StepStone Group (STEP) Q2 2027 earnings review
StepStone's fee profit jumps, but it cancels the extra dividend
StepStone Group, which manages private-market investments for institutions and wealthy individuals, grew its recurring fee profit much faster than its costs. Core fee-related profit jumped 56% from a year ago to $122 million as employee cash pay took a smaller share of revenue, lifting the core fee margin to 42%. Finance chief David Park improved the full-year cash pay outlook, so by our math the plan keeps that cost ratio near 42% in the second half. Clients also committed $42 billion of uninvested capital that will pay fees once put to work.
| Fee revenue, excluding catch-up fees | +35% from a year ago by our math (reported +37%) |
|---|---|
| Core fee-related profit margin | 42% 36% a year ago |
| Undeployed fee-earning capital | $42.4B +42% from a year ago |
| FY27 cash pay ratio outlook | Improved to ~42% from 43% of fee revenue previously |
⚖️ Verdict: 🟢 Bullish
The story got better because institutional fundraising and operating leverage beat expectations, proving the fee engine does not depend on one-off catch-up fees. One caution: strategy head Mike McCabe cancelled this year's extra annual dividend to save cash for next year's buyout of employee stakes in the private wealth unit, and quarterly inflows into those wealth funds slowed to $1.7 billion.
The question now is how much of the fast-growing fee stream public shareholders will keep per share after the private wealth buyout next year. Either the new 42% margin and $42 billion backlog outpace the new shares and debt issued in the buyout, or the buyout formula hands most of the wealth unit's growth to insiders. The buyout financing mix over the next 12 months and third-quarter wealth inflows will decide it.
🐂 Bull Case
Operating Leverage Lifted Core Fee Margin to 42%
StepStone measures its recurring operating profit with fee-related earnings (FRE), which strips out volatile deal bonuses and accounting charges. Chief executive Scott Hart said this profit reached $126.2 million, "surpassing last quarter's prior high by 20%". Even without $4.2 million in catch-up fees from new fund investors, core fee profit rose 56% from a year ago to $122 million.
That lifted the core fee profit margin by 6 percentage points to 42%. Employee cash pay — the firm's main operating cost — dropped by 5.3 percentage points of fee revenue to 40.8% by our math, while overhead and private wealth distribution costs fell 1 point to 14.7%. Finance chief David Park lowered the full-year cash pay outlook from 43% of fee revenue to 42%.
Park warned, however, "I caution you against using that as a run rate for the rest of the year." The firm hired staff late in the quarter, and client conferences in the next two quarters will push overhead up. What to watch: the cash pay ratio next quarter; holding at or below 42% as new hires collect full salaries would prove the margin gain is durable.
Record Institutional Inflows Pushed Committed Backlog to $42 Billion
Large institutional clients kept handing money to StepStone despite a slow private-markets exit environment. The firm raised over $11 billion in the quarter and $43 billion over the past 12 months, which Hart called "our strongest 12-month period of fundraising in our history". Strategy head Mike McCabe highlighted $7.5 billion of inflows into separately managed accounts (SMAs), custom portfolios built for single institutions.
- Undeployed fee-earning capital (UFEC, committed client money that pays fees once invested): $42.4 billion, up 42% from a year ago
- Debut infrastructure secondaries fund (buying existing infrastructure stakes): closed at its $1.5 billion cap
- Venture capital secondaries fund: activated after quarter-end, adding $1.8 billion to fee-paying assets in the third quarter
- Flagship pooled funds in market: over $11 billion raised toward a $20 billion prior-cycle baseline
These commitments offset $3.2 billion of custom-account outflows, which included a $1.5 billion account expiration management had flagged in advance. Total fee-earning assets under management (FEAUM) still rose 19% from a year ago to $158.2 billion. What to watch: first closes for the real estate secondaries and growth equity funds in early calendar 2027, which would replenish the $42.4 billion backlog as active funds start charging fees.
