# StepStone Group Inc.: Form 10-Q for the period ended Dec 31, 2020

- Company: [StepStone Group Inc.](/companies/step.md) (CIK 1796022)
- Form: 10-Q
- Filed: 2021-02-11
- Accepted by EDGAR: Feb 11, 2021, 16:14 ET
- Period: 2020-12-31
- Accession: 0001796022-21-000007
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1796022/000179602221000007/step-20201231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1796022/000179602221000007/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-10-01 to 2020-12-31 | $247.2m | us-gaap:Revenues |
| Revenue | 9 months, 2020-04-01 to 2020-12-31 | $428.6m | us-gaap:Revenues |
| Interest expense | 3 months, 2020-10-01 to 2020-12-31 | $26.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-04-01 to 2020-12-31 | $7.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-10-01 to 2020-12-31 | $9.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-04-01 to 2020-12-31 | $11.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-10-01 to 2020-12-31 | $25.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-04-01 to 2020-12-31 | $24.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-10-01 to 2020-12-31 | $0.87 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-04-01 to 2020-12-31 | $0.84 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-10-01 to 2020-12-31 | $0.87 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-04-01 to 2020-12-31 | $0.85 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-10-01 to 2020-12-31 | 32,704,975 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-04-01 to 2020-12-31 | 32,664,198 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-04-01 to 2020-12-31 | $120.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-04-01 to 2020-12-31 | $1.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-12-31 | $185.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-12-31 | $994.8m | us-gaap:Assets |
| Total liabilities | at 2020-12-31 | $460.7m | us-gaap:Liabilities |
| Long-term debt | at 2020-12-31 | $0 | us-gaap:LongTermDebt |
| Shareholders' equity | at 2020-12-31 | $146.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 92,597 characters.

*The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes included within this quarterly report on Form 10-Q, and our audited financial statements, the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our prospectus dated September 15, 2020, filed with the U.S. Securities and Exchange Commission (“SEC”) on September 16, 2020. This quarterly report reflects the historical results of operations and financial position of StepStone Group LP, our predecessor for accounting purposes, prior to the Reorganization and IPO. In this quarterly report, references to “we,” “us,” “our,” “StepStone” and similar terms refer to SSG and its consolidated subsidiaries, including the Partnership, following the Reorganization and IPO and to the Partnership and its consolidated subsidiaries prior to the Reorganization and IPO.*

### Business Overview

We are a global private markets investment firm focused on providing customized investment solutions and advisory and data services to our clients. Our clients include some of the world’s largest public and private defined benefit and defined contribution pension funds, sovereign wealth funds and insurance companies, as well as prominent endowments, foundations, family offices and private wealth clients, which include high-net-worth and mass affluent individuals. We partner with our clients to develop and build private markets portfolios designed to meet their specific objectives across the private equity, infrastructure, private debt and real estate asset classes. These portfolios utilize several types of synergistic investment strategies with third-party fund managers, including commitments to funds (“primaries”), acquiring stakes in existing funds on the secondary market (“secondaries”) and investing directly into companies (“co-investments”). As of December 31, 2020, we oversaw approximately $333 billion of private markets allocations, including $80 billion of AUM and $253 billion of assets under advisement (“AUA”).

We are a global firm and believe that local knowledge, business relationships and presence are all critical to securing a competitive edge in the private markets. We deploy a local staffing model, operating from approximately 20 offices across 13 countries in five continents. Our offices are staffed by investment professionals who bring valuable regional insights and language proficiency to enhance existing client relationships and build new client relationships. Since our inception in 2007, we have invested heavily in our platforms to drive growth and expand our investment solutions capabilities and service offerings, including through opportunistic transactions that have helped accelerate the growth of our team and capabilities. As of December 31, 2020, we had 563 total employees, including approximately 200 investment professionals and more than 360 employees across our operating team and implementation teams dedicated to sourcing, executing, analyzing and monitoring private markets opportunities.

We have a flexible business model whereby many of our clients engage us for solutions across multiple asset classes and investment strategies. Our solutions are typically offered in the following commercial structures:

- *Separately managed accounts (“SMAs”)*. Owned by one client and managed according to their specific preferences, SMAs integrate a combination of primaries, secondaries and co-investments across one or more asset classes. SMAs are meant to address clients’ specific portfolio objectives with respect to return, risk tolerance, diversification and liquidity. SMAs, including directly managed assets, comprised $61 billion of our AUM as of December 31, 2020.
- *Focused commingled funds.* Owned by multiple clients, our focused commingled funds deploy capital in specific asset classes with defined investment strategies. Focused commingled funds comprised $14 billion of our AUM as of December 31, 2020.
- *Advisory and data services.* These services include one or more of the following for our clients: (i) recurring support of portfolio construction and design; (ii) discrete or project-based due diligence, advice and investment recommendations; (iii) detailed review of existing private markets investments, including portfolio-level repositioning recommendations where appropriate; (iv) consulting on investment pacing, policies, strategic plans, and asset allocation to investment boards and committees; and (v) licensed access to our proprietary data and technology platforms, including StepStone Private Markets Intelligence (“SPI”) and Pacing, our portfolio cash flow, investment allocation and liquidity forecasting tool. Advisory relationships comprised $253 billion of our AUA and $5 billion of our AUM as of December 31, 2020.
- *Portfolio analytics and reporting.* We provide clients with tailored reporting packages, including customized performance benchmarks as well as associated compliance, administrative and tax capabilities. Mandates for portfolio analytics and reporting services typically include licensed access to our proprietary performance monitoring software, Omni. Through Omni, we provided portfolio analytics and reporting on over $540 billion of client commitments as of December 31, 2020, inclusive of our combined AUM/AUA, previously exited investments and investments of former clients.

We generate revenues from management and advisory fees and performance fees earned pursuant to contractual arrangements with our funds and our clients. We also invest our own capital in the StepStone Funds we manage to align our interests with those of our clients. Through these investments, we earn a pro-rata share of the results of such funds and may also be entitled to an allocation of performance-based fees from the limited partners in the StepStone Funds, commonly referred to as carried interest.

### Trends Affecting Our Business

Our business is affected by a variety of factors, including conditions in the financial markets and economic and political conditions. Changes in global economic conditions and regulatory or other governmental policies or actions can materially affect the values of the StepStone Funds’ holdings and the ability to source attractive investments and completely utilize the capital that we have raised. However, we believe our disciplined investment philosophy across our diversified investment strategies has historically contributed to the stability of our performance throughout market cycles.

In addition to these macroeconomic trends and market factors, we believe our future performance will be influenced by the following factors:

- *The extent to which clients favor private markets investments.* Our ability to attract new capital is partially dependent on clients’ views of private markets relative to traditional asset classes. We believe our fundraising efforts will continue to be subject to certain fundamental asset management trends, including (1) the increasing importance and market share of private markets investment strategies to clients of all types as clients focus on lower-correlated and absolute levels of return, (2) the increasing demand for private markets from private wealth clients, (3) shifting asset allocation policies of institutional clients and (4) increasing barriers to entry and growth for potential competitors.
- *Our ability to generate strong, stable returns.* Our ability to raise and retain capital is partially dependent on the investment returns we are able to generate for our clients and drives growth in our fee-earning AUM (“FEAUM”) and management fees. Although our FEAUM and management fees have grown significantly since our inception, adverse market conditions or an outflow of capital in the private markets management industry in general could affect our future growth rate. In addition, market dislocations, contractions or volatility could put pressure on our returns in the future which could in turn affect our fundraising abilities.
- *Our ability to maintain our data advantage relative to competitors.* Our proprietary data and technology platforms, analytical tools and deep industry knowledge allow us to provide our clients with customized investment solutions, including asset management services and tailored reporting packages, such as customized performance benchmarks as well as compliance, administration and tax capabilities. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information and our ability to grow our relationships with fund managers and clients of all types.
- *Our ability to source investments with attractive risk-adjusted returns.* The continued growth in our revenues is dependent on our ability to identify attractive investments and deploy the capital that we have raised. However, the capital deployed in any one quarter may vary significantly from period to period due to the availability of attractive opportunities and the long-term nature of our investment strategies. Our ability to identify attractive investments is dependent on a number of factors, including the general macroeconomic environment, valuation, transaction size, and the liquidity of such investment opportunity. A significant decrease in the quality or quantity of potential opportunities could adversely affect our ability to source investments with attractive risk-adjusted returns.
- *Increased competition and clients’ desire to work with fewer managers.* There has been an increasing desire on the part of larger clients to build deeper relationships with fewer private markets managers. At times, this has led to certain funds being oversubscribed due to the increasing flow of capital. Our ability to invest and maintain our relationships with high-performing fund managers across private markets asset classes is critical to our clients’ success and our ability to maintain our competitive position and grow our revenue.

### Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The spread of COVID-19 throughout the world has led many countries to institute a variety of measures in an effort to contain viral spread, which has led to significant disruption and uncertainty in the global financial markets. While some of the initial restrictions have been relaxed or lifted in an effort to generate more economic activity, the risk of future COVID-19 outbreaks remains and restrictions have been and may continue to be reimposed to mitigate risks to public health in jurisdictions where additional outbreaks have been detected. Moreover, even where restrictions are and remain lifted, and as vaccination treatment options become available and more accessible, certain groups of people may continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time, potentially further delaying global economic recovery.

