All right, we will go ahead and get started. Thank you, everybody, for joining us this morning. For those of you who do not know me, I'm Patrick O'Shaughnessy, and I cover capital markets here at Raymond James. And up next, we have a fireside chat with MSCI. And on MSCI's behalf, we have CFO Andy Wiechmann. Andy, thanks for joining us.
Thank you for having me. Always happy to be here. This is a great event, and as usual, great day so far.
All right, terrific. Well, maybe to kick things off, for the benefit of folks in the room who are a little bit less familiar with MSCI, could you just spend a few minutes describing the company as you see it today?
Sure. Yeah, it's a good place to start because I think the breadth and power of the MSCI franchise is often underappreciated. We're known as the index company, sometimes the analytics company, the ESG company. Some people might call us a financial technology company. Those are all accurate, and we are very good on all of those fronts. But I think it undersells the power of what we do. One way to think of MSCI is thinking of us as a critical provider of infrastructure across the capital markets, providing infrastructure that connects the providers of capital with the managers of capital, and ultimately the users of capital and the intermediaries in between. That infrastructure takes the form of content sets, like indexes, like data sets that help the market to understand opportunity sets. So here's how you define the investable universe of investable securities.
Here's how to think about industry classifications, taxonomies, hierarchies, ways that the industry can think about allocating across markets, understanding the performance of markets, understanding what's driving the performance of markets. We're providing things like analytic models and analytic applications that are helping investors to build portfolios to achieve their objectives more effectively. We're providing services and applications that help capital markets participants to manage risk and achieve specific performance objectives. And so we are touching every part of the capital markets ecosystem and providing those common languages that let the participants communicate with each other. And so as a result, we are serving the who's who of capital markets participants.
That's everyone from asset owners, asset owners like pension funds, sovereign wealth funds, insurance companies, endowments, foundations, through to the managers of capital, as I alluded to: traditional managers, alternative managers, private asset managers, as well as index fund managers. We are serving the intermediaries like exchanges, broker-dealers, trading firms, consultants as the common language and that infrastructure provider. We're embedded in the processes between all of those participants. We serve 7,000-plus parent entities. Again, these are blue chip who's who of participants in the market across over 100 countries. We are embedded in a critical ingredient in what they do day to day.
And as a result, we are in the strike zone of many of the key trends that are taking place in the capital markets and the investment industry that has enabled us to drive solid over the last five years a top-line CAGR that's solidly in the double digits. Also allows us to deliver EBITDA and free cash flow given the powerful operating leverage embedded in our financial model, given that we're selling IP-based solutions that can be used many times for many different use cases. We can deliver mid-teens EBITDA and free cash flow growth based on the CAGR we've had over the last five years. And we've had an adjusted EPS CAGR of 19% over the last five years. So it's a powerful business with a powerful financial model, and we are just getting started.
We are touching many, as I said, all parts of the ecosystem today, but there are big parts of that capital markets ecosystem where we are still relatively small and growing rapidly, so areas like the wealth-driven investment process, areas like insurance companies, we're relatively small within the fixed income investment process, and that's a high-growth area, and areas that are yet to be well-structured, well-defined, like the private asset investment process, we are a leader there, and we are at the forefront of driving standardization, adoption, if you will, creating the MSCI of private assets, so huge opportunities in front of us. We are in a good position and a very unique franchise. So thank you for starting there. It's an important question.
Yeah, and I think your response, as you finished up there, kind of leads me to the next question, which is, what are some of MSCI's key initiatives for 2025?
Yeah, so to those trends that I was alluding to in the investment industry and the big opportunities in front of us, probably the most notable trend facing us, and it's one of the most significant trends in the investment ecosystem, is this move towards rules-based, systematic, customized strategies or personalization at scale. And so you see whether it's at the institutional level, at the wealth-driven investment process level, at the tradable products, so broker-dealers, trading firms, exchanges, there is a push to create tailored solutions for the individual, for the institution to help them achieve their specific outcomes. And a very elegant way to do that is an index. Index at its core is a weighting of securities, a systematic weighting of securities.
