All right, we will go ahead and get started here. Thanks everybody for joining us this morning. For those of you who do not know me, I'm Patrick O'Shaughnessy, Capital Markets Technology Analyst here at Raymond James. Up next we have MSCI, and on MSCI's behalf we have CFO Andy Wiechmann. Andy, thanks for joining us again.
Thank you for having us. Great to be down here as always.
So, Andy, maybe to kick us off, we have a lot of portfolio managers and generalists in the room who are probably newer to the story. Can you just maybe provide a brief overview of what MSCI is, what it does, and maybe how what it does today compares to what it looked like five years ago?
Sure, sure. Yeah, so MSCI is a very unique organization. We are the only company that is intensely focused on helping investors with their most important job, which is investing. And so our tools are integral to basic parts of the investment process, things like how you define a market, how you segment that market, how you allocate your assets, so do that asset allocation across the market, how you track the performance of those allocations, how you understand the drivers of performance and risk in those allocations, and related to that, how you construct a portfolio, and importantly, how you manage risk and then achieve better outcomes on your portfolio. And so given that, that unique focus, that integral role we play in the investment process, we are serving the who's who of investors and investment organizations around the world.
So we're serving key investment decision makers, so CIOs, portfolio managers, research analysts, anyone that touches a portfolio among 7,000 of the world's largest investors, across 95-plus countries. And so we are heavily connected to the investment process. And so if you look at the trends that are fueling the investment industry more broadly and the structural changes that are taking place within the investment industry, we are benefiting from them. Maybe I can spend just a minute touching on those. So at the highest level, you have more savings, savings by individuals, by institutions, by governments. Those savers are increasingly directing their savings into the investment process to get productive returns. And so you have this growing pool of assets that are being invested. On the other side, you have more markets that are becoming investable. You have more asset classes.
You have more securities, and you have more information about all those opportunity sets. And so that is growth and complexity. And so you have more assets chasing more opportunities with more information. That is where MSCI comes in, and we provide order to that complexity to help investors navigate and take advantage of that growth in the industry. If you drill down a layer and look at the structural changes that are happening in investing, there are many trends, but there are three notable trends that I'll call out that are benefiting us. One is you see a move towards more personalized, rules-based strategies, where an index can be a very efficient and effective mechanism for representing a systematic investment strategy at scale.
And so that manifests itself in a number of different new investment products, growth, and assets, as well as tools needed for systematic investing. We call that indexation. Indexation is generating significant demand for our indexes, given the unique approach that, that we take. Secondly, I'd call out sustainable investing. There is a growing move to focus on more sustainable strategies and integrate more systematically sustainable considerations into investment processes. I would also call out private asset investing. So you're seeing an increasing allocation by investors to Private Assets and a screaming need for insights into how to think about those markets, understand the drivers of those markets, and ultimately construct portfolios to better get better outcomes. That is where MSCI comes in.
And so from the highest level, as well as the structural changes taking place in the industry, MSCI is well positioned. To your question about how does MSCI compare to the MSCI of five years ago, we are very much the same in that we have the same focus of helping investors and helping them with their most important jobs and to achieve better outcomes. But we are now serving a much broader range of clients, use cases, and providing more tools to them to help them do more of their investment process.
Just to dimension some of those transformations and big growth areas for us, over the last 5 years related to those trends I was talking about, if we look at ESG and Climate for us 5 years ago—so if we look at the run rate at the end of 2018, it was just above $100 million of ESG and Climate run rate across all of our product segments. Today, that's north of $500 million. If we look at Private Assets, in 2018, the run rate, which was almost entirely real estate focused back then, was $45 million. Today, that's north of $250 million for us, at the end of 2023. Now, that has been boosted by two acquisitions that we've made that have given us the best data set, investment quality data set, of private asset information.
and then if you look at our Index segment, which is being fueled by all the capabilities we have, our Index segment has grown from at the end of 2018, slightly north of $800 billion of run rate to close to $1.5 trillion of run rate for us today. And so the company continues to grow. It continues to expand. But as Henry likes to say, we're still at the ground floor of what is possible.
