StepStone Group Inc. (NASDAQ:STEP) Q2 2023 Earnings Conference Call November 3, 2022 5:00 PM ET
Company Participants
Seth Weiss – MD of Corporate IR
Scott Hart – CEO
Michael McCabe – Head of Strategy & Director
Johnny Randel – CFO
Jason Ment – President & Co-COO
Conference Call Participants
Ben Budish – Barclays
Michael Cho – JPMorgan
Samantha Platt – Bank of America Merrill Lynch
Adam Beatty – UBS
Alex Blostein – Goldman Sachs
Michael Cyprys – Morgan Stanley
Operator
Welcome to the StepStone Fiscal Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session.
I’ll now turn the call over to your host, Seth Weiss, Managing Director, Corporate Investor Relations. Mr. Weiss, you may begin.
Seth Weiss
Thank you, and good afternoon. Joining me on the call today are Scott Hart, Chief Executive Officer; Jason, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategy; and Johnny Randel, Chief Financial Officer. During our prepared remarks, we will be referring to a presentation which is available on our Investor Relations website at shareholders.stepstonegroup.com.
Before we begin, I’d like to remind everyone that this conference call as well as the presentation contains certain forward-looking statements regarding the company’s expected operating and financial performance for future periods and our plans for future dividends. Forward-looking statements reflect management’s current plans, estimates and expectations and are inherently uncertain and are subject to various risks, uncertainties and assumptions.
Actual results for future periods and actual dividends declared may differ materially and those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone’s most recent 10-K. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them.
In addition, today’s presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation and our filings with the SEC.
Turning to our financial results for the second quarter of fiscal 2023. We reported a GAAP net loss of $67.1 million for the quarter ended September 30, 2022. The GAAP net loss attributable to StepStone Group, Inc. was $29.2 million. We generated fee-related earnings of $39.0 million, adjusted net income of $37.3 million and adjusted net income error of $0.33. The quarter had no impact from retroactive fees. This compares to retroactive fees in the second quarter of fiscal 2022 that contributed $2.3 million to revenue and $2.1 million to fee-related earnings and pretax adjusted net income.
I’ll now turn the call over to StepStone’s Chief Executive Officer, Scott Hart.
Scott Hart
Thank you, Seth, and good afternoon, everyone. We delivered another very strong quarter, generating our highest fee-related revenue and highest fee-related earnings ever despite continued volatility in the capital markets. This period’s results offer further evidence of the resilience of our business model across economic cycles.
Turning to our results on Slide 5. We generated $37 million in adjusted net income for the quarter or $0.33 per share. This is down from $0.40 in the prior year quarter as performance fees have moderated from record levels. Looking over our trailing four quarters, we generated $1.54 of adjusted net income per share, which is up 15% from a year ago. Included in our quarterly results are $39 million of fee-related earnings, our best period ever, up 48% from the prior year quarter and up 31% on a per share basis. These record results come despite no retroactive fees in the quarter.
As we highlighted last quarter, our fee-related revenues are extremely resilient. The vast majority of our management fees are contractually committed for multiple years. Additionally, our fees are generally tied to committed or invested capital and, therefore, not impacted by market fluctuations. Furthermore, our diversification across geographies, asset classes, managers and strategies provides Stepstone with a wide array of tools to help our clients navigate these challenging markets.
We view our fee-related earnings as the balance that, when coupled with our performance fees, produced earnings engine with extremely strong growth and efficient cash flow. To that end, we were excited to outline the approach to our capital management that will utilize the high predictability and visibility of our FRE to deliver a stable and growing quarterly dividend. This will be complemented by a recurring supplemental annual dividend that will generally be funded by our performance-related earnings. Mike will give more detail shortly.
Moving to assets under management. We finished the quarter with $135 billion of AUM and $80 billion of fee earning assets. Over the last year, we have grown fee-earning AUM by over $13 billion or 20% and generating consistent and balanced growth across the asset class and commercial structure.