Pooled Funds Keep Lifting the Average Fee Rate
StepStone manages two main account types: custom accounts for institutions and focused commingled funds, which pool money from multiple investors and charge nearly three times the fee rate. Commingled funds grew 35% from a year ago to $73.6 billion, reaching 46.5% of fee-earning assets by our math, up from 41.1% a year earlier.
Because pooled funds and private wealth products grew faster than custom accounts, StepStone's average management fee rate over the past 12 months climbed to 0.67%, up from 0.63% a year ago. Fee revenue from pooled funds jumped 53% from a year ago to $194.4 million, driving total fee revenue up 37% to $297.6 million (or 35% excluding catch-up fees by our math).
What to watch: the average fee rate across non-private-equity funds next quarter. Park noted that new infrastructure co-investment and secondaries funds carry higher fee rates than older products, so continued inflows there would lift the firm-wide fee yield even while private-equity secondaries fees stay flat.
🐻 Bear Case
Private Wealth Buyout Will Cost Shareholders the Extra Dividend
StepStone's fast-growing private wealth unit is partly owned by the unit's employees through profit-sharing stakes. Every quarter, as the wealth business grows, StepStone records a larger accounting charge for the rising value of those stakes — $372.6 million this quarter, which pushed the company to a $71.2 million net loss under standard accounting.
StepStone can buy out those employee stakes starting in the second half of calendar 2027. To prepare, McCabe said "we intend to build cash by retaining the capital that would otherwise fund our supplemental dividend this fiscal year" — an extra payout that gave shareholders $0.55 per share last year. Management can use debt, cash and "to fund up to 75% of the consideration in StepStone equity".
Meanwhile, those wealth stakes claimed $29.6 million of StepStone's fee-related profit this quarter, nearly triple a year ago and 23.5% of the firm-wide total by our math. Public shareholders are giving up their extra cash dividend now to fund a buyout that will mostly issue new shares. What to watch: the buyout liability value in the second-quarter filing, which will show the current cash minimum.
Private Wealth Inflows Dropped Below Two Billion Dollars
The private wealth platform sells continuously open funds (evergreen funds) to wealthy individuals and acts as both a major fee growth driver and a source of volatility. Management previously pointed to a quarterly pace above $2 billion after collecting $2.8 billion in the first quarter. In the second quarter, subscriptions dropped to $1.7 billion, even as president Jason Ment said the dealer network grew by 40 to 50 partners to over 860.
Total wealth assets passed $23 billion with client withdrawals at 2%. Still, the drop from $2.8 billion to $1.7 billion shows how heavily the first quarter relied on demand for SPRING, its venture and growth fund, even though Ment said 55% of year-old partners sell two or more funds. Ment added, "You should expect to see announcements including StepStone as part of the private market solution for 401(k) solutions."
What to watch: third-quarter private wealth subscriptions. A rebound above $2 billion would show the second quarter was a normal summer pause rather than a lasting slowdown across the 860-partner network.
Uncollected Deal Profits Topped One Billion Dollars
StepStone earns a share of investment profits, called carried interest, when underlying funds sell holdings above a target return. On paper, this backlog of net accrued carry rose 23% from a year ago to $1.03 billion by our math ($2.38 billion gross minus $1.36 billion owed to employees). Park noted that 65% of this backlog is tied to fund programs "older than five years, which means that these programs are ready to harvest".
Actual cash payouts tell a slower story. Performance fee-related earnings (PRE, the cash deal profits StepStone keeps after paying staff bonuses) fell 5% from a year ago to $32.3 million. While that beat the $15.8 million collected last quarter, deal exits remain slow enough that paper profits are piling up three times faster than the firm turns them into cash.
What to watch: realized performance fees in the fourth quarter, after the third quarter's annual fee calculation for evergreen funds passes; sustained readings above $35 million would show the mature backlog is finally converting.
Risks this quarter didn't answer
Four standing concerns from prior quarters received no new numbers in the earnings release or on the call, leaving their resolution to the quarterly filing or the December quarter.
