StepStone Group Inc

NASDAQ:STEP

Earnings Call Analysis

Robust Earnings Growth and Strategy Expansion

StepStone Group had a record-breaking quarter, revealing an 18% year-over-year increase in management and advisory fees to $152 million and launching new infrastructure and private credit products to further drive growth. The firm's undeployed fee-earning capital soared to over $21 billion, signaling robust future earnings. Additionally, they anticipate an expanding fee-related earnings (FRE) margin due to operating leverage and strategic cost-saving initiatives, such as their recent non-core subsidiary sale. They have a systematic plan to acquire full ownership of certain business interests, which will gradually decrease income attributable to non-controlling interests (NCI). With the progressive buy-in of these interests, StepStone will pay primarily in equity to maintain alignement of interests, expecting the first exchange in the upcoming summer.

Impacts of Market Conditions and Strategic Initiatives

Despite challenging market conditions, StepStone Group reported strong results with substantial gross new commitments of $6 billion, acknowledging the impact of slower capital markets over the last two years. The company emphasized the importance of evaluating fundraising over an extended period due to the potential for sporadic inflows, a factor reflected in the $4.3 billion raised through separately managed accounts (SMAs) in the quarter. Furthermore, the expansion of their private wealth platform, underscored by the recent filing of the StepStone Private Credit Income Fund (CREDX), aims to support the objective of doubling fee-related earnings by fiscal 2028.

Growth and Margins Amid Net Losses

The earnings call unveiled a GAAP net loss of $23.4 million for StepStone Group, with GAAP net loss attributable to the company standing at $20.2 million or $0.32 per share. Despite these losses, fee-related earnings (FRE) rose to $50.7 million, a 19% increase from the prior year, yielding an FRE margin of 33%. The company anticipates that existing operating leverage and strategic cost-saving opportunities, along with recent initiatives such as the sale of Greenspring Back Office Solutions, will further expand FRE margins.

Asset Growth and Fee-Generating Capabilities

StepStone conveyed significant asset under management (AUM) growth, reporting $17.5 billion in gross AUM inflows over the past 12 months, a testament to the company's ability to attract and retain clients. An increased undeployed fee-earning capital (UFEC) of over $21 billion highlights potential future revenue, with the company experiencing flat fee-earning AUM growth within SMAs. Management and advisory fees rose by 18%, and an 18% year-to-date increase was noted for management and advisory fees per share, a figure that has grown 22% since fiscal 2019.

Strategic Acquisitions and Buy-ins

StepStone revealed plans to acquire the remaining stakes in their infrastructure, private debt, and real estate businesses. The proposed gradual buy-ins, primarily in exchange for StepStone equity, aim to maintain strong team incentives to grow these asset classes. The first exchange is expected in the upcoming summer and will be structured to slow the growth of income attributable to noncontrolling interests, which should ultimately phase out as StepStone works towards full ownership.

Fiscal Responsiveness and Future Prospects

The company reported strong operational metrics and focused on fiscal foresight. Private wealth platforms have seen over $300 million in inflows, with expectations to activate the CREDX fund later in the year. Cost management initiatives such as the GBOS sale and concentration on annual conferences may lead to increased compensation expenses in the fourth fiscal quarter but are anticipated to contribute positively to financial outcomes in the long term.

Performance Fee Earnings and Unrealized Carry

StepStone achieved $33 million in gross realized performance fees, which included both realized carry and incentive fees, marking a significant increase from both the last year and the previous quarter. A net accrued carry of $569 million has been recorded, up 6% year-on-year, and is primarily linked to older investment programs in 'harvest mode,' suggesting potential for upcoming realized gains.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to StepStone's Fiscal Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.I would now like to introduce your host for today, Mr. Seth Weiss, Head of Investor Relations. Please go ahead.

