I cover business and information services company here at RBC Capital Markets. We're excited to host Luke Flemmer, who heads private assets at MSCI. Luke, I'll kick off with a question that we're getting across all our info services coverage universe.
It's about Gen AI and the moats around the business. Maybe if you can help us or talk about what are the moats around the private asset business. Where do you get the data? How do you source the data? How much of it is proprietary, and what are the moats around the data? Thanks.
Yeah, sure. Great question, and obviously Gen AI is, you know, very much accelerating the ability to do data collection at scale. If the data is available, if it's ambient, then the ability to go and source that data and coalesce it is being greatly accelerated by Gen AI, and that's obviously creating threats to moats that were traditionally essentially operational in nature, right?
People have created scaled organizations to do that data collection, and that was effectively a moat, and now as the cost to do that is significantly reduced, there's not a lot of defensibility in those kinds of businesses. F ortunately for us within the private assets business at MSCI, essentially all of the data that we operate on is proprietary in nature.
We collect data from GPs. We collect many manager portfolios, and we run analytics for those managers. In the process of running those analytics, we also are able to generate derived data off those portfolios that we monetize in various fashions. We also collect information from LPs or asset owners on very large scale about all of the portfolios that they own.
We do that in furtherance of providing portfolio analytics and risk and performance book of record for those asset owners. Once again, we then use those datasets to generate you know, aggregate anonymized information around those markets, and that allows us to do things like create indexes, create you know, benchmarks for different relative performance, et cetera.
The sort of crux of our private assets business is proprietary data. There's a sort of inherent flywheel in that, which is that we're trusted by market participants that they provide that data with us. In many cases, there's a give to get dynamic, where in providing the data they get higher quality derived analytics back.
The last point that I would make is the derived information itself has a lot of intellectual property embedded in it, right? The methodologies by which we do construction of benchmarks, construction of risk measures, et cetera, reflect a significant amount of MSCI intellectual property. It's proprietary data combined with proprietary analytics to produce differentiated output.
That's great color. Obviously very strong moat around the business. When we think about, as you mentioned, like, Gen AI is operationalizing, making it easier to assimilate the data. Can you talk about how MSCI or within private asset particularly, how you're using Gen AI to not only improve, like, the operational front, but also customer-facing applications? Maybe if you want to start with the internal and then the external facing Gen AI implementation.
Yeah, absolutely. I'll actually add a third 'cause that's exactly how we think about it internally, which is sort of three dimensions of AI-
Mm-hmm
Opportunity for us. Dimension number one is on the data ingestion side, so we consume large amounts of unstructured data from clients and, you know, historically, that was fairly manual and expensive to ingest and normalize, and so we're leveraging AI extensively to bring down not just the cost.
But also, the time taken and also increase the amount of data and insight that we can extract from that data. We're really mining that data much more efficiently at higher speed and at lower cost on the intake side. The middle dimension of it that I would add is actually our internal, sort of operating efficiency as an organization.
That would manifest in things like product design, where we can use rapid prototyping and gen AI-enabled tooling to more rapidly engage with clients, you know, bring ideas to fruition, et cetera. We're using it extensively on the engineering side to actually build and implement software.
That's been a significant accelerant for us, you know, on the delivery side. The third dimension, as you mentioned, is the client-facing dimension. We're embedding generative AI front ends in our tools themselves. In our user interfaces, we have natural language interfaces. Clients can interrogate data, query data through our interfaces.
We're also delivering data through these connectors, these MCP connectors into Anthropic, OpenAI, and other large language model foundation providers so that our clients can consume data in whatever environment that they're looking to do so.
That's very helpful color. You talked about MCP servers. You also obviously talked about layering in the chats on top. How about agentic AI? Are you also leveraging agentic AI, or are there application that you're envisioning using agentic AI within private assets?
Yeah, we're watching the agentic space very closely. We intend to provide agents as back ends to actually service client requests so that it's not to get too technical, but as you know, the MCP Server is really a data endpoint, right?
Yeah.
That allows someone else's agent to query and gather data and then operate upon it.
Yes.
We are also building agents, you know, internally on our side that will face off against client agents and execute more complex and more long-running analytical tasks on their behalf.
That's-
As you know, it's a very rapidly moving space, and I think the consumption model of agents is something which is evolving rapidly, but we're definitely very focused on it.
