Can MSCI drag private markets out of the shadows?


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HEnry Fernández was once a counter-revolutionary. The man who, in three decades, built MSCI, a provider of stock indices, which has become the standard-bearer of financial globalization, began his career as a Nicaraguan diplomat in the government of Anastasio Somoza, a right-wing dictator. While some of his friends flocked to the left-wing Sandinistas before the revolution that toppled Somoza in 1979, he took one look at socialism in Eastern Europe and decided it was doomed to failure. Instead, he embraced free market capitalism and moved to Wall Street.

There he encountered another revolutionary movement that he has championed ever since: the march of capital markets. Since the Reagan era, he has played a role in many of the upheavals that have swept the world of finance, from securitization in the 1980s and the growth of emerging market investment in the 1990s, to the growth in tracking indices and currencies. traded funds (ETFss) this century. He maintains an idealistic tendency. Although many former advocates of environmental, social and governance investments have eschewed the climate-related hype of the past five years, there remains a real ESG believer.

He now bets that MSCIIndices can penetrate the opaque world of private finance – more than $12 trillion in assets held across private equity, credit, venture capital, real estate and infrastructure. These are some of the hottest segments of the capital markets. But they are reserved for institutions and wealthy investors. In these secretive markets, asset managers are reluctant to encourage greater transparency and liquidity for fear that their fees will suffer. Still, technology could evolve in Mr. Fernandez's favor.

MSCI, which was created by Morgan Stanley, an investment bank, in 2007 and has a market capitalization of $45 billion, derives two main sources of revenue from indexing. The first is benchmarking. It has more than 280,000 stock indexes around the world that inform investors about what is happening in public markets and provide a measurement tool for judging the performance of fund managers. If a fund puts all its money in small-cap Japanese stocks, for example, and MSCIJapanese mid- and large-cap stock indices are doing better, but underperforming. Nearly $15,000 billion in assets are valued worldwide.

The second source of income allows investment managers to create financial products, such as ETFss, based on its indices. Nearly $1.5 trillion in ETFs the assets are linked to MSCI, a multiplication by almost five in a decade. BlackRock, the world's largest asset manager, is the largest client. His boss, Larry Fink, and Mr. Fernandez have been kindred spirits for decades.

MSCIThe first foray into the private domain is via benchmark indices. Since 2021, it has spent nearly $2 billion to buy two data collection companies that create indexes for private assets, from real estate and infrastructure to private debt. As Mr. Fernandez explains, such indexes allow a real estate investor to decide the relative merits of investing money in, say, offices (which collapsed during the pandemic) versus data centers (which exploded). Collecting such information is tricky because many transactions are not publicly disclosed. MSCI creates indices by sourcing data from investors in private funds, who in turn receive records from asset managers of those funds' quarterly performance, including valuations of the underlying assets. Its most recent acquisition, for example, provides it with data on approximately 13,000 private funds, representing $15,000 billion in cumulative investments.

Could these references ultimately constitute the basis of the indices used by ETFss to bring private markets to the masses? It seems hard to imagine. Private assets do not trade with the frequency of listed assets. They also do not have the liquidity necessary for passive funds whose investors may wish to redeem their money at short notice.

Yet Mr. Fernandez believes that some parts of this opaque hinterland, such as private loans, are more liquid than others. “I bet that over time a secondary market for private credit will develop,” he says. To explain why, he looks back to his days as a young trader at Morgan Stanley during the “Liar's Poker” days of the 1980s. The mortgage market was nascent and illiquid until thrift stores that made home loans are under pressure to sell them. Wall Street firms like Salomon Brothers and First Boston (where Mr. Fink ran the mortgage department) scooped them up, turned them into mortgage-backed securities and sold them to investors, creating a secondary market very liquid. Similarly, banks that make loans today face regulatory pressure to limit the size of their balance sheets, and so sell some of their loans to companies with private credit services, like Apollo and Blackstone. Mr. Fernández believes that, as with the mortgage market, this transaction could lead to a secondary market that would ultimately have sufficient liquidity for index funds.

A big breakthrough will require technological advancements. For this, Mr. Fernandez has his eyes fixed on his veteran comrade-in-arms, Mr. Fink. This month, BlackRock launched its first Bitcoin ETFs, and Mr. Fink, who rarely keeps his cards close to his chest, has hinted that this could be the start of an extended foray into the cryptoverse that could eventually encompass private assets. ” If we could ETFs a bitcoin, imagine what we could do with all financial instruments,” he told Bloomberg. TV. “Everything is going to be ETFseditor’s note. »

ETF or WTF?

Mr. Fernandez notes that Mr. Fink has become a proponent of “tokenization” — the idea that financial assets and their owners can be recorded in a blockchain-like ledger, which could facilitate the exchange of goods and services. other private assets. This is an idea in its infancy. Some people think it's barmy. THE MSCI The boss admits that at the moment, he himself doesn't quite understand. But unlike the Sandinistas, who betrayed everything they once fought for, his revolutionary zeal remains as strong as ever.

Learn more about Schumpeter, our global trade columnist:
Why BlackRock is betting billions on infrastructure (January 18)
AI can transform education for the better (January 11)
Meet the savviest operators in today's oil markets (January 3)

Also: If you would like to write to Schumpeter directly, email him at [email protected]. And here's an explanation of how Schumpeter's Column got its name.

Correction (January 28, 2024): This article has been updated to better explain MSCI's business segments.



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