StepStone Group Inc. (STEP) Earnings Call Transcript & Summary

Good afternoon. Welcome to our next session. I'm Ben Budish, Barclays analyst covering the brokers, asset managers and exchanges. And for this chat from StepStone, we've got Scott Hart, CEO; and Mike McCabe, Head of Strategy. Gentlemen, welcome.

Thanks for having us here.

Maybe just to start off, could you share your thoughts on the current macro environment? How are clients thinking about allocations? Where are LPs looking to deploy? Where do you see potential upside in portfolios like...

Yes. And I think a few things on the environment. I think first of all, as we shifted into calendar 2024, which I recognized 9 months ago now, but really started to see a bit more appetite from clients to make new commitments to get things done, that was drawn in contrast to 2023, where it's really difficult to create any real momentum for new commitments. And so that certainly has felt healthier, and I think it continued throughout the course of 2024. But I mean a few observations we would make. You asked how our clients feeling about allocations. I think we've gone through this period where at least on a temporary basis, many clients were over allocated relative to their target allocations, whether initially driven by the denominator effect, but more recently driven by the slowdown in distribution activity. What we haven't seen much of though, is any real change or decrease in the longer-term appetite for the private markets asset classes. The long-term allocations continue to be stable, if not growing, in some of the less mature asset classes like private credit and infrastructure or some of the geographies where limited partners are a bit earlier in the build out of their private markets portfolio. So we certainly feel good about the longer-term appetite for private markets. The other thing I would say, I tried to be careful to avoid painting a picture where it sounds like the entire fundraising market is a positive one. I don't think it's a universally strong fundraising environment. The way we've tried to describe it's a bifurcated market between the haves and the have-nots. And if you have a strategy that's well suited for the current environment, and you have LPs and clients that continue to be supportive. And if you've been disciplined and therefore, have a strong track or the market, you can very much get successful fund raise done today. But if you're lacking any one or a combination of those things, it's a much more challenging environment. So we have found ourselves in the fortunate position that we do have a supportive client and LP base. We've had a number of strategies in market over the last year or a couple of years, particularly in and around the secondary space across not only venture capital, but private equity and real estate and certainly are very active in some of the in-demand asset classes like private credit and infrastructure.

Maybe talking about steps on more specifically, can you maybe unpack some of the drivers of your recent strong fundraising in the last couple of quarters, certainly surprised to the upside?

No, sure. We're coming off a record quarter and frankly, a record 12-month period in terms of the gross AUM additions or fundraising that we were fortunate enough to complete. So had about $12 billion, almost $13 billion of asset flows last quarter, $9 billion of that in our separate account business, about $3 billion across our commingled funds. If you looked at that over the LTM the last 12-month period, it was closer to $28 billion, which again is a record for the firm during any 12-month period. So look, obviously, with those numbers, there were a combination of factors. On the commingled fund side, I alluded to it on the last question. A lot of that was driven by the secondary funds that we had in market. Our venture capital secondaries fund had its final close at $3.3 billion, making it the largest venture secondaries fund in the industry. Our private equity secondaries fund, had interim closes bringing it to north of $4 billion, which is now the largest fund that we had steps don't have raised in our history and our real estate secondaries fund continues to be in market and holding strong interim closes. So that, together with our private wealth business was the real driver of the commingled fund flows. And then clearly, with $9 billion of separate accounts, I think that tells a pretty good story in terms of that supportive LP and client base. That's really driven by a variety of factors, a variety of geographies and a variety of strategies across the firm.

Great. Maybe in terms of the SMA side. So I think historically, we've talked about 90% retention, 30% re-up rates. I think in the last quarter, you talked about 60% of gross fundraising coming from re-ups, 40% from new clients and some expanded mandates with existing class. How does that mix look over time from re-up new clients? What are your thoughts there?

