MSCI's Luke Flemmer - "bringing clarity to investment decisions"

Summary

Alt Goes Mainstream Podcast Summary: Episode: MSCI's Luke Flemmer – "Bringing Clarity to Investment Decisions"
Date: February 26, 2026
Host: Michael Sidgmore
Guest: Luke Flemmer, Head of Private Assets, MSCI

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Overview:

This episode explores the evolving landscape of private markets, focusing on how standardization, normalization, and transparency of data are transforming investment strategies, liquidity, and benchmarking. Michael Sidgmore sits down with MSCI’s Luke Flemmer, whose background in technology, fixed income, and capital markets offers a unique perspective on the parallels between public and private market evolution. The discussion delves into the challenges and opportunities in harmonizing data, the trade-offs between transparency and alpha, the rise of secondaries, and the crucial role of technology and data infrastructure in bringing clarity to investment decisions.

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Luke Flemmer’s Background and Career Lessons (03:34 - 07:25)

• From Robotics to Finance: Luke started in robotics and automation, learning early the importance of standardizing and normalizing processes for efficiency—lessons he carries into financial markets.
• Market Structure Transformations:
  • Witnessed fixed income’s evolution from manual "white shoe" trading to central limit order books and millisecond liquidity (05:33 - 06:02).
  • Applied similar lessons in FX and sees private markets now at a similar inflection point.
• Attraction to Private Assets: Drawn to the untapped potential in private assets data, with a focus on creating connective tissue across the value chain for better decision-making.

Quote:
“If you want to automate and you want to drive scale, you have to drive standardization, you have to drive normalization, and then the processes can become incredibly efficient and repeatable.” — Luke Flemmer (04:49)

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The Central Role of Data in Market Evolution (07:25 – 08:38)

• Key Learning: The harmonization and normalization of data are essential for building transparency, price formation, and liquidity—leading to more efficient markets.
• Private Market Data Problem: Private markets are fundamentally limited by disjointed, incomparable data, stifling scale and market growth.

Quote:
“Data kind of wants to be free, but when it's disjointed, when it's not normalized... you can't really get the efficiency.” — Luke Flemmer (08:00)

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Transparency vs. Alpha: Trade-Offs and Market Dynamics (08:44 – 12:34)

• Information Asymmetry: Historically, the opacity of private market data benefited some investors, but this limited market growth and sustainable dynamics (09:23 – 10:14).
• Trade-Off: More transparency brings in more participants but can compress returns (alpha) as inefficiencies are arbitraged away.
• Durable Alpha: Some excess returns in private markets are genuine (e.g., managerial skill, illiquidity premium), but others are just a function of information gaps.

Quote:
“There is information value, and... that manifests in alpha. The expansion of information... is generally going to tighten up returns in these markets.” — Luke Flemmer (10:43)

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Measuring and Sustaining Alpha in Private Markets (12:34 – 14:00)

• Decomposing Alpha:
  • MSCI deeply analyzes public vs. private performance and persists upon observing several hundred basis points of alpha across regimes.
  • Lasting sources of alpha include managerial value add and the illiquidity premium.

Quote:
“But every time we take it apart... we see that there is this durable alpha and it's several hundred basis points and it's persistent across regime.” — Luke Flemmer (13:04)

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The "Atomic Unit" of Value: Company-Level Data (14:11 – 16:20)

• Public vs. Private Markets:

  • Public markets: Top-down, inherently standardized through venues and exchanges (15:01).
  • Private markets: Bottom-up, fundamentally bilateral; require building new data standards and language.

• Challenge: Making private and public data comparable is key for portfolio construction and benchmarking.

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Total Portfolio Thinking: Harmonizing Public and Private Data (16:20 – 18:57)

• "T-Shape" Framework:

  • Vertical: The evolution of private market data (timeliness, transparency).
  • Horizontal: Integrating public and private exposures into a total portfolio view.

• Uplifting Private Data: Essential so allocators can compare, benchmark, and manage unified risk and return exposures.

Quote:
“You actually think these things are comparable, but they're completely different, you're going to get into real trouble.” — Luke Flemmer (17:52)

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Philosophical Deep Dive: The Ship of Theseus and Market Identity (19:04 – 20:24)

• Philosophical Analogy: Making private markets too much like public markets risks losing their unique value proposition.
• Essential Question: How much standardization and openness is good before private markets simply become public markets with a new name?

Quote:
“Should private markets be public markets at the point where you make them the same in all respects... is there anything different or unique about that anymore?” — Luke Flemmer (20:00)

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Behavioral Impacts and the Diversity of Private Assets (20:24 – 22:23)

• Investor Behavior: Collapsing distinctions between public and private could erase reasons for private market investing.
• Diversity Needed: Not all asset classes (e.g., distressed debt, early-stage VC) should resemble public markets due to their inherently different risk-return, data, and liquidity features.

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Progress in Private Market Infrastructure (22:23 – 24:15)

• Current State:
  • Manager reporting remains the primary data source, but progress is underway with more disclosures and better marks.
  • LPs now demand more transparency; GPs are responding, improving data infrastructure.

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Secondaries and Active Portfolio Management: The New Toolkit (24:15 – 26:08)

• Denominator Effect: Post-Covid, institutional allocations to private markets faced strain, pushing more active management and attention to secondaries.
• Data Solutions: Products like Burgess help LPs with active portfolio management and better decision-making.

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Index Innovation: Blending Private and Public (26:15 – 29:20)

• MSCI’s New Index:
  • The 85/15 blend of public (ACWI IMI) and private equity requires daily pricing of privates—a novel technical feat (27:15).
• Value: Allows investors to view total equity exposure, highlights challenges like denominator effect and upward "stickiness" of private marks.

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Daily Pricing, Secondaries, and Liquidity Measures (29:20 – 33:14)

• Key Ingredients: Deep, continuously updated manager mark datasets (supported by acquisitions like Burgess), and public-private market correlation models.
• Secondaries Feedback Loop: More accurate price indices enable faster, more efficient secondary market transactions, whose results in turn inform benchmarks.
• Matrix Pricing Parallel: Similar to fixed income, active daily trading is not required to establish trust in valuations; robust indexation and periodic trades suffice.