We are closely monitoring developments related to COVID-19 and assessing any negative impacts to our business. The COVID-19 pandemic has affected, and may further affect, our business in various ways. In particular, it is possible that our future results may be adversely affected by slowdowns in fundraising activity and the pace of capital deployment, which could result in delayed or decreased management fees, or if fund managers are unable or less able to profitably exit existing investments, which could result in delayed or decreased performance fee revenues. The underlying investments in the StepStone Funds reflect valuations on a three-month lag, or as of September 30, 2020, adjusted for capital contributions and distributions during the three-month lag period ended December 31, 2020. For the nine months ended December 31, 2020, our investments in StepStone Funds and accrued carried interest allocations initially experienced significant declines during the first three months, primarily reflecting the unrealized depreciation in the fair value of certain underlying fund investments driven by the impact of COVID-19, and has subsequently seen significant increases, primarily reflecting the unrealized appreciation in the fair value of certain underlying fund investments driven by the general recovery in the financial markets.

### Recent Transactions

### Reorganization and Initial Public Offering

On September 18, 2020, we completed an IPO pursuant to which we issued 20,125,000 shares of Class A common stock at a price of $18.00 per share. We received net proceeds from the offering of $337.8 million, net of underwriting discounts of $24.5 million and before offering costs of $9.7 million that were incurred by the Partnership. We used approximately $209.8 million of the net proceeds from the offering to acquire 12,500,000 newly issued Class A units of the Partnership and approximately $128.0 million to purchase 7,625,000 Class B units from certain of the Partnership’s existing unitholders, including certain members of senior management.

In connection with the IPO, we completed certain transactions as part of the Reorganization to, among other things, provide for Class A common stock and Class B common stock; appoint SSG as the sole managing member of StepStone Group Holdings LLC, the General Partner; complete a series of merger transactions such that certain blocker entities in which certain pre-IPO institutional investors held their interests in the Partnership merged with and into SSG, with SSG surviving, resulting in the pre-IPO institutional investors acquiring 9,112,500 shares of newly issued Class A common stock of SSG; and classify the Partnership’s interests acquired by SSG as Class A units and reclassify the Partnership’s interests held by the continuing partners as Class B units.

See note 1 to our condensed consolidated financial statements included elsewhere in this quarterly report for more information about the Reorganization and IPO.

### Debt Repayment

On September 18, 2020, we repaid in full the indebtedness outstanding on our senior secured term loan in the amount of $146.6 million and terminated the facility, including the senior secured revolving facility. In connection with the repayment, we wrote-off the unamortized debt issuance costs and discount of $3.5 million, which is included in interest expense in the condensed consolidated statements of income for the nine months ended December 31, 2020. As of December 31, 2020, we had no debt obligations outstanding.

### Key Financial Measures

Our key financial and operating measures are discussed below. Additional information regarding our significant accounting policies can be found in note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report.

### Revenues

We generate revenues primarily from management and advisory fees, incentive fees and allocations of carried interest.

#### Management and Advisory Fees, Net

Management and advisory fees, net, consist of fees received from managing SMAs and focused commingled funds, advisory and data services, and portfolio analytics and reporting.

- Management fees from SMAs are generally based on a contractual rate applied to committed capital or net invested capital under management. These fees will vary over the life of the contract due to changes in the fee basis or contractual rate changes or thresholds, built-in declines in applicable contractual rates, and/or changes in net invested capital balances. The weighted-average management fee rate from SMAs was approximately 0.40% and 0.38% of average FEAUM for the twelve months ended December 31, 2019 and 2020, respectively.
- Management fees from focused commingled funds are generally based on a specified fee rate applied against client capital commitments during a defined investment or commitment period. Thereafter, management fees are typically calculated based on a contractual rate applied against net invested capital, or a stepped-down fee rate applied against the initial commitment. The weighted-average management fee rate from focused commingled funds was approximately 0.86% and 0.93% of average FEAUM for the twelve months ended December 31, 2019 and 2020, respectively, and primarily reflected the timing of new funds and shifts in asset class mix.
- The weighted-average management fee rate across SMAs and focused commingled funds was approximately 0.52% and 0.52% of average FEAUM for the twelve months ended December 31, 2019 and 2020, respectively.
- Fee revenues from advisory, SPAR or SPI services are generally annual fixed fees, which vary based on the scope of services we provide. We also provide certain project-based or event-driven advisory services. The fees for these services are negotiated and typically paid upon successful delivery of services or on the execution of the event-driven service. Because advisory fees are negotiated and typically paid upon successful delivery of services or on the execution of the event-driven service, advisory fees do not necessarily correlate with the total size of our AUA.
- Management fees are reflected net of (i) certain professional and administrative services that we arrange to be performed by third parties on behalf of investment funds and (ii) certain distribution and servicing fees paid to third-party financial institutions. In both situations, we are acting as an agent because we do not control the services provided by the third parties before they are transferred to the customer.

#### Performance Fees

We earn two types of performance fee revenues: incentive fees and carried interest allocations, as described below. Incentive fees comprise fees earned from certain client investment mandates for which we do not have a general partnership interest in a StepStone Fund. Carried interest allocations include the allocation of performance-based fees, commonly referred to as carried interest, from limited partners in the StepStone Funds to us. As of December 31, 2020, we had over $41 billion of performance fee-eligible capital across approximately 120 programs, of which over 80 were in accrued carried interest positions.

*Incentive fees* are generally calculated as a percentage of the profits (up to 10%) earned in respect of certain accounts for which we are the investment adviser, subject to the achievement of minimum return levels or performance benchmarks. Incentive fees are a form of variable consideration and represent contractual fee arrangements in our contracts with our customers. Incentive fees are typically subject to reversal until the end of a defined performance period, as these fees are affected by changes in the fair value of the assets under management or advisement over such performance period. Moreover, incentive fees that are received prior to the end of the defined performance period are typically subject to clawback, net of tax.

We recognize incentive fee revenue only when these amounts are realized and no longer subject to significant reversal, which is typically at the end of a defined performance period and/or upon expiration of the associated clawback period (i.e., crystallization). However, clawback terms for incentive fees received prior to crystallization only require the return of amounts on a net of tax basis. Accordingly, the tax-related portion of incentive fees received in advance of crystallization is not subject to clawback and is therefore recognized as revenue immediately upon receipt. Incentive fees received in advance of crystallization that remain subject to clawback are recorded as deferred incentive fee revenue and included in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets.

*Carried interest allocations* include the allocation of performance-based fees to us from limited partners in the StepStone Funds in which we hold an equity interest. We are entitled to a carried interest allocation (typically 5% to 15%) based on cumulative fund or account performance to date, irrespective of whether such amounts have been realized. These carried interest allocations are subject to the achievement of minimum return levels (typically 5% to 10%), in accordance with the terms set forth in the respective fund’s governing documents. We account for our investment balances in the StepStone Funds, including carried interest allocations, under the equity method of accounting because we are presumed to have significant influence as the general partner or managing member. Accordingly, carried interest allocations are not deemed to be within the scope of Accounting Standards Codification Topic 606 (“ASC 606”), *Revenue from Contracts with Customers.*

We recognize revenue attributable to carried interest allocations from a StepStone Fund based on the amount that would be due to us pursuant to the fund’s governing documents, assuming the fund was liquidated based on the current fair value of its underlying investments as of that date. Accordingly, the amount recognized as carried interest allocation revenue reflects our share of the gains and losses of the associated fund’s underlying investments measured at their then-fair values, relative to the fair values as of the end of the prior period. We record the amount of carried interest allocated to us as of each period end as accrued carried interest allocations, which is included as a component of investments in the condensed consolidated balance sheets.

Carried interest is realized when an underlying investment is profitably disposed of and the fund’s cumulative returns are in excess of the specific hurdle rates, as defined in the applicable governing documents. Carried interest is subject to reversal to the extent that the amount received to date exceeds the amount due to us based on cumulative results. As such, a liability is accrued for the potential clawback obligations if amounts previously distributed to us would require repayment to a fund if such fund were to be liquidated based on the current fair value of their underlying investments as of the reporting date. Actual repayment obligations generally do not become realized until the end of a fund’s life. As of December 31, 2020 and March 31, 2020, no material amounts for potential clawback obligations had been accrued.

### Expenses

*Cash-based compensation* primarily includes salaries, bonuses, employee benefits and employer-related payroll taxes.

*Equity-based compensation* represents grants of equity related awards or arrangements to certain employees and directors.

*Performance fee-related compensation* represents the portion of carried interest allocation revenue and incentive fees that have been awarded to employees as a form of long-term incentive compensation. Performance fee-related compensation is generally tied to the investment performance of the StepStone Funds. Approximately 50% of carried interest allocation revenue is awarded to employees as part of our long-term incentive compensation plan, fostering alignment of interest with our clients and investors, and retaining key investment professionals. Carried interest-related compensation is accounted for as compensation expense in conjunction with the related carried interest allocation revenue and, until paid, is recorded as a component of accrued carried interest-related compensation in the condensed consolidated balance sheets. Carried interest-related compensation expense also includes the portion of net carried interest allocation revenue attributable to equity holders of our consolidated subsidiaries that are not 100% owned by us. Amounts presented as realized indicate the amounts paid or payable to employees based on the receipt of carried interest allocation revenue from realized investment activity. Carried interest-related compensation expense may be subject to reversal to the extent that the related carried interest allocation revenue is reversed. Carried interest-related compensation paid to employees may be subject to clawback on an after-tax basis under certain scenarios. To date, no material amounts of realized carried interest-related compensation have been reversed. Incentive fee-related compensation is accrued as compensation expense when it is probable and estimable that payment will be made.

*General, administrative and other* includes occupancy, travel and entertainment, insurance, legal and other professional fees, depreciation, amortization of intangible assets, system-related costs, and other general costs associated with operating our business.

### Other Income (Expense)

*Investment income* primarily represents our share of earnings from the investments we make in our SMAs and focused commingled funds. We, either directly or through our subsidiaries, generally have a general partner interest in the StepStone Funds, which invest in primary funds, secondary funds and co-investment funds, or a combination of investment types. Investment income will increase or decrease based on the earnings of the StepStone Funds, which are primarily driven by net realized and unrealized gains (losses) on the underlying investments held by the funds. Our co-investment funds invest in underlying portfolio companies and therefore their valuation changes from period to period are more influenced by individual companies than our primary and secondary funds, which have exposures across multiple portfolio companies in underlying private markets funds. Our SMAs and focused commingled funds invest across various industries, strategies and geographies.