We strive to strike a healthy balance between re-ups with existing clients, expansion of existing accounts as well as adding new accounts. And historically, we've seen a cadence of roughly 2/3 of our growth has come from existing clients and 1/3 has come from clients expanding or adding new clients. But you can imagine, given our large installed base of existing managed account clients, that's where most of our growth is going to be coming from going forward. And when they do grow with us, they typically expand, as you mentioned, their accounts by as much as 30%. And the re-up rate is 90%. So those 2 metrics combined give a sort of equivalent same-store sales metric, if you will of over 100%. So roughly 2/3 of our growth drivers in managed accounts will come from our installed base.

Got it. And then what about from a new client perspective, where you knew LPs coming from and who are you replacing, is there a competitor, is there an in-house team who is the competition?

Yes. I mean geographically, they're coming from a variety of different sources. Again, in this sort of last 12-month period, International continued to be a very strong growth driver for us, in particular, markets like Asia, Middle East and Europe were some of the more significant geographies that help drive some of those new separate account flows. Again, hard to generalize though. And in terms of the question, who are we replacing, we're not necessarily replacing anyone. In many cases, these may be clients that are newer to the asset class that are establishing an allocation and figuring out how to partner with a group like StepStone to go out and execute on that allocation. In some cases, obviously, you mentioned some of the commingled fund flows is not necessarily replace anyone. That may be another sort of line item, if you will, in their portfolio. So look, we are happy to engage with clients in whatever setup that works best for them. And so I'd say it's less about replacing someone else, whether internal or another party and it's probably more about new allocations or new strategies within an existing allocation being established for some of those clients.

Got it. And Scott, you mentioned the international client base briefly. So I think the majority of your management fees do come from outside the U.S. So can you maybe talk a little bit about the attitude towards private markets outside the U.S.? How do allocations look? Where is there sort of more white space?

So you're right. So we have pretty consistently had about 2/3 of our management advisory fees that come from clients based outside of the U.S. I think that is the result of a long-standing effort and really one of the founding observations that we made when StepStone got started that a lot of the growth in private markets, whether where we and our clients were investing or where those clients were likely to be located, our view is that much of that was going to happen outside of the U.S. have built out a 27 office footprint around the world that has allowed us to service those clients very successfully. Like in terms of the view on private markets, I don't think it differs significantly relative to our LPs here in the U.S. I think the view is that they believe in the potential for alpha generation. I think it adds to the portfolio from a diversification standpoint are big believers in the power of the control-oriented nature of private markets investing. So I think the view on and the reason to include in one's portfolio is consistent across geographies. I think what differs is the stage of build-out of their portfolios. Again, that founding observation was driven by the fact that the U.S. market was a bit more mature when we were getting started 17 years ago relative to certain international markets where you may be starting with an allocation of 0 or low single digits. And even if you bring that to mid- to high single digits, can be quite meaningful on some very large pools of capital. And so I think it's really as a result of the stage of build out of their private markets portfolio is that the way that they engage with a group like StepStone or the strategies that are particularly relevant to them may differ somewhat relative to our U.S. clients.

Great. And maybe 1 last fundraising question again coming back to StepStone specifically. Can you talk about your current funds in the market and the upcoming fundraising cadence, What will be the largest contributors over the next, say, 12 to 18 months?

So Scott had mentioned, we had just came off of fantastic year and quarter with commingled fund raising, highlighting the largest venture capital secondaries fund in the history of the industry. And we were pleased to close that a little over $3.3 billion. We are now wrapping up our flagship private equity secondaries fund, which have a final close very shortly. We're also wrapping up our secondaries fund in the real estate space. We're also underway raising our co-investment fund for infrastructure as well a growth equity fund and private equity. So we have a number of funds that are currently in market coming to a close or coming to the last call it semester or 2 of fundraising. What we have around the corner in terms of new product launch is our flagship co-investment fund, which we expect to launch maybe early next year, if not later this year. We're also excited to announce the debut launch of a secondaries fund in infrastructure first of its kind. And in the private credit space, I should mention, we also have a multi-strategy venture total funds coming back to market shortly as well. And in private credit, we are constantly in market with a vintage series of private credit vehicles as well as the BDC.

