhibited strong financial metrics with management and advisory fees at $179 million, up 29% from the prior year quarter. Fee-related earnings (FRE) rose by 61% to $72 million, with an FRE margin expanding by 800 basis points to 40%. Excluding retroactive fees, the core FRE margin still showed substantial growth【4:5†source】【4:6†source】.

Significant Retroactive Fees Impact

The company benefited significantly from retroactive fees totaling $19.1 million this quarter compared to $2.8 million in the same period last year. These fees were mainly attributed to its private equity secondaries fund, special situation real estate secondaries fund, and infrastructure co-investment fund. Despite the unusual size of these fees this quarter, StepStone does not expect this trend to persist at the same level【4:2†source】【4:3†source】.

Increase in Dividend

Reflecting confidence in sustainable earnings growth, the company increased its quarterly dividend from $0.21 per share to $0.24 per share【4:8†source】.

Undeployed Fee-Earning Capital (UFEC) and Future Growth

StepStone's undeployed fee-earning capital (UFEC) surged to a record $27.6 billion, increasing by $5 billion from the previous quarter. This growth, combined with a high fee-earning AUM of $128 billion, up 23% year-over-year, positions the company well for continued revenue growth. The company also anticipates activating over $4 billion of capital from managed accounts by the end of the calendar year, offering a solid base for future earnings【4:0†source】【4:1†source】.

Investment in Growth and Increased Expenses

Cash-based compensation rose by 12% year-over-year to $78 million, driven by higher business development expenses and seasonal adjustments. StepStone plans to continue investing in its business development and private wealth teams, which is expected to increase cash compensation in the foreseeable future. Equity-based compensation also increased, reflecting ongoing investments in long-term incentive plans【4:4†source】【4:5†source】.

Record Performance Fees and Realized Carried Interest

The quarter experienced a peak in realized performance fees, the highest in two years, amounting to $43 million. Adjusted net income for the quarter was $57.2 million, up from $29.4 million in the previous year, primarily due to increased fee-related earnings and performance fees. Most of the unrealized carry is tied to older vintages, indicating limited investment periods and readiness for harvesting【4:5†source】【4:14†source】.

Wealth Management Innovations

StepStone's innovations in wealth management, including ticker-based products, have seen positive traction. These products simplify investment processes for individual investors, contributing to increased flows. The company continues to enhance its product offerings and maintain strong relationships with distribution partners across various channels, including RIAs, IBDs, and non-U.S. distributors【4:14†source】【4:15†source】【4:16†source】.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the First Fiscal Quarter 2025 StepStone Group, Inc. Earnings Conference Call. [Operator Instructions]. Please be advised, today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Seth Weiss, Vice President of Investor Relations. Please go ahead.

[Seth Weiss, executive]

Thank you, and good afternoon. Joining me on today's call are Scott Hart, Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategy; and David Park, Chief Financial Officer.

During our prepared remarks, we will be referring to a presentation, which is available on our Investor Relations website at shareholders.stepstonegroup.com.

Before we begin, I'd like to remind everyone that this conference call as well as the presentation contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. Forward-looking statements reflect management's current plans, estimates and expectations and are inherently uncertain and are subject to various risks, uncertainties and assumptions. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone's periodic filings. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them.

Today's presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation and our filings with the SEC.

Turning to our financial results for the first quarter of fiscal 2025. Beginning with Slide 3, we reported GAAP net income of $48.0 million. GAAP net income attributable to StepStone Group Inc. was $13.3 million or $0.20 per share.

Moving to Slide 5. We generated fee-related earnings of $71.7 million, up 61% from the prior year quarter, and we generated an FRE margin of 40%. The quarter reflected retroactive fees primarily from our private equity secondaries fund, special situation real estate secondaries fund and infrastructure co-investment fund. Retroactive fees contributed $19.1 million to revenue, which compares to retroactive fees of $2.8 million in the first quarter of fiscal 2024.

Finally, we earned $57.2 million in adjusted net income for the quarter or $0.48 per share. This is up from $29.4 million or $0.26 per share in the first fiscal quarter of last year, driven by both higher fee-related earnings and higher realized performance fees.

I'll now hand the call over to Scott.

[Scott Hart, executive]

Thanks, Seth. We carried over the momentum from last year as we enter our new fiscal period with very strong operating and financial performance. Our first quarter was a record period on several key fronts. With our strongest period ever for fundraising, our strongest period ever for net contribution to fee earning assets, which surpassed $100 billion, and our strongest period ever for net additions to undeployed fee earning capital, which reached our highest level ever of $27.6 billion. This sets StepStone up for a strong fiscal 2025 and for sustained growth beyond this year.