Quote:
“We don't need a large proportion of these private markets to trade for us to get a lot of price discovery... that can then open up the potential for a derivative market.” — Luke Flemmer (32:19)

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Building Trust in Private Market Benchmarking (33:14 – 33:53)

• What’s Needed:
  • More and better-quality data (law of large numbers for robust benchmarks).
  • Real-world adoption and testing across cycles to validate signals for allocation and risk management.

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Enabling the Wealth Channel and 401(k) Access (33:53 – 36:32)

• Opportunity Size: Massive appetite for private markets in the wealth and retirement sectors, but scaling allocations requires better transparency, liquidity, and suitability analytics.
• Barriers: Must overcome legacy opacity; comprehensive tools for liquidity, factor analysis, and risk decomposition are critical.

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Advisor’s Key Questions: Risk, Liquidity, and Portfolio Integration (37:05 – 38:28)

• Primary Concerns:
  • Liquidity: Ensuring expectations match reality, especially in less sophisticated channels.
  • Factor Analysis & Volatility: Making privates fit coherently in the overall asset allocation.
  • Risk Management: Total portfolio harmony across public and private exposures.

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Data Surprises & Misconceptions (39:05 – 40:31)

• Durable Alpha Confirmed:
  • Taking private products apart repeatedly, the data consistently shows durable alpha—even net of fees.
  • Value remains robust across different cycles, despite industry skepticism.

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Can Indexing Replicate Private Equity Alpha? (40:31 – 41:51)

• Approach:
  • MSCI’s PERT (Private Equity Return Tracker) index uses historical data to replicate private equity with public market baskets (now ETF: GTPI).
• Findings:
  • Achieves some outperformance, but active direct private equity strategies still deliver an extra 150–200 basis points on average, indicating continued value from manager selection.

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The Language and Standardization Challenge (41:51 – 44:18)

• Words Matter:
  • "Liquidity" means different things to different investors; it's imperative for the industry to agree on terms and definitions, even if requirements differ.

Quote:
“They should use the same words to mean the same things... a retail definition of liquid and a sovereign wealth fund definition... should not converge. That would be a bad thing.” — Luke Flemmer (43:33)

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MSCI’s Role as Connective Tissue (44:25 – 46:44)

• Independence: MSCI doesn’t push product, focusing instead on transparency, risk tools, and harmonized, high-quality data for GPs, LPs, and allocators.
• Goals:
  • Help managers and asset owners understand investment opportunities, risks, and product fit through ever-better data and benchmarking.
  • Offer tools for better dynamic portfolio management and standardization across the private–public spectrum.

Quote:
“We really are trying to bring clarity to these markets to allow them to function better and to allow them to grow.” — Luke Flemmer (44:49)

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Conclusion (46:48 – 47:13)

The conversation underscores the critical role of data harmonization for the future scalability, transparency, and efficiency of private markets. As private and public worlds converge, finding the right balance between standardization and preserving the special features of private assets will define the next era of alternative investing.

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Notable Quotes & Memorable Moments

• “If you want to automate and you want to drive scale, you have to drive standardization, you have to drive normalization...” — Luke Flemmer (04:49)
• “Data kind of wants to be free, but when it's disjointed... you can't really get the efficiency.” — (08:00)
• “There is information value... that manifests in alpha... increased efficiency in market is generally going to tighten up returns.” — (10:43)
• “Should private markets be public markets... is there anything different or unique about that anymore?” — (20:00)
• “We don't need a large proportion of these private markets to trade for us to get a lot of price discovery...” — (32:19)
• “They should use the same words to mean the same things...” — (43:33)
• “We really are trying to bring clarity to these markets to allow them to function better and to allow them to grow.” — (44:49)

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Useful Timestamps for Key Segments

• Luke's background and philosophy: 03:34 – 07:25
• The centrality of data: 07:57 – 08:38
• Transparency vs alpha: 08:44 – 12:34
• Atomic unit of value: 14:11 – 16:20
• Total portfolio & standardization philosophical discussion: 16:20 – 22:23
• Index innovation and daily pricing: 26:15 – 29:20
• Secondaries and pricing feedback loop: 29:20 – 33:14
• Wealth channel and advisor concerns: 33:53 – 38:28
• Durability of alpha & indexing private markets: 39:05 – 41:51
• Language and standardization: 41:51 – 44:18
• MSCI’s independent role: 44:25 – 46:48

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Final Takeaway

This episode delivers a nuanced, data-driven roadmap for private markets modernizing toward greater transparency and efficiency, all while cautioning industry stakeholders to maintain the unique value and diversity that set private assets apart from public ones. MSCI, through its data infrastructure and independent lens, aims to be the connective tissue enabling this transformation.

Transcript

[Luke Flemmer]

Data kind of wants to be free,

but when it's disjoint, when it's not

normalized, when it's not comparable, when it's not on the same timescale or quote

convention or you name it, you can't

really get the efficiency.

And so it's when you start to

get that harmonized data layer and then

you can start to build transparency, you can start to build price formation and

then liquidity, and then it becomes a sort of reinforcing, sort of market efficiency phenomenon.

[Podcast Host (Intro/Outro)]

Everybody gets peace, we're going mainstream. Everybody's going to eat, we're going mainstream. All my family see see you on Main street, we're going mainstream.