Given those frameworks that I talked about in the last question, our indexes are very uniquely positioned, and our franchise is uniquely set up to do that mass customization at scale. Probably the largest area we're focused on in our largest area of investment is we call it custom indexes at scale. That's investing in the data infrastructure, the applications to be able to do simulations and index construction at a fast rate, our production environment to be able to handle a massive amount of indexes, as well as the researchers and go-to-market staff that can help the investment industry understand how they can use these indexes to more effectively achieve their objectives. Custom indexes is an area where we continue to release enhanced capabilities. We're serving a broader swath of the ecosystem and probably our number one investment area.
As I alluded to and related to that, we are investing heavily in our go-to-market and our capabilities around the wealth-driven investment process, and so that does overlap with the custom indexes at scale, but more broadly, it's bringing together the MSCI toolkit to help wealth organizations create model portfolios at scale and optimize those model portfolios, oftentimes which involve an index or can revolve around an index, but we can do a lot more than just the index component of it, so that's a huge focus area. I touched on private asset investing, so when you think about an area where you've seen the highest growth in management fees within the investment industry and where you see the largest proportion of management fees, when you include the performance fees, it's around private assets, and the private asset investment landscape is not mature today, just to be blunt about it.
There aren't good standard definitions for how to define sub-asset classes, what's the difference between growth, LBO? There aren't good mechanisms and frameworks to describe even what is private credit, what are the different parts of private credit. There's not clarity on what is the value that managers are providing beyond just a track record of delivering IRRs and MOICs. How do investors think about risk and the risk that they're taking investing in various private asset strategies and funds? These are all things that MSCI does, and we have the capabilities to develop those tools that the industry needs to be comfortable allocating more assets to privates and understanding the risk and return that they're getting from those allocations.
And so a number of initiatives this year, everything from releasing additional content sets like indexes, things like nowcasting or evaluated pricing, liquidity insights, better risk insights into the market, but also solutions that just help investors manage their private asset portfolios better. So that's a huge area of focus for us. The last area I would highlight is around the fixed income investment process. So that's been an area you've heard us talking more about. We have invested over the last probably five or six years heavily in our analytics capabilities and fixed income and our index capabilities. Many of these trends that I've been alluding to in terms of move towards rules-based portfolios, the solutions-oriented type investment approaches cut across multi-asset class.
And we have unique multi-asset class capabilities and increasingly a differentiated fixed income capability that's allowing us to drive growth specifically within the fixed income investment process. And so that's an area where we continue to invest, continue to see attractive opportunities. And that is also built on, and all of those areas are leaning on some of our capabilities in areas like climate and sustainable investing, which are areas where we are really a leader and areas where investors are recognizing they need to systematically start to integrate these considerations into their portfolio because they are key drivers of risk.
Over the last 10 or 15 years, I think there have been a couple of big secular themes that have benefited MSCI. To be fair, MSCI drove those themes, such as factor investing and ESG investing. It showed up not just with your index franchise, but your analytics business and across the company. As you look to the future, do you see private credit or customization at scale as kind of secular themes on the same magnitude as some of the past themes?
So yes, and maybe even they build on what you alluded to. So things like factor investing, sustainable investing, those are areas that have a long way to go. We still believe those are massive opportunities, and they are key ingredients into that mass customization and personalization as well. Those are factors that are important to build a customized objective or at the very least to consider the risks associated with a strategy. And so there's a long way to go on those fronts. And climate investing, as we've talked about in the past, is still early in its adoption, its infancy, its understanding of how to really use it effectively. And that's something that we can help drive. So those are still big opportunities in their own right. But at the highest level, you have to keep in mind MSCI benefits from growth in the investment industry more broadly.
Going back to your first question, the thing that really drives our business is growth in the capital markets ecosystem, and that starts with global savings, so you are seeing continued growth in private savings, individual savings, you're seeing growth in institutional accumulation of wealth and savings. Government organizations or government-sponsored organizations continue to accumulate assets, and all of those savers are directing those savings to productive uses or what we call the investment industry. They want to get returns on their savings, and so you're seeing growth in investable assets, and that is something that fuels MSCI. These investors need frameworks to understand what is my opportunity set, how do I allocate across it. That is MSCI's bread and butter. We provide those common languages, so at the highest level, we continue to be fueled by growth of the investment industry.