Great. Maybe 1 last sort of asset class question. Just on secondaries since you have a relatively larger concentration there. I guess where do you think the market is? We kind of keep hearing that secondaries represent very small percent of total private market assets. What does the adoption curve look like in terms of LPs in terms of product reduction? How do you think about like the next 5 years for secondaries specifically?

It's a great question. The secondary has really gone through quite an interesting transformation over the last several years through the introduction of a fairly new activity, mainly being general partners leading secondary deals by generating liquidity with portfolio companies call the GP led transactions which now represent almost half of the secondary market leading to an annual deployment into the secondary space of roughly $140 billion. So it's large and it's growing. And a good way to think about the secondary market is a derivative to the primary market. So all the capital that GP deploy into primary funds, some percentage of that will turn over in the secondary market. And so as the entire asset class grows as well the secondary market.

Got it. I think the only thing I would add to that is some of the points that you made around being a relatively young immature market. I think there's variations across asset class as well. Private equity is obviously the most established secondaries market today, but I think the trends that we're seeing in areas like infrastructure, venture capital, private credit would suggest that certain of those asset class or earlier in the build out and is part of the reason that we spend so much time in trying to get ahead of the curve there, building out our capabilities.

Makes sense. Maybe moving over to the wealth side. Could you maybe start just give us an overview of the products you offer, talk about how StepStone as a solution provider may be differentiates from what a more traditional GP might provide.

So it's certainly a topic that we've been spending a lot of time on be the investor community, and I think for good reason. But I think in port to step back and remind people the approach that we took to the private wealth space because being a solution provider, as you mentioned, we try to take the same dilutions oriented approach to approaching it with the wealth market. Even though this is unlike, for example, in the separate account business, where you're truly building a customized portfolio for a single client, we thought there was really an opportunity to build a product that was customized for an entire channel here, but to do that successfully, it was important that we take the same listen at first mentality that we've always take into approaching our institutional client. And as we listened to the market, what was needed, what were some of the challenges that were faced by the individual investor a few things that become clear, some of which can be addressed by a number of different players in the market, some of which we thought we were particularly well suited to address. So certain challenges around avoiding capital calls, 1099 tax reporting as opposed to K1 tax reporting, being able to offer quarterly liquidity were the types of things that we've seen ourselves and others address over time. The thing that stood out to us at least initially in terms of where we could truly did was trying to create a product that was available down to the widest part of the wealth pyramid being these credit investor days into the first product, which we call SPRIM was designed to do just that it is in all private market strategy really served as the potential single-ticket solution for an individual investor. And again, I think particularly relevant when thinking about the net widest part of the wealth pyramid. Certain of those investors might only have a single or a small number of investments across the private markets and therefore, increasingly important to have a diversified portfolio, whether by asset class, by sector, by geography. But importantly, by underlying manager. And that's really one of the key differentiators as we think about the solutions provider or the multi-manager approach that we can take which is still in diversified portfolios across managers. If SPRIM kind of serves as the core of our private wealth strategy. What we've done over the last several years is we've built out really a suite of more specialized products, starting with venture and growth-oriented products that we call spring followed up by an infrastructure product called structure and most recently with a private credit product called CRDEX. And really, the view there was, if I take each of those in turn, spring, certainly, the venture and growth strategy is a popular and an in-demand one amongst the private wealth community. And we thought this was a much more balanced and appropriate way for the individual investor to gain access to high-quality venture growth exposure versus trying to pick off individual pre-IPO rounds or making other types of direct investments. Structure, I think it's truly differentiated in the market, you, if any, true comparables in terms of the multimanager infrastructure approach and so really was one of the first ways for that individual investors to gain access to infrastructure strategy. And then private credit, certainly not a shortage of private credit funds in the market, but only a small number of multi-manager funds out there and a lot of the research that we've done, private credit, a strategy that has essentially capped upside and therefore, all that much more important to protect your downside would suggest that the importance of diversification, including at the manager and the underlying position level is quite important in protecting that downside.

Maybe 1 other sort of differentiation is how you go to market, how your products are bought. So can you talk a little bit about the ticker element of the platform? And how much of an improvement is the point-and-click process versus what an investor would otherwise have to go through? How much of your success do you think may be attributable to this versus your broader product performance, marketing education.