We had an active period meeting with new and long-standing clients, and these conversations have further validated the message we have delivered on recent calls. While our clients and limited partners are undoubtedly cautious and selective, they are looking to stay invested and expect to see compelling opportunities across the private markets. Manager selection and asset allocation are particularly important in today’s environment, and StepStone is uniquely positioned to help investors navigate current conditions.
Late last month, we hosted the StepStone 360 Conference in New York, our annual investor conference. We were thrilled to host the event live after holding it virtually the prior two years. Our clients were enthusiastic to return to our conference in person with attendance up 30% pre-COVID levels and with roughly half the attendees traveling from outside the U.S.
Shifting to retail, making the private markets accessible to the individual investor is a central strategy for StepStone’s growth story, and we are excited to announce the rebranding of Conversus as StepStone private wealth. We continue to see strong flows from the individual investor, raising approximately $180 million for the quarter into our SeaPrime product, which will be rebranded S-Prime, and which now stands at more than $850 million of AUM and has generated an annualized return of 33% to our investors in its first 2 years since inception. Monthly subscriptions have reached an average of approximately $60 million over the quarter, up from $15 million per month this time last year.
As discussed on prior calls, we have a pipeline of additional retail products we intend to launch in the coming years, and are excited to announce the first close of our Private Venture and Growth Fund to be rebranded spring of $120 million after quarter end. We have also executed closes across offshore parallel funds and feeder funds into S-Prime and Spring totaling approximately $130 million, further opening our private market strategies for individual investors globally. With this change also comes a reorganization of our relationship with the StepStone Private Wealth team, which Mike will outline in more detail.
I’ll now turn the call over to Mike McCabe to speak about our asset growth, fee-related revenue growth and strategic initiatives in more detail.
Michael McCabe
Thanks, Scott. Turning to Slide 7. We generated $19 billion of gross AUM inflows in the last 12 months with greater than $7 billion coming from our commingled funds and greater than $11 billion in separately managed accounts.
Slide 8 shows our fee-earning AUM structure and asset class. For the quarter, we grew fee earning assets by over $1.5 billion. And subsequent to the quarter, we activated our PE secondaries fund, multi-strategy global venture capital fund and our first-ever infrastructure co-investment fund. These funds are still in fundraising mode, but the activations will result in approximately $2 billion of contributions to fee earning assets in our fiscal third quarter.
Additionally, Currency movements had a roughly $500 million drag on our fee earning assets this past quarter as dramatic U.S. dollar strengthening had enough sized impact. Looking over the last 12 months, we have grown fearing assets by $13 billion or 20%. When viewed over the longer term, we have generated a 28% organic growth rate since 2018. Our undeployed fee-earning capital stands at $16.5 billion, slightly lower than our prior quarter.
Now moving to growth by commercial structure for the quarter. We generated $700 million in fee earning assets in separately managed accounts. Commingled funds contributed about $800 million of net fee-earning assets for the quarter, driven in large part by deployments from our Senior Corporate Lending Fund and growth in our retail products. As of November 1, S Prime sits at more than $850 million of AUM.
When combined with the recently launched Spring Fund as well as offshore parallel funds and feeder funds, our retail platform has crossed the $1 billion threshold for a total of $1.1 billion. Along with this important milestone, and as Scott mentioned, we are thrilled to announce the rebranding of Conversus, as StepStone Private Wealth.
But we initially launched Conversus in 2019 as a wholly owned subsidiary we agreed to a flexible arrangement that provided the team with the right to buy the distribution, governance and administration business and make it an open architecture platform available to StepStone as well as other third-party managers. Given the tremendous success we’ve enjoyed, along with the growth in product development, we are making changes to ensure that the retail platform remains within StepStone and to align its growth strategy with our institutional growth strategy.
First, we’re eliminating the buyout option for the private wealth management team, consistent with our core tenet of building a culture around equity ownership, alignment of interest and performance-based compensation. We’ve established a mechanism for the private wealth team to participate in the growth of StepStone’s franchise and to incentivize further growth in the platform.
Going forward, the StepStone Private Wealth team will receive a profits interest equal to the ANI, earned by StepStone Private Wealth after covering all expenses associated with the dedicated distribution, governance and administration team, with an allocated portion of the associated fee revenue. While this will eventually lead to an effect similar to noncontrolling interest on our non-GAAP reporting, this arrangement will not be dilutive to our near-term earnings.
