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MSCI is one of the world's leading providers of financial indexes, data, and analytics. Its business spans four main segments: Index, Analytics, Sustainability and Climate, and Private Assets. Q2 was another strong quarter, driven by record ETF assets linked to MSCI indexes, growing demand from hedge funds, and improving momentum in Private Capital, while Sustainability remained a headwind.

Quarter at a Glance

What Mattered

1/ The Index Opportunity Gets Bigger

MSCI's Index business is finding new growth opportunities beyond the fees it earns on assets linked to its indexes. Organic subscription run rate grew 11.1%, while recurring net new subscription sales increased 41% to $28.1M, a second-quarter record. Hedge funds were a major contributor, generating nearly $15M in recurring net new sales across MSCI, their strongest quarter on record. Custom index subscription run rate also grew 23% organically, excluding the Compass acquisition.

Meanwhile, asset-based fees continued growing strongly, supported by record ETF assets of $2.8T linked to MSCI indexes. However, the blended ETF licensing fee rate declined from 2.35 basis points in Q1 to 2.28 in Q2. CFO Andy Wiechmann attributed the decline primarily to growth in lower-fee developed-market ex-U.S. and all-country index products, following contractual fee changes with BlackRock that had pressured rates in Q1.

Those assets also sit at the center of a trading ecosystem that MSCI has historically done less to monetize. CEO Henry Fernandez explained that MSCI has recently begun developing products specifically for hedge funds and other trading firms, rather than simply selling them offerings originally designed for traditional asset managers. These firms increasingly need customized indexes, constituent data, and analytical models to execute their strategies.

Fernandez argued that MSCI is still being paid too little for the value its indexes provide to activities such as index arbitrage. Management believes this represents a substantial opportunity and is concentrating on larger, more established multi-strategy hedge funds, which tend to have more stable relationships than smaller funds.

2/ Private Assets Gains Momentum

MSCI's Private Assets business, which includes Private Capital Solutions and Real Assets, continued making progress. Subscription run rate growth in Private Capital Solutions accelerated to over 16%, while recurring net new sales across the broader segment increased 58% to $6.3M, supported by demand from pension funds, sovereign wealth funds, and other institutional investors. Overall organic subscription run rate growth reached 8.3%.

CEO Henry Fernandez explained that MSCI has spent the past several years rebuilding its Private Capital business following the Burgiss acquisition. This included improving its data, bringing in new leadership, and developing products such as Private Capital Intel and Total Plan Manager. Management believes these investments are beginning to translate into stronger sales, although many newer products remain early in their commercialization.

Real Assets, meanwhile, continues to lag, with organic subscription run rate growth of just 2%. Fernandez acknowledged that the previous strategy lacked focus and said MSCI recently brought in new leadership to concentrate on more attractive areas of the real estate market. Profitability across the broader Private Assets segment also remained under pressure, with adjusted EBITDA declining 14% and its margin falling to 22.9% from 28.0% a year earlier.

MSCI is also looking beyond its traditional institutional customers to expand into private wealth and serve general partners that manage private funds. In July, the company announced a partnership with UBS aimed at making private market investments more accessible to wealthy clients. The partnership remains at an early stage and was announced after quarter-end, so it did not contribute to Q2 results.

3/ A Longer Road For Sustainability

The Sustainability business remains a significant headwind for MSCI. Cancellations across the combined Sustainability and Climate segment increased 40% YoY, particularly as clients in the Americas reduced spending. Recurring net new sales fell 62% to $1.9M, while organic subscription run rate grew just 3.2%. Management expects recurring net new sales for the combined segment to be roughly flat to slightly negative in Q3 and Q4.

CEO Henry Fernandez acknowledged that the downturn in Sustainability spending has lasted longer than he initially expected. He now describes it as a prolonged cyclical downturn rather than a structural decline in demand. Fernandez firmly believes that environmental, social, and governance factors will remain relevant to investment decisions and that demand will eventually recover, although the timing remains uncertain. In the meantime, management says MSCI is gaining market share as the industry consolidates, with customers increasingly turning to established providers.

Climate, which sits within the same reporting segment, is showing stronger demand, with subscription run rate across MSCI's product lines growing nearly 12%. Management highlighted increasing demand for physical climate risk analytics, which help investors assess how events such as floods and extreme weather could affect their assets. MSCI also announced the acquisition of First Street, a provider of physical climate risk models covering more than 2B structures. The deal closed in August, and management expected it to contribute approximately $10M in annualized subscription run rate, further expanding MSCI's capabilities in an area where customer demand remains stronger.