[Podcast Host (Narration)]

From Wall street to Melrose Avenue, we're going mainstream. Venture capitalists to athletes to creators, to the person who has collected trading cards, we're going mainstream. In a collision of culture and finance, we're going mainstream. This episode of Altgoes Mainstream is brought to you by Altimus, the full service fund administrator and transfer agent powering asset managers in private and public markets. As alts go mainstream, you need real expertise to handle complex fund structures, connect with key distribution partners, and handle sophisticated compliance reporting and transparency demands. That's Altimus High Tech High Touch Solutions for over 450 clients and 2,500 funds with over 775 billion in assets under administration. Backed by an expert team of over 1200 employees, they place client service at the core of their business, helping you navigate complexity during your fund structuring or launch and then supporting you through every stage of growth, whether you're already in the market or thinking about entering private wealth. You can trust their team's deep expertise in retail alternatives to help you reach your goals. Learn more at ultimusfundsolutions.com or email infoultimisfundsolutions.com welcome back to the Alcos Mainstream Podcast. Today's episode dives into how data and market structure are evolving private markets. We sat down in MSCI's New York office with Luke Flemmer, the Head of Private Assets at msci, to discuss how standardization and normalization of data can help bring efficiency, transparency and liquidity to private markets. Luke brings a unique perspective to private markets. He was previously Managing Director, head of Digital Strategy for Alternative Investments at Goldman Sachs Asset Management, and was co founder and CEO of Lab 49, a global solutions provider of investment and risk technology to asset managers and investment banks. When the ion Group acquired Lab 49, Luke became co head of Ion's capital markets division, delivering software and solutions to the group's global financial services customer base. Earlier in his career, Luke worked in the fields of robotics and artificial intelligence.

[Michael (Interviewer)]

He's also a CFA charter holder.

[Podcast Host (Narration)]

Luke and I had a fascinating conversation about private markets market structure and how MSCI is playing a role in driving standardization, normalization and transparency of data in private markets. We covered parallels to market structure evolutions in equities, fixed income FX and derivatives trade offs of transparency for private markets participants where investors will still be able to find durable alpha what standardization and normalization of data means for secondary markets, analogies to Greek mythology, how secondaries has gone from a trade to a portfolio management tool and how index creation might impact private markets. Thanks Luke, for sharing your wisdom, expertise and passion at the intersection of private markets and market structure. Collision of Culture in Finance

[Michael (Interviewer)]

Luke, welcome to the Elkos Mainstream podcast.

[Luke Flemmer]

Great to be here.

[Michael (Interviewer)]

Pleasure to have you. Well, thank you for having me here. It's a fantastic view. Looks like it's not a cloudy day, which is a good sign for the theme of today's podcast, which is increasing transparency in private markets. So we'll get to that. First, I want to get into your background. I think your background is a fascinating be instructive in terms of why we are where we are today in private markets as it relates to the market infrastructure. Your background has been at the epicenter of market structure evolution, so we'd love to start there.

[Luke Flemmer]

Thanks Michael, and it's great to get

to sit down with you.

We've been trying to do this for a while, so I'm excited to be here. I've been very fortunate in my career.

I'd like to say by design, but probably mostly by luck.

But I've gotten to see a couple of pretty fundamental transformations, both from a

technology and from a finance perspective.

I actually started my career in robotics

and automation back before robotics was cool.

They were less humanoid back then. But I did a bunch of work

early in my career around automation and

how do you take a manual process

and turn it into an automated process?

And I think the things that I

learned in that early phase of my career really instructed a lot of what we're still doing even today in my

role at msci, which is if you want to automate and you want to drive scale, you have to drive standardization,

you have to drive normalization, and then the processes can become incredibly efficient and repeatable. And you see that in robotics. Increasingly, we see that in the adoption

of AI and the ways in which these pretty simple basic processes can be

harnessed together to Create massive efficiencies and massive scale.

And so I sort of had that from a technical background. And then I started working on Wall street in the early 2000s in fixed income, which was just a super interesting time. And the rate of change that we

saw over that six, seven, eight year period. We had a little bit of a financial crisis in there as well, which made things interesting.

But just focusing on the mechanics of the fixed income market in the space of a few years really we went

from a world where the bond market was still a sort of white shoe business. You had a trading floor full of

people buying twos and selling 30s and

like that was the job, right?

And then you fast forward eight, nine years and you have central limit order

book trading, you have virtue and these other folks and they're making millisecond liquidity in the bond markets. And it was just remarkable transformation.

And I think that that movie was

really interesting to me. And I think then we've seen it in subsequently in other asset classes as well. But it informs a lot of how

I think about what's going on in

private markets because I saw the way

in which by standardizing data and availability

of data and then starting to drive price formation and then liquidity that flowed from that. The way that the market structure can just sort of completely be transformed through that.

So really interesting experience. And then worked in a few other asset classes as well.

Did a bunch of work in FX that also went through a similar transformation and it became an incredibly efficient market.

And then started working in private assets.

I think I was attracted to private assets for a couple of reasons. There's this fascinating value chain in private assets.

Assets that starts with, you know, the

portfolio company, with the operating company and all of the things that that operating company needs to do and all of the data and information and opportunity that exists there.

And then the way that that moves

through the investment process, through capital formation and increasingly through sort of emerging liquidity.

There's just a huge rich vein of data there which hasn't really.

I mean, I think it's coming into existence like in real time, but it hasn't really existed before.

These have been very disjoint data sets

and there's a huge amount of value in joining and creating that connective tissue across that life cycle.

And so the work we're doing in

private markets is super interesting.

[Michael (Interviewer)]

So I want to touch on your experiences in fixed income fx. I think if you look at other market structure evolutions from pre to post trade, you can look at private markets and Say, okay, it's undergoing a market structure evolution. What can be learned from some of those other asset classes and their evolutions? What would you say are the biggest learnings from your times working with other asset classes in their market structure evolutions? And where would you say we are in that market structure evolution in private markets?

[Luke Flemmer]

Couple comments if I were to boil down the learning, I would say it's

the centrality of data and the sort of harmonization and normalization of data. Data kind of wants to be free,

but when it's disjointed, when it's not

normalized, when it's not comparable, when it's not on the same timescale or quote

convention or you name it, you can't

really get the efficiency.

And so when you start to get

that harmonized data layer and then you

can start to build transparency, you can start to build price formation and then

liquidity, and then it becomes a sort of reinforcing, sort of market efficiency phenomenon.

And so I think that relates very much to private markets where you can't

get away from the data problem. Like the data problem is fundamental and integral to the problem.

And until you make progress on that,

you're going to be stymied in terms of creating real scale.

[Michael (Interviewer)]

I want to talk about something from a philosophical perspective, because opacity of data has been in some cases a benefit for certain players in private markets that relates to inefficiencies in the market. It helps certain investors buy at certain prices, sell at other prices. It maybe has created a more challenging secondaries market, which we can get to as well, but also maybe some benefits for certain players. How transparent should private markets become and where are the both positives and negatives of that happening in this specific asset class?