[Seth Weiss, executive]

Thank you and good afternoon, all. 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. In addition to our financial results, we filed an 8K that details an agreement under which StepStone will buy in the noncontrolling interests of the infrastructure, private debt and real estate businesses over time. Scott and Mike will provide commentary in their remarks.Turning to our financial results for the third quarter of fiscal 2024, beginning with Slide 3, we reported a GAAP net loss of $23.4 million. GAAP net loss attributable to StepStone Group Incorporated was $20.2 million, or $0.32 per share.Moving to Slide 4, we generated fee-related earnings of $50.7 million, up 19% from the prior year quarter, and we generated an FRE margin of 33%. The quarter reflected retroactive fees resulting from interim closings of StepStone's private equity Secondaries Fund, StepStone's multistrategy Global Venture Capital Fund, and StepStone's Infrastructure Coinvestment Fund, which in total contributed $8.6 million to revenue. There were no retroactive fees in the third quarter of fiscal 2023. Finally, we earned $42.1 million in adjusted net income for the quarter, or $0.37 per share. This is up from $31.2 million, or $0.27 per share, in the third fiscal quarter of last year, driven by a higher fee-related earnings and higher net performance fees.I'll now hand the call over to StepStone CEO, Scott Hart.

[Scott Hart, executive]

Thank you, Seth, and good afternoon everyone. We delivered solid performance in our fiscal third quarter, generating robust earnings, fundraising and asset growth, setting StepStone up for continued success in 2024 and beyond. As Seth mentioned, we are also excited to announce that we have entered into agreements to acquire the remaining stakes in each of our infrastructure, private debt and real estate businesses over the coming years. Mike and I will provide additional detail later in our comments.Beginning with our results, gross new commitments were $6 billion in the quarter. While the slower capital market conditions of the last 2 years have created a more challenging fundraising backdrop, we've continued to engage with existing and prospective clients who remain very constructive on the private markets and more specifically, many of the strategies that StepStone is able to offer. This quarter represents the fruition of many of those conversations and reflects the strength of our client relationships, many of which we've cultivated over decades. We continue to have a strong pipeline for fundraising across both new and existing clients.As we have commented in the past, we believe fundraising should be evaluated over a multiperiod horizon. The dynamics of our business may result in episodic inflows, particularly in separately managed accounts, where we raised $4.3 billion this quarter. However, as managed accounts largely paid fees on deployment rather than commitments, the contribution to fee-earning AUM and fee-related earnings tends to be steadier. Additionally, because of our strong retention rate, which is greater than 90%, our separately managed account relationships are extremely sticky and provide meaningful revenue visibility.Shifting to commingled funds, we generated gross inflows of $1.7 billion. We closed on $625 million in our Private Equity Secondaries fund, where we have raised approximately $3 billion to-date. We also had additional closes in our special situation Real Estate Secondaries Fund, our multistrategy Global Venture Capital Fund, our Infrastructure Coinvestment Fund, and our multistrategy Growth Equity Fund. We continue to see strong momentum in our evergreen private wealth products, where we raised over $300 million of subscriptions for the quarter and over $1 billion in subscriptions for the last 12 months.We are excited to further expand our private wealth platform with our recent filing of the StepStone Private Credit Income Fund, or what we are calling CREDX. This is an interval fund for U.S. investors. The fund will focus primarily on U.S. direct lending and specialty credit and will deploy capital through co-investments and secondaries. Like SPRIM, our all private markets fund and STRUCT (sic) [ STRUCTURE ] our Infrastructure Fund, CREDX will allow for daily subscriptions and will be investable via a ticker.We believe that the combination of bespoke separately managed accounts, commingled funds and our growing suite of private wealth offerings drives a sustainable pace of growth that will allow us to achieve the goal we set out at last June's Investor Day of doubling fee-related earnings by fiscal 2028. The strength of our platform creates a powerful flywheel, which helps propel StepStone forward, but our most important asset continues to be the people that work so diligently to enable our success.To that end, I'm thrilled to highlight StepStone's recent recognition from pensions and investments as one of the best places to work in money management. We are a fast growing multinational asset manager with capabilities across the private markets. We have made a concerted effort to develop a strong, distinct and unified culture at StepStone by embracing our diversity in both backgrounds and capabilities. Our success has been and will continue to be dependent on our ability to attract, develop and retain talent.Now, turning to the economic integration of our asset class teams, we are thrilled to announce that we have entered into agreements to purchase the noncontrolling interest in each of these businesses over the coming years. As a reminder, when we made this strategic decision nearly 10 years ago to expand our business from private equity into infrastructure, private debt and real estate, there were a couple of things that were clear to us. We needed to build large, experienced, senior teams who had built their careers in each of these asset classes to maximize our combined success. And we felt that offering equity ownership in the businesses that they were building would be critical to attract high quality teams and incentivize a type of entrepreneurial behavior that has made StepStone itself a success.Since the time of our IPO, 3 years ago, we have been consistent in telling you 3 things:First, this structure has been working well and has had its intended result. As we outlined during our Investor day last June, the infrastructure, private debt and real estate businesses have been on a similar trajectory to that of our private equity business during its first 10 years. We attribute much of that success to the quality of our team and the incentive structure driving their behavior.Second, there has always been a shared vision, but as these asset classes continue to scale, we would execute an equity exchange to improve our alignment for the next phase of StepStone's growth.And third, any transaction will be done on an accretive basis for our shareholders.We believe that the transaction agreements we have entered into achieve all of this and more while benefiting all stakeholders. The structure will continue to incentivize our asset class teams that drive growth in their businesses while improving StepStone's ability to participate in that growth. The long term nature of the agreements help ensure that there will be no disruption to the client experience. The transaction creates a path to 100% ownership and reduces complexity over time; and the valuation mechanism, which Mike will describe in more detail, ensures an accretive transaction. We've worked incredibly closely with each of our asset class heads, James, Marcel and Jeff, and their teams over nearly a decade, and we look forward to the next phase of our partnership in the years ahead.I'd now like to turn the call over to Mike, who will speak to our growth in the quarter and will provide greater detail on the buy in of the noncontrolling interests.