That's a very helpful background. I appreciate that. Andy, you've been at MSCI since 2012. I think that still makes you one of the new people on the senior management team at MSCI. How would you describe the company's culture, and how has that culture supported the company's long-term success?
Yeah, so I, I joined officially in 2012. I actually started working with the company back in 2006, when I was an investment banker, helping the company look at some small acquisitions, ultimately helped with the IPO and the sell-down by Morgan Stanley, and continued to cover them until I saw the light and joined in 2012. But even going back to 2006, as you say, I'm still relatively early in the journey compared to folks like Henry, our CEO, and Baer, our president, and folks like Remy, as well as many senior researchers, senior salespeople at the organization have been with us for a very long time. And I think that culture that they have created and we preserve today is a big competitive advantage for us and key differentiator relative to others. I would highlight a few dimensions of that.
So one is what Henry likes to call our owner-operator approach. And so we are shareholders. We are all shareholders in the company, and we take a long-term investment approach into how we drive and manage MSCI. And we are also managing the company day to day along those lines. We are not corporate executives who are looking to just make the company bigger and increase our cash compensation and take on more responsibility. We are looking to create long-term shareholder value.
That impacts how we manage the company day to day through our Triple-Crown Approach, which focuses on allocating our assets to those areas that are the highest returning, allocating our resources, our assets, our, our really our resources and our expenditures, but allocating those to those areas that are the highest returning, the fastest payback, and most strategic for us, where we have competitive advantage and will, will generate the most value. It governs our approach to capital allocation. We are continually focused on optimizing our capital structure and directing our excess capital to the highest returning uses across share repurchases as well as strategic full-time M&A. It also governs our compensation practices, as well, where we design compensation programs that are heavily aligned with creating shareholder value and more specifically the stock price and performance of the stock price.
It permeates many other aspects of the company, but that owner-operator mindset is something that I think is a, a critical differentiator for us. The second thing I would highlight is we run an integrated organization. And so we don't have divisions. We don't have business units. Yes, we do have product segments, but those products, are built on and supported by common technology, common research organization, a unified sales organization. And so that's not only important from an efficiency standpoint, but it's also, critical for us in, as I was talking about in your last question, helping investors with their most important process. And so we bring, interoperable, consistent frameworks that can help investors across a multitude of use cases. And so our, just as examples, our ESG and Climate indexes are built on our leading ESG and Climate ratings and content.
Our factor indexes are built on our factor models, our industry-leading factor models. Our Real Assets and our private equity content are supporting risk models within our Analytics segment. All of those come together to be able to allow us to deliver more value to our clients. The last thing I would highlight is our research orientation. So we have a very large research organization of 400+ individuals that are closely connected to our clients, as well as our sales organization being closely connected to clients, but are constantly looking at the trends in the investment process, what our clients are looking for, and translating those through to robust solutions that can help them achieve their objectives. And so that research orientation allows us to be innovative at the forefront of trends in the investment process and really differentiated relative to those that we compete with.
What do you think investors that are new to the MSCI story don't appreciate about MSCI in a way that your most informed shareholders do?
So, you know, we get the question oftentimes from investors that are new to the story and just trying to get up to speed. You know, they tend to focus on, I'd say, the fact that we are an index company that has well-established benchmarks that are benefiting from just growth in the investment industry. And those benchmarks can be used to create products like ETFs. And so we're growing with growth and passive investing. So yes, those things are true. You know, we are benefiting from growth in assets and growth in passive investing and new fund launches. But importantly, as I talked about in the first question, we are so much more than an index company. And in fact, we don't describe ourselves as an index company.
You can describe us as an info and analytics company or a data company or a financial technology company, but really how we define ourselves is an investment tool company. And so as I was talking about before, we are at the forefront of the key trends in the investment process, not because we are an index company, but because we are an investment tools company. And those other areas outside of index are very compelling growth areas in their own right, but importantly, they fuel our, our index franchise. And so they are the reason that we are and continue to be a leader in index, index investing and indexation, more broadly.