[Luke Flemmer]

There's no right answer. There's no sort of moral arbiter that says we must have transparency or we shouldn't or whatever. It's a dynamic market and it's a dynamic equilibrium of where that information it.

So I think that market participants will

do over time what's in their interest.

And so there's no doubt that information

asymmetry can be highly desirable. I read Andrew Ross Sorkin's 1929 over the Break.

It's a terrific book, but it was

all insider trading back then. There was the guys in House of Morgan and whatever were just doing deals and they were giving a slice at a discount to their friends. And that was just kind of how the market worked. It's a very different world from how

we exist today, but obviously that information asymmetry was valuable, but it also led

to unsustainable market dynamics.

And so if you want to expand

the market, you want to bring more participants into the market, you want to have more people commit capital and have

predictable market structure, the sort of inevitable

trade off of that has got to be information asymmetry.

So it doesn't mean that you go overnight from a world where the information

was relatively controlled to a world where it's just completely transparent and available. And that's not necessarily in anyone's interest. But there is a tension there between scaling the market and normalizing the information for the participants.

[Michael (Interviewer)]

What do you think that has the potential to do to returns in private markets?

[Luke Flemmer]

There is information value, and I think

that manifests in alpha.

And so I think that the expansion of information, the increased efficiency in market

is generally going to tighten up returns in these markets. And I think that seems like a logical conclusion.

It doesn't mean that the alpha is not sustainable. But I think as a general point,

if you say in a market with more liquidity, more transparency, is pricing going to be tighter? I think that's a reasonable expectation.

[Michael (Interviewer)]

Well, that's a great point because it's a good segue to the other angle of this, which is as more investors come into private markets and different kinds of products get created, evergreen funds, these public private products, enabling more investors to access private markets. You have a need for the ability to better understand and benchmark the difference or compare and contrast between public markets and private markets. So the positive, it seems, would be you now have the ability to look at private markets in a more comparable fashion to public markets and then compare and contrast. And to your point, you still may be able to generate alpha. You'll just be able to have more transparency around how you compare and contrast.

[Luke Flemmer]

If you want, we can talk a

little bit more about the dimensions of alpha and where those exist and why

I think those are durable. But even when there's genuine alpha, you

can have an overlay which is just a function of information asymmetry. Like, I'm going to sell you this glass, and you have no idea what a glass is worth or the fact that they went on sale yesterday.

You're probably going to overpay.

That's not real alpha, right? That's just information asymmetry.

Now, it may be that the glass

is actually valuable and it's more valuable than a plastic cup or whatever, and therefore you're going to pay that premium. There are premiums in the investment products that I think are durable. But the market will become more efficient. And so that squeezes out that sort of information asymmetry spread.

[Michael (Interviewer)]

I think I'd love to unpack. When you talk about alpha, let's get into some of the dimensions of alpha.

[Luke Flemmer]

So, well, let's talk private equity.

So at msci, we've taken private equity apart and put it back together like

100 times and we continue to look at the PMES.

We do a ton on the public market equivalents, we do a ton of modeling of private versus public performance and the correlations. And it underpins a lot of what we do on the indexation now costing side as well.

But every time we take it apart

and put it back together, we see that there is this durable alpha and it's several hundred basis points and it's persistent across regime. So we think that that is real.

And so what are the dimensions of that? I think there's some quite interesting sort

of value bridge work that's been done to really decompose that and attribute it.

But at the end of the day, there is managerial alpha.

These firms are coming in, they are making the operating companies more efficient. They are aligning incentives, they're putting structures in place that are effective. They are strong financial engineers and they're doing sensible things for the most part in terms of cost of capital and use of debt and things like that.

There is a dimension of the illiquidity premium which is very important and we'll

talk about that a bit more.

But the reality is patient capital, or

capital which is married to the timescale of the operating company and its evolution has value.

And so those are some of the

dimensions that I think in private markets are really important.

And as we think about the convergence

of public and private, and as those come together, how do you preserve dimensions of that and not sort of throw the baby out with a bathwater, if you will.

[Michael (Interviewer)]

I want to ask a question related to that. If we drill down on what the drivers of both alpha and benchmarking are, when you think about what feeds into being able to analyze benchmark performance in private markets and you could do the same in public markets, what in your mind is like the atomic unit of value that you need to start with that's super valuable, or the single source of truth that kind of feeds up into that, is that the, as you said earlier, the underlying company level data that feeds into everything.

[Luke Flemmer]

The sort of paradox, if you will, here is the following, which is in public markets, the evolution of public market

has been around the venue.

That's the Whole the point of a

public market is it's a boss, it's an exchange. It's a place where you come together to sort of transact on a multilateral basis. So normalization and standardization of the contract is sort of built into that market structure.

We've had the ticker tape is my

Andrew Ross Sorkin reading again.

But the ticker tape was invented in like 1867. So we've had prices on stocks coming

across for, you know, 150 years or whatever.

It's very mature in those markets. Private markets came the other way.

They came bottoms up, they came bilaterally by construction.

And so as we say, how do we make these two things look the same?

We're coming at it from a very, very different perspective.

And so we need to start building up the building blocks, as you say, or the language of these essentially bilateral

interactions so that we can make them fungible and comparable. That's really the challenge that we have.

It doesn't mean that we need to stop doing the thing that created value,

which is going out and finding great companies, investing and then backing management, doing all of the things that the private markets have been good at.

But we do need to start saying, how are these things the same? And as we get into total portfolio, how can they be comparable to what's

happening in the sort of top down public system? If that makes sense. That's really the crux in my view of what we're doing in private markets.

[Michael (Interviewer)]

So when you say that, my mind goes is a quote like Mark Rowan from Apollo. Public is both safe and risky. Private is both safe and risky. I'd love for you to unpack that conceptual framework in the context of what you just said, which is thinking about it in the total portfolio, as you think about standardization of both public markets, which is obviously further in its journey than the standardization of private markets. But how can allocators reconcile those things in both public and private markets as it relates to the standardization, how they might look at their total portfolio.

