StepStone’s Bradley on why the firm raised almost twice its target

StepStone Group last week held the final close of its latest secondaries fund on $2.1 billion against a target of $1.25 billion.

StepStone Secondary Opportunities Fund IV, whose return to market was revealed by Secondaries Investor in March last year, received commitments from investors including Cathay Life Insurance and Los Angeles Fire & Police Pension System, which each committed $40 million, and Fubon Life Insurance, which committed $30 million, according to Secondaries Investor data.

The firm’s co-head of secondaries Tom Bradley spoke to Secondaries Investor about the fundraise.

Congratulations on the final close of Fund IV. It’s not often you see a fund close on nearly double its target.

We are obviously very pleased with the amount of capital we raised. The target was commensurate with the volume of opportunities that we targeted historically: less efficient transactions made up almost entirely of very high-quality funds. We saw a healthy increase in that type of deal over the prior investment period and believe $2 billion is an amount of capital that could easily fit to that type of strategy. We did not have a hard-cap. We are pleased with the consistency of our returns, the lower risk profile of our strategy and that this resonated with LPs. 

Were there any particularly common LP questions? 

One of the questions we always got, ironically, was where do you think we are in the cycle? We said that with a strategy in which we buy into the highest quality managers we possibly can, the returns ought to take care of themselves. Those managers have generally proven over time that they outperform, regardless of cycle. We tried to say to investors, ‘We don’t know where we are and to some extent we don’t care because we aren’t market timers, though we think we are closer to some sort of correction today than we were yesterday’. Fortunately, and not by prediction, that has proved to be the case. 

StepStone doesn’t use leverage. Was this a significant selling point? 

We think the fact we don’t employ leverage is quite differentiated from what a lot of other secondaries firms have been doing over the past five or 10 years. An episode like the one we are currently in, in terms of market disruption, highlights the risks in a levered strategy that frankly haven’t come to the fore in a long time. 

How do you expect the crisis to impact pricing in the secondaries market? 

People always ask about the typical discount secondaries trade for. In some ways, it is an unanswerable question because it depends on what asset you’re talking about: How old is the fund you’re looking to price? What is the quality of the manager investing that fund? How much unfunded remains that you will be obligated to pay on a go-forward basis? Pricing has been very tight over the last four years. All I will says is that given the current market disruption, we anticipate that discounts will widen… It will become a buyer’s market where, over the last many years, it has been a seller’s market. 

How will you look to negotiate this environment? 

I think we will continue to employ the same strategy, seeking to buy into the highest-quality managers and funds that we can buy. We’re not interested in buying diversified beta. We hope that some level of greater distress in the market will translate into lower purchase prices. 

You can draw some parallels from the dot–com bubble bursting in the early 2000s and then the great financial crisis. Although there was some time-lag, given the shock to the system that each of those events caused, ultimately they created a plethora of opportunities in the secondaries market. We expect similar opportunities to occur today, if not to a greater extent.

Tom Bradley is co-head of StepStone Group’s secondaries team and other investment activities. Prior to StepStone, he was a partner at Pomona Capital, where he helped oversee the firm’s secondaries, primary and co-investment practices.