Consequently, our general partner investments do not include any significant concentrations in a specific sector or geography outside the United States. Investment income excludes carried interest allocations, which are presented as revenues as described above.

*Interest income* consists of income earned on cash, cash equivalents and marketable securities.

*Interest expense* consists of the interest expense on our previously outstanding debt and related amortization of deferred financing costs and amortization of original issue discount. The nine months ended December 31, 2020 includes a $3.5 million charge related to the write-off of unamortized debt issuance costs and discount in connection with the full repayment of our outstanding debt balance.

*Other income (loss)* includes foreign currency translation gains and losses and non-operating activities.

### Income Tax Expense

We are a corporation for U.S. federal income tax purposes and therefore are subject to U.S. federal and state income taxes on our share of taxable income generated by the Partnership. Prior to the Reorganization and IPO, we operated as a partnership for U.S. federal income tax purposes and therefore were not subject to U.S. federal and state income taxes. The Partnership is treated as a pass-through entity for U.S. federal and state income tax purposes. As such, income generated by the Partnership flows through to its limited partners, including us, and is generally not subject to U.S. federal or state income tax at the partnership level. Our non-U.S. subsidiaries generally operate as corporate entities in non-U.S. jurisdictions, with certain of these entities subject to local or non-U.S. income taxes. Additionally, certain of our subsidiaries are subject to local jurisdiction income taxes at the entity level. Accordingly, the tax liability with respect to income attributable to non-controlling interests in the Partnership is borne by the holders of such non-controlling interests.

### Non-Controlling Interests

Non-controlling interests (“NCI”) reflect the portion of income or loss and the corresponding equity attributable to third-party equity holders and employees in certain consolidated subsidiaries that are not 100% owned by us. Non-controlling interests are presented as separate components in our condensed consolidated statements of income to clearly distinguish between our interests and the economic interests of third parties and employees in those entities. Net income (loss) attributable to SSG, as reported in the condensed consolidated statements of income, is presented net of the portion of net income (loss) attributable to holders of non-controlling interests.

*Non-controlling interests in subsidiaries* represent the economic interests in the consolidated subsidiaries of the Partnership held by third parties and employees in those entities. Non-controlling interests in subsidiaries are allocated a share of income or loss in the respective consolidated subsidiary in proportion to their relative ownership interests, after consideration of contractual arrangements that govern allocations of income or loss.

*Non-controlling interests in the Partnership* represent the economic interests in the Partnership held by the Class B unitholders of the Partnership. Non-controlling interests in the Partnership are allocated a share of income or loss in the Partnership in proportion to their relative ownership interests, after consideration of contractual arrangements that govern allocations of income or loss.

### Operating Metrics

We monitor certain operating metrics that are either common to the asset management industry or that we believe provide important data regarding our business.

### Assets Under Management

AUM primarily reflects the assets associated with our SMAs and focused commingled funds. We classify assets as AUM if we have full discretion over the investment decisions in an account or have responsibility or custody of assets. Although management fees are based on a variety of factors and are not linearly correlated with AUM, we believe AUM is a useful metric for assessing the relative size and scope of our asset management business.

Our AUM is calculated as the sum of (i) the net asset value (“NAV”) of client portfolio assets, including the StepStone Funds and (ii) the unfunded commitments of clients to the underlying investments and the StepStone Funds. Our AUM reflects the investment valuations in respect of the underlying investments of our funds and accounts on a three-month lag, adjusted for new client account activity through the period end. Our AUM does not include post-period investment valuation or cash activity. AUM as of December 31, 2020 reflects final data for the prior period (September 30, 2020), adjusted for net new client account activity through December 31, 2020. NAV data for underlying investments is as of September 30, 2020, as reported by underlying managers up to 115 days following September 30, 2020. When NAV data is not available by 115 days following September 30, 2020, such NAVs are adjusted for cash activity following the last available reported NAV.

### Assets Under Advisement

AUA consists of client assets for which we do not have full discretion to make investment decisions but play a role in advising the client or monitoring their investments. We generally earn revenue for advisory-related services on a contractual fixed fee basis. Advisory-related services include asset allocation, strategic planning, development of investment policies and guidelines, screening and recommending investments, legal negotiations, monitoring and reporting on investments, and investment manager review and due diligence. Advisory fees vary by client based on the scope of services, investment activity and other factors. Most of our advisory fees are fixed, and therefore, increases or decreases in AUA do not necessarily lead to proportionate changes in revenue.

Our AUA is calculated as the sum of (i) the NAV of client portfolio assets for which we do not have full discretion and (ii) the unfunded commitments of clients to the underlying investments. Our AUA reflects the investment valuations in respect of the underlying investments of our client accounts on a three-month lag, adjusted for new client account activity through the period end. Our AUA does not include post-period investment valuation or cash activity. AUA as of December 31, 2020 reflects final data for the prior period (September 30, 2020), adjusted for net new client account activity through December 31, 2020. NAV data for underlying investments is as of September 30, 2020, as reported by underlying managers up to 115 days following September 30, 2020. When NAV data is not available by 115 days following September 30, 2020, such NAVs are adjusted for cash activity following the last available reported NAV.

### Fee-Earning AUM

FEAUM reflects the assets from which we earn management fee revenue (i.e., fee basis) and includes assets in our SMAs, focused commingled funds and assets held directly by our clients for which we have fiduciary oversight and are paid fees as the manager of the assets. Our SMAs and focused commingled funds typically pay management fees based on capital commitments, net invested capital and, in certain cases, NAV, depending on the fee terms. Management fees are only marginally affected by market appreciation or depreciation because substantially all of the StepStone Funds pay management fees based on capital commitments or net invested capital. As a result, management fees and FEAUM are not materially affected by changes in market value.

Our calculation of FEAUM may differ from the calculations of other asset managers and, as a result, may not be comparable to similar measures presented by other asset managers.

### Undeployed Fee-Earning Capital

Undeployed fee-earning capital represents the amount of capital commitments to StepStone Funds that has not yet been invested or considered active, and as this capital is invested or activated, will generate management fee revenue.

### Non-GAAP Financial Measures

Below is a description of our non-GAAP financial measures. These measures are presented on a basis other than GAAP and should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP.

### Adjusted Revenues and Adjusted Net Income

Adjusted net income (“ANI”) is a non-GAAP performance measure that we present on a pre-tax and after-tax basis used to evaluate profitability. ANI represents the after-tax net realized income attributable to us. The components of revenues used in the determination of ANI (“adjusted revenues”) comprise net management and advisory fees, incentive fees (including the deferred portion) and realized carried interest allocations. In addition, ANI excludes: (a) unrealized carried interest allocation revenues and related compensation, (b) unrealized investment income, (c) equity-based compensation for awards granted prior to and in connection with our IPO, (d) amortization of intangibles and (e) certain other items that we believe are not indicative of our core operating performance, including charges associated with acquisitions and corporate transactions, contract terminations and employee severance. ANI is income before taxes fully taxed at our blended statutory rate. We believe ANI and adjusted revenues are useful to investors because they enable investors to evaluate the performance of our business across reporting periods.

### Fee-Related Earnings

Fee-related earnings (“FRE”) is a non-GAAP performance measure used to monitor our baseline earnings from recurring management and advisory fees. FRE is a component of ANI and comprises net management and advisory fees, less operating expenses other than performance fee-related compensation, equity-based compensation for awards granted prior to and in connection with our IPO, amortization of intangibles and other non-core operating items. FRE is presented before income taxes. We believe FRE is useful to investors because it provides additional insight into the operating profitability of our business and our ability to cover direct base compensation and operating expenses from total fee revenues.

### Adjusted Net Income Per Share

ANI per share measures our per-share earnings assuming all Class B units in the Partnership were exchanged for Class A common stock in SSG. ANI per share is calculated as ANI divided by adjusted shares outstanding. We believe ANI per share is useful to investors because it enables them to better evaluate per-share operating performance across reporting periods.

### Consolidated Results of Operations

The following is a discussion of our unaudited consolidated results of operations for the periods presented. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.

*(in thousands)*

| Revenues | Three Months Ended December 31, 2020 | 2019 | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Management and advisory fees, net | $70,093 | $66,265 | $209,245 | $171,026 |
| Performance fees: |  |  |  |  |
| Incentive fees | 313 | 229 | 5,098 | 2,626 |
| Carried interest allocation: |  |  |  |  |
| Realized allocation | 26,063 | 19,581 | 38,257 | 43,540 |
| Unrealized allocation | 150,681 | (14,860) | 176,050 | 85,474 |
| Total carried interest allocation | 176,744 | 4,721 | 214,307 | 129,014 |
| Total revenues | 247,150 | 71,215 | 428,650 | 302,666 |
| **Expenses** |  |  |  |  |
| Compensation and benefits: |  |  |  |  |
| Cash-based compensation | 36,732 | 34,188 | 113,858 | 94,783 |
| Equity-based compensation | 3,206 | 482 | 4,641 | 1,432 |
| Performance fee-related compensation: |  |  |  |  |
| Realized | 10,241 | 10,418 | 17,952 | 24,582 |
| Unrealized | 73,629 | (6,993) | 83,487 | 43,552 |
| Total performance fee-related compensation | 83,870 | 3,425 | 101,439 | 68,134 |
| Total compensation and benefits | 123,808 | 38,095 | 219,938 | 164,349 |
| General, administrative and other | 12,624 | 13,306 | 34,487 | 37,985 |
| Total expenses | 136,432 | 51,401 | 254,425 | 202,334 |
| **Other income (expense)** |  |  |  |  |
| Investment income | 5,361 | 699 | 6,508 | 3,911 |
| Interest income | 83 | 399 | 342 | 1,139 |
| Interest expense | (26) | (2,434) | (7,353) | (7,747) |
| Other income (loss) | 799 | (247) | 1,261 | (358) |
| Total other income (expense) | 6,217 | (1,583) | 758 | (3,055) |
| Income before income tax | 116,935 | 18,231 | 174,983 | 97,277 |
| Income tax expense | 9,546 | 997 | 11,585 | 2,674 |
| Net income | 107,389 | 17,234 | 163,398 | 94,603 |
| Less: Net income attributable to non-controlling interests in subsidiaries | 5,496 | 5,170 | 18,634 | 9,656 |
| Less: Net income attributable to non-controlling interests in the Partnership | 76,315 | 12,064 | 119,976 | 84,947 |
| Net income attributable to StepStone Group Inc. | $25,578 | $— | $24,788 | $— |

45

### Revenues

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

Total revenues increased $175.9 million, or 247%, to $247.2 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, due to higher carried interest allocation, net management and advisory fees and incentive fees.