[Luke Flemmer]

The way that we think about the private public relationship is sort of as a T shape where the vertical stripe

of that is the private markets.

And it's the evolution of timeliness, transparency,

quality of the data on a standalone basis.

The horizontal, the bar of the T

is the total portfolio.

So if we want to do total

portfolio, which is to say we want

to put private investments or semi liquid or that sort of continuum pari passu with traditional stocks and bonds, in order for us to be able to do that in any meaningful way, the quality

of the private data has to have been uplifted.

Because if the private data is not adequately timely, if the pricing conventions, gross and net of fees and leverage and all these things are not adequately consistent, then when you start to try to

do the total portfolio work, it's just garbage.

Which is the most dangerous thing, because if you, you actually think these things

are comparable, but they're completely different, you're going to get into real trouble.

So I think that the work that needs to get done in private markets

is super important, and that is its timeliness of information, its normalization of data,

its development of a reference universe for

benchmarking and performance analytics, etc.

But in my mind and in our mind at MSCI, there's no getting away

from the fact that allocators, asset owners,

are taking a financial market exposure with

an intent of getting a return.

And they're doing that in public markets

and they're doing that in private markets.

And so when you acknowledge that as the reality, you start to say, how can I justify keeping these things completely disjoint? Because they're both, they're unified by the

fact that I commit capital and they're unified by the fact that I expect a return on some timeline.

And both of those things need to

be sort of in harmony.

And so once you acknowledge that, then you start to say, well, how much can I make them the same and

how much do they need to be different? And then you get into the whole total portfolio journey that we're on, and we're doing a bunch of work around tools and techniques for that.

[Michael (Interviewer)]

What do you think about that? How much do you think should be the same and how much do you think should be different and what should be the case in both camps?

[Luke Flemmer]

You brought up a philosophical question, so

I'm going to tell you my favorite

philosophical example now you can see what

you think of it.

There's this paradox called the ship of Theseus. So Theseus went around and slew the

Minotaur and did all kinds of great adventures. And then he founded Athens.

And so they docked Theseus's ship in

the dockyard at Athens and they kept it there for hundreds of years because he was a great hero and they wanted to commemorate him.

And the ship was old, it was

wooden, it was kind of rotting. And so they would go and replace a plank of the ship, and over time they replaced the planks. At some point, they'd replaced all of the planks with new planks.

And so the paradox is, is it

still the ship of Theseus? Or is it a new ship? What's the identity?

The reason that I bring that up is I think it gets to the crux of should private markets be public markets at the point where you make them the same in all respects? The expectations of liquidity, the expectations of transparency, the expectations of capital availability, are

they the public markets? And is there anything different or unique about that anymore?

And I think that's a question that I think gets glossed over.

People are all glib, they're like, yeah, privates are the new public and that should all be the same thing.

I don't think that that is a good organizing principle.

I think there is reasons why things are what they were historically.

And we need to make sure that

we unpack and continue the things that add value. Otherwise we will just have an extension of the public market.

[Michael (Interviewer)]

So let's stay philosophical here for a second. As you talk with both asset owners and asset managers, as you're building out the indexation, the benchmarking, et cetera, I want to talk about this from a behavioral dimension. So continuing on from your point, which is if we make private markets so much like public markets, then it's just an extension, what would that do from a behavioral perspective to investors in private markets? Do you think if the more private markets becomes like public markets, does it change their behaviors and the way they invest?

[Luke Flemmer]

Well, I guess my thesis would be if you really collapse them, then they become sort of interchangeable. And so what's the delineation of being

a private market investor?

I think we go to private markets for returns, we go to them for diversification, we go to them for duration

matching in some cases where we can get the return on that duration.

And I think those are already valuable

building blocks in an investors toolbox.

And so again, there's no moral arbiter

like the market will do what the market thinks makes sense.

But I do think there will be an equilibrium point.

Late stage venture is a good example. We have some indexation around that and people are building products around that late

stage venture segment that looks a lot

like public markets in certain dimensions. These are very large firms, large market cap, scalable.

Even though the transparency isn't there that

you get with a public company, there's still a lot of information available.

And so that's much closer on the

continuum to public markets. And that sort of feels appropriate.

But if you want to go and do a distressed loan, or you want to go and do venture capital, early

stage venture capital, or you want to

do growth equity, these are not the Same kinds of products and trying to

make them look like public markets is kind of a fool's errand. They just don't have those characteristics and

then the capital would be very expensive

if they needed to jump through all of those hoops.

So in my view, you need to

be able to tolerate a broad diversion.

[Michael (Interviewer)]

So then where are we in the building blocks? If we talk about the infrastructure as well as what you're building at msci, what are the building blocks in your mind that have been built and formed at this point as it relates to private markets? Continued evolution in market structure.

[Luke Flemmer]

Certainly in today's market structure, it all

starts with manager reporting that is the source of truth.

Will that evolve over time?

Probably, especially for some of the larger assets, where there'll be more of an ecosystem and there'll be more third party information that becomes available and AI will be interesting in that dimension as well

because you start to have the ability

to model these entities from the outside, even when they're relatively private, because there's more data available and you can draw more correlations.

But today the managers are still sort

of the source of truth with their reporting and their marks.

I think that we've made a lot of progress in these domains. I think the manager marks have been

tested through different domains. Obviously Covid was a big shock. A lot of denominator effect issues there. A lot of upward sticky marks sort of being interrogated by LPs of why are these the marks?

And then obviously as you get into

evergreens and potentially more regular marking and more transparency around that, it's driving, I think, better discipline, some tooling. There's some interesting vendors in the space that are doing things there.

So I think that whole process of

marking is going to get smoother and easier.

And then the amount of disclosures on

the operating companies or the loans themselves has just gone up significantly over the last several years. I think LPs have gotten a lot more demanding around. We want to understand what's in this fund and the characteristics, et cetera. And there's been a lot of pressure from the LPs and the GPs have sort of come to the party on that sort of. That baseline level of data I think has gotten significantly better over the last, call it, 10 years.