[Michael McCabe, executive]

Thanks, Scott. Turning to Slide 7. We generated $17.5 billion of gross AUM inflows during the last 12 months with over $11 billion coming from separately managed accounts and over $6 billion coming from commingled funds.Slide 8 shows our fee-earning AUM by structure and asset class. For the quarter, we grew fee earning assets by $2.1 billion. While most of the net growth came from our commingled funds, we had positive gross contributions in both commingled funds and separately managed accounts. We experienced $1.7 billion of distributions, including a large distribution of approximately $1 billion from our infrastructure-managed account, offsetting the gross AUM contributions resulting in a flat fee earning AUM growth within our SMAs. This is consistent with the expectation we set out on our previous earnings call and represents a relatively low fee-paying mandate.We had a record-breaking quarter on 2 important operating metrics. First, we increased our undeployed fee-earning capital, or UFEC, to over $21 billion, our highest level ever, which points to the future earnings power of StepStone. This increase comes from a strong SMA fundraising, particularly re-ups alongside some of our long-standing relationships. Our $21 billion UFEC includes $2.4 billion of commingled funds that are already raised and will be activated over the coming quarters, including $1.5 billion in our VC secondaries fund, which we anticipate activating in the middle of this calendar year and approximately $900 million in our real estate secondaries fund, which will come off fee holiday at the beginning of March.Second, we generated over $300 million of inflows this quarter on our private wealth platform. On the grounds of this success, along with feedback from our distribution partners, we launched our infrastructure product STRUCT this past fall, and as Scott mentioned, we recently filed CREDX, a private credit fund we expect to activate later this year.Slide 9, shows the evolution of our management and advisory fees. We generated a blended management fee rate of 58 basis points over the last 12 months, higher than the 54 basis points for the last fiscal year as we benefited from retroactive fees. We produced over $4.90 per share in management advisory fees over the last 12 months, representing an annual growth rate of 22% since fiscal year 2019. We generated an FRE margin of 33% for the quarter, which also includes the benefit from retroactive fees.As a reminder, we expect our FRE margins will continue to expand from a combination of operating leverage and strategic cost saving opportunities. We executed on one such initiative this past quarter with the sale of our noncore subsidiary Greenspring Back Office Solutions, or GBOS. We acquired GBOS as part of the Greenspring acquisition in 2021. GBOS was the fund administration platform for our venture capital funds, as well as a select number of third-party VC funds. We sold GBOS to the team who will continue to run the business, now branded Viridis, and will service our VC funds as our third-party administrator consistent with our operating model. The run rate net benefit from this transaction is expected to increase fee-related earnings by $2 million annually.Before handing the call to David, I would like to take a moment to discuss the structure and timeline of the buy-in of the noncontrolling interests mentioned by Scott earlier. We filed an 8K this afternoon, which includes the full transaction agreement, but I'll outline a few of the key points. As you are likely aware, StepStone currently owns 100% of our private equity business and roughly 50% of the infrastructure, private debt and real estate asset classes. The agreement we announced today prewires a systematic buy in of the interests that StepStone does not own over the coming years. We deliberately structured this as a gradual exchange to ensure our teams remain incentivized to grow their asset classes.The primary consideration for these buy-ins will be StepStone equity, thereby maintaining an important alignment of interest with a smaller portion in cash. The first exchange is expected to take place this summer, subject to customary closing conditions, and will account for approximately 1/10 of the 50% of the business owned by the infrastructure, private debt and real estate teams. We plan to execute subsequent buy-ins of approximately equivalent size each year, with the option to accelerate the remaining full exchange after 5 years, if mutually agreed. As Scott mentioned, each exchange will occur on an accretive basis, with each buy in occurring at a discount to the prevailing step multiple. As a result, the rate of growth of income attributable to NCI should begin to slow and eventually go away as we accumulate full ownership.I'd now like to pass the call over to our recently appointed Chief Financial Officer, David Park. We've had the pleasure of working with David side-by-side as our Chief Accounting Officer since 2019. David?

