StepStone Group Inc

NASDAQ:STEP

Earnings Call Analysis

Company Grows AUM, Mixed Margin Expectations

Over the last 12 months, the company amassed $15 billion in AUM inflows, maintaining a flat fee-earning AUM due to activation timings and step-downs but expects a promising increase with $2 billion of capital from real estate and venture funds set to contribute an additional $18 million in annual fees, boosting margins by 150 basis points by fiscal 2025. They posted a 19% increase in management and advisory fees to $142 million for the quarter. Despite pressure on the 31% FRE margin expected in the near term due to fund activations and increased seasonal general and administration expenses, the management is optimistic about revenue growth and aiming for a mid-30s FRE margin over the medium to long term. Meanwhile, performance fees declined by 79% per share, partly offset by an 18% growth in management fees per share, and fee-related earnings per share grew by 17% for the first half of the year.

Capital Inflows and Fee Earning Asset Management

The company has seen remarkable growth in gross assets under management (AUM), with inflows of $15 billion over the past year, split between $6 billion from commingled funds and $9 billion from separately managed accounts. Despite this, the fee earning AUM remained unchanged from the previous quarter. This stagnation is attributed to specific activations and step-downs which affected near-term fee earning asset growth. However, management is confident these changes do not impact the company's long-term growth trajectory.

Funds Performance and Pipeline

A standout achievement was the successful initial close of the venture capital secondaries fund at $1.25 billion. The company anticipates further closings and expects these funds to be activated and start earning fees in the first half of fiscal 2025. The real estate sector also shows potential, with a fully committed prior fund that led to a temporary reduction in fee earning AUM by $700 million. The company is actively investing in a current real estate fund, expecting to charge fees in late fiscal 2024, and forecasting future growth in managed account fees to more than offset the impact from distributions.

Growth in Private Wealth Management

Impressively, the company's private wealth platform exceeded $2 billion in managed assets. Launched in September 2019, the platform has shown explosive growth, doubling its net asset value in only 10 months, half the time it took to reach its first billion. This success is powered by a multi-faceted distribution strategy and the introduction of high performing funds, including SPRING and STRUCTURE, which have shown annualized returns of 25% and 30%, respectively.

Management and Advisory Fees Expansion

Over the last 12 months, the blended management fee rate increased to 57 basis points, up from the previous year's 54 basis points, leading to a 22% annual growth in per-share management and advisory fees since fiscal year 2019. The last quarter's fees stood at $142 million, marking a 19% increase from the prior year, primarily fueled by the growth in fee-earning AUM. The fee-related earnings margin (FRE margin) was noted at 31%, reflecting the influence of retroactive fees and subsequent margin improvement.

Upcoming Challenges and Strategies

Despite the positive signs, the company acknowledges specific challenges that may pressurize the FRE margin in the following two quarters. These include the step-down effect of the prior real estate fund and an expected rise in general and administrative expenses. However, management is optimistic that these should only pose temporary setbacks, as future fund activations are set to increase revenue and improve margins by fiscal 2025.

Performance Fees and Forecast

Realized performance fees for the quarter amounted to $7 million, lower than previous periods, with expectations set for these fees to remain modest throughout the rest of the fiscal year. However, there is an indication of an improving realization environment, which may lead to improved performance fees in the upcoming quarters.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the StepStone Group Second Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Seth Weiss, Head of Investor Relations. Please go ahead.

[Seth Weiss, executive]

Thank you. 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 Johnny Randel, 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.In addition, 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 filing with the SEC.Turning to our financial results for the second quarter of fiscal 2024. Beginning with Slide 3, we reported GAAP net income of $59.3 million. GAAP net income attributable to StepStone Group, Inc. was $26.2 million or $0.42 per share.Moving to Slide 4. We generated fee-related earnings of $43.8 million, up 12% from the prior year quarter, and we generated an FRE margin of 31%. The quarter reflected retroactive fees resulting from interim closings of StepStone's private equity secondaries fund and StepStone's multi-strategy global venture capital fund, which in total contributed $3.7 million to revenue, $3.4 million to fee-related earnings and pretax adjusted net income and 160 basis points to FRE margin. There were no retroactive fees in the second quarter of fiscal 2023.Finally, we earned $30.2 million in adjusted net income for the quarter or $0.26 per share. This is down from $37.3 million or $0.33 per share in the second fiscal quarter of last year, driven by lower net realizations and partially offset by higher fee-related earnings.I'll now hand the call over to StepStone's CEO, Scott Hart.