Our diverse array of offerings, supportive client base and in-demand strategies and asset classes all contributed to our results. In the quarter, we generated a record $12.6 billion of gross AUM additions. Fundraising was strong across commercial structures with commingled funds raising over $3 billion and separately managed accounts raising over $9 billion. Over the last 12 months, we have raised nearly $28 billion, our strongest 12-month period ever as we have successfully closed on several managed account re-ups and new mandates executed on several successful commingled fund raises, particularly in venture capital secondaries and private equity secondaries and continue to ramp our private wealth offerings.

Our success in raising capital is a result of years of building relationships, capabilities and track records. The last 12 months, in particular, are emblematic of the fruits of those efforts. While the pacing of fundraising can be episodic at times, the corresponding growth in fee-earning AUM and the build in undeployed fee-earning capital provides a runway for consistent top line growth.

Included in this quarter's fundraising is over $800 million of private wealth subscriptions, which is our strongest private wealth quarter ever. We have 4 evergreen private wealth funds in market; SPRIM, our all private markets fund; SPRING, our venture and growth equity fund; STRUX, our infrastructure fund; and CRDEX, our private credit fund, for which we accepted our first subscriptions in June. I'm also pleased to announce that SPRING was recently added to a second wirehouse. We are now distributing StepStone evergreen funds with nearly 400 partners with SPRIM and SPRING each on 2 wirehouses. We're thrilled with the development and uptake of our private wealth suite of offerings and continue to see a strong runway for growth.

Pivoting to our financial results, we generated $179 million in management and advisory fees and $72 million in fee-related earnings, which were up 29% and 61% year-over-year, respectively. We generated an FRE margin of 40%, which benefited from strong retroactive fees. Excluding the impact from retro fees, our fee-related revenue and fee-related earnings would have increased 18% and 35% year-on-year, respectively, driven by strong growth in our fee-earning AUM. The combination of robust fundraising over the past 12 months, along with recent commingled fund activations has set StepStone up to deliver strong financial performance in fiscal 2025 and positions us well to achieve the 5-year growth target of doubling fee-related earnings, which we established last year at our Investor Day.

Lastly, realized performance fees of $43 million were the highest level in the last 2 years. As you are aware, performance fees are largely dependent on a healthy realization environment. So we anticipate some volatility quarter to quarter. While capital market activity is still relatively muted and the last week has clearly been an eventful one for the public markets, with major stock indices entering correction territory and volatility measures more than doubling, we expect realizations and performance fees to continue to trend up off the low levels of last year.

To sum up, this was a very strong quarter with all key operating and financial metrics clicking. We do not expect this pace of retroactive fees to persist. The growth of fee-earning assets and undeployed fee-earning capital creates a higher base for sustainable sources of earnings. We feel excellent about the accomplishments of recent periods and even more excited about the progress we are making towards our longer-term goals.

With that, I'll pass the call to Mike.

[Michael McCabe, executive]

Thanks, Scott. Turning to Slide 8. As Scott highlighted, we generated nearly $28 billion of gross AUM inflows during the last 12 months with over $18 billion coming from our separately managed accounts and over $9 billion coming from our commingled funds. In the quarter, our commingled fund additions included $800 million in our private equity secondaries fund. Our PE secondaries fund has now raised over $4 billion, which is the first StepStone fund to reach the $4 billion mark and is well above the prior PE secondaries fund size of $2.1 billion. We expect the final close of a few hundred million dollars in this fiscal second quarter.

In real estate, we raised over $400 million in our special situation secondaries fund. This fund has now surpassed the prior vintage size of $1.4 billion, and we anticipate it will remain in market through at least the end of this calendar year. While limited partners remain relatively cautious on real estate, our special situation secondaries strategy remains a bright spot in the market.

Other notable commingled fund additions include approximately $800 million for the final close of our venture capital secondaries fund, which is consistent with the amount we discussed on our May earnings call. This brings the total fund size to $3.3 billion, the largest venture capital secondaries fund in the history of our industry. We also generated over $800 million in private wealth subscriptions and raised approximately $300 million across infrastructure, private debt and other venture capital funds. As a reminder, we include a list of our major funds on Page 29 of our earnings presentation.