That's great color. You obviously talked about the proprietariness of the data, but when it comes to private data or private credit, private asset data, there's a lot of confusion because there are a lot of players in the space. Preqin, PitchBook, S&P, Moody's also talk about private credit data. Can you just talk about, in particular, what data do you have and how it's differentiated compared to the other players in the marketplace?
Yeah, sure. I mean, those are all great firms that you mentioned, and they all, you know, they all bring different aspects of the data, you know, mosaic together for different clients. They all provide different kinds of value. O ne of the defining things in our private assets business we acquired a company called Burgiss about two and a half years ago at this point.
Burgiss is a business that's been around, you know, 30-plus years. It was a very long-standing organization. Those datasets have been collected literally since the late 1980s from LPs representing their investments with various managers. That dataset is LP-sourced.
It's not through FOIA, it's not manager contributed. It's really the cash flows, the capital calls, the distributions that LPs enjoyed in those funds. When we take that data, and when we compute an IRR or performance or a fund benchmark, it's really the gold standard of data, and we have a very long track record. As I said, we have private equity going back to the 1980s.
We have, you know, private credit going back, you know, 20 years, since really the inception of that as an asset class. We have real estate, et cetera. We have these very robust time series of data that allow us to build a lot of financial products on top of those that you really need that depth and robustness of data.
We continue to provide that service for many asset owners around the world, and so we continue to collect, you know, data of that nature, and that continues to sort of power our operations.
That's very helpful. Obviously, the trend in data is very powerful. The historical datasets are very powerful. As we think about the revenue growth, and maybe if you can split up between the private capital solution versus the real asset, can you talk about some of the headwinds that existed in the business over the last few years, and what are you seeing in terms of the trajectory going forward?
Yeah, sure. I think well, let me step back and say the overall comment is we view private assets as a holistic business for us, and there's a lot of synergy between the deep expertise we have on the real asset side and the more horizontal view that we're able to provide through the Burgiss acquisition, which is cross-asset class. It's private equity, it's private credit, it's real assets. It's all of those asset classes. We don't view those as silo businesses.
Okay.
We view them ultimately as an integrated offering to clients, and we will continue to integrate them more closely going forward.
Okay.
To treat them as two slightly separate business lines for the sake of the question, the real assets business, we made an acquisition of a company called RCA at the beginning of 2022, I think it was, which you know was a which coincided with quite a negative market cycle in commercial real estate, right?
We had a significant rise in interest rates and the fallout from COVID and all of the things you would be aware of. From a secular perspective, that market has been somewhat challenged for the last several years. As you know, in you know real estate is a market that takes a long time to stabilize because these are long leases, they're physical assets.
It's not a market that works itself out very quickly. These things have taken-
Yeah
Time to be metabolized. In some cases, we've seen, you know, conversion of, you know, of CBD into residential. These are all, you know, reshapings of the asset class. That's been a little bit of the backdrop for the last three or four years. There's been a little bit of lower transaction volume just a little bit of a depressed market.
As I've said, that market is working its way out. We are seeing, you know, more positive movement. We're also repositioning the business to a degree to focus on some of the new fund vehicles and the sort of new approaches that we're seeing in the market. T he sort of core plus open-ended structures were the prevalent structure for many years.
We've seen a lot more growth in opportunistic and value add, investment, typically in a closed-end fund structure rather than an open-ended fund structure. In fact, I believe I read the statistic that 65% of all real estate, commercial assets are now held in closed-end fund structures. It's quite a dramatic, y change.
Okay
In the shape of that business. We've been investing significantly in our offerings around closed-end funds and the analytics and portfolio analytics on these types of structures. It's actually very complementary with the datasets that we have on the private capital side as well, which historically have also been closed-end fund cross-asset. We're driving a lot of synergy there, and we're focusing on these new product lines.
We're injecting into new areas like data centers, for example. We launched some data center products last year. Those have been very well received. We're focusing more on infrastructure, which you know has had strong kind of secular growth through that period. We've made some investments in senior leadership in the team overall in real assets.
I'd say the backdrop was a degree of secular challenge, unfortunately, which coincided with our acquisition of that particular business. We feel quite confident that we're going to innovate and align with the needs of that particular market, and we're going to drive increased growth moving forward. That's certainly our goal.
On the private capital side, I would say that that's a business where we've really been in the process of digesting a fairly large acquisition. We completed the acquisition of Burgiss a little over 2 years ago at this point. You know, we've been merging the teams, merging the coverage teams, merging the product teams, et cetera.