[David Park, executive]

Thank you, Mike, and I look forward to having the opportunity to work with all of you in the investment community. I'd like to turn your attention to Slide 11 to speak to our financial highlights.For the quarter, we earned management and advisory fees of $152 million, up 18% from the prior year quarter. The increase was driven by growth in fee earning AUM across commercial structures, as well as $8.6 million in retroactive fees. Fee-related earnings were $50.7 million for the quarter, up 19% from a year ago. We generated an FRE margin of 33% for the quarter, up 250 basis points sequentially and consistent with the prior year period. Moving to expenses. Total cash and equity-based compensation expense was $74 million, down $1 million from the prior quarter. The decline was primarily driven by adjustments to our cash bonus accrual in connection with our annual bonus cycle.Looking ahead to our fiscal fourth quarter. While the sale of GBOS, which closed on December 31, will result in compensation savings. We expect to see an increase in overall compensation expense from our fiscal third quarter due to merit increases taking effect January 1. General administrative expenses were $27 million, up $4 million sequentially. Included in this quarter were expenses associated with our StepStone 360 private markets conference. We will host our Annual Venture Capital Conference later this month, so expect to see a similar level of expenses in the next quarter.As a reminder, our G&A expenses tend to be seasonally highest in our fiscal third and fourth quarters due to these annual investor conferences. Gross realized performance fees were $33 million for the quarter, up $14 million from last year and $26 million from the prior quarter. This period's performance fees reflect $15 million of realized carry and $18 million of incentive fees. Unlike carry, for which investment realizations drive the timing of revenue recognition, most of our incentive fees crystallize annually. The $18 million of incentive fees includes $9 million for Spring, with the remainder from private equity and infrastructure mandates.Our fiscal second and third quarters tend to be seasonally stronger for incentive fees in periods of positive market appreciation. Given Spring's annual crystallization in our fiscal third quarter, as well as other mandates that are recognized in these periods. In terms of performance fee-related compensation comp tied to our private equity funds have a roughly 50% payout ratio, while compensation related to our private wealth funds tends to have a higher payout ratio.Moving to Slide 12 management and advisory fees per share grew 18% for the year-to-date period and 22% over the long term period since fiscal 2019. Gross realized performance fees per share were down 56% for the year-to-date period and up 11% over the long term period. Adjusted revenue per share was flat for the year-to-date period as growth in management and advisory fees largely offset the decline in performance fees. Over the long term period, adjusted revenue per share was up 20%.Shifting to profitability on Slide 13, we grew FRE per share by 17% in our first 3 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 in FRE per share of 29%. Year-to-date ANI per share was down relative to last year, driven by lower performance fees, but has increased at an annual rate of 24% over the long term period.Moving to key items on the balance sheet on Slide 14, net accrued carry finished the quarter at $569 million, up 6% from a year ago, driven primarily by underlying valuation appreciation. As a reminder, our accrued carry balance is reported on a one quarter lag. Our own investment portfolio ended the quarter at $188 million. Unfunded commitments to our investment programs were $96 million as of quarter-end. Our pool of performance fee eligible capital has grown to over $70 billion, and this capital is widely diversified across multiple vintage years in over 200 programs. 75% of our net unrealized carry is tied to programs with vintages of 2018 or earlier, which means that these programs are largely out of their investment periods and in harvest mode. Of this amount, 53% 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]

Thank you. [Operator Instructions] Our first question comes from the line of Kenneth Worthington of JPMorgan.