Turning to managed accounts. We generated $9 billion of SMA additions with strength in private equity and infrastructure. 60% of the gross additions came from re-ups and 40% came from a combination of new client relationships and expansion of existing client relationships. This is an exceptional result that illustrates our ability to win new accounts and grow with existing clients. Managed accounts are a core strength for StepStone and are essential to the value proposition we offer as a solutions provider.

Slide 9 shows our fee-earning AUM by structure and asset class. For the quarter, we grew fee earning assets by $7 billion, our largest quarterly addition of fee-earning capital in our history. This quarter's fee-earning AUM growth benefited from an activation of our venture capital secondaries fund, contributing $3.3 billion to the fee earning balance. Additionally, we continue to grow our undeployed fee-earning capital, or UFEC to $27.6 billion, up $5 billion quarter-over-quarter. As Scott mentioned, this is our highest UFEC balance on record and has our greatest quarterly net increase in UFEC, which is notable considering the $3.3 billion activated from our BC secondaries fund.

The combination of our fee-earning AUM and undeployed fee-earning capital stands at $128 billion, up 10% sequentially and up 23% year-over-year, providing us with a high degree of visibility for continued growth in management fees as capital is deployed or activated. We anticipate activating over $4 billion of capital from managed accounts by the end of this calendar year.

Slide 10 shows the evolution of our management and advisory fees. We generated a blended management fee rate of 61 basis points for the last 12 months, higher than the 59 basis points from the prior year as we benefited from retroactive fees and a higher fee rate from our private wealth offerings.

Before concluding my remarks, I am pleased to announce that we are raising our quarterly dividend from $0.21 per share to $0.24 per share. This reflects our confidence in strong and sustainable growth in fee-related earnings.

With that, I'll turn the call over to David.

[David Park, executive]

Thanks, Mike.

I'd like to turn your attention to Slide 12 to speak to our financial highlights. For the quarter, we earned management and advisory fees of $179 million, up 29% from the prior year quarter. The increase was driven by strong growth in fee-earning AUM across commercial structures, a favorable impact from retroactive fees and a higher blended average fee rate.

Fee-related earnings were $72 million for the quarter, up 61% from a year ago. We generated an FRE margin of 40% for the quarter, up 800 basis points versus the prior year quarter. Normalizing for retroactive fees, core FRE margins expanded over 300 basis points to prior year period.

Moving to expenses. Cash-based compensation was $78 million, up 5% from last quarter and up 12% from the prior year. The growth reflected higher business development and revenue sharing tied to retroactive fees and the seasonal step-up in the cash bonus accrual, which we signaled on the last call.

Looking to the remainder of the year, we expect to see continued growth in cash compensation due to incremental hires for our new analyst class as we continue to invest in our business development team, private wealth team and other areas to support the growth in our business.

Equity-based compensation expense grew to $2.4 million, up from $1.7 million in the prior quarter. This reflects the layering of the third year's issuance of RSU awards. RSUs vest over 4 years, so you can expect to see the impact of the final layering of RSU expenses in our first fiscal quarter of 2026.

General and administrative expenses were $27 million, up $4 million from a year ago and down slightly sequentially. Gross realized performance fees were $43 million for the quarter and $22 million net of related compensation expense. Both were the highest level we've seen in 2 years.

Add it all up, and adjusted net income per share was $0.48, up 85% from a year ago, driven by growth in fee-related revenues, FRE margin expansion and higher net performance fees.

Moving to key items on the balance sheet on Slide 13. Net accrued carry finished the quarter at $677 million, up 7% from last quarter, driven primarily by underlying fund valuation appreciation. As a reminder, our fund valuations are reported on a 1 quarter lag. Our own investment portfolio ended the quarter at $218 million. Unfunded commitments to our investment programs were $109 million as of quarter end.

As of June 30, we had over $80 billion of performance fee eligible capital, which is widely diversified across multiple vintage years and over 200 programs. 85% of our net unrealized carry is tied to programs and vintages of 2019 or earlier, which means that these programs are largely out of their investment periods and in harvest mode. Of this amount, 54% is sourced from vehicles with deal-by-deal waterfalls, meaning realized carry may be payable at the time of investment exit.

This concludes our prepared remarks. I'll now turn it back over to the operator to open the line for any questions.

[Operator]

[Operator Instructions] And our first question is going to come from the line of Kenneth Worthington with JPMorgan.