And so we have this interoperable framework of tools, solutions, frameworks that, as I was talking about in the last question, really create the differentiated value proposition and allow us to stay at the forefront of those trends in the investment industry and drive outsized growth relative to other index companies, data companies, info services companies, financial technology companies.
During your interactions with investors, particularly your biggest long-term shareholders, what are they asking of senior leadership at MSCI? And perhaps just as important, what are they asking your company to not do?
Yeah, so, you know, you asked what how does MSCI compare to five years ago? And as I alluded to, we are bigger. We serve more cli or we're bigger in new, newer client segments. We have new content offerings. The mix of businesses change. But at our core, we continue to be that same organization that is focused on helping investors and helping them do their job better. And as I was alluding to, in the subsequent question, we bring a very strong strategic discipline, operating discipline, capital discipline to everything we do. And that consistency is, many would say, boring. We day in, day out, we're continuing to execute and continuing to focus on differentiating relative to competitors and creating that value proposition for investors.
But at the same time, we have this powerful business model, where most of our revenue, the large, large majority of our revenue, is recurring in nature. We are selling IP-based products that have inherent operating leverage in them. So we are this compounding business model. So our investors, more than anything, say, "Keep doing what you were doing. Keep operating," because over time, that creates enormous value for us. If you look at our CAGR, our revenue CAGR over the last five years, it's been 12%. As I alluded to, we're selling these IP-based products that have inherent operating leverage that allow us to reinvest in the business and drive strong free cash flow and operating profit growth. So our Adjusted EBITDA on free cash flow CAGR over the last five years has been 15%.
That combined with that strong capital discipline that I alluded to generates 20% Adjusted EPS CAGR over the last five years. And so that compounding nature of what we're doing is very powerful. And our shareholders tell us, "Keep doing, keep doing that." And on the flip side, they're saying, "Don't deviate from that. Continue to have that strategic focus, in these large markets, large and growing markets where you have competitive advantage. And we will see the value over time from that.
Then speaking of shareholders sharing their wisdom with MSCI, back in 2015, ValueAct briefly turned activist and got three board seats. Ironically, ValueAct sold its stake by the end of 2016 and missed out on much of the stock's long-term upside. Were there long-term and valuable suggestions imparted by ValueAct that still impact how MSCI operates today?
So yes. And as you alluded to, having an activist investor is very time-consuming. It can be a challenging endeavor. But it, it's also, an opportunity to engage more directly with all of your shareholders, not just one shareholder. It's an opportunity to crystallize what is creating that long-term value for you and, and communicate that, more explicitly externally. And so we were fortunate with ValueAct that they ultimately, were aligned with what optimizes long-term value for the organization and not just looking for near-term corporate action or corporate events to generate near-term results. They ultimately, supported us in, you know, what you've seen since then, over the last 10 years or so, this tremendous track record of, of long-term value creation. But there probably were a few areas where they really helped accelerate, enhance, our, our practices, most of which are areas that we were already working on.
You know, they helped us to further our frameworks and even become better in what we were doing. I would call out one capital allocation. And so they did help us recalibrate our approach to leverage. So we've taken, or they helped us take our what was at the time a very low leverage level up to what you see today. So in that 3x-3.5x growth at the trailing EBITDA, they would have had us go even higher, but ultimately helped us think through how that can enhance equity returns while preserving the flexibility to allow the company to be nimble and agile and take advantage of opportunistic opportunities. And so that was an area that they were helpful to further our thinking and even refine our approach to share repurchases, where we've been extremely successful.
I think we mentioned recently that we have bought back since 2012 close to 40% of the shares of the company at an average price of around $117 per share. So we've been extremely successful at creating value through our capital allocation. Then the other area that I would highlight is on compensation. I alluded to this earlier, but they really pushed for us to implement compensation structures that were aligned with our shareholders. We only make money when our shareholders make money. That's with a long-term focus. So heavy emphasis on stock-based comp structures that are based on continued appreciation in the stock price and align with what ultimately creates long-term value for the company.