[Scott Hart, executive]

Thank you, Seth, and good afternoon, everyone. Despite a number of continuing challenges in the macro environment, including volatility in asset prices, higher for longer interest rates and heightened geopolitical risks, StepStone continues to generate steady results. These results are driven by the breadth of our offering, specialization of our strategies and positive momentum in areas in which we've invested for growth. Although it is a difficult operating environment for asset managers, we believe we are well positioned in the industry and that we are setting the stage for strong continued growth in the years ahead. We remain on track to at least double our fee-related earnings within the next 5 years as we laid out at our Investor Day this past June.Last month, we hosted the StepStone 360 conference, our annual event for private markets, clients and investors. During times like these, our clients have a strong desire to understand the real-time trends and developments that we are seeing in the market and in our portfolios. The 360 conference gives us the opportunity to share our data and insights; present on our full suite of products and solutions; and importantly, hear directly from many of our clients and prospects. Our clients remain extremely engaged with the private markets and continue to turn to StepStone for help in meeting their long-term investing goals.Secondary is the strategy that continues to resonate with our clients in today's environment. While a general slow pace of realizations has muted the near-term market appetite for some private market investments, demand for secondaries across asset classes remains very strong and is a key area of differentiation for StepStone. Our deep relationships with general partners to play a large pipeline of investment opportunities, and our superior data and expertise allow us to identify the best of these opportunities, enabling us to buy high-quality assets at attractive prices. We are beginning to see greater willingness of sellers to transact as they adjust to the new valuation environment as other avenues for realizations continue to lag, which should result in an acceleration of our pace of deployment.During this most recent quarter, we executed a successful first close of approximately $1.25 billion in our venture capital secondaries fund, and an interim close of nearly $400 million in our private equity secondaries fund. We expect to activate the venture capital secondaries fund in the first half of our fiscal 2025, while our private equity secondaries fund is active and currently generating fees.Shifting to real estate. Our flagship commingled product is a special situation's GP-led secondaries fund. As we discussed at our Investor Day in June, the rise in interest rates, coupled with a significant volume of expected maturities in the coming years, creates a substantial opportunity for real estate recapitalizations. We are a leader in this market and have access to a significant amount of deal flow, much of which we create ourselves. This enables our investment team to be selective in deploying capital. Encouragingly, we are seeing real estate deployment opportunities begin to accelerate. We have fully committed our private real estate secondaries fund and our new fund is now actively investing. This new fund will begin earning fees in the spring after a 5-month fee holiday for investors that were part of the first close. To date, we have closed on approximately $1 billion in this fund. Additional fundraising is progressing well as we believe investors see our special situation strategy as an attractive means to access real estate, and one that is particularly well suited for today's environment.The timing of activations in our real estate and venture capital secondaries funds result in relatively modest revenue and fee-earning AUM growth for this current fiscal year, but provides clear visibility into a meaningful step-up in management fees, margin and fee-related earnings in fiscal 2025. We are also seeing healthy progress in our separately-managed accounts. The sales and closing cycle for SMAs can be long with exact timing difficult to predict, but we have a large pipeline of both new SMAs as well as re-ups, that is progressing well.Included in this quarter's gross additions were commitments from separately-managed accounts for which we've been engaged in discussion for over 2 years, a testament to the deep relationship building we engage in when partnering with clients. Inclusion of a multi-strategy venture allocation among these mandates is yet another example of the synergies from our expanded venture capital capabilities and a proof point that our strategies to help solve our clients' portfolio goals through market cycles.Shifting to Private Wealth. The fiscal second quarter was our best quarter ever, with over $350 million of new subscriptions. We've invested heavily in private wealth and these investments are paying off. We anticipate that this will be a significant contributor to operating leverage over time. As we announced in July, SPRIM, our core private markets Evergreen Fund became available for subscription daily by a ticker. This allows investment into the fund without the need for subscription documents, simplifying the onboarding process and eliminating a substantial point of [ frigate ]. The ticker has contributed to the acceleration of gross inflows, but encouragingly, we are seeing traction across all of our private wealth products and 4 pillars of distribution.SPRING, our Evergreen Fund for venture capital and growth equity continues to gain momentum. And in September, we held an initial close of STRUCTURE, StepStone's registered Providence Infrastructure Fund and our third Evergreen Private Wealth family of funds. Finally, I'm pleased to announce that SPRIM has been improved on a second wirehouse, and SPRING has been approved on its first warehouse. In each case with initial inflows expected in the coming months.Another area where we continue to invest is technology, and in our data science-driven portfolio management team and our software engineering team. We have spoken previously about our front-end research and back-end reporting platforms. We have rebranded our applications under one unified and interconnected suite, which we are calling SPY by StepStone. The SPY platform offers research, reporting, pacing and benchmarking applications. This integrated suite is only possible because of the investment we have made in our technology, our people and our relationships with both LPs and GPs.Before handing the call to Mike, I'd like to thank our CFO, Johnny Randel, for more than a decade of dedication and leadership to Stepstone. Johnny will retire at the end of this year. Johnny joined StepStone in 2010 and has been responsible for building and leading a deep and talented finance team. We are thrilled to announce that David Park, our current Chief Accounting Officer, will become Chief Financial Officer on January 1. David is already working closely with Johnny on the transition. David has been Stepstone's Chief Accounting Officer since joining the company in 2019. Together with Johnny, David helped guide Stepstone through our IPO and is a key leader of our Finance team. Johnny, we thank you for your years of dedication, leadership and strategic vision, and we congratulate you on your retirement.I'll now turn the call over to Mike McCabe to speak about StepStone's fundraising and fee-earning asset growth in more detail.