[Kenneth Worthington, analyst]

I wanted to start with the innovation in wealth management around the tickers. So where do you see the independent advisers now in terms of the education process here around the ticker-based products. and $800 million of sales is sort of a strong endorsement of what you've developed and sort of begs the question of what sort of feedback you're getting on the structure? Is it the ticker that you think is making the difference here? Or is it really just the performance has been good, the brand name is solid. Anything you can talk about in terms of attribution of the ticker in terms of strength of sales?

[Jason Ment, executive]

Jason here. Look, the overall goal of all of these products is to sand off all the rough edges of how hard it is for the individual investor to invest in private markets. And some of these rough edges are sanded off by the structure alone, right, 1099 tax reporting versus K-1s and no capital calls, et cetera. The ticker innovation, we think, is probably the most material development in sanding off those rough edges because the subscription process for a private fund is lengthy. The feedback has been very supportive, and we've seen the percentage for those funds that offer the ticker, we've seen those flows continue to creep up in terms of the mix between ticker versus subscription document. So it's certainly contributing. Hard to quantify exactly how much it's contributing to the growth, but we're at the point now where about half of the flows we see in the U.S. funds that offer the ticker are coming from ticker as opposed to sub doc.

[Kenneth Worthington, analyst]

Perfect. You answered it better than I asked it. So I appreciate that. Moving on, you sold, I think, the Greenspring back office this quarter. I believe you acquired the noncontrolling interest. I think it was throughout the quarter, maybe from April to June. And hopefully I had missed this in your prepared remarks. If you can take us in the P&L, talk about sort of what those events did in terms of impacting the P&L this quarter and if there's anything different in terms of what we should expect next quarter, the quarter after based on the timing this quarter?

[David Park, executive]

Yes, Ken, this is David. So I don't think you should expect anything different next quarter. Everything is fully baked in this quarter. The NCI buy-in was effective April 1. The Greenspring back office sale occurred at the end of December. So again, I think what we had communicated before was we did expect to see about a $2 million benefit to the bottom line with the sale of the Greenspring back office. That was fully baked in the calendar 1Q and this first fiscal quarter. So again, it should all be in run rate.

[Operator]

And our next question is going to come from the line of Alex Blostein with Goldman Sachs.

[Unknown Analyst]

This is Anthony on for Alex. I wanted to hit on fundraising and commingle funds. I know there's a few funds in the market right now, and I wanted to get an update on fund size expectations as well as which ones you expect to be generating retro fees for the rest of the fiscal year?

[Scott Hart, executive]

So you heard Mike talk during the prepared remarks about the key commingled fund flows during the quarter. And just to recap those, there was about $800 million that was raised during the quarter for our private equity secondaries fund, about $800 million that brought us to the final close of the venture capital secondaries fund. There was over $400 million raised across our real estate special situations secondaries fund. And the remainder, if I set aside the private wealth business, the remainder was spread across a number of infrastructure, private debt and venture capital strategies. So in terms of where we get to final fund size, the venture capital secondaries fund, as I mentioned, has now had a final close at about $3.3 billion. Mike mentioned during the call that our private equity secondaries fund is now a bit over $4 billion, and we expect to have a final close in the coming months of a few hundred additional million dollars. And again, we compared that to where the previous fund was at about $2.1 billion. But as it relates to the remaining funds that continue to raise still in the progress of getting those completed. We mentioned that real estate would wrap up around the end of the year, but no specific guidance in terms of fund size on any of the other vehicles there.

[Unknown Analyst]

Great. And my second follow-up is on margins. Just given the high jumping off point, this quarter, benefiting from retro fees. Do you still expect FRE margins in the mid-30s? Or is there some upside to that number just given the retro fee dynamic for the fiscal year?

[David Park, executive]

This is David. So again, like with the benefit of the retro fees we hit a 40% margin. But to your point, even with that, the retro fees margin saw a pretty healthy increase from last year. And just as Scott mentioned, the majority of the $19 million in retro fees this quarter was largely related to the PE secondaries fund, and we do expect another close next quarter. So you can expect to see some level of retro fees throughout the year. But even without that, we feel pretty good about where we are today and the progress we've made to date. And we do feel we're firmly on track to achieve the margins in the mid-30s over the medium term.

[Operator]

And our next question is going to come from the line of Ben Budish with Barclays.

[Unknown Analyst]

This is [ Nick Benoit ] on the call for Ben tonight. I just want to ask what the pipeline outlook for SMA flows. It looks like SMAs have picked up over the last few quarters. And we just want to think about the trajectory for the rest of the year and maybe how we should think about more normalized levels going forward?