[Michael (Interviewer)]

One place where my mind goes when you mention denominator effect, a lot of institutions were impacted by that post Covid and that had a ripple effect on private markets, on their institutions allocations. I think in part has driven continued interest in the wealth channel that wasn't going to change if institutions didn't have denominator effect. But I think it probably accelerated it. But it brings up an interesting point as it relates to the LP side of the equation. One, they now have to think about more active portfolio management. I think that gets into a pretty interesting discussion around the secondary market and how secondaries are evolving to be becoming a solution. And then it relates to what you've done with Burgess. You bought one of the best, if not the best, source of data on private funds in Burgess, and you own Burgess at msci. How do you think about this concept of active portfolio management from the LP perspective? And how are data solutions like what you're building at MSCI helping LPs put the piece of the puzzle together?

[Luke Flemmer]

That's a great question. I think one point I'd make that I think is important is again, if

we buy this theory that total portfolio is an increasingly important view, which I

think we do, then you say, well,

what are the dimensions of active portfolio management in that total portfolio?

And an important one I'll talk about in a second is obviously actively managing

the private aspect of that. And so secondaries is the key dimension to do that.

But the other aspect of it which is really important is, you know, the

public part of that portfolio is sort of liquid by construction.

And so if you have a total

portfolio where one side of the portfolio

is less liquid, more sticky, more constraining, there's a lot that you can do

on the other side.

And so this is where total portfolio

becomes quite powerful because you start to think about balancing liquidity and exposures across the total portfolio.

And you may have a lot more

liquid options in terms of that rebalancing before you need to go to the illiquid side, which is the primaries.

[Michael (Interviewer)]

Where my mind goes with a lot of what you just said is there's this need to understand both public and private. You recently launched an index that covers both public and private, which I think could be pretty instructive as you think about some of the evolutions of product structure, product innovation in private markets, whether it's with evergreens. And then investors have to think about both their private markets exposure and public markets exposure, or even these public private hybrid products. How is that unfolding and what does that mean in terms of how investors are now thinking about their public and private exposure?

[Luke Flemmer]

Yeah, so that was a pretty cool product, right?

An 85:15 blend would seem like a

good mix between acqui imi, so sort of the investable world, public equity universe and private equity. The 15% sleeve and we thought that was a really interesting product for a couple of reasons. The first reason was in order to do that, you need to daily price

the private equity side of it. So if you want to have a daily index that combines those two things, you can't have a stale price on the private side.

And so that brought together a lot of research and work we've been doing over the last several years around what

does it look like to put a daily price on private equity, and how would you do that?

But given that the source of truth

is the manager marks, those are quarterly and they're generally lagged.

How do you do that?

So I won't get into the details. There's some white papers and things on

the blog, but basically we're able to produce that daily price so that we

can now produce a composite price.

It's interesting for a couple of reasons. I think that it speaks to the fact that many investors, especially institutional investors, have a broad exposure to equity.

In some cases, they have 30% exposure to private equity. That's very substantial.

And so they are exposed to global

equity across public and private. And so why not give them a lens to look at that through?

It also starts to maybe open up methodologically some of the challenges that lead

to those denominator effects that you were talking about. There hasn't been great standardization in how people think about marking the privates to market.

Some people use PMEs, other people.

There are a variety of benchmarks that

sort of float around, but they're not sort of normalized. And so one of the things that you see with that denominator effect, which is kind of perverse, is public's gap down, privates stay upward, sticky.

Now you have a denominator effect, but is it real? Is that upward stickiness just a factor of smoothing or is it economic?

And then the perverse side of that

is, well, now we're unbalanced. Now we need to go do an LP secondary sale at a discount.

But if we actually priced at the

discount we got in market, we probably wouldn't have had the denominator effect in the first place.

It's a little perverse. So we think giving asset owners a tool to think about world equity in

a holistic way, and obviously there are

many slices and variations that you can

create off that index, is a very useful tool to start thinking about total equity exposure.

[Michael (Interviewer)]

What data or technology solutions are available now in private markets to enable you to price private equity daily? And what's still missing from the market

[Luke Flemmer]

structure when you think about pricing private equity daily, you're doing a few different things.

You're obviously using the manager marks and

you need a very large data set

of both current and historical marks. And that's something that we have, as

you mentioned, the Burgess data set required,

which is very valuable in that regard.

So you need that deep data set

and you need to keep updating it. So you need to have a broad range of marks that are coming in on an ongoing basis.

But then to get to the now costing, you have to do public market correlation.

Right. You essentially have to build that model that says here's a representative cohort of

public market equivalents, here are durable correlations

and therefore we can kind of impute where the privates are and those econometrics, it's above my pay grade of how those things get blended together.

But you're essentially using a combination of

the most current information that you have from managers and these sort of imputed relationships to the public markets. And that's a pretty well developed sort of science around that.

The dimension which is interesting is how

secondary prices start to feed into that.

And I think the evolution of the secondary market is going to be extremely

symbiotic with these data tools that we're building.

Because better indexation and information where you know where imputed price is accelerates price

formation and accelerates the bid process. It accelerates the time to close on secondary transactions.

And then the information that's coming out

of those transactions is positively feeding back into the development of those indexes, those prices, et cetera. So I think that's going to be a flywheel effect that we're going to see.

I think the last number I saw, I think secondaries was 220 billion or so last year and roughly between GP and LP and that's a 40% growth rate. So it's a big business, it's growing really fast.

I think it's going to be highly

impactful and I think those secondaries prices

flowing back in time into the overall pricing model is going to be very significant.

[Michael (Interviewer)]

But it's only a single digit percentage points of the total private equity market size.

[Luke Flemmer]

Right.

[Michael (Interviewer)]

So how should we think about secondary markets in the context of derivatives markets? What can secondaries markets and those in it learn from what happened in derivatives?

[Luke Flemmer]

I think the parallel that maybe I

would draw is actually the fixed income.

So if you look at for example a fixed income mutual fund, those are

liquid, you can trade them every day.

Only a couple of percent of the bonds in most mutual funds actually trade

on any given day.

So it's largely illiquid, but we trust the nav. And a lot of the pricing in

that is just matrix pricing. Like the price of the bond is matrix priced.