[Michael McCabe, executive]

Thanks, Scott. And I'd like to echo your words of appreciation for Johnny Randel, and congratulate David Park. Turning to Slide 7. We generated $15 billion of gross AUM inflows during the last 12 months with $6 billion coming from our commingled funds and $9 billion coming from our separately-managed accounts.Slide 8 shows our fee-earning AUM by structure and asset class. The earning AUM was flat relative to the prior quarter due to a few moving pieces this quarter related to activations as well as step-downs that impact the near-term timing of our fee-earning asset growth and management fees, but do not disrupt our long-term growth trajectory. Johnny will provide some commentary on the financial impact, but I would like to take a few minutes to walk through the effect on our fee-earning AUM and on our undeployed fee-earning capital:First, our venture capital secondaries fund had a very successful first close of approximately $1.25 billion, which currently resides in our undeployed fee-earning capital balance. This fund is still in market, and we continue to see strong interest. We anticipate further closings over the next 6 to 9 months. We expect that the capital raised this quarter plus additional funds raised hereafter will be activated and become fee paying in the first half of fiscal 2025. We are encouraged to see transactions pick up in real estate, particularly in the secondary recapitalizations and we see significant opportunities for future deployment.As Scott mentioned, our private real estate fund is now fully committed to investments. This triggered a step down in the fee base from committed capital to net invested capital near the end of the quarter. This resulted in a reduction of fee-earning AUM of $700 million, which is included in the distribution line of our fee-earning AUM walk on Page 18 of the presentation. Much of the step-down is temporary, driven by the fact that we have committed to, but not yet fully funded several investments. The unfunded commitments from this prior fund amounts to about $400 million and are not yet included in the net invested capital fee base, but are instead included in the undeployed fee-earning capital. As these investments fund through fiscal 2025, the capital will return to our fee-earning asset line.Pivoting to our current real estate vintage, the fund is now actively investing and fees will turn on in late fiscal 2024. We've closed on approximately $1 billion of this fund to-date and anticipate future closings over the next 12 months. We also had a $1.5 billion worth of distributions from our separately-managed accounts. As a reminder, distributions include exit activities, expiring mandates and step-downs in fee base. About $1 billion of this distribution relates to expirations. Occasionally, as was the case this quarter, these are older mandates that pay on committed capital for life. These mandates typically generate revenue at a lower or step-down fee rate and at expiration, the full capital commitment rolls out of fee-earning assets. In these circumstances, there is a disproportionate impact on fee-earning AUM relative to revenue.For this past quarter, the management fees that we expect to earn on the $1 billion of managed account contributions will more than offset the fees from the $1.5 billion of distributions. For the upcoming quarter, we expect to see expirations similar in size to this past quarter, along with a nominal impact on revenue. These step-downs and expirations are a normal course of our business, and we will let you know ahead of time when we anticipate them to occur.Shifting to Private Wealth. We have now surpassed $2 billion in assets under management. To put our growth in context, we first launched our private wealth platform in September of 2019 and crossed the $1 billion threshold in November of 2022. This was a great result for a product suite and distribution network that we built from the ground up. We are thrilled to have grown the platform by another $1 billion in only 10 months, doubling the net asset value and less than 1/3 of the time it took to raise our first $1 billion.Our success in private wealth is driven by progress across our 4 distribution pillars: RIAs, independent broker dealers, wirehouses and international and by the launch of additional funds such as SPRING and STRUCTURE. Each subsequent fund launch and each expansion of our distribution syndicate is bolstered by a growing brand awareness and by our strong track record of investment performance. SPRIM has generated a 25% annualized return since inception and SPRING has yielded a 30% return in its first 11 months. STRUCTURE had its initial close in September and is actively investing.Our undeployed fee-earning capital increased to $18.1 billion, its highest level ever, driven by a strong initial close of our VC secondaries fund and the dynamics around committed but not fully invested capital in our private real estate fund. At least $2 billion of this capital will convert to fee-earning AUM once we activate the current real estate fund and VC secondaries funds in the coming quarters.Slide 9 shows the evolution of our management and advisory fees. We generated a blended management fee rate of 57 basis points over the last 12 months, higher than the 54 basis points for the last fiscal year as we've benefited from retroactive fees and some favorable mix shift over the last 12 months. We produced over $4.70 per share in management and advisory fees over the last 12 months, representing an annual growth rate of 22% since fiscal year 2019.I'd now like to pass the call to our CFO, Johnny Randel.

