The world’s private asset classes have thrived largely in the shadows so far. Henry Fernandez of financial services and index provider MSCI intends to change that – and he believes doing so would lead the private asset universe to double or even triple in size.
On January 21 MSCI announced that it had entered into a strategic relationship with alternative asset data provider The Burgiss Group and acquired a “significant minority interest” in it for $190 million. Fernandez, the chief executive of MSCI, says that the agreement has opened a door for it to offer data and eventually analytical tools in alternative assets.
The plan? To use Burgiss’ data to build tools that better measure and quantify private equity, private debt, real estate and infrastructure funds and the general partners that oversee them, giving asset owners and others greater understanding and confidence to invest more in them.
“We want to help global investors create more efficient portfolios on a cost-benefit basis of managing assets and risk-adjusted returns,” Fernandez told AsianInvestor. “To go to private asset classes, our role is to go to the biggest institutional investors in the world and say: ‘How can we help you build better portfolios?’”
Asset owners have shown an increasing desire to better analyse and quantify private asset performance. APG Asset Management and the Teacher Retirement Syste of Texas have both sought to use alternative data and technology to improve their returns, while the UK's coal industry pension fund has conducted a deep-dive into its total costs to better improve its returns too.
MSCI’s ability to do assist in such efforts will come down to the availability and depth of available data, neither of which is easy to get from private asset investors who are deliberately opaque. It will depend in large part on the willingness of general partners and limited partners to share it.
Fernandez says that Burgiss already collects all the information that GPs of 10,000 funds distribute to their limited partners. These funds mostly consist of pooled vehicles and collectively they have around $7 trillion of committed capital. Between 62% and 63% is based in private equity funds, said Fernandez.
EXPLODING ASSET CLASS
It is likely that MSCI will require extra information to build more sophisticated analysis tools. Fernandez says his company has had productive conversations with many GPs about the idea and argued it would be in the interests of them to cooperate.
“GPs will have a choice to make with LPs: do they continue to keep all of this information so opaque and secret and so less conducive to the investment process that eventually they will be big fish in a small pond? Or do they join us in efforts to create all the tools we are talking about, so that the asset class explodes in size and then doubles or triples across the world?”
He claims that MSCI’s access to Burgiss’s information would, in addition to its existing knowledge of private assets, allow it to round out its understanding of “about 90% of committed capital” across private equity, real estate and other alternative asset classes – or around $9 trillion.
MSCI, however, may have its work cut out to convince some asset owners. The regional chief investment officer of an international life insurance company told AsianInvestor that MSCI’s ambitions in the private asset space are “not really interesting to us”.
“These assets are not meant to be easy to benchmark,” he added. “You either invest from first principles or do not play, in our view.”
The regional head of a US private equity company added that MSCI would face similar challenges to build analysis tools that data-providing rivals such as Preqin and Cambridge Associates do.
“One big issue in benchmarking private market assets is that the valuations of unsold positions are subject to the GPs’ discretion. Returns can be manipulated,” he said. “That’s particularly the case for newer funds.”
The former head of private markets at a pension fund was more positive. He noted that Burgiss was "the industry standard for LPs, providing reliable data", in part because getting information from LPs was more reliable than doing so from GPs or fund managers. He also agreed that gleaning more data might persuade asset owners to add to their private asset positions.
However the former head was more cautious about the ability of MSCI to build a proper private asset benchmark. "The holy grail would be to produce a broadly diversified and investable private equity index or exchange-traded fund but I don't know how they can get there," he said.
MSCI evidently sees an expansion into private asset coverage as a business opportunity and a necessity.
Its index business has helped drive the shift of investor assets into index funds and passive investments. But while passive investing has been growing, institutional investors across the world have also sought to put more capital into private asset classes. In essence, they have been willing to accept having their money locked away for several years, relatively little transparency and having to pay relatively high fees in return for the promise of double-digit returns.
Some, particularly Korean pension funds and some Australian superannuation funds, have invested heavily in private assets, sometimes 40% or more, though the average allocation sits at around the 15% or so mark.
Fernandez believes that MSCI can change that dynamic by making these asset classes easier to analyse and consider, be it from a performance perspective or at least in terms of transparency.
“Unless you build the infrastructure in these asset classes to fully incorporate them into a strategic asset allocation framework in a seamless way then these investors are always going to be incremental and be treated a little bit as a niche [area of investment],” Fernandez said.
Fernandez’s ultimate objective is for MSCI to become a one-stop-shop for investors’ financial market data and analysis needs. He likened the company to being like US software manufacturer Microsoft, which effectively offers all the tools for people who work in offices.
First up will be getting more institutional clients for Burgiss’s information in Asia. While the company has penetration in the US and Europe, Fernandez admits that it has very few clients in this region.
“Asia is a big focus of our driving adoption,” he said.
Joe Marsh contributed to this article.