Sure, Ben. As Scott mentioned, the listen first culture is, first and foremost, central to how StepStone works. And as we went out to build our products, the first question we asked whether it's the FAs or the wires or the IBDs is what are you looking for, for your clients? And frankly, the answer we got back was ease of use and convenience. The way most investors have participated in the private markets has been through a very lengthy and complicated subscription document process, which is time-consuming and frankly, legally complicated. What we've been able to do is create this very simple ease-of-use way for investors or FAs to allocate client capital to StepStone's product through a ticker. And of the 4 evergreen products that Scott mentioned, 3 of them have tickers. And those 3 are CRDEX, STRUX and SPRIM. And if we look back over the last, say, 12 months to answer your question about how successful has it been? We've nearly doubled the inflow into those 3 products through the ticker adding up to close to $900 million. And performance is incredibly important. We've certainly met or exceeded the performance expectations across all of our products, combining that performance with ease of use has really been the secret to our success here.

Got it. And what about from a distribution perspective? So how many RIAs, how many platforms selling the full suite of products. Where are you in terms of getting all the products on the wires? And maybe talk -- unpack a little bit the RIA channel as you see it, it's a little bit more differentiated, particularly given your larger competitors tend to partner with the largest banks, you have kind of been successful going after that channel in a bit of a differentiated way.

Sure. Our go-to-market strategy really began with SPRIM, and it was very clear before we could start approaching some of the wires of larger allocators, we need to build a certain critical mass and success. And so the 4-pronged strategy we have in the playbook, if you will, begins with the RIAs and building a critical mass there and get the adoption curve up and running, followed by the IBDs, then the wires and then international. So that's the 4-pronged playbook that we applied to SPRIM, which was incredibly successful. And as Scott mentioned, we launched several products after SPRIM, but using the same exact playbook of RIAs, IBDs, wires and then international. And where we sit today, these products are sitting on over 350 distribution platforms and a couple of wires and we'll continue to see the same success. And the launch of each subsequent product has at least met or exceeded the adoption curve of the prior product as the FAs and as the IBDs and wires are cross-selling and now we're sitting on 2 wires with SPRIM and 2 wires on spring.

Great. And then maybe from a future fundraising perspective in the wealth channel, maybe any kind of along the same lines, when you start selling through a new RIA, a new wire house bank, how long does it take to hit a steady run rate? So in other words, how much growth is there yet to come from increasing share at existing partners versus onboarding at new wins?

I think there's certainly still room to run. I think similar to the way it can be difficult to generalize when talking about our separate account business, it can be difficult to generalize in terms of exactly what the ramp looks like across any 2 platforms. If you had to generalize the RIA is likely to ramp and get the maturity faster than some of the larger wires, which could easily take 6 to 12 months. But I think in general, it's going to vary across different platforms. I think it's important to remember that the act of getting on the platform at the end of the process, it's very much at the beginning of the process. And the process of then onboarding the product, penetrating the financial advisers at that platform, then penetrating the underlying investors and clients of that financial adviser all take time. I think we've approached it in a patient way, but recognizing again that getting on the platform is just the beginning, not the end of the process for us.

Got it. What about competition in the channel? It feels like it's been a few years now, you guys were on the earlier side, especially with SPRIM. But how intense has competition gotten, is shelf space getting harder to come by and more crowded?

Well, I think we should begin by just mentioning the obvious which this is a very huge a large addressable market. And so there's plenty of room for players and there's plenty of room to grow. But I would characterize competition sort of in 2 different ways. There's a whole set of competition that is and amongst as Scott had pointed out earlier, the general partners. These are the direct shops whether it's the Blackstones or Carlyles or Brookfields in the world. And they're certainly competing with each other for shelf space. But then there's the solution providers of the world, the multi-manager platforms like StepStone where we see a few of our peers, but it's a much smaller incoming group. And so the competitive tension among the solution providers, it's a lot more limited. So we see a lot more ease of adoption among the RIAs, the FAs, the IBDs and the wires. So from a competitive landscape, we feel very comfortable where we sit as a multi-manager solution provider. And I think the shelf space for the direct is perhaps be a little more competitive.