Additionally, we are locking in our ability to buy out the profits interest at an accretive price in the future through a quick call arrangement. This arrangement allows the StepStone Private Wealth management team to put the profits interest to StepStone beginning in July of 2026 and allows StepStone to call the profits interest beginning in July of 2027.
The full terms of the option agreement are incorporated in the 8-K we filed this afternoon and are summarized in a related FAQ document that we posted on our shareholders’ website. The approach towards compensation and incentives that we are taking with our retail strategy is one we have traveled many times as we expanded our capabilities beyond private equity into real estate, infrastructure and private debt. We believe these important strategic moves provide for better alignment and facilitate accelerating growth of this platform.
Slide 9 shows the evolution of our management and advisory fees where we are generating nearly $4 per share in revenues over the last 12 months, representing an annual growth rate of 25% since 2018. We generated a blended management fee rate of 55 basis points which is slightly higher than prior years due to a mix shift toward commingled funds from the contribution of Green Spring.
Now before turning the call over to Johnny, I would like to take the opportunity to discuss capital management and how we plan to approach dividends going forward. As we have discussed in the past, we have a capital-efficient business model that generates significant free cash flow. Similar to our earnings, our free cash flow generation comes from two sources.
First, fee-related earnings, which are highly visible and contractually linked to revenues committed for many years; second, performance fees, which we view as a backlog of earnings linked to over $550 million in net accrued carry that will be realized over time, but are more episodic in nature. In thinking through these sources of cash flow and after engaging with several investors and stakeholders, we plan to adopt an approach to dividends that is aligned to both our business model and to the preferences of our shareholders.
We have approved a dividend of $0.20 for this quarter. We expect to grow this quarterly dividend generally at the same pace as our fee-related earnings. This normal dividend provides a strong yield and payout. Additionally, we plan to augment our payout each year with a recurring supplemental dividend funded by excess cash that is generally tied to full year performance-based earnings. We plan to pay the supplemental dividend in addition to our regular quarterly dividend each June, subject to board approval.
With this approach, we expect our shareholders will benefit from both the growth in FRE with a steady and growing quarterly dividend and will realize tangible value from our performance fees through an annual supplemental payout. We believe the market is assigning relatively little value to alternative managers’ performance fees today. Our supplemental payout presents a concrete and transparent way for our shareholders to realize this value.
I will now turn the call over to our CFO, Johnny Randel.
Johnny Randel
Thank you, Mike. I’d like to turn your attention to Slide 11 to speak to a few of our financial highlights. For the quarter, we earned management and advisory fees of $119 million. The strength in revenue was driven primarily by continued growth in fee earning assets. Profitability remains very strong as our FRE margin expanded to 33% for the quarter, up approximately 100 basis points year-over-year and quarter-over-quarter. As Scott mentioned, we did not receive any retroactive fees in the current quarter, excluding the impact from retroactive fees in the prior quarter comparisons, we expanded our FRE margin by nearly 3 percentage points on both a year-over-year and quarter-over-quarter basis.
Shifting to expenses. Compensation was down nominally versus the prior quarter, as we saw some adjustments to bonus accruals, while G&A increased at a modest pace given incremental travel costs and professional fees. Gross realized performance and incentive fees were $32 million for the quarter, as realizations slowed from the elevated pace we had seen in the last five quarters, partially offset by strong incentive fees. We anticipate a continued moderation of realizations in the near term.
Moving to Slide 12. Adjusted revenue per share is 8% higher for the first two quarters of the fiscal year, driven by 27% growth in per share management and advisory fees, offset by a 20% decrease in performance fees. Speaking to the longer term, adjusted revenue per share has grown by a 30% compounded annual rate since fiscal 2018.
Shifting to our profitability on Slide 13. Fee related earnings per share has grown by 32% in our first two quarters. The increase was driven by growth in management and advisory fees and by margin expansion. Looking over the longer term, we have generated an annual growth rate of 45% and fee-related earnings per share since 2018.
