StepStone steps up pace(3)

PCG spin-out StepStone has more than doubled its staff to 10 investment professionals in the past five weeks. Amanda Janis talks with co-founder Monte Brem about the California firm’s broad ownership structure, its two major clients and the attractions of non-discretionary work.

There are two, large digital picture frames in the lobby of the StepStone Group’s La Jolla, California office. One frame cycles through photos of firemen, policemen and other pension fund beneficiaries, while the other displays pictures of employees’ children.

“The focus is on who we really work for,” says Monte Brem, co-founder of the advisory firm and former president of cross-town gatekeeper Pacific Corporate Group. Brem mentions the frames while describing StepStone’s “collegial atmosphere” that he says enables it to attract – and will allow it to retain – top talent.

From “little things” like the frames and organising family-oriented employee events, to bigger factors like creating an open, all-inclusive and communicative team environment, StepStone tries to “think of all the different ways that people can be satisfied long-term working with us,” Brem says.

Brem and his StepStone co-founders – former PCG chief investment officer Thomas Keck and former PCG managing director Jose Fernandez – were themselves part of an executive exodus that sources have tied to PCG’s unwillingness to extend ownership and control of the firm to employees.

Without commenting on PCG, Brem said that shared ownership factors prominently into StepStone’s structure.

“Our view is the investment specialists are really the key to building the business,” he said. “You want to make sure that you have equity ownership and profit participation in the hands of the people that are doing the investing. The whole team has equity, the whole team has profit participation.”

Approximately 80 percent of StepStone’s equity is distributed to team members, and 90 percent of its profits go to employees, Brem said. The balance of each goes to the George Kaiser Family Foundation, an investor in StepStone and one of its two clients. The Kuwait Investment Authority is the firm’s other client.

“They’re both very large clients and they keep us very busy, so we already have a decent client base,” Brem said.

Now that the firm has met its initial goal of building a team of 10 investment professionals, it hopes to grow its client base within the next six months.

The team’s experience with large LPs likely gives StepStone an upper hand when knocking on doors and submitting proposals.

In addition to the three founders’ and vice president of business development Brey Jonestenure at PCG, managing director Jaime Guzman-Fournier led the US government’s Small Business Investment Program; senior associate Scott Harris was formerly at TPG; research associate John Coehlo was formerly assistant vice president at mid-market lender ATEL Capital; research associate Erika Streck focused previously on direct equity investments for Allied Capital; and research analyst Anthony Cusano was previously a consultant with Meridian Value Fund. Research analyst John Kettnich also spent time at PCG.

StepStone’s strategy is to focus on separate, single LP accounts whether they are discretionary or non-discretionary. Brem says there are no plans for the foreseeable future to raise co-mingled fund of funds.

The strategy should pay off in light of two market trends driving client movement, Brem says.

“A lot of the managers who have traditionally done discretionary and non-discretionary are abandoning the non-discretionary work, so they’re firing all their consulting clients effectively,” he says.

Opportunities should also arise from LPs unhappy that some advisers who do both single LP accounts and fund of funds are phasing out separate accounts and requiring clients to commit to fund of funds, he says.

“A lot of clients and institutions are not happy with losing that customisation to their portfolio,” Brem says.

He adds that an increase in private equity allocations “across the board right now” is also creating opportunities.

Upon meeting its goal of expanding its client base, what’s next for StepStone?
 
“We’ll go out and recruit the next series of people and probably get to 20 investment professionals in the next 12 to 18 months, that’ll be the goal,” Brem said.