But then when you drill down a layer, what you're seeing is growth in the number of securities and investable asset classes. So you're seeing growth in, as you alluded to, private assets. You're seeing more security types becoming available and complex security types. You're seeing the over-the-counter markets continue to grow at a rapid growth rate. And so the need for systematic frameworks to navigate and understand performance of risk in those markets is what drives MSCI's business. On top of the growth in global savings and the way that manifests itself in our business is, as you alluded to, mass customization. This is something that's been talked about for a long time, but we're now at a stage where you have the tools and the technology to do this at scale.
This is an area where, as I said before, MSCI is uniquely positioned given the range of indexes that we have, the analytic content we have, so our risk models, our portfolio construction tools, our optimization tools, together with the insights we have across asset classes. We can do this across the total portfolio together with some of the key inputs that investors are looking for, like climate considerations or sustainability objectives, uniquely positions us to serve that need. That's something that will continue to grow gradually. We see it among institutions via institutional passive mandates. We see it among the wealth-driven process, most purely in direct indexing, but even more broadly in model portfolios. We see it within trading firms like broker-dealers who are creating over-the-counter instruments or structured products that are trying to achieve custom outcomes.
We are uniquely positioned to help drive that and benefit there. Then, as you alluded to, areas like private assets, it's really in its infancy in terms of how investors are able to manage their private asset investments. We are really trying to bring that same discipline and structure that we've brought to public assets to private assets. Another one that takes time, we say overnight change in the investment industry takes 10 years, but this is one where we really should be uniquely positioned to help drive that institutionalization, that industrialization, that standardization of the private asset investment process, which is a massive opportunity for us.
And so you spoke about growth in the investment industry as a tailwind for you. As we focus on the public equities market, for the last, I don't know how many years, five, 10 years, U.S. markets have outperformed developing markets, emerging markets, et cetera. And MSCI's brand, and I think a lot of your key indices focus on non-U.S. markets. Despite the fact you do have U.S. products, I think people don't always appreciate. But your brand, where you have relative strength, is often perceived as being outside the U.S. If we do see a shift in the investment markets and U.S. underperforms, could that be a tailwind for MSCI?
So firstly, the strong performance of the U.S. market is a helpful thing for us. The U.S. has the largest investment industry in the world. These organizations are our clients. So to the extent they are seeing their assets grow, that is a helpful factor to us. And as you said, Patrick, we do have a range of not only broader products that are used to help manage U.S. portfolios and U.S. exposures, but we do have indexes. And we've grown our U.S. index franchise, particularly over the last 10 years on the heels of things like factors and ESG. If you look at ETFs linked to MSCI indexes, about 27% of those assets are in U.S.-focused funds. And so we do have a presence there. But the flip side of it, as you're alluding to, the majority of the assets are in international-focused funds.
And so growth in U.S. a ssets helps fuel things like the World Index and ACWI because U.S. securities are a big part of those indexes, but where we are most notable and have the most significant strength is in international investing, and so that's when U.S. investors are investing on the index side, when U.S. investors are investing outside their home country, it's when European investors are investing outside Europe, and so when you see rotations to international investing, not only do you oftentimes see higher growth of those assets, but you also see more fund launches, capital accumulation, and those are areas where we are strongly positioned as a benchmark provider, but more broadly as a tool provider, and so, yeah, we've been in this period over the last several years of outsized flows into U.S. exposure products, outsized performance of the U.S. market, again, that's helpful.
But to the extent you see, and you've seen this in the past in periods, heavy rotation into international, including in emerging markets, we have a very strong presence in those markets, and it is helpful to us.
So you spoke about, yeah, hey, markets being up is good for all of your clients. Just what's the current state of affairs in terms of your clients' health, their budgets, and how does that differ maybe between asset managers versus broker-dealers versus some of your other key client segments?
Yeah, sure. So it does vary based on client segment. Our largest client segment is active asset managers, which comprise roughly 50% of our subscription run rate, so the subscription part of the business. And as you said, the rising asset levels, the market performance has been helpful. This has been a client segment that has undergone secular pressures. So active managers, basically since the financial crisis, have seen fee pressure, and they've seen muted flows. I don't want to say they've seen continual outflows, but they've seen muted flows and some years outflows. And in recent years, so the last few years, they have seen outflows. And so they have been feeling pressure. And I think that's been exacerbated by the rate environment where you've seen strong moves of assets into things like cash products, money market funds, even rates more broadly.