[Scott Hart, executive]

So on the SMA flows, you'll have both the gross AUM flows as well as then and Mike outlined some of this, the conversion of undeployed fee-earning capital, interfering AUM. So you have the related fee-earning AUM flows as well. Look, I would say the pipeline continues to be solid. Obviously, we're coming off with a record breaking quarter this quarter, and we've always guided to the fact that there will be some lumpiness from quarter to quarter, but we feel good about the continued pipeline of both re-up and new opportunities, I'd say, particularly outside the U.S. in parts of the world like Asia, Middle East and parts of Europe, quite a bit of activity. But then as it relates to the fee-earning AUM flows, we talked during the prepared remarks about the fact that over $4 billion of undeployed fee-earning capital is likely to activate by the end of the calendar year. On top of that, if you were to look at the presentation, we talked about the fact that this quarter, we had about $4.1 billion of UFEC that converted into fee-earning AUM. A sizable part of that was the activation of the venture secondaries fund, but there was about $1.3 billion of UFEC deployment as well. And look, as we think about the current deployment environment, we've certainly seen a rebound from the lows of the first half of 2023, but still a somewhat muted environment today, albeit with a more exciting pipeline as we look out to the second half of the year here. So we generally expect to see some positive momentum as it relates to the conversion of UFEC into fee-earning AUM.

[Unknown Analyst]

Great. And then separately, it was great to hear SPRING adds to its second wirehouse during the quarter. I just want to touch on kind of the competition you're seeing on the wires and how much harder to get product on these various platforms compared to 12 months ago with all the influx of products come to the market seems like.

[Jason Ment, executive]

Jason here. Look, the products that we've created for the wealth channel, we believe are relatively differentiated versus what the elite sponsors bring as well as the peers. SPRING, in particular, stands out as a rather unique product in the venture growth space, multi-manager. And I mean if it's getting more difficult, I would say, it may be, but SPRING got on fast runs of these 2 wires than we were able to get SPRIM on. So I think we're going to get our share of shelf space based on the products we've developed, the performance that we're showing and the large dedicated team that we've put on the field to market these products and service the clients afterwards.

[Operator]

And our next question is going to come from the line of Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Maybe just on private wealth, it seems like the ticker, you're getting a bit of traction with there. And just curious, as you think about sort of the next stage of innovation in the private wealth channel, what else can be done to remove frictions for investors coming into the private market space. One thing that comes to mind, I'm curious to get your thoughts on it as potential development of model portfolios for private markets. So curious where we are in that journey. What steps are you guys taking as you think about removing even more frictions and opening up access further?

[Scott Hart, executive]

We do believe that model portfolios will play a part in the growth of private markets inside the portfolios of individual investors. That's for sure. We expect that the DC space will be part of that as well. And in terms of friction, the ticker in the U.S. is now a path that people are starting to understand. We do believe that there will be solutions outside the U.S. to help with this as well. And those different legs, I think each will provide a lot of avenues for innovation. And we still think that there's space for innovation in the product offerings, i.e. products that we're able to bring to bear that aren't out there yet. And so those are all different avenues where I think we'll continue to innovate.

[Michael Cyprys, analyst]

Great. And just a follow-up question on the margin profile. I think you mentioned the margin would be up a couple of hundred basis points year-on-year, excluding the retro fees suggesting sort of an underlying margin profile of about 35%, if I have that right in the quarter. So just curious why that is not or should that be the right jumping off point as we go forward from here, putting aside any incremental retro fees? Why or why not? Is there an expectation for investment spend hiring to accelerate meaningfully that would take it a bit slower. Just curious if you think about the moving parts there.

[David Park, executive]

Yes. David here. I think that's right. Like if you exclude the retroactive fees for this quarter, you're closer to about 34% margin. We do expect, like I said in the prepared remarks, to invest in our business development team, private wealth team and other key support areas. So that's going to be a little bit of a drag on margins. But again, we do feel we're in a good place and the trajectory is still going up into the mid-30s over the medium term.

[Operator]

[Operator Instructions] And our next question will come from the line of Adam Beatty with UBS.

[Adam Beatty, analyst]

Just wanted to parse out the fee rate a little bit. Obviously, some nice momentum there. And you mentioned, obviously, the catch-up fees as well as some lift from momentum in the wealth channel. So just wondering if you could maybe parse that out either on a trailing 12-month basis or for the quarter in terms of the contribution of wealth management that we should think of as sort of a positive going forward?