[Johnny Randel, executive]

Thank you, Mike. Before speaking to the quarter, I would like to say a very, very sincere thank you to my colleagues here at StepStone. It has truly been my privilege to work alongside you, and I look forward to seeing what StepStone does next. I want to also add my congratulations to David Park. David has been a great friend, a great partner in these past 4 years, and I know that he will be a fantastic leader of the finance organization, going forward.Now I'd like to turn your attention to Slide 11 to speak to our financial highlights. We earned a management and advisory fees of $142 million for the quarter, up 19% from the prior year, driven primarily by growth in fee-earning AUM. Our FRE margin for the quarter was 31%, retroactive fees in this quarter had a positive impact on the margin of 160 basis points. For the trailing 12-month period, we have reported an FRE margin of 31%.Turning to Expenses. Compensation was up about $5 million sequentially. As we mentioned on the last earnings call, we had relatively limited hiring in our first fiscal quarter, so this quarter reflected some incremental hiring. General and administrative expenses were flat sequentially, but we do expect an uptick in the next 2 quarters, driven by seasonal expenses associated with investor conferences. We just held our StepStone 360 Private Markets Conference in October, and we will host our Annual Venture Capital Conference in early 2024.As Scott and Mike mentioned, the timing of fund activations and step-downs impact the pace of revenue growth and margin expansion for this fiscal year. The step down in our private real estate fund will create a headwind on our management fees, while the current vintage fund is [ on a fee ] holiday. This headwind as well as the seasonal increase in G&A expense I mentioned will create some pressure on our FRE margin in the next 2 quarters. However, we expect this to be temporary as commingled fundraises that we have already closed but not yet activated, give us clear visibility into a step up in revenue and margin in fiscal 2025. We currently have approximately $2 billion of capital that has been raised in our real estate and venture secondaries funds that is not yet activated or fee-earning.Once these funds are activated, we expect this capital will contribute over $18 million in annual management fees and have a positive impact on the margin of at least 150 basis points. As Scott and Mike mentioned, the real estate fund fees from the initial close will activate in late fiscal 2024, and we anticipate the venture secondaries fund to activate in the first half of fiscal 2025. Additional fundraising and deployment across our commingled funds, evergreen funds and separately-managed accounts will further contribute to revenue growth and operating leverage in the coming periods.We remain on pace to expand our FRE margin to the mid-30s over the medium to long term, consistent with what we outlined at our Investor Day. Gross realized performance fees were $7 million for the quarter, which is down both year-over-year and sequentially. As we mentioned last quarter, we are seeing some signs that the realization environment is improving. It generally takes a few quarters for transactions to work through the pipeline, so we expect that realized performance fees will remain modest for at least the rest of this fiscal year. As a reminder, we generally do not control the timing of exit on our investment.Moving to Slide 12. Adjusted revenue per share is down for the first half of the fiscal year. We had a 79% decrease in gross realized performance fees per share, partially offset by 18% growth in management and advisory fees per share. Since fiscal 2019, we have grown adjusted revenue per share by 20% compounded annual rate.Shifting to our profitability on Slide 13, we repeat related earnings per share by 17% in our first 2 quarters. The increase was primarily driven by growth in management and advisory fees. Looking over the longer term, we have generated an annual growth rate and fee-related earnings per share of 29% since fiscal 2019. Our year-to-date ANI per share was down relative to last year, driven by lower performance fees that has increased at an annual rate of 23% over the long-term period.Moving to the balance sheet on Slide 14. Net accrued carry finished the quarter at $634 million, up 4% from the previous quarter, driven by underlying valuation increases for the period ended June 30. As a reminder, our crude carry balance is reported on a 1-quarter lag. Our own investment portfolio ended the quarter at $188 million, unfunded commitments to our investment programs were $98 million as of quarter end. Our pool of performance fee eligible capital has grown to over $67 billion, and this capital is widely diversified across multiple vintage years and approximately 195 programs. 77% of our unrealized carry tied to programs with vintage years of 2018 or earlier, which means that these programs are largely out of their investment periods and are in harvest mode. 59% of this unrealized carry sourced from vehicles with deal-by-deal waterfalls, and 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]. One moment for our first question. Our first question comes from Ben Budish with Barclays.