And the fixed income asset classes, lower fees in general. So that has pressured many of these active managers. But you've also seen muted market performance. Yes, over the last 18 months, you've seen the sustained momentum in the equity markets, but you had seen going back to late 2021, kind of volatile markets, down markets, and all of that contributed to a time of strong pressure on active managers. Now, I alluded to, and you asked about, you've seen that turn. So the momentum that we've seen over the last 18 months in equity markets leads to higher assets. It leads to more revenue. These are organizations that want to be growing. They want to invest. And so we have seen some improvement in buying behaviors.
There are definitely some lingering pressures in certain areas, but we are seeing improvements in discussions and that translating through to constructive dialogues on pipeline, and these are organizations where we can help them, so we are focused on parts of the industry where we can help them launch strategies to attract assets and strategies that can achieve higher fees. Other client segments haven't been quite as dramatic, so our next largest client segment, banks and broker-dealers, we did see a year ago, a year plus ago, some large global banks who are going through restructuring cost efficiency efforts that did create some noise and pressure on us, but I'd say the environment generally for, especially large global banks, is more constructive right now, so that is helpful for us.
You've seen over the last year, so behind banks and broker-dealers, hedge funds is a significant client segment for us. And you've seen a strong performance for hedge funds, particularly multi-strat hedge funds over the last year, a year and change, as well as trading firms more broadly. And we have, whether it's indexes, risk models, broader risk management tools that can be really helpful to those organizations. We've benefited from the momentum they've seen.
Mic cut out?
Yeah.
Andy's mic cut out if you can check that, please.
Yeah. Are you getting me?
Yep, we're back.
There we go. Okay. Excellent, so yeah, we've been benefiting from this success on hedge funds, and then areas like wealth management have been just an area of sustained momentum, and that's an area that's helping to drive our growth, and then as we talked about alternative managers like private asset managers, another area where we're well positioned, and so yes, everyone tends to focus on parts of the asset management industry that are feeling pressure, and there will continue to be structural pressure on the industry, but we do have opportunities to grow there, but there are big parts of the investment industry where we are smaller today, but well positioned to drive outsized growth, and so we have tremendous opportunities in front of us.
You mentioned some of the challenges that asset managers have had. And Credit Suisse obviously went away last year. And typically your index subscription business grows 10%-12% every year, kind of like clockwork. And it did dip below 10% growth in 2024. Are you pretty confident that is going to prove to be a blip and the initiatives that you spoke to earlier are going to allow that business to regain double-digit growth?
Yes. We continue to have conviction about the long-term opportunity in index subscription as well as indexes more broadly, and there are tremendous opportunities on the asset-based fee side, but we continue to see tremendous opportunities licensing our index content for a whole host of use cases that will fuel that subscription growth. As you mentioned, as we talked about, we've seen a confluence of factors feeding into that slowdown in index subscription growth. All the pressures we talked about on the asset management industry that have been acute over the last few years. As I talked about, the pressure on many global banks and restructuring efforts that we saw a year ago, the rotation to a heavy focus on U.S.-focused strategies, particularly within our index subscription franchise. Our bread and butter on benchmarks is international investing.
And so all those factors contributed to the growth slowing to 8.5%, which we saw in the most recent quarter. But given the wealth of opportunities across customization at scale, indexation more broadly, the opportunities we have in wealth managers, hedge funds and trading firms and broker-dealers with insurance companies lead to massive opportunities. And so we continue to be very excited about the trajectory and opportunity in front of us on the index subscription side.
Current events question for you. Obviously, a pretty big seismic political shift in the U.S. in recent months. How do you see that impacting your sustainability franchise, if at all?
Yeah. So it's important to keep in mind that there are not many notable federal-level sustainability regulations today in the U.S. And so the current administration is unlikely to push more regulation in the U.S., but there's not much there to start with that could be impacted. The growth of our U.S. franchise has really been around financial materiality. And that's an area where MSCI really differentiates relative to others. It's how we established ESG as a key input into the investment process. It's why does sustainability matter from a risk and return standpoint in the investment process? And that is not going away. And so the political rhetoric, all the chatter coming out of Washington around many aspects of ESG and sustainability does create some noise. It creates some hesitancy in buying behavior.