Net management and advisory fees increased $3.8 million, or 6%, to $70.1 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The increase was driven by new client activity and an 18% growth in FEAUM across the platform. The increases were partially offset by a $0.8 million decline in revenues associated with liquidating portfolios for which StepStone serves as the replacement manager. The prior year results included approximately $3.8 million in retroactive fees primarily related to additional closes for StepStone Secondary Opportunities Fund IV (“SSOF IV”) and $1.0 million related to an advisory success fee in December 2019. For new investors, fees relating to periods prior to the closing date are considered retroactive.

Incentive fees increased $0.1 million, or 37%, to $0.3 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019.

Realized carried interest allocation revenues increased $6.5 million, or 33%, to $26.1 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, reflecting higher realization activity within our private equity funds. Unrealized carried interest allocation revenues include the reversal of realized carried interest allocation revenues. Excluding the reversal, unrealized carried interest allocation revenues increased $172.0 million, to $176.7 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting a larger increase in the cumulative allocation of gains associated with the underlying portfolios within our private equity funds primarily driven by the continued recovery in global financial markets despite the ongoing economic impacts of COVID-19.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

Total revenues increased $126.0 million, or 42%, to $428.7 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, due to higher carried interest allocation, net management and advisory fees and incentive fees.

Net management and advisory fees increased $38.2 million, or 22%, to $209.2 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. This increase was driven by new client activity and growth in FEAUM across the platform, including retroactive fees of $9.0 million from StepStone Real Estate Partners IV (“SREP IV”), which had its final close in September 2020. The increases were partially offset by a $1.4 million decline in revenues associated with liquidating portfolios for which StepStone serves as the replacement manager. For new investors, fees relating to periods prior to the closing date are considered retroactive.

Incentive fees increased $2.5 million, or 94%, to $5.1 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019.

Realized carried interest allocation revenues decreased $5.3 million, or 12%, to $38.3 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, reflecting lower realization activity within our private equity funds. Unrealized carried interest allocation revenues include the reversal of realized carried interest allocation revenues. Excluding the reversal, unrealized carried interest allocation revenues increased $85.3 million, or 66%, to $214.3 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The increase in unrealized carried interest allocation for the nine months ended December 31, 2020 was primarily attributable to a larger increase in the cumulative allocation of gains associated with the underlying portfolios within our private equity funds primarily driven by the continued recovery in global financial markets despite the ongoing economic impacts of COVID-19.

For the nine months ended December 31, 2020, our investments in StepStone Funds and accrued carried interest allocations initially experienced a $128.5 million decline during the first three months, primarily reflecting the unrealized depreciation in the fair value of certain underlying fund investments driven by the impact of COVID-19, and have subsequently seen a significant increase of $342.8 million, primarily reflecting the unrealized appreciation in the fair value of certain underlying fund investments primarily driven by the continued recovery in global financial markets.

### Expenses

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

Total expenses increased $85.0 million, or 165%, to $136.4 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, reflecting increases in performance fee-related compensation, equity-based compensation and cash-based compensation, partially offset by decreases in general, administrative and other expenses.

Cash-based compensation increased $2.5 million, or 7%, to $36.7 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, due to increased staffing and compensation levels. Our full-time headcount increased 14% from December 31, 2019 to December 31, 2020.

Equity-based compensation increased $2.7 million, or 565%, to $3.2 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The increase was attributable to the grant of restricted stock units (“RSUs”) made to certain employees and directors in connection with our IPO in September 2020.

Performance fee-related compensation expense increased $80.4 million, to $83.9 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting the increase in carried interest allocation revenue. Realized performance fee-related compensation decreased $0.2 million, or 2%, to $10.2 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, despite the increase in realized carried interest allocation revenues as a portion of realized carried interest allocation revenue in the current-year period included revenue with no associated compensation expense.

General, administrative and other expenses decreased $0.7 million, or 5%, to $12.6 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The decrease primarily reflected declines of $2.2 million in travel and associated costs for investment evaluation and client service, $1.1 million in marketing expenses and $0.5 million in amortization expense for intangibles. These decreases were partially offset by an increase of $1.5 million in legal and professional fees, $1.1 million in insurance costs and other general operating expenses. We anticipate travel and other expenses will return to prior levels as the COVID-19 situation improves, and that costs associated with being a public company will be reflected in our expenses going forward.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

Total expenses increased $52.1 million, or 26%, to $254.4 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, due to increases in performance fee-related compensation, cash-based compensation and equity-based compensation, partially offset by decreases in general, administrative and other expenses.

Cash-based compensation increased $19.1 million, or 20%, to $113.9 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, due to increased staffing and compensation levels, as well as $4.1 million in severance costs. Our full-time headcount increased 14% from December 31, 2019 to December 31, 2020.

Equity-based compensation increased $3.2 million, or 224%, to $4.6 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The increase was attributable to the grant of RSUs made to certain employees and directors in connection with our IPO in September 2020.

Performance fee-related compensation expense increased $33.3 million, or 49%, to $101.4 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting the increase in carried interest allocation revenue. Realized performance fee-related compensation decreased $6.6 million, or 27%, to $18.0 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting lower realization activity.

General, administrative and other expenses decreased $3.5 million, or 9%, to $34.5 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The decrease primarily reflected declines of $5.5 million in travel and associated costs for investment evaluation and client service, $1.6 million in marketing expenses, $1.5 million in amortization expense for intangibles, and other general operating expenses, partially offset by an increase of $2.8 million in legal and professional fees, $1.8 million in information and technology expenses and $1.6 million in insurance costs. We anticipate travel and other expenses will return to prior levels as the COVID-19 situation improves, and that costs associated with being a public company will be reflected in our expenses going forward.

### Other Income (Expense)

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

Investment income increased $4.7 million, or 667%, to $5.4 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting overall changes in the valuations of the underlying investments in the StepStone Funds.

Interest income decreased $0.3 million, or 79%, to $0.1 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019.

Interest expense decreased $2.4 million, or 99%, to $26 thousand for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The decrease was primarily due to the full repayment of our previously outstanding senior secured term loan (“Term Loan B”) in connection with the IPO in September 2020.

Other income (loss) increased $1.0 million to income of $0.8 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting favorable foreign currency translation.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

Investment income increased $2.6 million, or 66%, to $6.5 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting overall changes in the valuations of the underlying investments in the StepStone Funds.

Interest income decreased $0.8 million, or 70%, to $0.3 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019.

Interest expense decreased $0.4 million, or 5%, to $7.4 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The decrease was primarily due to the full repayment of our previously outstanding Term Loan B in connection with the IPO in September 2020, partially offset by the write-off of $3.5 million in unamortized debt issuance costs and discount with the full repayment of our Term Loan B.

Other income (loss) increased $1.6 million to income of $1.3 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting favorable foreign currency translation.

### Income Tax Expense

Income tax expense primarily reflects U.S. federal and state income taxes on our share of taxable income generated by the Partnership, as well as local and foreign income taxes of certain of the Partnership’s subsidiaries. Prior to the Reorganization and IPO, income tax expense consisted of local income taxes and foreign income taxes for subsidiaries that have operations outside of the United States as the Partnership is treated as a flow-through entity and is not subject to federal income taxes.

Our effective income tax rate was 8.2% and 5.5% for the three months ended December 31, 2020 and 2019, respectively, and 6.6% and 2.7% for the nine months ended December 31, 2020 and 2019, respectively. Our overall effective tax rate is less than the statutory rate primarily because (a) we were not subject to U.S. federal taxes prior to the Reorganization and IPO and (b) a portion of income is allocated to non-controlling interests, and the tax liability on such income is borne by the holders of such non-controlling interests.

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

Income tax expense increased $8.5 million, or 857%, to $9.5 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The increase was primarily related to U.S. federal and state income taxes recognized on our share of taxable income generated by the Partnership for the three months ended December 31, 2020 and a general increase in taxes paid in non-U.S. subsidiaries. For the period prior to the Reorganization and IPO, we were not subject to U.S. federal income taxes.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

Income tax expense increased $8.9 million, or 333%, to $11.6 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The increase was primarily related to U.S. federal and state income taxes recognized on our share of taxable income generated by the Partnership for the nine months ended December 31, 2020 and a general increase in taxes paid in non-U.S. subsidiaries. For the period prior to the Reorganization and IPO, we were not subject to U.S. federal income taxes.

### Net Income Attributable to Non-Controlling Interests in Subsidiaries

Net income attributable to non-controlling interests in subsidiaries increased $0.3 million, or 6%, to $5.5 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. The increase was primarily attributable to an increase in income generated by our consolidated subsidiaries not wholly-owned by us.