We're actually seeing very strong growth in that business now. We feel like we've really incorporated that into the core of MSCI, and we're starting to accelerate sales, client engagement on a global basis, and we're starting to see that in the performance now.
That's great. Maybe just zooming out, you talked about obviously the synergies between real assets and private capital solution. Can you also talk about the synergies between your private asset business and the rest of the phenomenal portfolio within MSCI, right from indices, sustainability and analytics?
Yeah. Absolutely. I mean, look, that was the strategic insight that drove the acquisition of IPD, you know, almost 15 years ago at this point, was the insight that, you know, MSCI was a scaled and leading player in the public markets, and we help clients with portfolio construction, indexation, risk, all of these things in the public markets, and the private markets were a burgeoning asset class, you know, and certainly that's played out in spades in the market over the last decade or so.
So we see private assets as very complementary and ultimately something that's going to be increasingly closely integrated with the public markets. I would say our view is that some flavor of a total portfolio approach will become more and more prevalent.
We are seeing it on the institutional side. We see more and more clients that are no longer comfortable just managing their private allocation on a standalone or a strategic basis, but really want to make capital planning decisions across the total portfolio. That applies to liquidity and cash flow, but it increasingly applies to risk and exposure, right?
We have a lot of conversations with clients around thematic exposure, right? Help me understand a geopolitical dimension or an AI dimension, all these kinds of things, and they really want to interrogate the total portfolio. Then on the wealth side, which is a big growth area for private assets, again, we believe that when you're constructing a you know an individual client portfolio, you...
If private alts are going to be a significant, you know, allocation, you can't do it on a black box basis. You have to be able to apply the same degree of rigor to portfolio construction that you would apply in the public market. Those are, you know, in our view, tailwinds that are moving the world towards more rigor and more of a total portfolio construction approach.
When we think about private assets in the context of MSCI, I sort of think about it in a T-shaped construct. The horizontal bar of the T is the total portfolio story, right? How can we compose, you know, public equity, public fixed income, and private assets on a like for like basis, right?
How can we use factor analysis? How can we use cash flow modeling, et cetera, to think about that portfolio construction? In order to do that, and this is the vertical bar of the T, we need to uplift the quality of the data and the analytics in the private sleeve, right?
Yeah.
Because in some cases, you know, the quality of the disclosures, you know, the data available is inadequate. The models are not robust. They're not on a like for like basis, et cetera. We're doing a lot of work, and we think there's a lot of great business to be done with clients in that vertical stripe, uplifting the quality of the private assets data.
We absolutely do it with an eye to the total portfolio. We already have products in market that are very popular and widely adopted, which are total portfolio products. We have many asset owners that use us to manage their total portfolio, you know, on a single platform. Many of these techniques that I'm talking about are not theoretical. They're already being used, you know, on the ground.
That's very helpful, and maybe that's a good segue into my next question. I think on the last earnings call, there was a call out for a few products, particularly Private Capital Portfolio Management, Total Plan Manager, and then Private Capital Transparency Data.
Yeah.
Those were the big growth drivers. Can you just talk about what those products are at a high level and what's driving the growth there?
Yeah. Absolutely. Private Capital Transparency is in some sense the building block. That's really the data products and services that collect this ground truth data from the managers. We collect the reporting on, you know, tens of thousands of funds.
You know, I think we have $16 trillion of notional capital that's in those funds. It's a very scaled data operation. Through that process, on behalf of clients, we collect all of the manager reporting using AI increasingly. We sort of digitize and normalize, and then we play that information back to them on a clean and like for like basis. In some sense that offering underpins a lot of what we do for asset owners.
that's a product that, you know, has been very popular with clients and we continue to expand there. It is an area of a lot of innovation for us. A lot of the AI capabilities are being driven into that platform. The portfolio management is the classic, you know, the classic product line in the space, and this is really the product that allows asset owners to understand their exposure.
It allows them to understand their capital calls, their distributions, their exposure by fund, the underlying, you know, contents of what's inside those funds, look at relative manager performance, look at quartiling of, you know, of fund performance, benchmarking, et cetera.
It really is the sort of cockpit that allows asset owners to manage their private exposure. Then, Total Plan Manager is a very rapidly growing and successful product for us. That is exactly, you know, what it sounds like. It is a total portfolio solution.
It allows clients to bring in their public positions, you know, directly from their custodians. They can even bring in liquid alts, you know, hedge fund exposure, and then they can bring in all of their private markets exposure, and they can view those on a common set of frameworks and analytics.