As we've said in the past, we do see more measured purchasing decisions, particularly in the U.S., of investors who are trying to clarify with their clients, trying to clarify with their constituents, get their arms around what they might be regulated around could mean for them. And all of that causes more measured purchasing decisions. But it also, at the same time, creates this opportunity to really focus on what, at its core, sustainable investing is. And as I said, that's an area where MSCI is always differentiated. We help investors understand how they can use these inputs into being better at their job, at what their core job is, which is achieving better risk-adjusted returns or specific investment objectives. And we've developed the tools to help on that front.
So the political environment creates some additional noise, but it also creates an opportunity for us to clarify really what ESG, what sustainable investing, what climate investing really is at its core, which is it's an investment tool to achieve better outcomes. And so that is what we are focused on. We see the opportunity to gain market share, displace competitors, but also evangelize the industry to really understand at its core what ESG is. And I think Europe's further along in that journey, but there's even some complexity in Europe related to a multitude of regulations there where we think there is a need to really clarify what ESG is. And MSCI can play a key role in that. And ultimately, providing more standards clarity is something that will benefit not only the industry, but MSCI.
How are you thinking about MSCI's pricing power right now? And I guess your subscription business and then the asset-based fee business. And to that latter point, if we see renewed pricing wars in the ETF space, how does that impact MSCI?
Yeah. So maybe I'll take the two in parts, but there are underlying themes that cut across both of them. So on the subscription side, as I alluded to earlier, we play a very unique role in the investment ecosystem. But from a client standpoint, what that means for them is we can help them attract assets and sticky assets. And that's something that's true not only on the subscription side, but also on the passive side. And so when we think about pricing, we think about the value that we are bringing to our clients. And that's not only in terms of the ecosystem around our indexes, but it's also related to the enhancements that we make to our tools, our offerings, how we are helping our clients become more efficient, how we are helping them engage with a broader range of clients and investment ecosystem participants.
And so all of that enables us to continue to capture that value, oftentimes through price increases. We can do more for our clients in terms of broader usage of our tools that helps us capture more price. And then we do focus on as well what others are doing in the industry. And there are instances where others are being more aggressive on price. And that creates opportunities for us to capture share, position ourselves well in the industry. And so we have the ability to not only enhance our position in the industry, but capture value through price increase. And while we continue to develop that ecosystem, a broader range of users who are using our tools continue to enhance the tools that we're offering, we think we can do both. And we are well positioned to continue to capture price.
On the index side, the indexed investing side or the passive investing side, listen, it's a wide universe. And so there are some participants, some big parts of the industry that are focused on low-cost mass retail brands. And the differentiation there is on cost. You have seen zero-fee passive mutual funds for years now. You've seen fees come down in certain ETFs that are out there. We do expect overall fees to continue to come down over time. But we do believe that there are other big parts of the industry that are focused on quality and brand. And there are big parts of the industry where we can help our ETF partners attract assets that will pay higher fees. And so we are a key revenue center for these ETF providers. And so ETF providers want to do more with us.
They want to work with us. And they are willing to pay for it. And so there are areas where the fees are sustainable, but also we can continue to capture outsized assets. And we're very differentiated on those fronts. If you extend beyond just ETFs, there are big parts of the passive investment industry we call institutional passive. So this is for us, $3.9 trillion of assets that are tracking our indexes in non-ETF wrappers, where we do see different dynamics and fees. Because we are helping in those personalization, those customization strategies that I alluded to earlier, more generally non-market cap weighted products, we are playing a more significant role in that value chain. And we're capturing strong economics. So you've actually seen fees be steady in that part of the market.
And so as long as we continue to differentiate, help our clients attract assets, sticky assets that will pay higher fees and be a revenue center, which we're confident we can, or we can help our clients be more efficient, there are sustainable economics and outsized growth for us over time.
All right. Terrific. With that, we are out of time. But thank everybody for joining us.
Thank you. Thanks, Patrick.