So the RIAs and the wire so you think about products like SPRIM, which is a broad private markets vehicle, does that sit separately from a private equity infrastructure real estate. Is that considered a separate category? Is that what kind of helps us stand out and make competition less intense. Is that fair?

It really is unique in that way because it's a multi-asset class. It's a multi-manager and it's a multi-strategy approach. So as Scott mentioned, the investor down to the accredited level that may only have a $50,000 or $100,000 to invest in the private markets, and they only have 1 ticket. Well, with this 1 ticket through SPRIM and through the ticker, they can get access to the widest range of the private markets in the most diversified way.

Got it. Makes sense. And what about from a distribution fee perspective, there's definitely an increasing worry from investors that the largest distributors may start to demand a greater share of the economics. Is that something you're seeing? How are your partners thinking about that economic share?

It's interesting, as we've watched the market grow at some of the distributors are approaching fees in different ways and sometimes in the same channel. So you'll find some distributors, for example, in the wires a few years ago, weren't charging anything, but supply and demand created this imbalance and capitalism is now coming forward, and they're trying to get some economic share of the growth that we're all enjoying. And in some cases, there's wires that charge an upfront onetime fee. In some cases, there's wires that charge a trail. And then in some cases, none, there's no fee at all. So I think it's evolving, and we'll see how it plays out. But there are different approaches among the distributors and even within similar channels. But we'll continue to see and monitor and watch. What's most important for StepStone is that we don't rely on any one distributor or 1 channel. It's so important to have that 4-pronged approach with RIAs, IBDs, wires and international to diversify our exposure to the distributors so as they evolve, we have this diversified approach where we can pretty much go with everyone.

And how do you think about the risk that -- as you said, capitalism keeps taking hold? Is that -- I guess the industry is still quite young. If you're back here in 3 years, what does the conversation sound like?

It's hard to tell. I mean, capitalism is certainly underway. But again, I think we take comfort in the fact that we've taken such a diversified approach in terms of who we are partnering with from a distribution standpoint.

I understand. Makes sense. One or 2 more questions on the wealth side. So there was some press not too long ago about secondary space, private market funds, alleging that returns are generated simply marking up assets and I think it was a broader industry comment, not a StepStone specific comment. But the implication was that this is sometimes send inappropriately. What would your response be to that?

Well, I think what we need to do here is to clarify a misperception that were marked up an assets. That's actually not the case. What we're doing is we're buying an asset that has a fair market value assigned to it in accordance with GAAP by the general partner. Now the general partner has limited partners in their funds that are faced with the situation and based on their specific situation, will sell their interest in that fund and that interest can be acquired at a price below the fair market value. And that difference in price is oftentimes referred to as a discount. So StepStone and its secondary business will buy an asset that has a fair market value oftentimes below that value and pick up a discount and there's a gain that gets recorded when we settle on that transaction. But what's really important is when we unpack the long-term value every time we invest through the secondary market into an asset, where is the value coming from? Where are the ultimate gains coming from? And our data suggests when we unpack the attribution of value, most of it is coming from the growth of the asset going forward and not so much about the discounted settlement.

Got it. Appreciate that. Maybe 1 last question on the retail side. Scott, we talked earlier about your sort of asset -- your LP base, U.S., international. So what does it look like on the retail side, you indicated on the institutional side, the sort of attitude towards private markets aren't too different. How does that translate on the retail side? And then from a management fee perspective, again, institutionally, most of our fees are outside the U.S., is there a similar opportunity for wealth side?

