MSCI Inc. ($MSCI)

[ Audio Gap ] Ashish Sabadra, and I cover business and information services company here at RBC Capital Markets. We are excited to host Luke. Luke Flemmer, who heads private capital -- Private Assets, sorry, at MSCI.

So 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. So 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?

Yes, sure. Great question. And obviously, Gen AI is is very much accelerating the ability to do data collection at scale. So 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 we're 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. Fortunately, 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, and in process of running those analytics, we also are able to generate derived data off those portfolios that we monetize in various fashions. And then we also collect information from LPs or as to owners on very large scale about all of the portfolios that they own. And again, we do that in furtherance of providing portfolio analytics and risk and performance book of record for those asset owners. But once again, we then use those data sets to generate aggregate and modernized information around those markets and that allows us to do things like create indexes, create benchmarks for different relative performance, et cetera. So the sort of crux of our Private Assets business is proprietary data. And 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. And 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. So it's proprietary data combined with proprietary analytics to produce differentiated output.

That's great color. Obviously, a 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. So 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. So maybe if you want to start with the internal and then the external-facing gg implementation.

Yes, absolutely. I'll actually add a third because that's exactly how we think about it internally, which is sort of 3 dimensions of AI opportunity for us. Dimension number one is on the data ingestion side. So we consume large amounts of unstructured data from clients. And 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. So really mining that data much more efficiently at higher speed and at a 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. And so 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, bring ideas to fruition, et cetera. And then we're using extensively on the engineering side to actually build and implement software. And that's been a significant accelerant for us on the delivery side. And then the third dimension, as you mentioned, is the client-facing dimension. We're embedding Generative AI front ends in our tools themselves. So in our user interfaces, we have natural language interfaces, clients can interrogate data, query data through our interfaces. And we're also delivering data through these connectors, these MCP connectors into Anthropic, Open AI 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. So you talked about MCP servers. You also obviously talked about layering in the chats on top. How about Agentic AI? Are you also leveraging an Agentic AI? Or are there applications that you're envisioning using Agentic AI within private assets? .

Yes. We're watching the Agentic space very closely. We intend to provide agents as back ends to actually service client requests. So that -- not to get too technical, but as you -- the MCP server is really a data endpoint, right? So that allows someone else's agent to query and gather data and then operate upon it. We are also building agents internally on our side that will face off against client agents and execute more complex and more long-running analytical tasks on their behalf. So as you know, it's a very rapidly moving space, and I think the consumption model of our agent 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?

Yes. Sure. I mean those are all great firms that you mentioned, and they all bring different aspects of the data mosaic together for different clients. So I think they will provide different kinds of value. The -- one of the defining things in our Private Assets business, we acquired a company called Burgiss about 2.5 years ago at this point. And Burgiss, as a business, it's been around 30-plus year. It's a very long-standing organization. And those data sets have been collected literally since the late '80s from LPs representing their investments with various managers. And so that data set 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. So when we take that data and when we compute an IRR or a performance or a fund benchmark, it's really the gold standard of data, and we have a very long track record. Obviously, as I said, we have private equity going back to the '80s. We have private credit going back 20 years since really the inception of that as an asset class. We have real estate, et cetera. And so 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. And we continue to provide that service for many, many asset owners around the world. And so we continue to collect data of that nature and that continues to sort of power our operations.

That's very helpful. So obviously, the trended data is very powerful. The historical data sets 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?

Yes, sure. And I think quite -- 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. And we don't view those as silo businesses, we view them ultimately as an integrated offering to clients, and we will continue to integrate them more closely going forward. But to treat them as two 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 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. So from a secular perspective, that market has been somewhat challenged for the last several years. And as you know, in -- 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. And so these things have taken time to be metabolized. In some cases, we've seen conversion of CBD into residential. These are all reshapings of the asset class. And so that's been a little bit of the backdrop for the last 3 or 4 years. There's been a little bit of a 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 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. So the sort of core, 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. So it's quite a dramatic change 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. And it's actually very complementary with the data sets that we have on the private capital side as well, which historically have also been closed-end fund cross assets. So we're driving a lot of synergy there, and we're focusing on these new product lines. And 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 is -- has had strong kind of secular growth through that period. And we've made some investments in senior leadership in the team overall in real assets. So I'd say the backdrop was a degree of secular challenge, unfortunately, which coincided with our acquisition of that particular business. But we feel quite confident that we're going to innovate and align with the needs of that 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. We've been merging the teams, merging the coverage teams, merging the product teams, et cetera. And 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 solutions. 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.

Absolutely. I mean, look, that was the strategic insight that drove the acquisition of IPD almost 15 years ago at this point was the insight that 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. 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 stand-alone or strategic basis, that really want to make capital planning decisions across the total portfolio. And 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. And then on the wealth side, which is a big growth area for private assets, again, we believe that when you're constructing an individual client portfolio, if private -- if alts are going to be a significant 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 have -- that you would apply in the public market. So those are, in our view, tailwinds that are moving the world towards more rigor and more of a total portfolio construction approach. And so when we think about private assets in the context of MSCI, I sort of think about it in a T-shaped construct. So the horizontal bar of the T is the total portfolio story, right? How can we compose 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. But 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? Because in some cases, the quality of the disclosures, the data available is inadequate. The models are not robust, they're not on a like-for-like basis, et cetera. So 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, but we absolutely do it with an eye to the total portfolio. And we really have a product in market that are very popular and widely adopted, which our total portfolio product. So we have many asset owners that use us to manage their total portfolio on a single platform. And so many of these techniques that I'm talking about are not theoretical that were already being used 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. 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?

