MSCI Unveils Innovative Index Blending Public and Private Equities for Holistic Market Insight

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Index provider MSCI has launched a global benchmark incorporating both public and private equities, as investors increasingly look to private markets to boost returns and diversify their portfolios.

The MSCI All Country Public + Private Equity index will allocate a 15 per cent weighting to private equity. It combines MSCI’s All Country World Investable Equity index, which contains 8,300 listed companies — 99 per cent of developed and emerging markets listed stocks — with a newly launched All Country Private Equity index. The latter tracks the valuations of 10,000 private equity funds globally.

The launches follow rapid growth in the private equity sector in recent years, with assets under management more than doubling to $4.7tn since 2018, according to consultancy Bain, despite concerns among some commentators over valuations being paid.

As private asset investments become increasingly widespread, MSCI expects more demand for a total equity benchmark.

“I would say that the lines around public and private equity are blurring,” said Luke Flemmer, MSCI’s head of private assets.

“Institutional investors increasingly view equity as a unified asset class encompassing both publicly listed and privately held companies,” MSCI said in a report about the index’s methodology.

The index group has shifted towards the measurement of private asset valuations and performance in recent years.

In August 2023, it completed the purchase of US private asset data analytics company Burgiss, paying $697mn for the remaining two-thirds it did not already own. BlackRock acquired Preqin, a UK private markets data group, for £2.55bn in cash in March this year.

In a sign of the potential for private asset investments to grow, wealthy investors hold roughly 50 per cent of global capital but represent just 16 per cent of assets under management in alternative investment funds, according to Bain.

However, despite a broad trend of investors shifting into private assets, institutional fundraising for new private equity funds has stalled of late. This has encouraged the creation of evergreen funds, which have no fixed end date and which are often marketed to wealth managers and their rich clients.

Not everyone is convinced of the need for a combined public and private equity benchmark.

“Clients for whom we manage public-private portfolios usually have a total return objective and/or a volatility threshold in mind, rather than a ‘beat the index’ approach,” said Maya Bhandari, Emea multi-asset chief investment officer at US asset manager Neuberger Berman.

Another issue is that the wide range of returns over the past decade among private equity managers is a reason not to use a combined index that averages out performance, added Bhandari. This dispersion is much less of an issue for portfolio managers reliant on benchmarks and investing in global equities.

The new combined benchmark would be calculated daily based on the daily performance of each component index and would be rebalanced quarterly, said MSCI.

“[This new benchmark] extends our private assets toolkit [to give] investors a simpler way to access, benchmark and allocate to private capital,” said Flemmer.

How does MSCI’s new index methodology address the ancient challenges of comparing public and private equity valuations?

The Rise of Integrated Market Indices

For decades, investors have largely segmented their portfolios between public equities – stocks traded on exchanges – and private equities – investments in companies not publicly listed. MSCI’s latest innovation challenges this conventional approach, introducing a new index methodology that seamlessly blends both asset classes. This move aims to provide a more complete and nuanced view of the overall market, addressing a growing demand for choice investments and a more holistic understanding of company valuations.

Understanding the New MSCI Index Methodology

The core of this new approach lies in MSCI’s ability to consistently value and compare companies across the public-private divide. Historically, the illiquidity and valuation complexities of private equity have made direct comparison with publicly traded companies arduous. MSCI’s solution involves:

* Complex Valuation Models: Utilizing advanced techniques to estimate the fair market value of private companies, factoring in growth potential, risk profiles, and comparable transactions.

* Data Integration: combining extensive public market data with proprietary private market intelligence, including deal flow data and company financials.

* Dynamic Weighting: Employing a weighting system that adjusts based on market capitalization,liquidity,and other relevant factors,ensuring a balanced representation of both public and private assets.

* Regular Rebalancing: The index will be rebalanced periodically to reflect changes in valuations and market conditions, maintaining it’s accuracy and relevance.

This methodology allows for the creation of indices that more accurately reflect the true economic landscape, moving beyond the limitations of solely focusing on publicly available data. The indices are designed to be used as benchmarks for investment portfolios, offering a new avenue for portfolio diversification.

Benefits of blended Indices for Investors

The integration of public and private equities within a single index offers several key advantages:

* Enhanced Market Representation: Captures a broader spectrum of economic activity, including innovative companies that remain private for extended periods.

* Improved Risk-Adjusted Returns: Private equity frequently enough exhibits lower correlation with public markets,perhaps reducing overall portfolio volatility.

* Access to Growth Opportunities: Provides exposure to high-growth companies that are not yet available to public market investors.

* More Accurate Benchmarking: Allows investors to compare their performance against a more representative market benchmark.

* Diversification Benefits: Reduces concentration risk by spreading investments across a wider range of companies and sectors.

ESG Considerations in MSCI’s Blended Indices

MSCI is a leading provider of ESG ratings (as highlighted on platforms like Zhihu), and this commitment extends to its new blended indices. ESG factors are integrated into the valuation process for both public and private companies, ensuring that sustainability considerations are reflected in the index composition.

* ESG Data Integration: MSCI leverages its comprehensive ESG data to assess the sustainability performance of private companies, using a combination of direct assessments and proxy data.

* ESG Scoring: Private companies are assigned ESG scores based on their performance across environmental, social, and governance pillars.

* Index Construction: ESG scores are incorporated into the index weighting methodology,favoring companies with strong sustainability profiles.

This focus on ESG aligns with the growing demand for sustainable investing and allows investors to build portfolios that are both financially rewarding and environmentally responsible.

Practical Applications and Use Cases

These blended indices aren’t just theoretical constructs. They have practical applications for a variety of investors:

1. Pension Funds: Seeking to diversify their portfolios and enhance long-term returns.
2. Endowments & Foundations: With long investment horizons and a focus on sustainable investing.
3. Wealth Managers: Looking to offer clients access to a broader range of investment opportunities.
4. Asset Owners: Aiming to benchmark their performance against a more comprehensive market index.

Accessing MSCI ESG Data

Investors interested in understanding the ESG performance of companies within the MSCI universe can find detailed data and ratings. According to Zhihu,MSCI covers over 8,500 publicly listed companies globally,with data updated regularly to reflect the latest ESG performance. This data is crucial for informed investment decisions and aligning portfolios with sustainability goals.

The Future of Market indices

MSCI’s move to blend public and private equities represents a important step towards a more holistic and accurate representation