(Bloomberg) -- Private asset manager StepStone Group faces a potential $2.17 billion payout to its retail fund managers starting this quarter, an obligation that could require more than double the cash on its balance sheet and dilute shareholders by up to 30 percent.
"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. The company, which reports fiscal year results Wednesday, declined to comment further during its pre-earnings quiet period.
The liability stems from a 2022 incentive deal with a team of managers known as CH Equity Partners. The deal gives them the right to demand StepStone buy out their 51% interest in the fee earnings of certain funds. The cash portion of the payment could reach $660 million, compared to StepStone’s December cash balance of $266 million.
The looming payout highlights a conflict at the heart of StepStone’s rapid growth. While its $220 billion in managed assets have been swelled by popular retail funds, the accounting used for some investments has been questioned by industry peers and contributes directly to the size of the manager payout.
Retail Growth and Accounting Scrutiny
StepStone’s growth has been significantly driven by retail investors accessing private markets through its "evergreen" funds, such as the StepStone Private Venture and Growth Fund (SPRING). To build these funds, StepStone is a major buyer in the secondary market, acquiring stakes in companies like SpaceX and Databricks from earlier investors.
The firm uses an industry-standard accounting practice of booking "day-one markups" on these secondary purchases. When an investment is bought at a discount, it is often immediately valued higher in the fund's portfolio, generating instant paper profits. In the six months ended September 2025, StepStone’s venture fund reported $424 million in unrealized gains while realizing only $1.4 million.
This practice has drawn criticism. On Apollo Global Management’s (APO) May 6 earnings call, CEO Marc Rowan said such markups can lead to mispricing in funds marketed to retail investors. StepStone has previously stated that of the 39 percent gain reported by its SPRING fund in calendar 2025, only three percentage points came from these initial markups.
The Price of Performance
The structure of the 2022 deal with CH Equity Partners entitles the managers to a majority of the fee earnings from the fast-growing infrastructure, real estate, and private credit funds. Now, the managers can exercise their right to have StepStone "buy-in" this interest, valued at $2.17 billion on the company's latest financial statements.
StepStone has disclosed that the remainder of the payment beyond the cash portion can be made with newly issued stock. Thirty percent of those shares would be immediately salable, creating a significant overhang on a stock that has more than tripled since its 2020 IPO. While the company has noted the buy-in could be accretive to earnings long-term by eliminating the profit-sharing, it has also warned it may need to seek financing to fund the immediate cash demand.
This article is for informational purposes only and does not constitute investment advice.