It's not actually an observable trade, but there's enough marginal liquidity that people feel

confident that that's the right nav and that's sort of where value is.

And so I think by analogy, we don't need a large proportion of these private markets to trade for us to

get a lot of price discovery and a lot of anchoring on value that can then open up the potential for a derivative market.

Because in order to write a swap

or a note on the other side of this basket, I just need to

believe that the price formation is robust. And that's where I think indexation, some

of the stuff we're working on, for example, and others, has a real role

to play because you start to bring

an independent measure of value that's methodologically robust.

And now I can start to take

the other side of that trade.

If the value is entirely generated by

the principles kind of idiosyncratic, it's much harder for me to take the other side of that bet because there's all kinds of gaming issues and just transparency issues.

And so indexation and price discovery can

enable more liquid products and it can ultimately enable a derivatives market.

[Michael (Interviewer)]

What do you think it will take to create more trust and transparency around indexation or benchmarking in private markets?

[Luke Flemmer]

Well, data obviously is the key input. As the amount of available data goes up by multiples or orders of magnitude, the formation of those benchmarks is much more robust. It's just like law of large numbers, that stuff becomes robust.

And then I think the other side is use and adoption.

As people use these things, as they

see them tested through different market cycles,

different kinds of dislocations, and see that they actually do provide a useful signal, whether that's on performance or allocation or risk management, people will adopt them more and use them more broadly.

[Michael (Interviewer)]

How does this all relate to the increasing unlocking of access to the wealth channel? And I'm going to the kind of endpoint of that. One of the endpoints, 401ks, how much can all the work that you're doing at MSCI help get those in private markets and those around private markets more comfortable with. To your point, as there's more data, more transparency, it becomes easier to enable more investors to access private markets.

[Luke Flemmer]

That's a great question. And it goes back to your earlier question around, do folks want to give

up information opacity, give up information asymmetry I think is where the rubber meets the road. On that trade off. The wealth opportunity is massive.

It's growing very rapidly, but we've only

scratched the surface on that opportunity set. I think wealth investors want to be in these markets. They think they're attractive, they think they're interesting, they like the return characteristics.

This is not a product being pushed

down looking for need. I think there is genuine sort of desire for these products.

And so it's a huge opportunity. You just massive opportunity. But in order to get there, like

a bunch of things need to be true that aren't completely true today.

And the amount of allocation, the proportion

in the portfolio is sort of the

key deciding factor here. If you have a de minimis allocation

to private markets, you know, a few

percent, you can really live with the

fact that it's just this sort of thing off to the side, nominally uncorrelated, normally has alpha kind of illiquid. That's fine. It can have a small place in

the portfolio if you try to increase

the size of that and particularly if you start to bring it into retirement and these very sort of fiduciary structures,

you can't just say, well, it's this

weird thing off to the side that we don't understand.

You need to be able to say

why did we make this allocation? Why did the advisor say this was an appropriate product for this portfolio?

And you can't really do suitability if

you can't decompose and explain what this thing does.

So you need to be able to understand liquidity characteristics. You need to be able to understand frankly in these semi liquid vehicles what

some of the stress constraints are. There's gated liquidity. What does that really mean in practical purposes? Can I explain to my client what that might look like?

And you need to be able to do sort of factor analysis and exposure

analysis on the total portfolio.

Because if I'm going to have a

15% allocation to these private markets now, I have specific sector geopolitical, you name it, exposures that I need to understand across the portfolio.

I can't just ignore them in one

side of the portfolio if that's going to be material.

And I think there's a lot of

work that we as an industry need to do in that space. That's something we're doing a lot of work in. And I think that that unlock of

giving advisors, giving home offices the tools to understand how do I do portfolio

construction that's mixed public, private, but that's

rigorous because the rigor on the public

side is very high. We have great tools, we have great analytical frameworks. They're very well understood, they're used consistently.

No one's going to create a public

portfolio on a hunch, on an intuition. It's not going to work.

But the private side does not yet

have that level of rigor. And so I think we need to rapidly uplift the quality of the data and analytics so that people can start doing more holistic portfolio construction. And that's going to be a massive unlock on growth.

[Michael (Interviewer)]

What are the questions that advisors are asking you as it relates to, if I'm an advisor, how should we think about benchmarking? How should we think about how this data interacts with our broader portfolio or asset allocation? How should we think about how it impacts risk volatility? Alpha vs beta? What types of questions are they asking you as you all collectively work together to kind of create more of that rich data that'll help them do their job better?

[Luke Flemmer]

It's a number of those things that you've enumerated. I think liquidity is very important. Obviously, when you're in a world of

ultra high net worth and private placement, people do understand the characteristics of these investments.

As you come down market, and then

even leaving the regulatory dimension of it

aside, you really need to make sure

that people understand the liquidity characteristics because

getting stuck with a mismatch of expectation

versus reality on liquidity would be very bad for the market and very undesirable.

So one of the key things that

we hear are questions around liquidity and do we understand the liquidity? Does the expectation match the reality across a variety of scenarios? And I think that's probably the number one question. And then the second one is all the things that you've said, like how

do I actually do some sort of

factor decomposition on this and make it more side by side with the rest of my portfolio and risk management?

[Michael (Interviewer)]

So sometimes perception is different than reality. As you now get to see so much data. Sometimes data tells you answers that otherwise you wouldn't be able to get. Are there any surprises from your perspective, or is there anything that you wouldn't have thought to be the case as it relates to private markets or the benefits of illiquidity or the issues of illiquidity or something related to the data that you're seeing and getting that has surprised you? That is a misconception that many have about private markets.

[Luke Flemmer]

I think the thing which is, has been gratifying.

I mean, maybe Surprises.

A stronger but certainly gratifying is we have taken these private products apart and

put them back together a bunch of different ways.