[Kenneth Worthington, analyst]

First, on the SMAs. So $1.1 billion made into commitments into fee paying AUM. If I heard you correctly, I think you said $4.3 billion of fundraising that would eventually flow into fee-paying AUM over time. So maybe first, you ended the quarter in SMAs, I think, with $56.7 billion of SMA fee-paying AUM, how big is the total asset pool that's going to migrate into fee-paying AUM over time? And I guess, over what period would you expect that migration to take place? I guess, that's where I like to start.

[Scott Hart, executive]

Sure. Thanks, Ken, for the question. This is Scott. So a couple things in there, I think, one, just thinking about what we think was a very successful quarter from a fundraising standpoint across our SMAs that, as Mike touched on, was largely driven by strong re-up activity across our client base, as well as some new client additions, as well as we think about how much of the current undeployed fee-earning capital will convert into fee-earning AUM over time. It's really largely driven by the $21 billion of UFEC, Mike referenced. Of that, about $2.5 billion is in commingled funds that will activate over the next couple of quarters.The majority of the rest of that undeployed fee-earning capital is in the form of separate accounts. As a reminder, our separate accounts tend to pay on invested or deployed capital, whereas the commingled funds tend to pay on committed. There would be some commingled funds in that number, but largely driven by separate accounts, and we'd be consistent in our sort of guidance around how to think about the deployment of those vehicles. We've always talked about it being deployed over a 3 to 5 year time period, and that continues to be consistent today.

[Kenneth Worthington, analyst]

Okay. And haven't made it through the 8K, so apologize if this is in here. So on the buyout of the NCI for real estate, [ infra and ] credit, you said 1/10 of the 50% goes this summer. What is the cadence of the continuation of that buyout? Is it 1/10 a year? Is it happening every quarter? Like, what is the cadence of what we should expect? And when does that sort of wrap up?

[Scott Hart, executive]

Sure. So the cadence will be 1/10 per year over the next 5 years to start. There will be, after 5 years, the potential to accelerate the buy-in of the remaining interest, if mutually agreed, but otherwise would continue on and essentially be done over a 10-year period. With one exception, which is that infrastructure could be done over a 15-year period. So, yes, all that detail laid out in the transaction agreements, which, as you pointed out, we wouldn't have had time to review in any detail at this point in time. But that'll happen on an annual basis with the potential to accelerate after 5 years. Otherwise, base case is being done over 10 years.

[Kenneth Worthington, analyst]

Okay. Great. Congrats on getting that done.

[Operator]

Our next question comes from the line of Ben Budish of Barclays.

[Benjamin Budish, analyst]

Maybe first, can you unpack a little bit more of the incentive fee dynamic? I think, that the number was a bit -- probably a bit higher than most of us were expecting. That was very helpful color on the SPRIM contribution -- the SPRIM contribution versus the other pieces. But can you maybe just talk a little bit more about what that cadence should look like going forward? Obviously, it will be somewhat contingent on performance. But how should we sort of think about that just given this is a -- was obviously quite a good quarter for that? And what should we sort of be thinking through for the next, on a yearly basis, if you can kind of help there?

[David Park, executive]

Yes, Ben. This is David. Thanks for the question. Our incentive fees are generally tied to programs that either sit outside of StepStone vehicles or our private wealth funds. So really they tend to crystallize annually and they're really in our second and third fiscal quarters. So if you think about it, SPRIM was roughly half of the 18 million. And as the fund grows, you can imagine the incentive fee growing in the fiscal third quarter as well. But again, typically you should expect some modest incentive fees over the next couple of quarters, but the second and third quarter should typically be the strongest.