Net income attributable to non-controlling interests in subsidiaries increased $9.0 million, or 93%, to $18.6 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019. The increase was primarily attributable to an increase in income generated by our consolidated subsidiaries not wholly-owned by us.

### Net Income Attributable to Non-Controlling Interests in the Partnership

Net income attributable to non-controlling interests in the Partnership represents the portion of net income or loss attributable to the interests held by the Class B unitholders of the Partnership subsequent to the Reorganization and IPO. Net income attributable to non-controlling interests in the Partnership was $76.3 million and $120.0 million for the three and nine months ended December 31, 2020, respectively. Prior to the Reorganization and IPO, all of our income or loss relates to the Partnership and has been presented as non-controlling interests in the Partnership.

### Assets Under Management

AUM was $67 billion as of March 31, 2020, $72 billion as of September 30, 2020 and $80 billion as of December 31, 2020.

### Assets Under Advisement

Assets related to our advisory accounts were $229 billion as of March 31, 2020, $241 billion as of September 30, 2020 and $253 billion as of December 31, 2020.

### Fee-Earning AUM

#### Three Months Ended December 31, 2020

FEAUM increased $2.3 billion, or 5%, to $46.6 billion as of December 31, 2020 as compared to $44.3 billion as of September 30, 2020. Of the increase, $1.9 billion was from SMAs and $0.4 billion was from focused commingled funds.

#### Nine Months Ended December 31, 2020

FEAUM increased $5.4 billion, or 13%, to $46.6 billion as of December 31, 2020 as compared to $41.2 billion as of March 31, 2020. Of the increase, $4.2 billion was from SMAs and $1.2 billion was from focused commingled funds.

*(in millions)*

|  | Three Months Ended December 31, 2020 SMAs | Focused Commingled Funds | Total | Nine Months Ended December 31, 2020 SMAs | Focused Commingled Funds | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning balance | $33,417 | $10,893 | $44,310 | $31,089 | $10,104 | $41,193 |
| Contributions(1) | 1,848 | 303 | 2,151 | 4,511 | 1,483 | 5,994 |
| Distributions(2) | (180) | (8) | (188) | (326) | (307) | (633) |
| Market value, FX and other(3) | 280 | 77 | 357 | 91 | (15) | 76 |
| Ending balance | $35,365 | $11,265 | $46,630 | $35,365 | $11,265 | $46,630 |

(1) Contributions consist of new capital commitments that earn fees on committed capital and capital contributions to funds and accounts that earn fees on net invested capital or NAV.

(2) Distributions consist of returns of capital from funds and accounts that pay fees on net invested capital or NAV.

(3) Market value, FX and other primarily consist of changes in market value appreciation (depreciation) for funds that pay on NAV, the effect of foreign exchange rate changes on non-U.S. dollar denominated commitments, and reductions in fee-earning AUM from funds that moved from a committed capital to net invested capital fee basis or from funds and accounts that no longer pay fees.

The following tables set forth FEAUM by asset class and selected weighted-average management fee rate data:

*(in millions)*

| FEAUM | As of December 31, 2020 | March 31, 2020 | December 31, 2019 |
| --- | ---: | ---: | ---: |
| Private equity | $20,960 | $19,929 | $19,269 |
| Infrastructure | 12,251 | 11,424 | 10,516 |
| Private debt | 9,052 | 6,328 | 5,952 |
| Real estate | 4,367 | 3,512 | 3,614 |
| Total | $46,630 | $41,193 | $39,351 |

| Weighted-average fee rate(1) | As of December 31, 2020 | March 31, 2020 | December 31, 2019 |
| --- | ---: | ---: | ---: |
| Private equity(2) | 0.64% | 0.66% | 0.64% |
| Real estate, infrastructure and private debt asset classes(3) | 0.41% | 0.37% | 0.39% |
| Total | 0.52% | 0.51% | 0.52% |

(1) Weighted-average fee rates reflect the applicable management fees for the last 12 months ending on each period presented.

(2) The change in weighted-average fee rates primarily reflected the timing of new funds.

(3) The change in weighted-average fee rates primarily reflected shifts in asset class mix.

### Undeployed Fee-Earning Capital

As of December 31, 2020, we had $17.4 billion of undeployed fee-earning capital on which we will earn fees once deployed or activated.

### Non-GAAP Financial Measures

The following table presents the components of FRE and ANI:

*(in thousands)*

|  | Three Months Ended December 31, 2020 | 2019 | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Management and advisory fees, net | $70,093 | $66,265 | $209,245 | $171,026 |
| Less: |  |  |  |  |
| Cash-based compensation | 36,732 | 34,188 | 113,858 | 94,783 |
| General, administrative and other(1) | 12,624 | 13,306 | 34,487 | 37,985 |
| Plus: |  |  |  |  |
| Amortization of intangibles | 835 | 1,343 | 2,505 | 4,029 |
| Non-core items(2) | 768 | 1,202 | 5,037 | 4,047 |
| **Fee-related earnings(1)** | 22,340 | 21,316 | 68,442 | 46,334 |
| Plus: |  |  |  |  |
| Realized carried interest allocations | 26,063 | 19,581 | 38,257 | 43,540 |
| Incentive fees | 313 | 229 | 5,098 | 2,626 |
| Deferred incentive fees | — | — | 4,700 | 799 |
| Realized investment income | 2,344 | 589 | 4,012 | 3,141 |
| Interest income | 83 | 399 | 342 | 1,139 |
| Write-off of unamortized deferred financing costs | — | — | 3,526 | — |
| Other income (loss)(1) | 799 | (247) | 1,261 | (358) |
| Less: |  |  |  |  |
| Realized performance fee-related compensation | 10,241 | 10,418 | 17,952 | 24,582 |
| Interest expense | 26 | 2,434 | 7,353 | 7,747 |
| Income attributable to non-controlling interests in subsidiaries(3) | 5,628 | 4,998 | 19,297 | 9,336 |
| **Pre-tax adjusted net income** | 36,047 | 24,017 | 81,036 | 55,556 |
| Less: Income taxes(4) | 9,012 | 6,004 | 20,260 | 13,889 |
| **Adjusted net income** | $27,035 | $18,013 | $60,776 | $41,667 |

(1) Foreign currency translation gains and losses have been reclassified from general, administrative and other expenses to other income (loss) in our consolidated income statements for all prior periods presented to conform to the current period presentation.

(2) Includes compensation paid to certain equity holders as part of an acquisition earn-out ($1.4 million for the nine months ended December 31, 2019), severance costs ($0.8 million for the three months ended December 31, 2019, and $4.1 million and $0.9 million for the nine months ended December 31, 2020 and 2019, respectively), transaction costs ($0.3 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $0.3 million and $1.1 million for the nine months ended December 31, 2020 and 2019, respectively), loss on change in fair value for contingent consideration obligation ($0.4 million for the three and nine months ended December 31, 2020), and other non-core operating income and expenses.

(3) Includes income attributable to non-controlling interests in subsidiaries net of non-controlling interest portion of unrealized investment income (loss) ($0.1 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $(0.5) million and $0.3 million for the nine months ended December 31, 2020 and 2019, respectively), and non-controlling interest portion of loss on change in fair value for contingent consideration obligation ($0.2 million for the three and nine months ended December 31, 2020).

(4) Represents corporate income taxes at a blended statutory rate of 25.0% applied to pre-tax adjusted net income for all periods presented. The 25.0% is based on a federal statutory rate of 21.0% and a combined state, local and foreign rate net of federal benefits of 4.0%. As we were not subject to U.S. federal and state income taxes prior to the Reorganization and IPO, the blended statutory rate of 25.0% has been applied to all periods presented for comparability purposes.

### Adjusted Revenues and Adjusted Net Income

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

Adjusted revenues increased $10.4 million, or 12%, to $96.5 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting increases in net management and advisory fees and realized carried interest allocation revenues.

ANI increased $9.0 million, or 50%, to $27.0 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily due to the increase in FRE as discussed below, an increase in realized carried interest allocation revenues, net of related compensation, and lower interest expense, partially offset by a higher allocation of income to non-controlling interests.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

Adjusted revenues increased $39.3 million, or 18%, to $257.3 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting increases in net management and advisory fees and incentive fees (including the deferred portion), partially offset by decreases in realized carried interest allocation revenues.

ANI increased $19.1 million, or 46%, to $60.8 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily due to increases in FRE as discussed below, as well as increases in realized carried interest allocation revenues, net of related compensation and incentive fees (including the deferred portion). These increases were partially offset by a higher allocation of income to non-controlling interests.

### Adjusted Net Income Per Share

The following table shows a reconciliation of diluted weighted-average shares of Class A common stock outstanding to adjusted shares outstanding used in the computation of ANI per share for the three and nine months ended December 31, 2020 and 2019. As Class A common stock did not exist prior to the Reorganization and IPO, the number of adjusted shares outstanding used in the computation of ANI per share for all prior year periods presented reflect the number of adjusted shares for the period from the IPO date to September 30, 2020 for comparability purposes.

*(in thousands, except share and per share amounts)*

|  | Three Months Ended December 31, 2020 | 2019 | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Adjusted net income | $27,035 | $18,013 | $60,776 | $41,667 |
| Weighted-average shares of Class A common stock outstanding – Basic(1) | 29,237,500 | 29,237,500 | 29,237,500 | 29,237,500 |
| Assumed vesting of RSUs(1) | 1,012,657 | 745,347 | 977,400 | 745,347 |
| Assumed vesting and exchange of Class B2 units(1) | 2,454,818 | 2,411,318 | 2,449,298 | 2,411,318 |
| Exchange of Class B units in the Partnership(1)(2) | 65,578,831 | 65,578,831 | 65,578,831 | 65,578,831 |
| Adjusted shares(1) | 98,283,806 | 97,972,996 | 98,243,029 | 97,972,996 |
| Adjusted net income per share | $0.28 | $0.18 | $0.62 | $0.43 |

(1) Our Class A common stock did not exist prior to the Reorganization and IPO in September 2020. As a result, the number of adjusted shares outstanding used in the computation of ANI per share for all prior year periods presented reflect the number of adjusted shares for the period from the IPO date to September 30, 2020 for comparability purposes.