That's great. That's very helpful color. Talking about risk and exposure, obviously there are a lot of headlines around private equity and private credit. In that kind of environment, is that a positive or concerning for your business? Does the demand come down? Or as you mentioned, like, does the demand for transparency, so any color on those fronts?
Yeah, look, I mean, you know, we're not concerned about it in terms of our business trajectory.
Sure.
You know, obviously it's unhelpful in the financial markets when you have any areas of distress. Well, I would break it apart. I think there are a couple of different things going on, and maybe it's useful to look at each of them.
Sure.
In private equity, there's a longer running trend, and this has been going on for probably, you know, really three or four years at this point, which is an issue of delayed distribution, right? One of the things people have struggled with in private equity is that it has not been cash generative, right? This has been a function of, you know, geopolitics, depressed M&A market. There's a variety of
Yeah
....of different things we could talk about. That is actually driving quite a lot of innovation in that market. We're seeing a lot more focus on continuation vehicles and other fund structures. It's also a huge tailwind for the secondary trading market, right? We saw secondaries last year reach $240 billion. That was about a 40% year-on-year growth rate.
About $120 billion of that LP-led and about $120 billion GP-led. That's an area which is growing very rapidly, and it's stepping in to fill some of this like liquidity gap, which hasn't really been forthcoming from private equity. We see that as a huge opportunity for us to provide indexation tools, analytics, et cetera, around that market.
Mm-hmm.
In private credit, we're dealing with two different issues that I think are getting a little conflated maybe in the public mind. Issue number one is actual confidence in the credit quality itself, right? There have been a few, you know, notable, you know, the cockroaches comment from Jamie Dimon and others.
There have been some issues around disclosure and in some cases, you know, collateral management, et cetera, and those have been quite high profile. That's led to a degree of concern around the overarching, you know, credit quality in those portfolios. The second and kind of distinct issue is a liquidity issue, which is a function of some of these semi-liquid fund structures that have gated redemptions by design.
Because people have gotten nervous about the credit, they've tried to sort of over redeem, and therefore some of these firms have run into redemption gates, and that's causing, you know, some anxiety in the market. I think both of those, you know, are very aligned with things that we've been building and, which predate, in fact, some of these concerns.
Thing number one is, you know, tools around disclosure quality, like allowing LPs to actually see whether they're getting high quality disclosures from these managers and frankly, to rate their managers on a comparative basis in terms of the quality of disclosure. We think that'll be extremely valuable for the industry as it's going to drive the overall disclosure and transparency quality up. Then we've been doing a lot of work in credit quality itself.
We did a partnership with Moody's last year. We're making Moody's Analytics available to our clients in situ so that they can assess exposures that they have in their portfolio. We're doing more work at the asset class level, and I think this is very important. Understanding, you know, not all private credit is created alike, right?
Mm.
There may be particular sectors. Maybe we're lending to SaaS, maybe we're not. You know, maybe there's regional dimensions, et cetera. We're providing a lot of the tools to allow investors to tease this apart and understand their exposure much better, which we think will be very constructive and allow investors to regain, you know, some of a degree of confidence through the use of those tools. The other dimension is on liquidity. You know, does this wrapper provide liquidity if and when I need it, right?
Yeah.
We're, again, building tools to help you know with stress testing and liquidity and scenario analysis on these fund structures to help you know to help asset owners assess their exposure, but also in some cases to help the managers, the GPs themselves, you know, talk more coherently or more consistently around the design of some of these products.
Again, it's you know it's always unfortunate when there's dislocations like this in the market, but we think that this will only accelerate the secular trend, which is a demand for higher quality analytics and transparency in private assets.
That's great color. One of the things you obviously also mentioned is this could also drive demand for ratings, and this is where your partnership with Moody's is obviously very helpful. Maybe if you can just step back and provide us some background on the Moody's partnership, how that's progressing, and if you can also talk about your go-to-market strategy there.
Yeah. Absolutely. You know, obviously, as you know, Moody's has a formal ratings business.
Got you.
They have an analytics business.
Yeah
Which are, you know, sort of Chinese walled. This collaboration is on the analytics side.
Okay.
Moody's has a suite of products that they make available to clients that allow them to essentially generate a probability of default, you know, on an individual loan.
Mm-hmm.
By extension, an applied rating to that loan. They have a very rich, you know, model that they've calibrated over all the data that they see and they continue to update. We have very granular information on the loans themselves that we collect through our transparency service.
