By Bill Alpert

Before private asset stocks lost their savor this year, StepStone Group was one of the tastiest. Now things might be turning more sour.

In the five years since its 2020 initial public offering, StepStone shares more than tripled as the firm built funds that now manage $220 billion in private equity, credit, and venture capital. The venture fund has notable holdings in the hot commodities Databricks and SpaceX.

After the close Wednesday, the New York firm reports March fiscal year results. Investors might also learn whether StepStone will soon have to make a whopping payout to its fund managers. Under its terms, the payout could require more cash than StepStone has on its balance sheet, and dilute shareholders by as much as 30%.

It goes back to a deal StepStone made in November 2022 with the team of Charlotte, NC, money managers -- a group known as CH Equity Partners -- that run its "evergreen" funds for individual retail investors. As an incentive, StepStone gave the team a 51% interest in the fee earnings of its infrastructure, real estate, and private credit funds.

StepStone declined to comment on the payout beyond its public disclosures, during its pre-earnings quiet period. It recommended that investors listen to Wednesday's earnings call.

"The structure and mechanics of the CH arrangement have been disclosed in public filings and prior earnings calls," StepStone spokesperson Maggie Duffy told Barron's in an email Tuesday.

Those evergreen funds have grown so quickly that the managers' cut of the fees often have turned StepStone's income statements into consolidated statements of loss, under generally accepted accounting principles.

The analysts who say the firm's $53 stock can rise to a consensus target price of $71 generally ignore that expense, and others, to project that adjusted earnings will rise from $2.10 a share in the fiscal year just ended, to $2.50 in fiscal 2027.

That earnings growth is largely coming from retail investors whose advisors steer them to the StepStone Private Wealth funds, which go by monikers like SPRING and say they offer "institutional-level" access to private venture and infrastructure deals.

Some of those earnings also come from an accounting quirk.

To fill its fast-growing funds, StepStone has become a big buyer in what's known as the "secondaries" market for private assets, where an early investor can unload their stake in a private fund -- or a still-private company like SpaceX -- for some cash. Two-thirds of the $3.3 billion StepStone Private Venture and Growth Fund, aka SPRING, are these secondhand investments.

Secondary investments also provide StepStone and its fund managers with instant profits on paper, through an accounting treatment that has become increasingly debated in private market circles. A secondary buyer like StepStone usually gets a discounted price on its purchases. When StepStone adds the investment to its own portfolio, however, it typically values it at the higher price ascribed to the investment by the fund where it came from.

The practice is industry standard in private markets, because GAAP rule makers haven't yet found a better way to mark these secondhand investments.

The investment newsletter writer Nick Nemeth noted Wednesday that StepStone's venture fund booked $424 million of unrealized gains in its most recently reported six months, ended September 2025, while capturing just $1.4 million in realized gains.

These so-called " day-one markups" boost the profit that StepStone and other private asset investment firms report, and more concretely, generate bigger cash incentive payouts for their money managers.

But some in the industry want to change that.

On Apollo Global Management's May 6 earnings call, CEO Marc Rowan said day-one markups lead to mispricing when used at evergreen funds marketed to retail investors.

"We're not sure if this accounting practice makes sense, although it is what is currently demanded by the marketplace," Rowan said.

StepStone's fund prospectuses all say that its markups on discounted secondary investments will boost the funds' net asset values, its profits, and the annual incentive fees it pays to its money managers. It has characterized these unrealized gains, on its earnings calls, as the fruits of savvy investment shopping.

"We have a sense for which companies are going to be the major value drivers in the venture space, and then we go out and use our full toolbox of ways to acquire those interests," said StepStone CEO Scott Hart, on the company's February 2026 earnings call. Of the 39% gain reported by the SPRING venture fund in calendar year 2025, only three percentage points came from day-one markups, with the rest from subsequent fair value markups.

But the rising net asset values of StepStone's retail funds now leave it with the obligation to make a substantial payout to the CH Equity Partners fund managers that run those wealth products. Under the deal struck in 2022, the CH group can require StepStone to "buy-in" their half share in the funds' investment fees, starting in this June quarter.

StepStone has been accruing the liability on its financial statements, and the latest estimate of the cost of buying in the CH fee interest was $2.17 billion. The fund managers can demand one quarter of the payment in cash, a sum that StepStone has estimated could reach $660 million. The rest can be paid with newly issued StepStone stock, and 30% of those shares would be immediately salable, with no lockup.

The company and stock analysts have been talking about the CH buy-in for a long time, and StepStone says it should prove accretive to company earnings, as it eliminates the costly profit-sharing with the Charlotte group. On its December balance sheet, however, StepStone had $266 million of cash, and it has previously warned investors that it may need to seek equity or debt financing to fund the buy-in.

It will probably be discussed on today's earnings call, too.

Write to Bill Alpert at william.alpert@barrons.com

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May 20, 2026 14:40 ET (18:40 GMT)

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