(2) Assumes the full exchange of Class B units in the Partnership for Class A common stock of SSG pursuant to the exchange agreement.

### Fee-Related Earnings

#### Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019

FRE increased $1.0 million, or 5%, to $22.3 million for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, primarily reflecting higher net management and advisory fees and lower general, administrative and other expenses, partially offset by higher cash-based compensation.

#### Nine Months Ended December 31, 2020 Compared to Nine Months Ended December 31, 2019

FRE increased $22.1 million, or 48%, to $68.4 million for the nine months ended December 31, 2020 as compared to the nine months ended December 31, 2019, primarily reflecting higher net management and advisory fees and lower general, administrative and other expenses, partially offset by higher cash-based compensation.

### Reconciliation of GAAP to Non-GAAP Measures

The table below shows a reconciliation of revenues to adjusted revenues.

*(in thousands)*

|  | Three Months Ended December 31, 2020 | 2019 | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $247,150 | $71,215 | $428,650 | $302,666 |
| Unrealized carried interest allocations | (150,681) | 14,860 | (176,050) | (85,474) |
| Deferred incentive fees | — | — | 4,700 | 799 |
| Adjusted revenues | $96,469 | $86,075 | $257,300 | $217,991 |

54

The table below shows a reconciliation of income before income tax to ANI and FRE.

*(in thousands)*

|  | Three Months Ended December 31, 2020 | 2019 | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Income before income tax | $116,935 | $18,231 | $174,983 | $97,277 |
| Net income attributable to non-controlling interests in subsidiaries(1) | (5,628) | (4,998) | (19,297) | (9,336) |
| Unrealized carried interest allocation revenue | (150,681) | 14,860 | (176,050) | (85,474) |
| Unrealized performance fee-related compensation | 73,629 | (6,993) | 83,487 | 43,552 |
| Unrealized investment income | (3,017) | (110) | (2,496) | (770) |
| Deferred incentive fees | — | — | 4,700 | 799 |
| Equity-based compensation | 3,206 | 482 | 4,641 | 1,432 |
| Amortization of intangibles | 835 | 1,343 | 2,505 | 4,029 |
| Write-off of unamortized deferred financing costs | — | — | 3,526 | — |
| Non-core items(2) | 768 | 1,202 | 5,037 | 4,047 |
| Pre-tax adjusted net income | 36,047 | 24,017 | 81,036 | 55,556 |
| Income taxes(3) | (9,012) | (6,004) | (20,260) | (13,889) |
| Adjusted net income | 27,035 | 18,013 | 60,776 | 41,667 |
| Income taxes(3) | 9,012 | 6,004 | 20,260 | 13,889 |
| Realized carried interest allocation revenue | (26,063) | (19,581) | (38,257) | (43,540) |
| Realized performance fee-related compensation | 10,241 | 10,418 | 17,952 | 24,582 |
| Realized investment income | (2,344) | (589) | (4,012) | (3,141) |
| Incentive fees | (313) | (229) | (5,098) | (2,626) |
| Deferred incentive fees | — | — | (4,700) | (799) |
| Interest income | (83) | (399) | (342) | (1,139) |
| Interest expense | 26 | 2,434 | 7,353 | 7,747 |
| Other (income) loss | (799) | 247 | (1,261) | 358 |
| Write-off of unamortized deferred financing costs | — | — | (3,526) | — |
| Net income attributable to non-controlling interests in subsidiaries(1) | 5,628 | 4,998 | 19,297 | 9,336 |
| Fee-related earnings | $22,340 | $21,316 | $68,442 | $46,334 |

(1) Includes income attributable to non-controlling interests in subsidiaries net of non-controlling interest portion of unrealized investment income (loss) ($0.1 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $(0.5) million and $0.3 million for the nine months ended December 31, 2020 and 2019, respectively), and non-controlling interest portion of loss on change in fair value for contingent consideration obligation ($0.2 million for the three and nine months ended December 31, 2020).

(2) Includes compensation paid to certain equity holders as part of an acquisition earn-out ($1.4 million for the nine months ended December 31, 2019), severance costs ($0.8 million for the three months ended December 31, 2019, and $4.1 million and $0.9 million for the nine months ended December 31, 2020 and 2019, respectively), transaction costs ($0.3 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $0.3 million and $1.1 million for the nine months ended December 31, 2020 and 2019, respectively), loss on change in fair value for contingent consideration obligation ($0.4 million for the three and nine months ended December 31, 2020), and other non-core operating income and expenses.

(3) Represents corporate income taxes at a blended statutory rate of 25.0% applied to pre-tax adjusted net income for all periods presented. The 25.0% is based on a federal statutory rate of 21.0% and a combined state, local and foreign rate net of federal benefits of 4.0%. As we were not subject to U.S. federal and state income taxes prior to the Reorganization and IPO, the blended statutory rate of 25.0% has been applied to all periods presented for comparability purposes.

### Investment Performance

The following table presents information relating to the performance of all the investments that StepStone recommends and subsequently tracks across asset classes and investment strategies, except as set forth in greater detail, below. The data for these investments is generally presented from the inception date of each strategy and asset class through September 30, 2020 and have not been adjusted to reflect acquisitions or disposals of investments subsequent to that date.

The historical results of our investments are not indicative of future results to be expected of existing or new investment funds, and are not a proxy for the performance of our Class A common stock, including because:

- market conditions and investment opportunities may differ from those in the past;
- the performance of our funds is largely based on the NAV (as defined below) of the funds’ investments, including unrealized gains, which may never be realized;
- newly-established funds may generate lower investment returns during the period that they initially deploy their capital;
- changes in the global tax and regulatory environment may impact both the investment preferences of our clients and the financing strategies employed by businesses in which particular funds invest, which may reduce the overall capital available for investment and the availability of suitable investments, thereby reducing investment returns in the future;
- competition for investment opportunities, resulting from the increasing amount of capital invested in private markets alternatives, may increase the cost and reduce the availability of suitable investments, thereby reducing investment returns in the future; and
- the industries and businesses in which particular funds invest will vary.

Historical and future returns of investments included in our track record are not directly correlated to potential returns on our Class A common stock.

For the purposes of the following table:

- “Invested capital” refers to the total amount of all investments made by a fund, including commitment-reducing and non-commitment-reducing capital calls;
- “NAV” refers to the estimated fair value of unrealized investments plus any net assets or liabilities associated with the investment as of September 30, 2020;
- “IRR” refers to the annualized internal rate of return for all investments within the relevant investment strategy on an inception-to-date basis as of September 30, 2020 (except as noted otherwise, below), based on contributions, distributions and unrealized value;
- “Net IRR” refers to IRR net of fees and expenses charged by both the underlying fund managers and StepStone; and
- “Net TVM” refers to the total value to paid-in capital or invested capital expressed as a multiple, and is calculated as distributions plus unrealized valuations divided by invested capital (including all capitalized costs).

### StepStone Performance Summary

| PRIVATE EQUITY INVESTMENT STRATEGY(1,3) | NET IRR(2) | NET TVM(2) | REAL ESTATE INVESTMENT STRATEGY(3,4) | NET IRR(2) | NET TVM(2) | INFRASTRUCTURE INVESTMENT STRATEGY(3,5) | NET IRR(2) | PRIVATE DEBT INVESTMENT STRATEGY(3,7) | IRR(7) |
| --- | ---: | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Primaries | 15.4% | 1.5x | Core/Core+ fund investments | 7.8% | 1.4x | Primaries | 7.5% | Direct lending (Gross)(8) | 6.1% |
| Secondaries | 17.3% | 1.4x | Value-add/opportunistic fund investments | 8.8% | 1.3x | Secondaries | 13.3% | Distressed debt (Gross)(8) | 7.8% |
| Co-investments | 19.8% | 1.6x | Real estate debt fund investments | 4.8% | 1.1x | Co-investments(6) | 7.6% | Other (Gross)(8,9) | 8.7% |
|  |  |  | Value-add/opportunistic secondaries & co-investments | 15.8% | 1.3x |  |  | **Private debt gross track record(8)** | 7.1% |
|  |  |  |  |  |  |  |  | **Private debt net track record** | 6.3% |

(1) Private Equity includes 1,043 investments totaling $97.0 billion of capital commitments and excludes (i) two advisory co-investments and 107 client-directed investments, totaling $100.0 million and $9.4 billion, respectively, of capital commitments, (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client’s first cash flow date.

(2) Net IRR and Net TVM are presented solely for illustrative purposes and do not represent actual returns received by any investor in any of the StepStone Funds represented above. StepStone fees and expenses are based on the following assumptions (management fees represent an annual rate):

i. Primaries: 25 basis points of net invested capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs.

ii. Secondaries: 125 basis points (60 basis points for Infrastructure) on capital commitments in years 1 through 4 for management fee. In year 5, management fees step down to 90% of the previous year’s fee. Secondaries also include 5 basis points of capital commitments for fund expenses and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Secondaries also include 12.5% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle.

iii.Co-investments: 100 basis points on net committed capital for management fee, 5 basis points of capital commitments for fund expenses, and 1 basis point of capital commitments drawn down in the first cash flow quarter for organizational costs. Co-investments also include 10.0% of paid and unrealized carry (15.0% of paid and unrealized carry for Real Estate), with an 8% preferred return hurdle.