Our year-to-date ANI per share is down relative to last year’s elevated level, but has an annual growth rate of 38% over the long-term period driven by robust growth in both fee-related earnings and realized net performance fees.
Moving to the balance sheet on Slide 14. Gross accrued carry finished the quarter at approximately $1.2 billion, which is $177 million lower than the previous quarter. The decrease is primarily driven by the reduction of underlying valuations during the June 30 period. As a reminder, our accrued carry balance is reported on a one quarter lag. Our own investment portfolio ended the quarter at $107 million, essentially flat versus the prior quarter. Unfunded commitments to these programs were $85 million as of quarter end.
Our pool of performance eligible capital has grown to $59 billion, and this capital is widely diversified across multiple vintage years and 165 programs. 63% of our unrealized carry is tied to programs with vintages of 2017 or earlier, which means that these programs are largely out of their investment periods and have entered harvest mode. 57% of this unrealized carry is sourced from vehicles with deal-by-deal waterfalls, meaning realized carry may be payable at the time of investment exits.
This concludes our prepared remarks. I’ll now turn it back over to the operator to open the line for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Ben Budish from Barclays. Please state your question.
Ben Budish
Hi, guys. Thanks for taking my questions. I wanted to ask about the FRE margin. I think last quarter, you said you were expecting about 30% for the year, and it looks like you’re tracking ahead of that and you came in a good bit ahead of our model for the quarter. Any kind of update to your full year expectations and maybe the longer-term trajectory?
Michael McCabe
Hi, Ben, it’s Mike McCabe here. And thanks for the question. Yeah, we came in a little bit ahead of what we expected in part to some benefits from expenses as well as other things going on. But look, I think our guidance that we offered about the full year hasn’t changed, and we still feel over the medium term, operating leverage will continue to kick in as we scale, and we still think that a margin somewhere, as we’ve discussed in the past, in the mid-30s as a part of the thesis that should be maintained. But we had a good quarter, and we feel good about the result. And we feel good as we head into the end of the year, but nothing has changed from our perspective in terms of what our expectations are.
Ben Budish
Great. And if I could maybe ask a follow-up on your retail flows. It looks like those kind of picked up nicely in the quarter, at least versus what we saw last quarter on kind of the $60 million a month. How much of that is due to kind of increased distribution versus same-store sales and as we kind of continue to go through the winter. Are you seeing a hesitancy on retail investors like we’re kind of seeing in some other areas? Or are you guys still kind of small enough and growing fast enough that you should kind of grow through that?
Jason Ment
Look, Jason here. Thanks, Ben. It is driven in part by expansion in the number of platforms and the types of platforms that we’re getting the funds on as well as same-store sales on repeat buyers, so to speak, with the channels we’re on. So it’s pretty broad based. The reaction to the product, in spite of volatile markets, continues to be very strong, and that relates to both S Prime and Spring. Spring, obviously, is just getting started this month. And the uptake for meetings and the like has been really positive and encouraging.
Ben Budish
Okay, great. Thanks so much for taking my questions.
Operator
Our next question comes from Ken Worthington from JPMorgan. Please state your question.
Michael Cho
Hi, good evening. This is Michael Cho in for Ken. I just wanted to touch on kind of fundraising and commitments through the end of the year. I guess we’re hearing that given all the fundraising earlier in the year that many pension funds don’t have the capacity to potentially invest in calendar 2022. And and that next year, that capacity could return. I guess, one, is this something that you are seeing? And if so, did it depress September flows at all? Or could this challenge December quarter commitments? And then two, conversely, could we actually see commitments step up early next year?
Scott Hart
Yeah, Michael, thanks for the question. This is Scott. And I think our commentary around the fundraising environment will really be a continuation of some of the comments that we’ve made over the last couple of quarters. I think you are right to highlight that because of the number of funds that have been in market fundraising, many LPs have had a significant number of re-ups in their pipeline, and that has meant that, in some cases, a good portion of their 2022 budget was spent early in the year.