[Benjamin Budish, analyst]

Maybe first for Scott, you talked a little bit about the pipeline of new SMAs and rehabs, looking robust, but it can take some time to materialize. I wonder if you could unpack that a little bit. What are you seeing is kind of real time? And what is sort of the reason for, I don't know, the delay? Or what does the pipeline look like in terms of either investor type or the type of assets still looking to invest? And any color around that would be helpful.

[Scott Hart, executive]

Sure. Thanks, Ben, for the question. So as I mentioned in the prepared remarks, pipeline is building and developing nicely. I think, one of the changes that we've seen relative to COVID in a couple of years since when much of the SMA activity was really driven by re-ups and expansion of existing client mandates, as there's been a very healthy mix of new relationships and new mandates of late as well, particularly when you look at this current quarter and in the last couple of quarters. So that's obviously encouraging and clearly build the pipeline of future re-ups and potential expansion opportunities. So, that's certainly one trend that we're seeing.Second, the driver to your point of perhaps slight delays in re-ups is really driven by deployment, right? It's a matter of fully investing the prior vehicle and coming back around to that re-up opportunity. We have made steady progress there and feel like we have some important re-ups in the pipeline at the moment. And given our continued re-up rate that has been quite successful, again, north of 90% over time, feel good that, that will convert into new commitments.The last thing I would perhaps mention is that -- and we made a quick reference to it in the prepared remarks, but the presence of venture opportunities, which may come as a bit of a surprise to some of you. I mean, I think it is a continued area of interest amongst clients, both here in the U.S. and internationally. And so we were excited to have a multi-strategy venture mandate in the mix there as well.So again, given the number of opportunities that we're pursuing, sometimes hard to generalize, but feel good that there is quite a bit of activity and a building pipeline of both new and existing clients in the SMA pipeline.

[Benjamin Budish, analyst]

Great. Very helpful. Maybe one follow-up on the Retail side. It seems like things keep trending in the right direction there. You talked about the 4 kind of channels, RIAs, IBD, wireless and international. Where are you seeing, I guess, the most traction? What is your expectation as some of the funds, I think you mentioned SPRIM is going to be added to another wire SPRING will be added to its first. What do you think the potential size from those new kind of distribution relationships could add? And what is sort of the mix right now between those various channels?

[Jason Ment, executive]

Sure. Ben, this is Jason. Thank you for the question. In terms of I guess, first geographic areas in terms of the most traction. The team is by far more built out in the U.S. relative to abroad on the dedicated Private Wealth team. And so, flows are definitely stronger here in the U.S. today. We expect that will balance out over time as we continue to invest in the distribution partners abroad.In terms of the flows between the products, look, SPRIM U.S. is the most seasoned of all the products, it's the largest of all the products to date. And so therefore, there's a bit of size to get size. You're eligible for inclusion by more distribution partners. And so therefore, that's certainly helpful. And when I look at the kind of Day 0 comparison, SPRIM versus SPRING, SPRING is off to a very strong start. Clearly, the performance there is definitely helpful at 30% since inception. And so, we do expect that to continue to scale nicely. STRUCTURE, it's simply too soon to tell. We're just a couple of months in here, but conversations have been positive.

[Operator]

One moment, our next question. Our next question comes from Ken Worthington with J.P. Morgan.

[Kenneth Worthington, analyst]

So probably along the same lines. So you announced the release of the daily NAV ticker for SPRIM, maybe Scott or Mike, I was hoping you could flesh out more on your prepared remarks and give us some progress you're making in terms of the marketing of the new structure? How is education going on in the new products for the RIAs? And what does the sales cycle seem like it's developing for this new product with that sort of pre-existing customer base? Is this a 3-month sales cycle? Is it a year? How long do you think it will take for the fruits of your labor to really become more apparent in the numbers?