Net IRR and Net TVM for certain investments may have been impacted by StepStone’s or the underlying fund manager’s use of subscription backed credit facilities by such vehicles. Reinvested/recycled amounts increase contributed capital. Investment returns reflect NAV data for underlying investments as of September 30, 2020, as reported by underlying managers up to 100 days following September 30, 2020. For investment returns where NAV data is not available by 100 days following September 30, 2020, such NAVs are adjusted for cash activity following the last available reported NAV.

(3) Investments of former clients are included in performance summary past the client termination date until such time as StepStone stops receiving current investment data (quarterly valuations and cash flows) for the investment. At that point, StepStone will then ‘liquidate’ the fund by entering a distribution amount equal to the last reported NAV, thus ending its contribution to the track record as of that date. Historical performance contribution will be maintained up until the ‘liquidation’ date.

(4) Real Estate includes 389 investments totaling $57.6 billion of capital commitments and excludes (i) 24 client-directed investments, totaling $2.7 billion of capital commitments, (ii) three secondary core/core+ investments, totaling $237.8 million, and (iii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client’s first cash flow date. Includes the discretionary track record of Courtland Partners, Ltd., which StepStone acquired on April 1, 2018 (the “Courtland acquisition”).

(5) Infrastructure includes 118 investments totaling $21.8 billion of capital commitments and excludes (i) approximately 11 infrastructure investments made by the Partnership prior to the formation of the Infrastructure subsidiary in 2013 or made prior to the Courtland acquisition, and eight client-directed investments, totaling $501.9 million and $548.7 million, respectively, of capital commitments, and (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client’s first cash flow date.

(6) Includes asset management investments.

(7) Private Debt includes 463 investments totaling $21.1 billion of capital commitments and excludes (i) 22 client-directed investments, totaling $1.4 billion of capital commitments, and (ii) investments for which StepStone does not provide monitoring and reporting services to the client that made the investment. Investment returns are calculated on a constant currency adjusted reporting basis converting non-USD investment cash flows and NAVs to USD using the foreign currency exchange rate corresponding to each client’s first cash flow date. IRR is presented solely for illustrative purposes and does not represent actual returns received by any investor in any of the StepStone Funds represented above. StepStone fees and expenses are based on the following assumptions (management fees represent an annual rate): Private Debt fund investments include 65 basis points on the quarterly net asset value for management fee. Net IRR for certain investments may have been impacted by StepStone’s or the underlying fund manager’s use of subscription backed credit facilities by such vehicles. Reinvested/recycled amounts increase contributed capital. Investment returns reflect NAV data for underlying investments as of September 30, 2020, as reported by underlying managers up to 100 days following September 30, 2020. For investment returns where NAV data is not available by 100 days following September 30, 2020, such NAVs are adjusted for cash activity following the last available reported NAV.

(8) Subset performance is presented net of fees and expenses charged by the underlying fund manager only (performance results do not reflect StepStone fees and expenses).

(9) Other includes mezzanine debt, infrastructure debt, collateralized loan obligations, private performing debt, senior debt, fund of funds, leasing, regulatory capital, trade finance and intellectual property/royalty.

### Liquidity and Capital Resources

### Sources and Uses of Liquidity

We generate cash primarily from management and advisory fees and realized carried interest allocations. We have historically managed our liquidity and capital resource needs through (a) cash generated from our operating activities, (b) realizations from investment activities, (c) borrowings, interest payments and repayments under credit agreements and other borrowing arrangements, (d) funding capital commitments to our funds, and funding our growth initiatives, including capital expenditures and acquisitions to expand into new businesses.

As of December 31, 2020, we had $189.0 million of cash, cash equivalents and restricted cash and $700.3 million of investments in StepStone Funds, including $636.9 million of accrued carried interest allocations, against $320.9 million in accrued carried interest-related compensation payable. On September 18, 2020, we repaid in full the indebtedness outstanding on the Term Loan B in the amount of $146.6 million. As of December 31, 2020, we had no debt obligations outstanding.

Ongoing sources of cash include (a) management and advisory fees, which are collected monthly or quarterly, (b) carried interest allocations and incentive fees, which are volatile and largely unpredictable as to amount and timing; and (c) distributions from our investments in the StepStone Funds. We use cash flow from operations and distributions from our investments in the StepStone Funds to pay compensation and related expenses, general and administrative expenses, income taxes, capital expenditures, dividends to our stockholders and distributions to holders of Partnership units, and to make investments in the StepStone Funds. We believe we will have sufficient cash to meet our obligations for the next 12 months.

### Cash Flows

The following table summarizes our cash flows attributable to operating, investing and financing activities:

*(in thousands)*

|  | Nine Months Ended December 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $120,297 | $67,850 |
| Net cash provided by (used in) investing activities | (8,549) | 38,041 |
| Net cash used in financing activities | (12,505) | (30,342) |
| Effect of exchange rate changes | (191) | (57) |
| Net increase in cash, cash equivalents and restricted cash | $99,052 | $75,492 |

#### Operating Activities

Operating activities provided $120.3 million and $67.9 million of cash for the nine months ended December 31, 2020 and 2019, respectively. For the nine months ended December 31, 2020 and 2019, respectively, these amounts primarily consisted of the following:

- net income, after adjustments for non-cash items, of $6.2 million and $15.6 million; and
- net change in operating assets and liabilities of $114.1 million and $52.3 million, primarily reflecting changes in accrued compensation and benefits, accrued carried interest-related compensation, and due from affiliates.

#### Investing Activities

Investing activities provided (used) $(8.5) million and $38.0 million of cash for the nine months ended December 31, 2020 and 2019, respectively, and primarily consisted of the following amounts:

- net contributions to investments of $7.5 million and $5.4 million;
- purchases of fixed assets of $1.0 million and $0.2 million; and
- net proceeds from sales and maturities of marketable securities of $0 million and $43.7 million.

#### Financing Activities

Financing activities used $12.5 million and $30.3 million of cash for the nine months ended December 31, 2020 and 2019, respectively, and primarily consisted of the following:

- sale of non-controlling interests of $3.3 million and $110.8 million;
- proceeds from IPO, net of underwriting discounts of $337.8 million and $0 million;
- purchase of non-controlling interests of $131.3 million and $107.2 million;
- payment of deferred offering costs of $9.7 million and $0 million;
- payments on term loan of $147.0 million and $1.1 million; and
- distributions to non-controlling interests of $64.9 million and $31.7 million.

### Prior Credit Agreement

In March 2018, we entered into a credit and guaranty agreement (“Credit Agreement”) with various lenders. The Credit Agreement was arranged by JPMorgan Chase Bank, N.A. (“JPMorgan”), as the administrative agent, and provided for the Term Loan B with an aggregate principal of $150.0 million and a senior secured revolving facility (“LOC”) with an aggregate borrowing capacity of $10.0 million. Net proceeds from the Term Loan B were $145.7 million, net of arrangement fees and other expenses. A portion of the proceeds were used to repay the outstanding balances on a prior credit facility.

On September 18, 2020, we repaid in full the indebtedness outstanding on the Term Loan B in the amount of $146.6 million and terminated the LOC. In connection with the repayment, we wrote-off the unamortized debt issuance costs and discount of $3.5 million, which is included in interest expense in the condensed consolidated statements of income for the nine months ended December 31, 2020. As of December 31, 2020, we had no debt obligations outstanding.

### Equity Transactions

In August 2019, we completed a series of transactions resulting in the unitization of our equity and the combination of certain classes of our equity to facilitate the sale of newly issued equity interests in us to certain institutional investors (the “2019 Transaction”). We received approximately $110.8 million in net proceeds from the sale of equity to institutional investors and used all of the proceeds to repurchase an equal number of equity interests from certain of our existing equity holders. In addition, we repurchased additional Class D partnership interests from a former employee for $2.3 million, which will be paid to the former employee at such time as carried interest allocations are realized by us. In connection with the 2019 Transaction, the previously existing Class A1, Class B, Class C and Class D partnership units were canceled and combined with and into the existing Class A partnership interests of the Company as a single class with equal value (without substantive changes to economic rights associated therewith), with each partner participating ratably in all distributions, including carried interest.

In June 2020, one of our consolidated subsidiaries completed a transaction to repurchase partnership interests in the subsidiary from a former partner for approximately $3.3 million, and subsequently sold an equal number of partnership interests to certain employees of the subsidiary for approximately $3.3 million, resulting in no net proceeds to the subsidiary.

In connection with the consummation of the IPO, we issued new partnership interests to certain StepStone professionals in the Infrastructure subsidiary in exchange for their partnership interests in the Infrastructure subsidiary, which increased our interest in the Infrastructure subsidiary to approximately 49% and decreased the interest of the StepStone professionals in the Infrastructure subsidiary to approximately 51%.

### Future Sources and Uses of Liquidity

In the future, we may issue additional equity or debt with the objective of increasing our available capital. We believe that we will be able to continue to meet our current and long-term liquidity and capital requirements through our cash flows from operating activities, existing cash and cash equivalents, and our ability to obtain future financing.

#### Dividend and Distribution Policy

We may pay dividends to holders of our Class A common stock in the future. The declaration and payment by us of any future dividends to Class A stockholders is at the sole discretion of our board of directors. Subject to funds being legally available, we will cause the Partnership to make pro rata distributions to its limited partners, including us, in amounts sufficient to make payment of applicable income and other taxes, to make payment under the Tax Receivable Agreements, and to make payment for corporate and other general expenses. Because our board of directors may determine to pay or not pay dividends to our Class A stockholders, our Class A stockholders may not necessarily receive dividend distributions relating to our excess distributions, even if the Partnership makes excess distributions to us.