Yes, absolutely. So private capital transparency is sometimes the building block that's really the data products and services that collect this ground truth data from the managers. So we collect the reporting on tens of thousands of funds. I think we have $16 trillion of notional capital that's in those fund. So it's a very scaled data operation. And through that process on behalf of clients, we collect all 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. And so in some sense, that offering underpins a lot of what we do for asset owners. And that's a product that has been very popular with clients and we continue to expand there. And it's 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 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 content of what's inside those funds, look at relative manager performance, look at quartiling of fund performance, benchmarking, et cetera. It really is the sort of cockpit that allows asset owners to manage their private exposure. And then total fund manager is a very rapidly growing and successful product for us. And that is exactly what it sounds like. It is a total portfolio solution. It allows clients to bring in their public positions directly from their custodians. They can even bring in liquid alts, 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. Does the -- in that kind of environment, is that a positive or a concerning for your business? Does that demand come down? Or as you mentioned, like does the demand for transparency. So any color on that, those fronts? .

Yes. Look, I mean, it's -- we're not concerned about it in terms of our business trajectory. Obviously, it's unhelpful in the financial markets when you have any areas of distress. In many ways, the -- some of the current -- 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. So in private equity, there's a longer running trend, and this has been going on for probably really 3 or 4 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? And this has been a function of geopolitics, depressed M&A market, there's a variety of different things we could talk about. But 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. And it's also a huge tailwind for the secondary trading market, right? We saw secondaries last year reached $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. So 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 for private equity. We see that as a huge opportunity for us to provide indexation tools, analytics, et cetera, around that market. In private credit, we're dealing with 2 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 notable the cockroaches comment from Jamie Dimon and others. There have been some issues around disclosure and in some cases, collateral management, et cetera, and those have been quite high profile and that's led to a degree of concern around the overarching 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. But 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 some anxiety in the market. I think both of those are very aligned with things that we've been building and which predate in fact, some of these concerns. Thing number one is 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 will be extremely valuable for the industry that's going to drive the overall disclosure and transparency quality up. And 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. So understanding, not all private credit is created alike, right? So there may be particular sectors, maybe we're lending to SaaS, maybe we're not. 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 some of the confidence through these sort of tools. And then the other dimension is on liquidity. Does this wrap-up provide liquidity if and when I need it, right? And again, we're building tools to help with stress testing and liquidity and scenario analysis on these fund structures to help asset owners assess their exposure, but also, in some cases, to help the managers, the GPs themselves talk more coherently or more consistently around the design of some of these products. So again, 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. And then one of the things you obviously also mentioned that 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?

Yes, absolutely. So the -- obviously, as you know, Moody's has a Formal Ratings business and then they have an Analytics business, which are the Chinese world. those collaborations on the Analytics side. So Moody's has a suite of products that they make available to clients that allow them to essentially generate a probability of default on an individual loan and by extension, an implied rating to that loan. And they have a very rich 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 servers. And so we're able for clients to essentially run their portfolios through these Moody's Analytics and give them additional insight into the risk that sits in those portfolios. And again, I think this is part of 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? If you went back, call it, 5, 10 years, people were a lot more focused on absolute return, and it was a little bit set and forget on the fund, right? I make a commitment, I make my capital calls, I get distributions back. And at the end of the day, I got 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 a lot of the sort of emerging risks in the market, a lot of the aspects of deglobalization and tariffs and geopolitics and AI and all of these sort of incumbent risks, asset owners really want to understand what they own, because if they have exposure to multiple different funds 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 economic exposure to those holdings. And so what clients are looking to do and what we're -- I think what we're quite advanced in is how do I look at my effective portfolio, ignoring the fund wrappers for a minute. And so that's where tools like these Moody's Analytics and other things and also our sort of asset and deal level analysis 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'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. Otherwise, I'll just go ahead with my questions. I was going to ask about monetization, the historical monetization, where was at, 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?

Yes. A couple of comments. So we have a very strong institutional asset owner, institutional LP base. And that was acquired through the Burgiss business and then has been growing significantly, and it was very complementary with the core MSCI franchise, where we serve, obviously, many, many asset owners around the world on the public side, and we help them with public risk and exposure, et cetera. So across the asset owner spectrum, we really range from single family, multifamily office. We have a strong Endowments business. We have a very strong Pension business, and we have some of the largest sovereign wealth funds with clients. So we really span that asset owner spectrum. Our total planned portfolio continues to get strong traction in endowments and at the smaller end of the pension market. It's a very nice product. But we've also integrated that with our borrower Risk Manager product on the more enterprise side. And so we're able to offer clients, asset owner clients a pretty seamless experience across the range of complexity that they need. And so we see asset owners as a very strong aspect of our franchise and one that we absolutely intend to continue to grow. And from an absolute perspective, it's the largest. And so we think the absolute contribution will certainly continue to come from there. We have a quite robust GP or Alternative Manager business through the real asset side of the business. We have many large real estate managers. In many cases, these are multi-strategy managers, and we help them with all kinds of portfolio analytics, and that's a really very robust business. But 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 across their life cycle. And so 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. And then we actually have data that helps with sourcing, underwriting and portfolio management in the GPs themselves. So that is an area of growth that we're focused on. And then last, but not least is on the wealth segment. So as I alluded to before, 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 get placed into investor portfolios. And so that's an area of growth for us and where we're focused. So I would say those are the 3 main ones that I would call out.

That's great color. And then maybe just on the margins. The margins for Private Assets have been lower compared to the company average. Obviously, it's a more nascent business. How do you think about the margins evolving over a period of time?

Yes. Look, I mean, as you know, the MSCI as a firm has very robust margins. In private assets, it's a growth area for us. So we're reinvesting a significant amount in that area, and we intend to continue to do so. But with AI and automation and the things that I've talked about on the data processing side, we believe that 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.