[Michael McCabe, executive]

Ken, this is Mike. I think, what I might do is invite Jason Ment to address that a bit more specifically since he looks after the Private Wealth channel.

[Jason Ment, executive]

Thanks, Mike. Thanks, Ken. On the ticker, I think there, it's been welcomed with open arms. Certainly, by the RIA community, in particular, it definitely makes their life materially easier. We expect IBDs to, some of them at least, use the ticker. I think the wires will be the last there to adopt and don't have a real time line as to when that might be.In terms of the kind of, let's call it, the brand education cross-sell, if you look at the different channels, I would kind of cite the following. If I look at the distribution syndicate for SPRIM, and this will be all kind of U.S. to U.S. If I look at that syndicate, about 1/3 of those distribution partners have also come in to SPRING. And then conversely, if I look at the SPRING distribution base, over 2/3 of those are SPRIM distribution partners as well. So clearly, the brand awareness helps and there's a bit of a -- if you like the StepStone story across private markets, you're going to like it inventory and growth specifically. So again, STRUCTURE it's too soon to tell, but we'd expect to see a similar pattern.

[Michael McCabe, executive]

But certainly, landing that second wire or something you've been asking me about for some quarters now, and we were delighted to be able to announce that this quarter, and we expect to see some acceleration of growth across Private Wealth with this new partnership in place.

[Kenneth Worthington, analyst]

Awesome. And then on SMAs and fee rates, we saw the elevated distribution. You attributed some of this or a bunch of it to step downs and some expirations. As you see this migration from -- of these committed capital contracts, should we start to see the fee rate on the SMA side also step up? And I don't think we saw this quarter the SMA or the fee rate in SMAs is pretty stable. Is that something that we should see in coming quarters as this trend persists?

[Johnny Randel, executive]

Ken, it's Johnny. Just let me talk a little bit about that. I think what you'll see over time is any one fund rolling off won't have much of an impact. If we had series of these over a short period of time, perhaps. But the reality of it is there's just so many SMAs flowing through there, a mixture of rates. It might move a little bit, but we don't expect a dramatic change over time, just given the kind of ongoing pricing of what's in the pipeline and what has been re-upping. So, we don't expect a material change.

[Operator]

One moment for our next question. Our next question comes from Adam Beatty with UBS.

[Adam Beatty, analyst]

Just wanted to take a quick pulse on the Investor Day target of doubling FRE by 2028. It sounds like the top line, as both Mike and Johnny mentioned, the top line looks to be in good shape, but the AUM has some puts and takes that seem like they're going to maybe even out over the coming quarters. So I guess my question is, over the longer term, say, post calendar '24, should we look for kind of AUM growth and fee growth to converge maybe in the high teens, given the target for margin expansion? And if so, what areas do you look to be the primary drivers of that through 2028?

[Scott Hart, executive]

Yes, Adam, thanks for the question. This is Scott. Maybe I'll start and Mike may jump in here as well. Obviously, he spent quite a bit of time on this topic during the Investor Day. But a few things, I mean, you referenced some of the step-downs in distribution activity that took place this quarter. Obviously, that didn't come as a surprise to us. It doesn't really have an impact on our 5-year plans that we laid out. And one of the things that we talked about during the Investor Day was the fact that, look, there are multiple ways for us to get there and to achieve those targets. And so, as we think about what we're seeing in the business and really the fact that all of the key building blocks for continued growth as it relates to fundraising, continued strong re-ups despite a tough market environment continue to be there.Really, the biggest factor in the near term and as we look at the business, just for the quarter has been one of deployment, right? And so, the slower deployment really driven by overall market activity, M&A activity, et cetera, being down has resulted in some of the funds that we've now raised or had first closes for not yet activating some of the accounts that [ pay on ] invested capital, investing in line with the 3- to 5-year pace that we've always talked about, but maybe a slower pace than what we had seen over the last few years and some of those re-ups taking a bit longer to arrive. But when we think about the business over a 5-year time frame or really the next few years, I would say no real change to what we talked about at Investor Day.And if anything, feel like with some of the positive news around the private wealth channel, the venture capital fundraising, the progress we've made on different commingled vehicles feel quite good about the longer-term trajectory. But Mike, you may want to jump in with additional thoughts there.