Obviously, what has further complicated that is just the decline in the public markets and the resulting denominator effect. Now I would say, as we’ve been out on the road, speaking with our clients and prospective clients as we welcomed many of our clients at our 360 Conference a few weeks ago. We’ve been having many conversations with LPs. Look, the denominator effect is real. But what I would tell you is that don’t seem to be panicking. Certainly, in some cases, may have reduced budgets, but those budgets are not being reduced to 0. I think the challenge has been, there’s just no — there’s been no little sense of urgency, which has just resulted in timing taking a bit longer than during the hot fundraising markets that we’ve had over the last couple of years here.
And so whether that is the time between a commitment being approved and ultimately closed, whether that is the amount of time to get to the next closing on a commingled funds, we have seen a bit of a slowdown from a timing standpoint. But I think much of this is timing. Mike made the comment during our prepared remarks, that we have now activated a couple of our commingled funds post quarter end, which will help drive another $2 billion of fee-earning AUM in the next quarter.
And I do think that as we enter 2023, that will free up some budget in LP’s calendars and budgets there.
Michael Cho
Okay. Great. Wonderful. Thanks for that color. And then if I could just switch gears and just ask a quick follow-up on your — on the retail comments. Your progress is clearly very strong. I’m just kind of wondering, from a competitive perspective, can you provide any color around the, I guess, the competitive environment for your products and kind of in terms of — is there more or less competition for that retail alternative shelf space?
Scott Hart
So maybe I’ll start and then hand it to Jason to talk in a bit more detail. But as we think about the two products that we have started to raise in the retail space, both S-Prime and Spring. As we talked about in prior quarters, we really took a solutions-oriented approach the way that we approach the market there. Prime being our single ticket solution for the private markets and really capitalizing on some of the key differentiators of StepStone, that being a multi-asset class, multi-strategy global platform that has the ability to offer a product such as that one.
I think similarly, as we moved on to Spring, our ability, particularly post the Green Spring acquisition that closed just over a year ago, to offer a product like this is particularly differentiated and not existed in the market until spring. But maybe I’ll just ask Jason to provide any other comments he might make as it relates to the competitive market.
Jason Ment
Yeah. The only thing I’d add, Scott, is that as it relates to S Prime, in addition to it being multi-asset, remember, this is accredited eligible, which is differentiated from many of the other peer funds focused on private equity that are out there today.
Michael Cho
Okay, great. Thank you.
Operator
Our next question comes from Samantha Platt from Bank of America. Please state your question.
Samantha Platt
Thank you for taking my question. So I want to start with retail. Can you give us some color on where you see both the white spaces and the client demand from the retail side in terms of product offering?
Jason Ment
Sure. Thanks for the question, Jason. Again, look S Prime and Spring are the first two products. They’re not our last two products. The asset classes that we cover include infrastructure, real estate, private debt beyond just private equity. And we think that there is room for retail-oriented product across the asset classes, not ready to announce a fund going live just yet, but development opportunities across the asset classes exist for StepStone, where we think we can create products that are responsive to hold in the market and that play exactly to our strengths and the flywheel effects of the platform that we’ve created.
Samantha Platt
Great. And then just a follow-up. I want to touch on commingled fundraising quickly. Can you remind us what funds are coming — are currently raising and any large ones that are coming back to market in 2023?
Scott Hart
Sure. Thanks, Samantha. So if you look at Slide 29 of the earnings presentation, you’ll see a table with both our historic commingled funds as well as a list of those that are currently in market. A few comments that I would make. One, we have recently held our final close on our VC Micro fund at about $234 million above that funds target.
If you look at the table at the bottom of the page here, you’ll see a list of different funds, some of which Mike mentioned during his prepared remarks. So our private equity secondaries fund, which has, to date, closed on $1.2 billion was activated post quarter end. Our multistrategy global venture capital fund has closed on over $400 million similarly was activated post quarter end and our infrastructure a co-investment fund, the first of its kind here at StepStone has had initial closing as well.
There are several funds that have returned to market have not yet held first closings. Those would include our multi-strategy growth equity fund, our special situations, real estate fund as well as our corporate direct lending fund. And then obviously, prime and spring will both continue to raise on a go-forward basis here.
