IPO Launch: StepStone Group Readies $280 Million IPO

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StepStone Group (STEP) intends to raise $280 million in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides private market portfolio development services to a variety of investors worldwide.

STEP has produced uneven revenue due to its highly variable carried interest revaluations and the private asset advisory industry may contract in the short-term due to Covid-19 pandemic effects.

New York, New York-based StepStone was founded to develop private market asset expertise and provide customized portfolio construction advisory services to clients globally.

Management is headed by co-founder, Co-CEO and Chairman Mr. Monte Brem, who was previously Managing Director, Principal and President at the Pacific Corporate Group, a private equity firm.

Below is a brief overview video of StepStone:

Source: StepStone Group

The firm counts a variety of institutional and family offices as clients, as the chart breakdown shows below:

stepstoneclients

The company’s primary offerings include:

  • StepStone Private Markets Intelligence
  • Omni Database
  • Multi-Asset class expertise - private equity, infrastructure, private debt and real estate

The firm operates across almost all major regions worldwide, with most of its AUM/AUA coming from the Americas region, as the chart shows below:

stepstonemkts

Partners capital totaled nearly $237 million as of March 31, 2020. from investors including Argonaut Holdings, Sanford Energy, Thomas Alcott Bradley, and David Jeffrey.

The company pursues new institutional clients through a direct business development & marketing approach as well as through fund distributors.

A significant portion of the firm's AUM/AUA comes from regions outside the Americas, so management retains offices in Dublin, Hong Kong, Lima, London, Rome, Sao Paulo, Seoul, Tokyo, Toronto and Zurich.

G&A and Other expenses as a percentage of total revenue have been uneven as revenues have varied.

The G&A and Other efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of G&A and Other spend, was negative (15.7x) in the most recent reporting period. The negative figure was due to negative revenue as a result of a large negative carried interest charge.

According to a 2020 market research report by ResearchAndMarkets, the global market for wealth management was valued at an estimated $487 billion in 2019 and is expected to initially contract due to the Covid-19 pandemic and ultimately rebound to $585 billion by 2023.

This represents a forecast CAGR of 9.4% from 2021 to 2023.

The main drivers for this expected growth are an increasing retiree population, growing wealth of high net worth individuals and increasing demand for alternative investments providing adequate yield opportunities.

Also, aspects that could negatively impact the wealth management industry include continued dampening effects from the Covid-19 pandemic, the rise of Fintech firms seeking to automate services and increasing usage of passage investing techniques.

North America was the largest region, representing 53.7% of the total market in 2019, followed by Western Europe, the Asia Pacific region, and others.

Notably, the Western Europe region is expected to grow the fastest followed closely by the Asia Pacific region.

The wealth management market is highly fragmented, 'with a large number of small players.' Major participants include ultra-large U.S. and Swiss banks.

StepStone’s recent financial results can be summarized as follows:

  • Uneven total revenue
  • Variable operating income
  • Uneven cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

stepstonepl

Source: Company registration statement

As of June 30, 2020, StepStone had $90.7 million in cash and $393.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $62.3 million.

StepStone intends to raise $280 million in gross proceeds from an IPO of its Class A common stock, selling 17.5 million shares at a proposed midpoint price of $16.00 per share.

Class A common stockholders will be entitled to one vote per share while Class B shareholders will be entitled to five votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $1.6 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 18.46%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use $186.5 million of the net proceeds from this offering to purchase newly issued Partnership units, at a per-unit price equal to the per-share price paid by the underwriters for shares of our Class A common stock in this offering.

We intend to use approximately $74.6 million, or approximately $113.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock, of the net proceeds from this offering to purchase Class B units from certain of the Partnership’s unitholders, including certain members of our senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of our Class A common stock in this offering. Accordingly, we will not retain any of this portion of the proceeds.

We intend to cause the Partnership to use approximately $147.3 million of the remaining net proceeds to repay in full the indebtedness outstanding, including accrued interest, under our Term Loan B, which is scheduled to mature in March 2025 and bears an interest rate of approximately 5.0% as of June 30, 2020, and terminate such facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Existing Credit Agreement” for a description of the Term Loan B.

Additionally, we intend to cause the Partnership to use approximately $6.0 million of the remaining net proceeds to pay the expenses incurred by us in connection with this offering and the Reorganization.

We intend to cause the Partnership to use any remaining net proceeds to facilitate the growth of our existing businesses, to expand into new businesses that are complementary to our existing businesses and for other general corporate purposes.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are J.P. Morgan, Goldman Sachs, Morgan Stanley, Barclays and UBS Investment Bank.

Commentary

StepStone is seeking public investment to fuel its global growth plans.

The company’s financials have been uneven and ‘lumpy’ with its non-cash carried interest allocation valuations providing either large gains to income or large losses, skewing net results in the process.

G&A and Other expenses as a percentage of total revenue has predictably varied; its G&A and Other efficiency rate has also been highly uneven due to the variability in total revenue.

The market opportunity for private asset wealth management is large and expected to grow after the ill effects of the Covid-19 pandemic recede.

J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 68.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to other private asset wealth manager Hamilton Lane, the IPO is reasonably valued.

However, investors in STEP would have to be comfortable with the firm’s highly uneven revenue figures.

During good periods, those revenues will swell from non-cash carried interest valuation adjustments, but bad years/periods will also occur, as has happened in the most recent reporting period, skewing results heavily negative in the process and potentially confusing investors.

With the firm’s gyrating revenue figures and an industry expected to contract over the short-term due to Covid-19, my opinion on the IPO is NEUTRAL.

Expected IPO Pricing Date: September 15, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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