The last thing I would highlight is, and this was more indirect from the experience, but it was a good reminder for us that we need to always balance investing for the long-term while delivering period to period, strong results and strong growth. And so that is the delicate balance that we are continually walking, which is, fueling these long-term investment opportunities for us while at the same time continuing to deliver attractive track records of free cash flow and profitability growth.
So you mentioned kind of the long-term financial targets that you guys as a company has. How do you want investors to view those targets? Is it aspirational? Is it a multi-year average? Kind of how do you guys think about that framework that you put out there quantitatively?
Yeah. So I would say we have, and I was talking about this, tremendous opportunities in front of us with tremendous opportunities across client segments, huge client segments where we're small today, doing more within the existing client segments where we're well-established, tremendous opportunities around new content areas, many of which I've talked about, tremendous opportunities across asset classes where we are small in areas like fixed income. And I alluded to Private Assets that are huge markets in their own right. And so our long-term targets reflect those financial targets that we believe we can deliver on over the long term and through the cycle. And so whether it's at a segment level or at the aggregate level, these are growth rates that we believe that we can deliver through the cycle.
There will be times when we are above it, which we've seen many times in recent years. There could be times when our growth rate might be below it. Again, through that cycle, those are growth rates that, we can deliver across the business.
So maybe kind of coming back to something that you spoke about earlier, your legacy index franchise tends to benefit from a winner-take-all sort of a competitive environment. But there's other segments like analytics and ESG and Climate where it's intensely competitive. Why does MSCI win in those competitive areas?
So if, if by winner-take-all, you mean providing common languages or standards that the industry adopts to use to communicate performance or risk or other parts of their investment process consistently, I'd say that winner-take-all, benefit actually permeates most of what we do. It cuts across most of our segments. Within ESG and Climate, yes, there are a lot of competitors out there. But what we have created, and part of the reason why I think we are strong and a leader in, in ESG and Climate is because we've, we've built it in a way that creates that common nomenclature or framework that investors can use not only to achieve their own specific objectives but communicate to their clients or communicate to regulators in a systematic fashion. We're creating almost that common language or standard within ESG and Climate.
And similarly, within analytics, things like our risk models, our risk measures, are aligned with certain specific regulations and how ultimately clients or constituents, of our clients want to see, risk. And so we are similarly creating those common languages. And that's important across everything we do. We tend to have this track record of establishing standards in new areas of investing. And that's what we're trying to do, across many of these new growth areas that we've talked about. And so those barriers to entry, if you will, or those established positions are relevant in every product line. But outside of that, I would call out, and I touched on this earlier, a few attributes of what we do that allow us to differentiate even within those segments. And so, innovation.
So as I alluded to, we're at the forefront of trends which make our tools very relevant for what our investors are looking for day to day, related to that. And I mentioned this earlier. They are heavily research-driven. And so they are built for purpose. These are tools that are designed for the investment process. They're not just a dataset that's gonna be licensed across whomever wants to license it. We're happy to take money, and we will do that. But they are designed for that specific purpose of understanding the drivers of performance and risk, understanding an investment opportunity set systematically, and then building and managing a portfolio over time, which really differentiates us relative to our competitors who typically view the competing offering as just a data product, a solution, an application.
Yes, you can describe ours that way, but it is designed to be an investment tool. And then the last thing that, I would say is, we have this tremendous ecosystem and footprint around our tool. So we, as I alluded to earlier, we talk to the who's who of investors, most importantly, asset owners. So we're working with the world's largest pension funds, sovereign wealth funds, increasingly endowments, foundations, insurance companies who use our frameworks as part of their investment process, which drives adoption across managers and other intermediaries in the investment process. And so, that all combined with having best-in-class quality continues to differentiate us even in areas outside of index.
You touched on innovation a few times in that last response. What is the innovation process at MSCI, either internally or working with clients to figure out, "Hey, what is the solution that, you know, we can come up with here?