We're able, for clients, to essentially run their portfolios through these Moody's Analytics and give them additional insight into, you know, the risk that sits in those portfolios. I think this is part of a, you know, of an industry trend, but one that I think we're very much at the forefront of, which is asset owners are no longer comfortable treating the fund as a black box, right?
You know, if you went back, you know, call it five, 10 years, people were a lot more focused on absolute return, and that it was a little bit set and forget on the fund, right? You know, I make a commitment, I make my capital calls, I get distributions back, and at the end of the day, I got a you know, a multiple on invested capital or an IRR, and as long as that was a good number, I felt pretty comfortable about that.
I think just through, you know, a lot of the you know sort of emerging risks in the market, a lot of you know the aspects of de-globalization and tariffs and geopolitics and AI and all of these sort of you know incumbent risks, asset owners really want to understand what they own.
Yeah.
Because if they have exposure to multiple different funds, you know, they have an implicit portfolio that they're exposed to, right? They may only have partial ownership in the underlying holdings, but they do have ownership in the economic exposure to those holdings. What clients are looking to do and what we're, I think we're quite advanced in is, how do I look at my effective portfolio, you know, ignoring the fund wrappers for a minute?
Mm-hmm.
That's where tools like these, Moody's Analytics and other things and also our sort of asset and deal-level analyses become very valuable because they allow me to think about my portfolio and my exposures irrespective of the fund structure for the purpose of that assessment.
That, that's very helpful color. Maybe just a quick question on monetization. Actually, if there are any questions in the room, please raise your hand and we can have a mic go around. Or otherwise I'll just go ahead with my questions.
I was going to ask about monetization, the historical monetization, where was it, which customer segments, but then as you're talking about, like, how this business is evolving and demand is coming up from more private equity, asset managers, wealth managers, how do you expect the monetization to change over the next several years?
Yeah. Couple comments. We have a very strong institutional asset owner, institutional LP base.
Yes.
that was, you know, acquired through the Burgiss business.
Yes
... and then has been grown significantly. It was very complementary with, you know, with the core MSCI franchise, where we serve obviously many asset owners around the world on the public side, and we help them with public, you know, risk and exposure, et cetera. You know, across the asset owner spectrum, you know, we really range from single-family, multi-family office.
You know, we have a strong endowments business. We have a very strong pension business, and we have some of the largest sovereign wealth funds as clients. We really span that asset owner spectrum. You know, our total plan portfolio continues to get strong traction in endowments and, you know, at the smaller end of the pension market. It's a very nice product.
We've also integrated that with our Barra Risk Manager product on the more enterprise side. We're able to offer clients, asset owner clients a pretty seamless experience, you know, across the range of complexity that they need.
We see asset owners as a very strong aspect of our franchise and one that we absolutely intend to continue to grow. From an absolute perspective, it's the largest, we think the absolute contribution will certainly continue to come from there. We have a quite robust GP or alternative manager business.
Mm-hmm
Through the real asset side of the business. We have many large real estate managers. In many cases, these are multi-strategy managers. We help them with all kinds of portfolio analytics, and that's a really very robust business. We've been, over the last year or a couple of years, really focused on taking the private capital data set and looking at how we can also bring that to GPs, you know, across their life cycle.
We have tools to help with capital formation, fundraising, helping GPs talk about their portfolios and performance versus peers versus market. That helps on the investor relations side as well. We actually have data that helps with sourcing, underwriting, and portfolio management in the GPs themselves.
That is an area of growth that we're focused on. Last but not least is on the wealth segment. As I alluded to before, you know, we feel very strongly that the wealth channel needs robust data, transparency, benchmarks, analytics to think about the total portfolio and how these private assets, you know, get placed into investor portfolios, and so that's an area of growth for us and where we're focused. I'd say those are the three main ones that I would call out.
That's great color. Then maybe just on the margins, the margins for private assets have been lower compared to the company average. Obviously, it's a more recent business. How do you think about the margins evolving over a period of time?
Yeah, look, I mean, as you know, MSCI as a firm has very robust, you know, robust margins. In private assets, it's a growth area for us, so we're reinvesting, you know, a significant amount in that area, and we intend to continue to do so. With AI and automation and the things that I've talked about on the data processing side, we believe that, you know, we have good control over the margins and that it's a strongly profitable business but again one that we're currently growing.
That's great. We'll keep it there. Thank you. Thanks, Luke.
Thank you very much. Appreciate it.
Thanks, everyone.
Thanks, everyone. Good timing.