[Benjamin Budish, analyst]

Okay, helpful. And then maybe one strategic question, sort of on the retail side with SPRIM, you were one of the first to market with a sort of broad, like private markets vehicle, I think, versus at least the other public companies we all look at who are a bit bigger and tend to be more concentrated in the wires. You do have a bit of a different distribution strategy, but just any thoughts on the competitiveness with a private credit fund? It seems like there are more maybe options in the market, but at the same time, you've got some differentiated distribution through the RIA channel, which is maybe a little bit less contested. But just how are you feeling about sort of the competitive environment for that product specifically, just given there are already some other incumbents out there with an offering?

[Jason Ment, executive]

Thanks, Ben. This is Jason. So as you think about where we are going to have competitive edge in the private wealth channels, the credit fund that we are bringing is a multi-manager vehicle. And that compares very favorably in our mind relative to the single manager vehicles the private [ BDCs ] and the like that are out there.In private credit, there is a performance benefit through diversification, through number of loans and number of managers. And we've got white paper research out there on that point. And there is also a benefit from being able to scale deployment with an open architecture model. And so, relative to the single manager BDCs, we think we've got space. There is very few comps out there in terms of the multi manager, though there is one out there that's quite prevalent. What we've done to differentiate there is that CREDX will be a blend of direct lending and specialty credit, as opposed to a pure play direct lending or pure play specialty credit fund.

[Benjamin Budish, analyst]

Okay. Got it.

[Operator]

Our next question comes from the line of Michael Cyprys of Morgan Stanley.

[Michael Cyprys, analyst]

Great. Congrats on the NCI buy-in announcement. That's great to see. Maybe just to start there, maybe you could talk a little bit about how you approached the valuation dynamics with the buy-in? What sort of mix of stock and cash can we expect to see? Any particular lockups on the stock portion? And what's the sort of expected magnitude of accretion?

[Scott Hart, executive]

Yes. So Mike, maybe I will start there. This is Scott, and then hand it off to Mike McCabe to touch on a part of the question as well. But first of all, thanks for the comment there and congratulations. We're quite excited about it as are our teams here. So look, the way that we approach the valuation and really the way that we're able to deliver on what we have suggested all along to you and our public shareholders to deliver an accretive transaction. With the structure of the valuation at a discount to the StepStone trading multiple, it will be on a sliding scale depending on exactly where it is that we are trading as a firm at that time, but that's clearly a big part of locking in an accretive transaction.I'll maybe hand it to Mike to talk through just how you ought to think through the second half of your question there.

[Michael McCabe, executive]

Okay. Great. Thanks, Scott, and thanks, Mike. Yes, we're very excited about this. As we announced at our IPO at our Investor Day in June of last year, this was a priority. And we've probably reached a stage of scale and team and global footprint across our platform where it made sense to proceed with this mechanism. As Scott mentioned, the buy-in of the NCI will be done at a discount to the prevailing step multiple. And back to Ken's question earlier, it will be done at a cadence of once per year. And then, just the way the mechanism works is the larger the multiple that StepStone's trading at, the greater the discount.That's the sliding scale that Scott mentioned. You can go into the transaction agreement and conjure up a little more detail, but for the purpose of this call, the range of discount you should expect based on where we're trading to be anywhere between 10% to 30% of StepStone's prevailing multiple at the time. In terms of other aspects of the transaction agreement, I would encourage you to go into the document and of course, follow up with Seth Weiss with any granular detail after that.

[Scott Hart, executive]

And sorry, maybe to just touch on one part of your question that I skipped over, the cash and stock component. You should think about the cash being somewhere in the 10% to 20% range, really, with the remainder in the form of stock, and there will be transfer restrictions on that, that would allow the team to sell about 1/3 a year over the first 3 years, which has been a consistent approach we've used in the IPO, the Greenspring sale, et cetera.

[Michael Cyprys, analyst]

Great. Maybe just a follow up question on the FRE margin. Nice to see the 33% in the quarter here. And just given some of the changes that you made with selling off the fund admin business, wonder if there are any other changes as well? Maybe you could just speak to the outlook for the FRE margin. Into the March quarter and also into your fiscal '25, do you think we're clearly above 30% on a quarterly basis going forward? And then, with the minority buy-in, how does that impact the FRE margin profile over time, as I believe the subs operate with a higher margin, what sort of uplifts can we see from that over?

