The creation of more transparent comparisons and benchmarking tools for private markets is welcome news for investors and portfolio managers.MicroStockHub/iStockPhoto / Getty Images
While investors can rely on benchmarks such as the S&P/TSX Composite Index or the MSCI World Index to understand how Canadian or global equities are performing, tools to evaluate private assets are comparatively scant. That’s beginning to change.
In June, BlackRock Inc. acquired alternative investment data provider Prequin Ltd., a move that the asset manager’s chief executive officer, Larry Fink, said could see the firm “index the private markets.”
That development was followed on July 22 when MSCI Inc. reported it was launching the MSCI Private Capital Indexes, a suite of 130 indexes that track the primary asset and subasset classes of international private markets funds.
For investors and portfolio managers, the creation of more transparent comparisons and benchmarking tools for private markets is welcome news.
“The private asset category has increased meaningfully, and that requires different aspects to become more standardized around transparency of information to help investors make more informed decisions,” says Vlad Tasevski, head of asset management, institutions and investors at Purpose Investments Inc.
“So, we’re seeing some large players come in and try to introduce key characteristics of public investments, which we’ll see more of going forward.”
The involvement of BlackRock and MSCI means the data will be meaningful, he adds. “Those names have strong reputations and very high integrity.”
Toronto-based Purpose runs three private market funds in Canada, including a private credit fund with Apollo Global Management Inc. and a private equity offering with Pantheon Ventures.
MSCI’s indexes use data sets from closed-end funds whose managers and investors (or “limited partners,” in private markets parlance) use its vast platform as their performance book of record.
Investors can’t directly take positions in any of the component funds of a specific index or recreate a fund based on the index. They are “replicable [of an asset class], but not investible,” says Luis O’Shea, executive director and head of private capital research for MSCI.
That differs from public market indexes such as the MSCI World Index, which ETFs use to invest in the underlying assets.
Thousands of global fund managers and investors use the MSCI platform to log net asset values and underlying positions, cash flows, redemptions and other metrics, the firm says. Tracking that aggregate data could help facilitate relevant market information, allowing for more meaningful, data-backed insights, including price discovery for subasset classes and strategies.
That will make private markets not only better understood by more investors, but more accessible as well, Mr. O’Shea says. Trusted benchmarks would boost market integrity, making more investors comfortable investing in private markets.
MSCI’s private capital indexes are accessible through the data provider’s subscription-based platform and through third-party partners, such as FactSet.
“The questions these indexes and these data are addressing are universal – they apply to huge sovereign wealth funds and public pension funds as much as individual investors or anybody who wants to invest in these asset classes,” Mr. O’Shea says.
“Fundamentally, we’re trying to answer the most basic question that public indexes do, which is, ‘What kind of returns are typical [for that asset class or strategy]?’”
Many private market funds and portfolio managers use public indexes such as the S&P 500 to compare private-market returns.
“Benchmarking to indexes that are built with data from private capital funds, we would suggest, is a much more appropriate benchmark for private capital investments,” says Brian Schmid, managing director and global head of private capital products at MSCI. “The goal of this launch is to create a set of indexes to be leveraged for benchmarking purposes, and ultimately asset allocation decisions.”
The rise of benchmarks and their related risk analytics helped transform public markets, making them more accessible to investors, BlackRock’s Mr. Fink said during the firm’s conference call announcing the Prequin acquisition on June 30, “Our aim is to do all of that in the far less mature data, analytics and index business for private markets.”
Private markets are the fastest-growing corner of asset management, BlackRock said when the deal was announced, with alternative investments more broadly expected to reach about US$40-trillion by the end of the decade.
“That’s the most promising element of all of this. The technology is such that it can gather enough data now to give us some benchmarking tools,” says Tracey Lundell, senior investment advisor at Harbourfront Wealth Management in White Rock, B.C. “Those are the pieces that are missing that would give comfort to that individual investor.”
Sustainability is another area of private markets in which scrutiny and the ability to understand things such as emissions output and environmental impacts is often lacking, and could be addressed, she says.
“We have a lot of clients who also want ethical portfolios, and I hope this might morph into better ESG screening ability, which just doesn’t exist right now or is very difficult to find information on for private investments.”
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