Samantha Platt
Great, thank you.
Operator
Our next question comes from Adam Beatty from UBS. Please state your question. Please state your question.
Adam Beatty
Thank you and good afternoon. I wanted to ask about the transition at Conversus and just obviously, there’s some changes to the economic structure. So I guess, number one is what level of maybe AUM or what have you coming through that group would we expect to start seeing some kind of notable impact on your adjusted income statement, whether it’s $0.01 per share or $1 million of ANI or what have you. So — and that will be helpful in terms of how the timing of when we should expect that. Also, I wanted to ask operationally if there was anything changing.
It sounds like there’s good traction and good momentum. You’re planning to grow the group. And also, is it still open architecture like it was at inception? Or are you adjusting that at all? Sorry for all the questions. Thank you.
Scott Hart
So thanks, appreciate. I’ll start on the first one and then maybe hand to Jason for the second. So on the first question, and again, sort of need to separate between the distribution business and part of the business being rebranded StepStone, private wealth here and the asset management part of the business, and we mentioned during some of our remarks, the fact that to date, the distribution business on its own has not been profitable. Clearly, the asset management side is we haven’t given specific guidance in terms of when that will cross over but I think have historically disclosed some of the fee rate as well as the splits on that business, which will hopefully be helpful as we progress.
And obviously, as we have done in the past, we’ll continue to keep you updated on both the flows and the current AUM across all of the retail-oriented products. But maybe to Jason for the second part of your question.
Jason Ment
Yeah. So no real change to the operating model with the team. We’ve ironed out how to work together as partners over the last two years, and it’s been going great. So no reason to fix something that isn’t broken. In terms of the team size, we’ve been continuously adding to the distribution team and the operations team that’s part of the private wealth platform to scale it not only with the AUM and the inflows, but also with the number of funds and number of parallel vehicles and the like from a governance perspective and an administration perspective. So team will continue to grow inside nearly 50 today.
And then in terms of scope and where they’re spending their time as we have expanded our capabilities, and as Scott alluded to earlier, spring being a great example and the Green Spring acquisition that closed last year, we think that we can create a number of offerings for this channel that are directly responsive to the needs of the channel. And so I would expect that the private wealth platform will be focused on StepStone powered product here into the future.
Adam Beatty
That’s great detail. Maybe just one more, if I could, maybe a quicker one. Just around the kind of the secondary dividend around the performance allocations, which seems like it should be a really positive development for shareholders. Just in terms of the level of payout or what have you, wondering how that might compare with the implied payout levels around your FRE-oriented dividends, which are obviously fixed for a few quarters. Thanks.
Michael McCabe
Yeah. Thanks, Adam. It’s Mike here. And as I mentioned in my remarks, the supplemental dividend we expect to fund once a year, every June in addition to the quarterly dividend. And look, we think it’s a way to better align the dividend with our business model and give shareholders the dual benefit of capitalizing on a very steady, reliable, growing base dividend or out of the FRE.
But more importantly, allowing our shareholders to capitalize on a very reliable and growing base dividend with the performance fees. The payout will be generally tied to a full year performance based earnings from our carried interest. So yeah, I think we’re looking at basically a full year performance fee-based earnings, subject to board approval, as we discussed, and we’re excited to make this announcement as well. So thank you.
Adam Beatty
Okay. Sounds good. Thank you, Mike. Appreciate it.
Michael McCabe
Welcome.
Operator
Our next question comes from Alex Blostein from Goldman Sachs. Please state your question.
Alex Blostein
Yeah, yes. Good evening. Thanks for the question I wanted to go back to one of the earlier questions around LP behavior and some of the allocation trends you guys are seeing, especially on the back of the conference you recently had. So — it feels like up until this point, the majority of the headwinds we’ve seen in the space have surrounded private equity, predominantly U.S. pension plans.
Given your fairly broad and global footprint, and obviously, you guys focused not just on private equity but other asset costs as well. Are you seeing any of the denominator effect headwinds spilling into sort of other asset classes outside of profit equity and again, particularly outside of the U.S. pension plan kind of LP base.