[Scott Hart, executive]

So, Mike, again, as we've talked, we've really prioritized investing in the business for growth over time, and our investment in the private wealth platform is one such example. Technology and other areas, as well as our global footprint have been key prior to us to invest. But we feel we have largely invested in the platform across and across the organization and expect to see a margin expansion through a combination of operating leverage as well as some other efficiencies that we think we can capture across the organization. But maybe I'll ask David to comment a little bit on some detail there.

[David Park, executive]

Yes. Thanks, David here, if you look at our -- compensation is clearly the largest expense line item, and we did have some favorability this quarter. If you normalize for the bonus crow adjustment, you can think about run rate as roughly $75 million. And looking into the next quarter, if you layer on merit increases that took effect on January 1, you should largely get there.Looking over time, I think the way we look at it is more on a total comp, cash and equity comp as a percentage of fee revenues, and it's trended in the low 50% range over the last couple of years. And while this maybe -- you should see some movement quarter to quarter, but we do expect this ratio to trend down gradually over time. Some of the, I guess, movement you're going to see is going to be due to timing of commingled fundraising. But again, over time, we do expect FRE margins to trend down over time.

[Scott Hart, executive]

And maybe to follow up on your second part of your question there. As the buy-in occurs over time, again, we report FRE on a consolidated basis, so don't expect to see margin expansion through these buy-ins per se. But again, I think it ties back to the broader comment about as we scale up broadly as an organization, we should expect to see some operating leverage continue to kick in and add FRE.

[Operator]

Our next question comes from Alexander Blostein of Goldman Sachs.

[Alexander Blostein, analyst]

Just another quick follow up around the transaction. Mike, can you clarify if you guys are buying all of the earnings or you just buying FRE, or you doing FRE and carry? And how, if at all, will compensation dynamics at the existing subs or the real estate, infra and debt? How would the compensation change, if at all, for folks that work there? So would they start getting more equity in StepStone? Does anything change in the carry payout? Anything like that?

[David Park, executive]

Sure. Maybe I'll start with the first part of your question and maybe invite Scott to layer on a few comments as well. But yes, the buy in is all cash flows FRE as well as PRE. So it's management fees as well as performance fees. And given the episodic nature of how performance fees work, that was really what led to the thesis behind taking a longer term, gradual approach so that we have its cadence of a series of buy-ins that will happen over a period of time, which should smooth out some of the ebbs and flows that we find in the performance fees.And also, as Scott mentioned, the buy-in will be largely equity to just foster that important alignment of interest with some cash. But as far as the underlying compensation to the teams is concerned, maybe I'll invite Scott to share a thought.

[Scott Hart, executive]

Sure. So no real change, for example, to how carry is treated, as carry will continue to go 50% to the team, 50% to the house. Obviously the ownership of that will change over time. I think the biggest change from a compensation structure standpoint is the ability to increasingly utilize StepStone, RSUs and stock as a component of [ one's ] compensation, consistent with the approach that we've taken really across our team since the IPO. And so going forward, particularly for the investment team, we'll have now multiple levers to pull or components of stock between base, bonus, carried interest as well as RSUs.

[Alexander Blostein, analyst]

I got you. Great. My second question around the secondaries business, it seems to be quite active, and the momentum in the market continues to sort of build there for many reasons we talked about. Can you help us frame how much of the $21 billion of capital that's not paying fees yet is sitting in secondary strategies? And when it relates to those specifically, should we expect a little bit of a faster pace of deployment relative to maybe what we've seen in the past, given recent market dynamics?

[David Park, executive]

Yeah. So thanks, Alex, for the question. I mean, we've never provided an exact breakout of the undeployed fee-earning capital by either strategy or asset class. But what I would tell you is when we think about the $2.5 billion of commingled funds that will activate shortly, those are entirely secondary funds between our Venture Capital Secondaries Fund and our special situation Real Estate Secondaries Fund. But the activation of those will be less driven by sort of either the rapid deployment that you talked about. It will be driven by the fee holiday on the real estate fund, which will expire in early March here, as well as the completion of the investment of the prior venture secondaries fund, which again, we expect sometime middle of this calendar year.As we think about what remains in that undeployed fee-earning capital number. Again, haven't ever provided an exact breakdown, but secondaries is not as meaningful of a component of the undeployed fee-earning capital relative to some of our co investment and primary strategies today.