Yeah. It's you touched on the important point there, which is working with clients. I think it's always dangerous when you're operating in a vacuum, dreaming up what the next new thing is that the industry's gonna want. We call that at MSCI "MSCI's gift to the world." You know, typically, that does not work out. And so our innovation process is heavily linked to those strong relationships that I just alluded to with the world's leading investors and that team of 400-plus researchers that I mentioned earlier who are both engaging with our clients to help them understand how to use our tools but also talking to them about that next wave in tools that they will need, those next solutions that they will need, how they are thinking about their portfolio and how they're allocating assets, and how can we help them on that journey.
And so that really feeds into our innovation process and our product lifecycle and roadmap. And importantly, it is consistent with our Triple-Crown Approach where typically, those things that we know clients are looking for are those things that we can help them, we can help develop for them and ultimately monetize quickly. And so fuels that Triple-Crown Approach of high-return, fast payback, innovation that we've created at this organization.
All right. About five minutes left. I'll pause now and see if there's any questions in the audience.
I have a simple question. You talk about all these growth areas that you go into. As a new person looking at your stock, which ones do you think might be great for growth potential? Why?
Yeah. So it's always a tough question because we do have these many layers of growth. I would call out, one of those first trends that I highlighted in Patrick's first question, which is this move towards more customized rules-based portfolios, which manifests itself in a number of different ways across the investment industry but translates through to indexation or the growing utility of indexes into the investment process. And so that is something that's creating opportunities for us to sell our indexes across a wider range of client bases. So we see tremendous growth of use of our indexes among wealth management organizations who are developing model portfolios based on our indexes and then implementing parts of those model portfolios through direct indexing, which is customized indexes at scale, built on our indexes.
We see it within broker-dealers who are creating things like over-the-counter derivatives, total return index-linked swaps, structured products based on our indexes to help their clients, whether those are institutions or their wealth-driven clients, achieve specific objectives. We even see it among quantitative hedge funds. We see it among intermediaries, like exchanges as well. And so you see this growing ecosystem of use of indexes across a wide range of use cases where the index is an integral part of that investment process.
And so, given the approach that we take in as an index provider, which isn't just looking at what are the, largest stocks on a specific exchange or what are the largest stocks in a specific market, but here is the opportunity set, the total investable market, here's how to segment it across geographies, countries, sectors, styles, sizes, climate considerations, risks, risk models, in a systematic fashion, lends itself to these more systematic rules-based, strategies. And so, it is something that's opening up many different parts of the investment universe for selling our index content to. And it is opening up a wide range of additional use cases. So that's very exciting. So one that I would call out, and that touches many other areas including wealth and climate and index derivatives, but, very exciting opportunity for us.
One more.
About, price increases . Index use. What?
Yeah. So this and it's not just within Index. We are increasingly becoming regulated as an organization, and our clients are also increasingly regulated. We recognize that we play a very important role within the investment process, and the investment ecosystem. And that necessitates and means that we need to continue to focus on doing things the right way. And importantly, we need to continue to create value for our clients. And so when you look at, we are already regulated. There's the EU Benchmark Regulation, which grew out of IOSCO. And so we've been regulated for some time within our Index organization. But there are other parts of our organization where we are and will be regulated, that the regulations tend to focus on things that we believe we do well and differentiate us from others.
And so that's things like strong governance, focus on strong quality, transparency around our methodologies and our approach, as well as ensuring that we are free from conflicts of interest. And so those are all things that we take to heart and do very well. And related to that, as long as we continue to add value to our clients, and to your point about price increases, we are very mindful that we need to continue to add value to our clients. Our growth is going to come from our largest clients and our established clients, many of which are feeling pressure. And to do that, we need to continue to deliver value, one, to substantiate price increases, but more importantly, where most of our growth comes from continuing to upsell our clients.
It's something we take to heart and are very focused on. If we do things right, and we've seen this with many regulations that have come in, it's an opportunity for us. It makes it challenging for other players to compete. It's something that continues to elevate our game and differentiate us within the investment ecosystem. It's something we take very seriously and think we are well-positioned for.
Patrick.