Scott Hart
Yeah, Alex, thanks for the question. I think I’ve said in the past that I’m not sure I completely agree with the narrative that is only limited to U.S. pension funds. I think the denominator effect has the bit impact others as well. But I think it’s probably been less prevalent, as you mentioned, in other asset classes where many LPs find themselves under allocated today. I think the difference that we’ve cited in the past as it relates to certain of the international markets where we’ve been active is that you still have a large number of LPs coming online with private market allocations for the first time.
And I think as we engage with our clients, there are other factors that may impact some of our international LPs, including some of the FX movements of late, which have impacted some of their unfunded commitments. So I think there are a variety of factors that are impacting LP allocations today. I think what continues to excite us about our position in the marketplace is that with our diversified platform across asset class.
I mean one of the things that you — and geographies, one of the things that you find is that at a time like this, where many of our clients believe this will be an interesting time to invest, and these will be attractive vintage years, but they may look to other strategies that were — it may have been out of favor over the last several years or more may have come into favor for various reasons.
So whether that is infrastructure as a result of the embedded inflation protection or some of the opportunities that we’re seeing around energy transition or energy security, whether that is in the private debt space where not only have you, which is largely floating rate, not only have you seen a rise in base rates, but also spreads increase. And so when you think about our teams investing at the very top of the capital structure at those increased rates, I think we’re seeing renewed interest there.
Our private debt teams thinking about opportunistic credit, so not just distress, but other areas where you can take on complexity or identify funding gaps to generate attractive returns. But even within asset classes like private equity and real estate, where I think we will see opportunities in and around the secondary space as a result of many of the things that are taking place in the market today. So I think there are plenty of opportunities and there’s plenty of interest among LPs to identify attractive opportunities in the coming vintage years here.
Alex Blostein
Very helpful. My second question, maybe just a clarification and a bit of a broader question as well about capital management. I guess, broadly in [indiscernible] kind of comments, nice job with the dividend. I think it will be welcome moved as well. Is — so essentially, you’re paying out 100% of PRE once a year. That’s kind of the bottom line. And what is the timing of that? Is that a December event? So you kind of decided by the end of the calendar year or is it a fiscal year?
And my bigger picture question, sorry for the multicolor, I guess. But how does that inform your broader capital allocation decisions, including the potential of buying out noncontrolling interest from teams on the debt side or the infrastructure side where you don’t currently have 100% ownership.
Scott Hart
Sure. Thanks, Alex. I think the payout is going to be largely in line, as I mentioned, with Alex, in line with the full year performance-based fee rate. Is it going to be 100% or close to 100%? That’s what our expectations are for now. But again, as I mentioned, it’s subject to board approval. And frankly, it’s tied to your — a little bit of your next question, and it’s also tied to the opportunities we see in the market.
So we wanted to do it on a recurring basis once a year and have the flexibility throughout the year to react to any opportunities that may arise. But the expectation is that we would make the payout each June. So it’s fiscal based subject to board approval that will be paid out in June in addition to the base quarterly dividend.
The second part of your question is, this does not inhibit our ability in any way, shape or form to pursue any other opportunities, whether it’s internal M&A and buying in the NCI or externally as we’ve done in the past. As you’ve seen in the past, whenever we do any kind of M&A, we prioritize alignment of interest, we prioritize equity ownership. And I think that we’ll continue to make that our priority as we think about buying in the NCI with our subs, likely be equity-based, not so much cash based.
But we have the flexibility to toggle between the considerations based on the environment that we’re in. But we would expect that that would not be much of a use of cash but more of a shared equity transaction and maintaining that important equity-like culture that got us to where we are today and maintaining those alignments of interest have also kept the teams working collaboratively and across asset classes and across strategies.
Alex Blostein
Super. Thanks very much.
Operator
Our next question comes from Michael Cyprys from Morgan Stanley. Please state your question.
Michael Cyprys
Yeah, good afternoon. Thanks for taking my question. Just maybe coming back to some of the commentary around the denominator effect that you were alluding to and some LPs perhaps being over their allocations. And then you layer in less realization activities, there’s just less distributions going back to LP.