[David Park, executive]

Yes. Adam, this is David. So if you look at our blended fee rate of 61 basis points this quarter, it certainly did benefit from retroactive fees. So if you exclude that, we're kind of right back in the high 50s. And if you look at private wealth, it's right around $4.2 billion in total assets. So it grew about $1 billion from last year. So you can see that as it continues to grow, with the higher fee rate, it will tend to lift the overall blended fee rate. But at $4 billion, it's going to take a little bit of time to really move the needle.

[Adam Beatty, analyst]

Okay. Makes sense. And then just on some of the wealth management products. Interesting how you mentioned that you were getting on platforms maybe at a more accelerated rate, which speaks to the relationships that you've been able to develop. So just wondering in terms of the positive flows there, what you're seeing in terms of preferences, wirehouses maybe versus other distributors or maybe by segment in terms of the customer base?

[Jason Ment, executive]

In terms of the syndicate that we put together for the different funds, at this point, we've got just about 100 different partners that are distributing more than 1 product, meaning 2 products and about half that or so that are distributing even more than that. So certainly, cross-sell is part of the play here as opposed to mix among the different types of platforms as different, whether it be an RIA, an IBD, wire or international partner have had a good experience with us with one fund, they are providing its additional shelf space as they evaluate the other products that we've got. So I think that is probably one of the interesting parts of this.

In terms of the mix between the different types of channels, we still continue to be a U.S.-dominated distribution with all of the funds. We're continuing to invest in our non-U.S. distribution, and the wires are definitely a growing portion of the allocation, and we're happy there, but we're equally dedicated to our other distribution partners. They all make up an important part of this ecosystem and have different needs, and we're dedicated to ensuring that we meet each one of those distribution partners where they are.

[Operator]

And we have a follow-up question from the line of Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Just wanted to circle back to the UFEC balance growth, up substantially in the quarter. I was hoping maybe you could help unpack some of the moving pieces there. Was it like $9 billion or so added to the top of the funnel? And then just on the $4 billion of SMA capital that you expect to be activated, I believe, by calendar year end, just curious what drives the confidence around that. And so I don't recall hearing that sort of commentary in the past.

[Jason Ment, executive]

Sure. So if you think about the moving pieces relative to last quarter, you're right, there were about $9 billion of SMA related AUM flows, essentially all of which flowed into that undeployed fee-earned capital balance, and then offsetting that was the activation of the venture capital secondaries fund. And again, that was raised at the final close was $3.3 billion, the $800 million was raised during the quarter. So it was less than that that kind of came out of the UFEC balance. So those are the main drivers together with the $1.3 billion of deployment that I mentioned that get us to the current balance. And I think one of the ways to think about that, it wasn't specifically related to your question, but we've always talked about our ability to deploy that UFEC over a 3- to 5-year time period. And just to kind of reiterate some of the math we walked through last quarter, if you think about the $1.3 billion of deployment this quarter and were to annualize that to get to about $5.2 billion run rate, it implies just over a 4-year investment period, despite the fact that deployment has been somewhat muted here, but just over 4 years, once you adjust for the $4-plus billion of activations.

Just as it relates to your final question on the activation. As a reminder, some of our separate accounts do, in fact, pay on committed capital. And so these were separate accounts that closed during the quarter have not yet activated mostly because we are still investing the prior fund for those that were re-ups. And so our confidence level comes from expectations around when we expect to be fully deployed on the prior vehicle, and therefore, we'll be able to activate those separate accounts.

[Michael Cyprys, analyst]

Great. Anything to be aware of on step downs on fees or fee basis on those prior vintages as you activate the next tranche?

[Jason Ment, executive]

Well, yes. I mean, typically, when we do activate a new tranche, it will result in a step down to the fee base of the prior vehicle. These are all vehicles that we have kind of gone through re-ups for in the past. So nothing we would call out as it relates to unusual step-downs in fee based, which we've, again, committed to calling out for you going forward here.

[Operator]

Thank you. And I would now like to hand the conference back to Scott Hart for any closing remarks.

[Scott Hart, executive]

Well, thanks, everyone, for your time and continued interest in StepStone. We appreciate the time today. And hopefully, you sense the level of excitement around here for both the quarter that we just achieved as well as the outlook going forward as we look forward to updating everyone again next quarter. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.