[Alexander Blostein, analyst]

Got you. That's helpful color.

[Operator]

Our next question comes from the line of Adam Beatty of UBS.

[Adam Beatty, analyst]

A quick couple of questions on the NCI buy-in. Great to see the structure laid out and kind of the culmination of that sort of long term process. So, just wondering if there are any contingencies around the performance of the teams in any way, just either around timing or amount or evaluation? And also a quick clarification around the potential acceleration after 5 years, is that like an all or nothing kind of scenario? Or could it be sort of accelerated with a fairly completing the process? So it'd be great to get some color and some details.And also maybe if you could, whether or not you would, to the extent that you did more M&A in the future, whether you would look to have a similar structure or something different?

[Scott Hart, executive]

Yes. Thanks, Adam, for the questions there. So maybe taking them in order, is there a performance-related component to it? The main part of that is the financial performance of the businesses, which will ultimately drive the value of those businesses over time. And so really, our view there is, we've come up with a structure that will continue to incentivize those teams to grow their businesses over time. And to the extent they're able to or successful in doing that, they will benefit from that performance.On your second question, around the acceleration, really, anytime after the 5-year point, if we were to mutually agree to accelerate, that would result in the complete buyout to where we would own 100% of the relevant asset class. It doesn't have to be all or nothing in the sense that you may have 1 asset class where we mutually agree to accelerate, but not all 3. But at that point in time, if there was an acceleration, it would result in us owning 100% of the equity at that time.

[Michael McCabe, executive]

And to answer your M&A question, but before I do, I'll also put a clarification on the first question of contingencies. We'll also note in the transaction agreement that if StepStone's multiple were to trade below 16x as a contingency, that would pause an exchange in a given year and then resume in the following year. I want to just clarify that one minor contingency that hopefully is of help here.From an M&A standpoint, I don't think this changes StepStone's perspective on the market. It certainly doesn't affect our capacity or capability to execute on anything strategic in that nature. As we've mentioned, there's a very small amount of cash involved in this transaction, 10% to 20% that is easily covered by our revolver that we currently have in place. So we feel we have the flexibility and the capital structure to continue to march forward on a strategic front should opportunities present themselves.

[Adam Beatty, analyst]

That's great. And then just quickly around commingled fundraise and the outlook there just wanted to get maybe a high level take on what you've kind of got in the plan for the coming year or 2, which vintages might be coming up for a new fundraise, and also kind of what you're hearing from LPs at the current moment.

[Scott Hart, executive]

Sure. I mean, certainly in terms of what we are hearing from LPs at the moment, it feels like sentiment is moving in the right direction. I mean, you can imagine with, for example, the S&P 500 hitting 5000 for the first time today, we're not talking as much about the denominator effect. We are still talking about the numerator effect in the sense that the rapid deployment, the strong sort of [ lead ] performance and valuations of private markets portfolios and the slowdown in distributions does still have some investors over-allocated relative to their target allocations.But not only the recovery in the public markets, but views on interest rates and views on the current outlook are certainly meaning that LPs are more willing to commit and transact today, and we've been the beneficiary of that with some of the closings that we referenced during this past quarter, as well as some of the fundraising momentum that we have at the moment. And so, as we think about what we have in market at the moment, we do have a number of our key commingled funds and strategies in the market. We're late -- in the late stages of fundraising for our Private Equity Secondaries Fund, which, as we referenced, and now stands at about $3 billion. Similarly, our Venture Capital Secondaries Fund now stands at about $1.5 billion, and those funds will continue to fundraise, but should wrap up in the first half of this calendar year.We continue to raise for our special situation Real Estate Secondaries fund, which has good momentum, and is very well positioned for the current environment. And we're in market with other key strategies like our multistrategy growth equity fund, our inaugural Infrastructure Coinvestment Fund, as well as our Corporate Direct Lending Fund. So lots of opportunity in the market from a commingled standpoint right now. We'll obviously also continue to be raving across each of our private wealth strategies, for the -- going forward here.

[Adam Beatty, analyst]

Perfect. Appreciate it.

[Operator]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Scott Hart for any closing remarks.

[Scott Hart, executive]

Great. Well, thanks, everyone, for joining us today. We appreciate the questions and the continued interest in StepStone, and we look forward to speaking with you next quarter. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.