And the alpha is durable. The reason that people go into private markets is borne out by the data. And as we get more data and we go deeper on the analysis, it's robust, it comes in and out of

fashion, but it's always like low grade, fashionable to sort of dis private markets and say, yeah, but the fees and

even net of fees, even really looking very rigorously at it, we see in private equity and private credit, these are

just great investment vehicles. There's real value in there. And so that's been gratifying to see. I think as we've gotten deeper under

[Michael (Interviewer)]

the hood, what's the next layer of nuance? I think we all know getting in the top quartile or top decile managers generally tends to outperform and that matters a lot, certainly in more asset classes than others. Right. The interquartile spread is wider in something like venture as an example, relative to large buyout. But is there any nuance to what you just said as it relates to private markets, relative to public markets that you have to be in managers that are first or second quartile in a certain asset class in order to have that durable alpha, or is it private markets writ large? What I'm getting to is kind of could you create an index for private equity and if you allocated to the index, you'd beat public markets on the

[Luke Flemmer]

question of can one create an index

that would replicate but outperform public markets?

We launched an index several months ago

called PERT Private Equity Return Tracker.

And what we did there was we took the rich historical data set that we have on private equity and we said what would it look like to

replicate that with a basket of public equities?

And so we built and backtested a very rich model and we now have an index that we produce that is

a representative basket that replicates as best we can the performance of private equity.

And Goldman actually launched an ETF on top of that. GTP I think is the ticker. And so that's a passive ETF product

that replicates exposure to private equity.

And in our analysis, there's a couple

of hundred basis points of alpha in that product. And a lot of that is driven by sector tilt, growth tilt. There are a number of factor tilts

that constitute that portfolio, but that seems

like an outperforming portfolio. It doesn't perform as well as the closed end fund direct strategies. So you still leave 150, 200 basis points on the table as opposed to the direct strategy.

But it's a really interesting intermediate sort of product. And I think what that's telling us is there's real skill in the manager

selection and in the sort of portfolio construction that's going on in these alternative managers.

[Michael (Interviewer)]

I want to relate what you just shared to something you said earlier, which was really understanding the nuances of the public versus private and what certain features of each asset class mean. I think we probably both agree that words matter, definitions matter. If you had to tell those in private markets what nomenclature matters and or needs to change or evolve, I won't lead you too much, but things like liquidity or other words that are these weighty words that are trying to help people understand what's actually happening in private markets, both from a philosophical perspective, but also from a data perspective and an analytical perspective. What are some of those words that you would choose and why?

[Luke Flemmer]

I think liquidity is a real word. It's maybe used a little globally. I think you need to define what

liquidity really means, because as we've seen throughout various market stresses, liquidity is not always there when people expect it to be there. And so understanding your definition of liquidity I think is really important.

[Michael (Interviewer)]

Do you think different investors can have different definitions of liquidity and that's okay, or do you think, related to your point earlier about the market moving towards standardization, are there certain terms or worldviews that need to become standardized in order for the market structure to continue to evolve?

[Luke Flemmer]

People should use the same words to

mean the same things, otherwise they'll get confused and that won't be good.

It doesn't mean that everyone's requirements of

liquidity or definition of what good liquidity means needs to be the same.

So there is value in long duration products. But there are investors that have very

long time horizons on their capital and it's desirable for them to have vehicles to put that capital into where they can get the benefit of that illiquidity.

And so not everything needs to be ultra liquid. And so a retail definition of liquid

and a sovereign wealth fund definition of liquid or expectation of liquid should not converge. That would be a bad thing and that would be value destructive.

They should use the same words to

mean the same things.

And so if you think back to

your accounting, your quick ratio and things like that, but let's have standardized definitions of what we mean by that kind of liquidity, and I think that that's

really useful and especially in the wealth

channel, there's more that we can do there to create that, as you say, a new kind of lexicon or set of terms of what do we mean by these things would be really useful.

[Michael (Interviewer)]

How do you think you can play that role as the connective tissue that helps both GPs and LPs and then within LPs? To your point, a sovereign may be very different from an individual in terms of what they need, their liquidity horizon, their duration. How do you think you can be that connective tissue to help those constituents piece it all together?

[Luke Flemmer]

The thing that I like about MSCI and that makes this job so interesting is we're independent in the market.

We're not pushing product, we're not raising money, we're not an investment advisor. We're not doing any of those kinds of things.

We really are trying to bring clarity

to these markets to allow them to function better and to allow them to grow.

And so in order to do that, we need to work with the people that are actually creating the risk, which is the managers. We need to give them information that

we have just from the universe of things that we see so that they can be better at creating risk. They can be better at understanding from

the universe of data what investments are

good, what are bad, where is the world going, what's happening with tariffs and globalization and supply chain. And there's a wealth of data there that can enable managers to generate better risk. There's a wealth of market information around

capital flows and LP behaviors that can

help them understand where the puck is going and help them think about product design and product creation and bringing the right products to market at the right time, which is super important.

And then we can collect ever increasingly

granular and high quality data from those managers. And I think in the process of collecting that data, help them think a little bit about standardization and normalization of the data that they generate so that not everything is kind of ex post normalization, but it can be a little bit ex ante sort of standardization. I think that's already happening, but we

could do more there. And then we can help the asset

owners and allocators obviously understand that investable universe. They can understand from a fund selection and investment perspective, how do I feel about this versus that they can understand

true manager performance and also true strategy performance over time.

And we can give them tools to understand the total portfolio and how to think about continually rebalancing or sort of dynamically managing that portfolio. And I think things like indexation, benchmarks,

risk analytics, these are all super useful

items in the toolbox to create a more harmonized view across public and private markets.

[Michael (Interviewer)]

I think that's such a great way to wrap this up. The harmonization between public and private I think encapsulates a your career journey, the journey that private markets is undergoing with that market structure evolution. You talk about kind of being in the connective tissue, and I think, how do you get to that source of truth that is independent? I think all of that is encapsulated in what you just shared. This is a fascinating conversation. Thanks so much.

[Luke Flemmer]

Terrific. Thanks so much for having me on. I really enjoyed our discussion. Thanks.

[Podcast Host (Narration)]

Thanks for listening to this episode of Alt Goes Mainstream. I hope you enjoyed it. You can read more about Alts at my substack altgoes mainstream.substack.com Thanks a lot

[Michael (Interviewer)]

and have a great day.

[Podcast Host (Intro/Outro)]

We're going mainstream.

[Luke Flemmer]

Sam.