[SINGAPORE] Index provider MSCI sees a recovery in global real estate fuelling faster growth in its private-market indices in the coming years, after a property downturn slowed the momentum.
Last July, the company launched MSCI Private Capital Indexes – 130 indices constructed from private-asset funds with more than US$11 trillion in capitalisation.
That follows its US$913 million purchase of private asset market data provider Burgiss in 2023, and a US$950 million acquisition of Real Capital Analytics, which specialises in private real estate, in 2021.
That, however, should change soon. “We’re forecasting stability of that this year as the real estate transactions (in) the world… recover,” Henry Fernandez, chairman and chief executive officer of MSCI, told The Business Times earlier this month in an exclusive interview.
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Global property markets showed signs of stabilising in Q4 2024. In a report issued last October, Savills said it projected global real estate investments to jump 27 per cent in 2025 to US$952 billion, after a forecast 7 per cent gain in 2024. That would be a substantial recovery from US$699 billion in 2023 – the lowest since 2012.
Given the tailwind a real estate recovery should provide to MSCI’s private-markets business, Hernandez reiterated the segment should grow by the high-teen per cent margin annually, “at a minimum”, for the next few years.
Growing appetite
MSCI is also aiming to ride on the global growing appetite for private markets.
Investor appetite for the asset class has been expanding in the past few years, amid rising allocation spanning large institutions, such as pension funds and insurers, to individuals including high-net-worth ones. While less liquid and transparent than publicly-traded assets, private markets can offer higher returns than the listed ones, over the long term.
“Clearly, the level of allocations by institutional investors… into private assets, is increasing, so they’re going to need more and more of our products,” Fernandez noted. “The opportunity to sell to the individual LPs (limited partners) through the wealth management firms is significant around the world. And as I said, we’re doing very little right now of selling into this, (which) is a major growth area for MSCI in the years to come.”
Limited partners refer to investors who contribute capital to a private equity fund, but do not participate in the daily management of the fund, or its portfolio companies.
Still, the day the private markets business would match the contribution from its public assets to MSCI’s earnings is likely “a couple of decades” away, Fernandez explained.
In Q4 2024, private assets accounted for 8.8 per cent of MSCI’s total operating revenue of US$743.5 million, lagging the 56.5 per cent from its index segment, which primarily consists of public equity indices.
A scenario where earnings from both businesses will contribute equally to MSCI, will require “a huge growth rate in private markets, and… a significant slowdown in the rate of growth of what we do in the listed markets, which we don’t think is going to happen”.
He pointed out that while the number of initial public offerings has been declining in developed economies such as the US and UK in the past few years, the reverse is occurring in the emerging markets.
On the other hand, investors also want more transparency in the bond markets, which would power the growth in the listing of corporate and high-yield bonds, he added.
Watering down requirements
One area where he sees growth continuing is environmental, social and governance (ESG), even as investors dial back their commitment to a strategy plagued by lacklustre returns, regulatory fatigue and political backlash.
Investment clients pulled out record amounts of money from ESG funds in the US last year, said market researcher Morningstar. The situation is not better in the European Union, where funds complying with the region’s strictest ESG standards suffered record outflows in the last quarter.
“The world has slowed down, as it relates to sustainable investing, both ESG and climate, because the world is extremely focused on short-term crises right now,” Fernandez said, citing concerns over US tariffs and the conflict in the Middle East.
Still, this does not mean that climate risk has dissipated. “If anything, the physical risk has increased dramatically,” he said, pointing to the wildfires in South Korea and Los Angeles.
In fact, he sees demand for ESG-related investments coming back strongly, even though the European Union is watering down ESG reporting requirements. Likening the EU’s resetting of the ESG regulatory system to a football game interrupted by the referees changing the rules, he sees the game resuming when the new rules are set.
Despite a tough year for ESG funds, MSCI’s operating revenue from the segment, which includes climate, rose 12 per cent year on year in Q4 2024, to US$85.2 million. For the full year, ESG and climate revenue was 13.6 per cent higher at US$326.6 million.
“That tells you there is still demand for this in the world… because these are fundamental issues that are not going away.”