#### Tax Receivable Agreements

We have entered into an Exchanges Tax Receivable Agreement with certain continuing partners of the Partnership and a Reorganization Tax Receivable Agreement with certain pre-IPO institutional investors (collectively, the “Tax Receivable Agreements”). The Tax Receivable Agreements provide for payment by SSG to these continuing partners and pre-IPO institutional investors of the Partnership of 85% of the amount of the net cash tax savings, if any, that SSG realizes (or, under certain circumstances, is deemed to realize) as a result of increases in tax basis (and utilization of certain other tax benefits) resulting from (i) SSG’s acquisition of such continuing partner’s and institutional investor’s Partnership units in connection with the Reorganization and IPO and (ii) in the case of the Exchanges Tax Receivable Agreement, any payments SSG makes under the Exchanges Tax Receivable Agreement (including tax benefits related to imputed interest). SSG will retain the benefit of the remaining 15% of these net cash tax savings under both Tax Receivable Agreements.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that would expose us to any liability or require us to fund losses or guarantee target returns to clients in our funds that are not reflected in our condensed consolidated financial statements. See notes 4 and 14, respectively, to our condensed consolidated financial statements included elsewhere in this quarterly report for information on variable interest entities and commitments and contingencies.

### Critical Accounting Policies

We prepare our condensed consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and judgments, however, are both subjective and subject to change, and actual amounts may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.

See note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report, and note 2 to our audited consolidated financial statements included in our prospectus dated September 15, 2020, filed with the SEC on September 16, 2020, for a summary of our significant accounting policies.

### Recent Accounting Developments

Information regarding recent accounting developments and their effects to us can be found in note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report.

## Market risk

As filed, 6,566 characters.

In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets in which we participate, including price risk, interest-rate risk, access to and cost of financing risk, liquidity risk, counterparty risk and foreign exchange-rate risk. Potentially negative effects of these risks may be mitigated to a certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other business activities that are designed to benefit, either in relative or absolute terms, from periods of economic weakness, tighter credit markets or financial market dislocations.

### Market Risk

Our predominant exposure to market risk is related to our role as general partner or investment manager for our focused commingled funds and SMAs and the sensitivities to movements in the fair value of their investments, which may adversely affect our performance fee revenues and investment income.

Our management fee and advisory fee revenue is only marginally affected by changes in investment values because our management fees are generally based on commitments or net invested capital and our advisory fees are fixed. As of December 31, 2020, NAV-based management fees represented approximately 2% of total net management and advisory fees. We estimate that a 10% decline in market values of the investments held in our funds as of December 31, 2020 would result in an approximate $0.5 million decrease to annual management fees.

The fair value of the financial assets and liabilities of our focused commingled funds and SMAs may fluctuate in response to changes in the fair value of a fund’s underlying investments, foreign currency exchange rates, commodity prices and interest rates. The effect of these risks is as follows:

- Incentive fees from our funds are not materially affected by changes in the fair value of unrealized investments because they are based on realized gains and subject to achievement of performance criteria rather than on the fair value of the fund’s assets prior to realization. As of December 31, 2020, we had $12.7 million of deferred incentive fee revenue recorded in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets.
- We earn carried interest allocation revenue from certain of the StepStone Funds based on cumulative fund performance to date, subject to specified performance criteria. Our carried interest allocation is affected by changes in market factors. However, the degree of impact will vary depending on several factors, including but not limited to (i) the performance criteria for each individual fund in relation to how that fund’s results of operations are affected by changes in market factors; (ii) whether such performance criteria are annual or over the life of the fund; (iii) to the extent applicable, the previous performance of each fund in relation to its performance criteria; and (iv) whether each funds’ performance related distributions are subject to contingent repayment. As a result, the impact of changes in market factors on carried interest allocation revenue will vary widely from fund to fund. An overall decrease of 10% in the general equity markets would not necessarily drive the same impact on our funds’ valuations, as many of our investments in our funds are illiquid and do not trade on any exchange. Additionally, as a large percentage of our carried interest allocation revenues are paid to employees as carried interest-related compensation, the overall net impact to our income would be mitigated by lower compensation payments. As of December 31, 2020, the maximum amount of carried interest allocation subject to contingent repayment was an estimated $92.8 million, net of tax, assuming the fair value of all investments was zero, a possibility that we view as remote.
- Investment income changes in relation to realized and unrealized gains and losses of the underlying investments in our funds in which we have a general partner commitment. Based on investments held as of December 31, 2020, we estimate that a 10% decline in fair value of the investments would result in a $6.3 million decrease in the amount of income.

### Exchange Rate Risk

Our business is affected by movements in the exchange rate between the U.S. dollar and non-U.S. dollar currencies in respect of revenues and expenses of our foreign offices that are denominated in non-U.S. dollar currencies and cash and other balances we hold in non-functional currencies. The amount of revenues and expenses attributable to our foreign offices is not material in relation to our U.S. offices. Therefore, changes in exchange rates are not expected to materially affect our condensed consolidated financial statements.

Certain of our focused commingled funds and SMAs hold investments denominated in non-U.S. dollar currencies that may be affected by movements in the exchange rate between the U.S. dollar and foreign currencies, which could affect investment performance. The currency exposure related to investments in foreign currency assets is limited to our general partner interest, which is typically no more than one percent of total capital commitments. Changes in exchange rates are not expected to materially affect our condensed consolidated financial statements.

### Interest Rate Risk

During the quarter ended September 30, 2020, we used a portion of the net proceeds from the IPO to repay in full the indebtedness outstanding on the Term Loan B in the amount of $146.6 million and accrued interest of $0.6 million. As of December 31, 2020, there were no debt obligations outstanding. Of the $189.0 million of cash, cash equivalents and restricted cash as of December 31, 2020, we estimate that interest income would increase by $1.9 million on an annualized basis as a result of a 100 basis point increase in interest rates.

### Credit Risk

We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting the counterparties with which we enter into financial transactions to reputable financial institutions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.

## Controls and procedures

As filed, 3,518 characters.

#### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.

Our management, under the supervision and with the participation of our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective to provide reasonable assurance that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We have not engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act, and therefore our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company.”

#### Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,725 characters.

There have been no material changes from the risk factors previously disclosed in “Risk Factors” included in our prospectus dated September 15, 2020, filed with the SEC on September 16, 2020, except for changes to the risk factor titled “The exit of the UK from the EU (Brexit) could adversely affect our business and our operations,” as set out below.

***The exit of the UK from the EU (Brexit) could adversely affect our business and our operations.***

The UK left the EU on January 31, 2020 and entered into a new trade and cooperation agreement with the EU on December 30, 2020 (the “Trade Agreement”). The nature of the future relationship between the UK and the EU remains uncertain. Brexit has caused significant geo-political uncertainty and market volatility in the UK and elsewhere. Depending on the success of the Trade Agreement and the terms of the future relationship between the parties, the UK could lose access to the single EU market and to the global trade deals negotiated by the EU on behalf of its members, which could have a material adverse effect on our operations and the operations of the portfolio companies in which our funds invest. For example, a decline in trade could affect the attractiveness of the UK as a global investment center and, as a result, could make doing business in Europe more difficult.

Under the EU single market directives, mutual access rights to markets and market infrastructure exist across the EU and the mutual recognition of insolvency, bank recovery and resolution regimes applies. In addition, certain regulated entities licensed or authorized in one EEA jurisdiction may operate on a cross-border basis in other EEA countries in reliance on passporting rights and without the need for a separate license or authorization. With the expiration of the Brexit transition period on December 31, 2020, UK regulated entities lost the right to passport their services to EEA countries, and EEA entities lost the right to reciprocal passporting into the UK. In response to this, as planned, we have engaged our affiliate entity, StepStone Group Europe Alternative Investments Limited (“SGEAIL”), formerly known as Swiss Capital Invest Holding (Dublin) Limited, which is based in the EU, to allow us to continue to engage in regulated activities within the EU. SGEAIL is authorized by the Central Bank of Ireland pursuant to AIFMD and UCITS and authorized to provide certain MiFID II services. We also may establish offices in various EU jurisdictions to employ and supervise operations in such jurisdictions. While we believe that taking these steps will help to ensure that we are able to continue to conduct business in the UK and the EU after Brexit, there remains some uncertainty as to the full extent to which our business could be adversely affected. Further, the UK’s departure from the EU and the potential resulting divergence between the UK and EU regulatory frameworks may result in additional complexity and costs in complying with regulations across both the UK and EU. See “Business—Regulatory Environment—Foreign Regulation” in our prospectus dated September 15, 2020, filed with the SEC on September 16, 2020, for additional information about the potential effects of the loss of passporting privileges and our planned responses. The movement of capital, the right of establishment and the mobility of personnel may also be restricted. In addition, UK entities may no longer have access rights to market infrastructure across the EU and the recognition of insolvency, bank recovery and resolution regimes across the EU may no longer be mutual.

Brexit has also caused exchange rate fluctuations. In particular the British pound has weakened significantly against both the U.S. dollar and the Euro. Further exchange rate volatility may occur. Unhedged currency fluctuations have the ability to adversely affect our funds and their underlying business investments.

Further, the UK’s determination as to which, if any, EU laws to repeal, retain, replace or replicate upon its exit from the EU could exacerbate the uncertainty and result in divergent national laws and regulations. Changes to the regulatory regimes in the UK or the EU and its member states could materially affect our business prospects and opportunities and increase our costs, or require us to adhere to new regulations that may be burdensome for us. In addition, Brexit could potentially disrupt the tax jurisdictions in which we operate and affect the tax benefits or liabilities in these or other jurisdictions in a manner that is adverse to us and/or our funds. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.

Filed Feb 11, 2021.
Source: SEC EDGAR, the filing index for accession 0001796022-21-000007. Last ingested by Listed: Nov 10, 2026, 04:46 ET. No prices; not investment advice.