I think there's certainly an opportunity internationally on the wealth side. You heard Mike made the comment that really 4-pronged to our distribution strategy, and he mentioned international as the fourth one. I think we're probably pleasantly surprised at some of the success that we had internationally relatively early with SPRIM in markets like Latin America. But I think it's still early innings in terms of the potential outside of the U.S. I do agree. I mean, when you think about the international presence we have and a success of our international business more broadly, I think we already well positioned to capitalize on the opportunity. In this case, I mean, there are differences relative to the U.S., whether it is product design, whether it is the platforms themselves that operate internationally, whether it's certain selling rules, these are things that you oftentimes have to tackle region by region, if not country by country, and so it will take some time to really scale the international wealth business over time, particularly when you look at it relative to our success here in the U.S. But no less of an opportunity. There's certainly several markets that private markets are very well accepted. There are some large players in those markets and look forward to continue to grow the wealth business in each of those international markets.

Got it. Maybe talking about deployment and activity levels. So I think since your Investor Day last year, fee earning AUM is up like 10% but undeployed fee earning capital is up quite a bit more. So what are your thoughts on the pace of deployment here? And then maybe kind of a second question, I'll wrap into one, just kind of broader industry. Same question, but just given the look through, you have for your business to many, many GPs had us like industry-wide deployment look.

Well, so I think on those stats that you just mentioned around the growth in UFEC compared to our growth in sort of -- and just for the benefit other than UFEC is our undeployed fee-earning capital. And the fact that many of the separate accounts that we raised actually pay fees on invested capital and therefore, the fundraisings are separate from when they actually convert into [indiscernible] AUM, which takes place as we deploy that capital. So look, I mean, we're coming off this period where it's been a pretty challenging couple of years from both a fundraising any deployment standpoint. I think what a few of those stats tell you is that we have very much been successful on the fundraising side. That's part of what has driven the growth of our undeployed fee-earning capital. On the deployment side, it's an evolving story. And I think you get a bit of a different picture if you look backwards compared to when you look forward. From a backward-looking standpoint, things have been slow to recover. I think we probably saw things bottom out kind of mid-2023 started to rebound throughout the second half. And that has at least somewhat continued throughout the first half of '24 where we start to get a bit more excited is when you look forward and take into account the pipeline of opportunity, either that we are seeing in the market or that we've now approved and are pending close, that's where we've seen some real positive momentum here. And it's not just a number of deals that we have seen has increased. I think the quality of those deals has increased. So whereas our approval ratios, for example, across our private equity co-investment business had dropped pretty meaningfully in 2023. Those have rebounded to more normalized levels. The average ticket and the size of the opportunities that we're seeing have increased as well. And so those are all things that I think are positive from a forward-looking deployment standpoint. The last time I would make because the undeployed fee-earning capital that we talked about at StepStone reached an all-time high of about $27 billion. Within that $27 billion, there's north of $4 billion that will be activated we think by the end of this calendar year, that will simply take place once the predecessor separate accounts or vehicles are fully invested and we turn on the new account. So that leaves you another, call it, $22 billion to deploy -- we've always talked about that UFEC undeployed being deployed over a roughly 3- to 5-year time period. And when we look back at our historic pace of deployment, even at the somewhat depressed levels that they currently stand today, still very comfortable with the ability to deploy that responsibly and successfully over the next 3 to 5 years. Look, in terms of your question on what we're seeing from a more industry-wide basis, I kind of come back to our co-investment business as evidence of what we're seeing real time in the market because these are transactions that are coming from a range of different managers. And I would kind of point to the same trends that I've referenced in terms of the pickup in deal flow, the quality of that deal flow today as well as the size of some of those deals, very different than a period a year or 2 ago, where everyone had kind of moved towards the mid-market that was where you could get deals done based on the availability of leverage at the time, but it resulted in smaller equity checks for everyone involved in those transactions.

Got it. And maybe a similar question on the realization front. And while you've done always control the timing of realizations and how should investors think about a likely cadence? What would your expectations be for next year? I imagine your answer would be kind of representing the broader market, but also your thoughts around as a member of selection.