[Michael McCabe, executive]

That's right. Thanks, Scott. We feel really good about the way our gross AUM flow for the first half of this year is developed, and we have 6 more months left in this fiscal year to continue to deploy as well as form new capital. So on a gross AUM basis, we feel really good about our progress. It's the fee-earning AUM, Adam, that you're pointing to where there are certainly some puts and takes as certain mandates either expire or roll off as we bring new mandates onto the platform.And what we're seeing a little bit on the revenue side, as you point out correctly, it still is very healthy and looks good, but there is a little bit of a delay this year, which does, to your point, make fiscal 2025 a really important year for StepStone across all key metrics as the timing of activations and the timing of deployment really go live as we enter that fiscal year. I hope that addresses some of your questions here.

[Adam Beatty, analyst]

No, it sure does.

[Scott Hart, executive]

And may last -- Adam, last thought I would share is, I mean, look, in our view, right, our continued ability to meet those longer-term goals is going to have a lot more to do with how successfully we invest on behalf of our clients and the great level of client service that we provide more so than whether a fund gets activated this quarter versus next quarter. And so, we're going to maintain that very selective approach and that client-first approach that has served us so well over the last 15 years here.

[Adam Beatty, analyst]

Yes. Back to the Touchstone, makes sense, Scott. And then just one follow-up. Scott, actually, you said just a phrase that kind of caught my attention. And congrats, by the way, on the wealth management channel, getting on the new platforms. It seems like a lot of the work there is coming to fruition. You talked about it contributing to operating leverage -- and I guess maybe I have a prejudice in my mind, but it's -- I always think of the wealth management channel as needing a fair bit of sales effort, needing a fair bit of education effort. But I don't think of it as like high leverage, but maybe there's something I'm missing that you can help me with.

[Scott Hart, executive]

Sure. No, look, while that is certainly true, one of the things that we are also offering to clients in that channel is the ability to invest alongside and with the same high degree of quality with our institutional clients. And so, when you really think about what we're doing from an investment team and from an investment standpoint, it is really participating alongside of our institutional clients and institutional funds, and that's really where some of the leverage comes into play, given how much of the sort of fees dropped to the bottom line on the investment side there.

[Adam Beatty, analyst]

Perfect. Got it now.

[Operator]

One moment for our next question. Our next question comes from Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

Just maybe I'll piggyback on Adam's question around operating leverage when it comes to the wealth channel. I believe there is a revenue share or kind of equity ownership share agreement within the channel as you sort of build it out. Can you give us a sense at what level of assets or revenue base, does it start to sort of break profitability and contribute more to the bottom line kind of like on a net basis, sort of like net of minority interest? And [ already ] there and kind of how do you expect that to scale and actually add to the kind of net of minority interest and not controlling interest to FRE?

[Johnny Randel, executive]

Yes. I'll start and then others can add. The reality of it is it kind of varies. I mean, I think we are getting there given the scale we've seen and the team we've got attached to it. As Scott mentioned, there is the investment process, which is a big part of what's we think driving the success in terms of the returns that are being produced, that's helped driving the scale. And so, when you kind of think about it from a consolidated business perspective, we haven't given specific numbers, but we're kind of in the range. And then from here, that's when you start thinking about kind of that sharing you mentioned. So the scale, and as Mike talked about, doubling it in 10 months. And if that continues, then obviously, we do think it can have an impact over time.

[Alexander Blostein, analyst]

Got it. Okay. All right. We can follow up. My other question or maybe should have been my first question, I wanted to talk a little bit about the secondaries business with you guys, Scott, it sounds like you're seeing an increased opportunity for deployment there. You mentioned the urgency may be on part of the sellers to come to market is great today than it's been in the past given that there's not a lot of exits in the primary market. So help us maybe frame how much in dry powder you guys currently have across your secondaries business, perhaps even including the funds that are currently fundraising,? How quickly do you expect to put that to work given the opportunity set? And maybe just help us think about maybe the frequency at which you could start coming back to markets with subsequent vintage years if the opportunities have to continue to improve.