- December performance fee for the SPRING wealth fund: Ment declined to estimate the year-end payout after last year's $208 million windfall, noting only that $70 million of net cash left the fund in a September special payout.
- AI software risk inside private credit and venture portfolios: Hart said the firm relies on diversification across managers and vintages, without quantifying how much of the portfolio sits in software borrowers.
- 2027 buyout of minority stakes in real estate, infrastructure and debt units: the prior filing warned the annual exchange could be skipped if StepStone's valuation multiple stays low; the upcoming 10-Q will update the multiple input.
- Board oversight of the private wealth buyout: the 10-Q will confirm whether the board completed its transition to a majority of independent directors by the September 2026 deadline ahead of the buyout talks.
👓 Other Themes
Higher Interest Rates Slow Deal Exits Across Private Markets
The 10-year US Treasury yield crossed 5% during the quarter, keeping private-market asset sales near historic lows with $15 trillion of industry capital still unsold, Hart said. Because buyers can no longer rely on cheap debt, StepStone is pitching its secondary funds to cash-strapped investors and rolling out free portfolio software (Total Portfolio Allocator), SPI AI, and six FTSE Russell indices, which McCabe called a longer-term revenue build.
💲 Other KPIs
Profit per share excluding one-offs (adjusted net income per share, which strips out unrealized deal marks and the private wealth buyout charge) rose 22% from a year ago to $0.66, up from $0.48 last quarter. That was the second-highest quarterly profit in StepStone's history, driven entirely by the 61% jump in recurring fee-related profit while net cash deal fees dipped 5%.
Corporate cash and equivalents (excluding cash held inside consolidated investment funds) rose from $213.1 million in March to $297.0 million, while corporate debt obligations edged up from $270.6 million to $286.2 million. By our math, that swung the asset manager from $57.5 million of net debt six months ago to $10.8 million of net cash as it builds reserves for next year's private wealth buyout.
Adjusted weighted-average shares — which count all partnership units that can be swapped into public Class A stock — rose 2.5% from a year ago to 125.5 million, following the May 2026 issuance of shares and units to buy in minority stakes in its asset-class subsidiaries. From last quarter, the share count dipped by 418,000 shares by our math.
🔮 Guidance
Raised (cost ratio lowered). Park improved the full-year employee cash pay plan by 1 percentage point to 42% of fee revenue after the second quarter landed at 41%. By our math, that leaves the ratio averaging 42% across the second half of the fiscal year, up 1 point from this quarter as late-quarter hires collect full salaries.
Unchanged from last quarter and up 18% from the $0.28 per share paid a year ago. The board declared $0.33 per share payable on December 15, 2026, keeping the regular quarterly payout steady even as the firm holds back cash elsewhere.
Withdrawn. McCabe announced that the private-markets firm will skip its annual supplemental dividend for fiscal 2027 after paying $0.40 and $0.55 per share over the last two years. Retaining that cash helps fund the upcoming buyout of the private wealth employee stakes within the next 12 months.
❓ Key Questions
What profit figure sets the private wealth buyout price?
Minority stakes in the private wealth unit took $29.6 million of fee-related profit this quarter, nearly triple a year ago. Management has not disclosed the unit's standalone revenue, profit margin or the exact formula inputs driving the multi-billion-dollar buyout liability.
Did StepStone pause share buybacks to save cash?
Management cancelled the extra annual dividend to save cash for the private wealth buyout. The release did not state whether the firm also paused stock repurchases under its $100 million March 2026 authorization during the quarter.
Why did private wealth inflows drop to $1.7 billion?
Gross subscriptions fell from $2.8 billion in the first quarter to $1.7 billion, dropping below the $2 billion mark even as the dealer network added 40 to 50 partners. Management did not say how much of the drop came from the SPRING fund.
Will the 2027 minority-stake exchange go ahead?
Last quarter's filing warned that the annual buyout of minority stakes in the real estate, infrastructure and debt units could be skipped in 2027 depending on StepStone's trading multiple. Management did not update that threshold on the call.