Yes. And look, I think somewhat related to the response on deployment because I think we are, as we've seen the private markets mature, likely see the more trading of assets between private markets players meaning deployment for 1 firm may represent a realization for another. So I think they are linked in some ways. But as we look at the industry-wide information, again, you saw a similar trend in terms of the bottom out in middle of last year, started to see a recovery in the second half. That recovery started -- it did stall a bit, I'd say, in the first half of '24. Part of that is because the one thing we didn't see return in a big way were full realizations. You saw quite a bit of activity in terms of dividend recaps, minority sales, either public sell-down of equities of a company that had been IPO-ed in years prior, but saw very little in terms of full realization. And I think that's what will need to come back for us to see a real recovery in realization activity. We're seeing some of that. Again, if I just use our own portfolio, as an example, have now seen some either announced or some in-process transactions that are likely to lead to full realizations. I think that is really what we're going to need to see to even start to approach the levels of realizations that we saw a few years ago in years like 2021.

Got it. Maybe now moving over to the financial profile of the company. So you set a medium-term target of doubling FRE through 2028 implies about a mid-teens CAGR. So how do you think about the trade-offs between top line growth, margin expansion in the current environment seems like things are firing pretty well. What does it look like from an FRE margin perspective when you lean into that growth, how do we think about the puts and takes.

Sure. If we go back to the time when StepStone went public, Scott and I had talked at length about this dilemma of managing the business for growth versus managing the business for profitability. And at the time, in 2020, our FRE margins were roughly, call it, 26.5% but we made a priority to invest in growth in teams and geographies and technology. And as a result, as we sit here today, we've enjoyed the margin expansion of roughly 800 basis points simply by virtue of growing the top line of the business in terms of prepaying assets. As we think about going forward, we feel comfortable as we continue to enjoy those growth drivers that Scott had outlined, whether it's through SMAs or commingled funds or private wealth, that operating leverage will continue to click into margin expansion. But that's also augmented by ways to just add efficiencies to the business, whether it's outsourcing or whether it's technology or through systems and so we feel comfortable that our margins now in the sort of low 30s -- call it 33% net of retroactive fees. We'll continue to migrate comfortably into the mid-30s over time.

Got it. And then just in terms of your kind of overall FRE growth trajectory, how do you think about potential upside to that number? I imagine some part of the expectation-setting process is sort of thinking about achievable but beatable targets. So we're still early into that kind of 5-year path. But if you end up outperforming where is it most likely to come from?

Well, I think most of the outperformance is likely to come from a combination of the acceleration we're seeing in the adoption curves on our private wealth platform, and we'll continue to see growth in our managed accounts and we'll continue to see our commingled funds coming back to market at or above prior venture sizes. So we think all of the assumptions that we've placed into the doubling of our FRE margin through 2028 has all come from organic growth of doing what we are currently doing with our installed platform, not really stretching or looking to M&A or something inorganic to get to those goals.

Got it. Well, speaking of M&A, organic versus inorganic maybe a final question here. So how do you think about your key investment areas at StepStone, how do you think about CapEx, OpEx, dividend and then from an M&A perspective, are there any other asset classes, capabilities you feel like StepStone is missing that would make sense to buy and not build?

I mean capital management is something that Scott and I and the Board talk about on a regular basis. And but we have the benefit of being a very capital-light balance sheet-light business. And so when we think about prioritizing capital management, again, it begins with the first dollar is going to be invested back into the business to drive growth. And that's what we've been doing for the last 14 years. And so we feel like we have built out the platform across asset classes, across strategies, across geographies with the technology that is world-class. And so the first dollar goes back into the business. The second dollar, because we're a capital-light business, will be distributed back to our shareholders. And we've come up with a pretty unique and innovative dividend policy, which, as you know, is bifurcated between a quarterly dividend that's paid out as a function of our fee-related earnings. And in addition to that quarterly payout of FRE, we have an annual payout that's paid each June as a function of our performance fees. So we have this bifurcated dividend policy of fee-related dividends and performance-related dividends. And then after we've invested in the business, have to return capital to our shareholders, if we see something strategic, like we announced a couple of quarters ago of buying in the NCI interest, which will be some cash, some equity or other strategic ways to continue to drive the business in an accretive way, we'll think about that, and I think we have a great track record of using M&A as a tool to build out our business and integrate teams.

Got it. Well, gentlemen, what a pleasure it's been to have you here. Thank you so much. Appreciate your time. Thank you.

Thank you, Ben.