[Scott Hart, executive]

Yes. Thanks, Alex. So look, I don't think we've put out there an exact number in terms of dry powder that we have across the secondaries business. But if I just kind of break it down, and I'll maybe stick with some of the commingled vehicles, with some of the incremental closings on the private equity secondaries fund, that fund has now raised nearly $2.5 billion. It has started to invest, but it was still, obviously, much of that available in terms of dry powder and has some overage accounts that fit alongside of it.When you think about the venture business, we mentioned the first close at $1.25 billion, which will all be dry powder. But part of the reason we won't activate that fund until next fiscal year, as we mentioned is that there is still some remaining dry powder in the $2.6 billion venture fund that we raised shortly after the Greenspring acquisition.In real estate, we've had closings on about $1 billion for the current fund. And as we mentioned during the prepared remarks, the prior vehicle is now fully committed. And so, that kind of gives you a sense across some of our main dedicated commingled vehicles. And obviously, there's a separate account capital, both within the private debt and infrastructure businesses that I hadn't referenced as well as in private equity that adds that dry powder number.Now I think in terms of the pace of deployment, look, one of the things, particularly in this type of market environment with some of the risks that exist that we continue to be very focused on is portfolio construction. It's one of the few things that is completely within our control. And so, we have taken the approach of wanting to build diversified portfolios across a number of different metrics, including across vintage years. And so, I would generally expect that these funds are deployed over a roughly 3-year period in order to achieve that vintage year diversification. So I think that's probably the right way to think about it, recognizing that certain separate accounts may have a shorter or a longer investment period.And maybe last point I would make, given how much time we've talked about the private wealth business, clearly, some of what we are doing in those vehicles is secondary focus as well, which would further add to that dry powder number.

[Operator]

One moment for our next question.[Operator Instructions] Our next question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

I just want to ask about private credit. I was hoping you could talk about the opportunity set that you see in private credit today, particularly as banks are pulling back. Which of your strategies would you say are best positioned here? And which strategies might be able to raise meaningful capital as you look out over the next 12 to 24 months in private credit? And I [ think you also have ] a retail vehicle launching in the credit space as well. So maybe you can provide an update on that, too.

[Scott Hart, executive]

Yes. So Mike, thanks for the question. I mean, I think in the private credit space, we continue to see and hear about quite a bit of interest amongst our existing and prospective clients even during the course of this year, I think the interest as our private debt team travels the world has continued to grow. We clearly view it as a very attractive risk reward when you can think about not only have base rates increase, but spreads have remained fairly consistent. So when you're talking about 12% type gross asset yields, investing at the highest part of the capital structure. And when you look at the performance in past downturns, it's clearly a part of the business and a strategy that we think is quite attractive in today's market.The challenge has been, one, like I've talked about across the business of deployment with M&A activity down quite meaningfully, deployment has been slower than we otherwise would have liked, which has meant that we've had to continue to look for alternative deployment method that has, in some cases meant looking beyond corporate direct lending to areas like real estate and infrastructure, where we think there will be an opportunity, but also similar to the other asset classes looking to strategies like secondaries, which is one where similar to private equity and venture capital, we think that our position as one of the leading limited partners and one of the leading primary capital allocators positions us very well as a replacement LP or as someone to participate in secondary transactions, so that continues to be an active area for our private debt colleagues as well.

[Michael Cyprys, analyst]

Okay. And maybe just a follow-up question on realization backdrop continues to remain soft. As you mentioned, we've been hearing anecdotes from LPs that is starting to create liquidity challenges on their side. And are you starting to hear any sort of pressure points that LPs are pushing GPs to want to find liquidity events, maybe even selling assets at prices that GPs may not otherwise necessarily want to pursue an exit? Just curious, how you're seeing this all sort of play out here as you kind of look out over the next 12 months or so?

[Scott Hart, executive]

Sure. And I think so much of what we've talked about over the last, call it, 18 months has been the denominator effect, and the fact that it's really more of an issue of being over allocated. But as the slowdown in distributions has continued now for roughly 18 or so months, and you had a period of time, which is still true today, where both capital calls and distributions are down relative to where they had been over the last several years.However, I would say that distributions are down meaningfully more, meaning that most LPs are experiencing more capital calls than distributions. And I think you're right that for some, it will start to create some liquidity pressure, leading LPs to either tap the secondaries market themselves as a source of liquidity and as a source of realizations or certainly actively talking to their GPs, maybe not so much putting pressure to sell, but letting them know that before they can commit to new funds, they need to start to see some liquidity coming off of their portfolio. And so, I think that is a dynamic that is starting to take place in the marketplace for sure.

[Operator]

That concludes the question-and-answer session. At this time, I would like to turn the call back to Scott Hart, CEO, for closing remarks.

[Scott Hart, executive]

Great. Well, thanks, everyone, for joining the call today and for your continued interest in the StepStone story. We look forward to continuing the conversation in the quarters ahead. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.