So just given that setup, curious what sort of activity and interest you’re seeing around liquidity solutions that could be offered to LPs secondary transaction activity. What sort of activity levels are you seeing there? How is that trending? What might help accelerate that from here? And what sort of discounts are you seeing in the marketplace? And how is that trending?
Scott Hart
Sure. Thanks, Mike. Yes, look, I think this is something that we’ve talked about over the last couple of quarters is that as you do find LPs over allocated, we suspect that part of the solution will be looking to the secondaries market. I mean I think we’ve seen LPs handle this in a few different ways. One may be just slowing their commitments, typically by being a bit more selective about which of their re-ups to pursue. But over time, in particular, if this environment continues, we expect to see more LPs looking to tap in the secondaries market.
And as we’ve talked about in prior quarters, the growth in the secondary market, which had been so driven by GP-led secondaries over the last couple of years have now seen quite a bit of LP activity at least in terms of deal flow that is hitting our funnel. I think in terms of what is actually transacting, it’s still a low percentage, still have a bit of a Bid-Ask spread.
There’s still uncertainty around exactly where valuations will shake out in the coming quarters. But when we look at our own pipeline of activity on the LP-led secondary side, we saw tremendous growth year-over-year in that area. And I think, frankly, we expect to see continued interest on the GP-led side as well as this will remain one of the few potential exit routes in this environment.
I think we’ve talked in the past about the fact that there is quite a bit of dry powder both in the hands of in traditional buyout firms, but also in the hands of secondary buyers that are likely to continue to drive that activity. We certainly have seen discounts increase. It depends a bit on the strategy that you’re looking at, but whereas buyouts across the market probably went from high 90s pricing to now down to the low 90s.
You saw venture and growth fund, you had greater discounts than that. But again, I think the question is a bit less on the discount right now, more on where is the next quarter is marked going to be so you don’t enter into a transaction, thinking you’re buying at a discount only to find out you’ve actually paid a premium.
Michael Cyprys
Great. And just a follow-up question on re-up rates. Just curious what you’re seeing there over the past quarter or two as you’ve been raising commingled funds and separate account funds as activity there. Just curious what you’re seeing on the re-up side. And as your customers are re-upping, how much are they on average sort of increasing the size of the commitments relative to what they had funded in the past?
And then separately, can you talk to some of the new customer activity? I know during COVID, this was an area that had slowed down, but now that you’re out traveling and we see it in the G&A there as well. Just curious what you’re seeing on the new customer trends? And if you’re able to quantify anything that would be helpful, too. Thank you.
Scott Hart
Sure. So on the re-up rates, the stat that we’ve shared that we started to share last quarter was one that was more of a since inception re-up rate, which was north of 90% on our separate accounts. And on average, those separate accounts is seeing a 30% increase from the prior to the subsequent separate account, that doesn’t reflect the last couple of quarters, but what I would tell we haven’t shared a stat there, but I would tell you that re-up rates have continued to be quite strong, particularly on a separate account side.
In general, we tend to find on the commingled side that given the number of LPs in those funds, you often see slightly lower re-up rates, but it’s also a great opportunity to engage with new clients who are looking to access the StepStone platform. So again, I think we continue to see strong re-up activity. And I think you’re right, as we’ve been able to get that out there on the road, both as it relates to some of the commingled funds that were in the market with, but also the continued dialogue around separate accounts.
We’ve been making very good progress with new clients. I referenced it earlier, but one of the challenges has been just the timing between an approved account and actually getting it over the finish line is still taking some time. Again, I think partially driven by this slight lack of urgency, if you will, but we feel very good about the progress we’re making with new clients today.
Michael Cyprys
Great, thank you.
Operator
[Operator Instructions] At this time, we have no further questions.
Scott Hart
Well, great. Well, thanks, everyone, for your time today. As always, we appreciate your interest in the StepStone story and look forward to keeping you up to date in the quarters ahead. Thank you very much.
Operator
This concludes today’s conference call. Thank you for attending.
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