Video: Morningstar Brings Clarity to Complex Private Markets

Kunal Kapoor: I hope everyone has been enjoying the conference, and welcome back to the main ballroom here in beautiful Navy Pier, Chicago. Nice sunny day here, a little warm, but I bet you’re not complaining about the weather at least. Meanwhile, we’ve got a lot to talk about and a great afternoon as well, and I’m just going to start by stating the obvious. Markets are up, the markets are down. But the level of uncertainty people are feeling is probably greater than ever. And we want to lean into the theme of data because the investors that we jointly serve want clear, reliable signals from us. It’s really data that seeks and provides those signals. It’s the foundation of how we’ve learned to support advisors in our journey together.

Our goal is always to combine independent research with a long-term perspective that transforms all that raw data available to us into actionable insights to help build the workflows that you use to serve investors. In fact, I think one of the beautiful things about our relationship is that it’s allowed for the creation of a universal language of investing. When you show up to a client meeting, that language roots you in common ground and allows you to build a successful plan for your clients.

As you’ve probably picked up at this conference, the language is evolving, and it’s guided in particular by three forces that are reshaping the investment landscape. The first is expanding choice. The second is personalization. The third, which will be the focus of my remarks today, is the convergence of public and private markets. If you’ve been to this conference in the past, you’ve heard me talk about the first two points quite a bit, so I won’t spend as much time on them, but here’s what I will say. Investor choice is mushrooming. There’s a mushrooming menu of investments that investors face today. You just have to look at the remarkable rise of active ETFs. A few years ago, I heard plenty of people saying, “eh, that’s not going to amount to anything.” Well, guess what? Since 2020, assets in US active ETFs have grown from about $180 billion to more than $1 trillion today, and there have been more than 1,000 new active ETFs—1,000 new active ETFs—launched since the start of 2024, so less than 18 months ago. It’s why we’re featuring so many speakers who can help you understand what’s happening in that space.

Now, if you’ve been to many Morningstar conferences, you’ve probably heard our analysts often say, “more options don’t always mean better options,” and that is incredibly true. It’s why our tools, whether it’s star ratings, fair value estimates, Medalist Ratings, are so important in helping you sort through all of that choice. These signals actually have made Morningstar the universal language that you’ve been using on investing.

Now, on the second point I made on personalization, everyone’s favorite topic, AI, is really reshaping how those signals, and importantly your advice, gets delivered. There’s a lot of flash behind AI, but that’s not what I’m referring to. I’m referring to the function. Because far from replacing financial advisors, it’s going to empower those of you who embrace it to be successful, because what it really does is it removes the friction and the paperwork from your workflows. Nobody likes paperwork, let’s admit it. It gives you time to focus on what really matters, which is your clients. We’re using AI in Advisor Workstation and our newly launched Direct Advisory Suite, where we’ve got smart assistants, and you can even generate personalized proposals with these smart assistants. We’re trying to change the way you do your work, and if you haven’t already, please swing by the Morningstar Hub in the Exhibit Hall, and you can try your hand with some of these tools and workflows.

Let me focus now on public and private convergence. If you were listening earlier to Vanguard CEO Salim Ramji recording the podcast with our Dan Lefkowitz and Christine Benz, he talked about the fact that the private markets, it’s going to be a little while before they have as much of an impact as public markets, and I think that’s exactly right. But no one can dispute the fact that this is a snowball coming down the hill, and it’s dominating conversation, headlines, and maybe even your LinkedIn feed.

By show of hands, I just wanted to ask, how many of you or your clients are thinking about private markets or investing in private markets? It’s about right when I look across, I think about 20 to 30% of you raising your hands, which is, I think, where it’s at. Now, let’s be clear about something. Public markets have been a trusted path and will remain a trusted path for capital formation, investor returns, and long-term retirement planning. Let’s be frank, they have also delivered really well for investors in the past few decades. If you’re going to change anything, you really need to be sure you’re adding incremental value as opposed to subtracting it.

But we know from our Voice of the Investor study that 25% of retail investors in some way are interested in private equity or are thinking about it, and if they’re not invested, they’re curious. You may wonder why that is, but think about all the people you know today who just simply work at companies that are private-equity-backed. Just the fact that you have so many people working at those companies means they’re thinking about it and they’re experiencing it in a firsthand way that makes them wonder how they can participate in it. And of course, then there are the stats. The number of public companies in the US has declined, while the number of PE- and VC-backed companies has skyrocketed from fewer than 9,000 in 2005 to approximately 75,000 today. That is why investors want to tap in and they’re thinking about it. Companies are staying private longer. They’re raising more money from private sources. While it’s true that private-equity and VC-backed companies like OpenAI and SpaceX are hogging the headlines, what’s really underlying that behavior is a belief that those firms are getting better pricing in private markets, and that’s why many of them are not even coming and IPOing. If you look at data within PitchBook, you’ll see that beginning in 2021, there’s really been a dearth of IPOs relative to historical levels.

That being said, while private equity grabs all the headlines, it’s really private credit where I think you should be focusing your attention and where I think most of the opportunities for advisors are going to come to be. In fact, tomorrow morning, my conversation with Apollo CEO Marc Rowan is going to focus on this particular topic. It’s because private debt in the US has now amassed over $1.2 trillion in assets under management, $1.2 trillion. So firms like Blackstone and Apollo, which were not household names, and which, let’s be frank, didn’t have the calling card that maybe some of the retail asset managers did, are suddenly in the lexicon because they’re engaging in direct lending, they’re buying distressed debt, they’re providing mezzanine financing, and essentially they’re providing alternative income sources and some degree of diversification.

For advisors, that has meant that there’s been a surge in what are called interval funds. Now, interestingly, you may not know this, but the interval fund was created in 1993, which is the same year that the ETF was created. I’m all about the facts here, but there are now only about 140 of them, of these semiliquid interval funds, but they’re managing over 100 billion in assets, and what sets them apart is obviously that they only offer periodic liquidity windows. But here’s what’s interesting. In the past five years, we’ve had more launches in this space than in the preceding 27 years. In 2025, we’re already on pace for a record year for new launches.

Now the natural question, and I’m sure many of you are asking about it, “well, if it’s that good, is there a free lunch involved somewhere?” If you were paying attention to your economics professor, you know that there’s no such thing as a free lunch. Private investments do, in fact, come with higher fees, less transparency, and importantly, less liquidity. They’re complex. They’re not as easy to understand. In fact, in our recent survey, we heard that nearly a third of advisors are thinking about offering these vehicles but do not want to because they are so complex.

Now, as everyone at Morningstar knows, that’s like a Morningstar Bat-Signal. We want to bring clarity to complexity in all we do. It’s our rallying cry. For example, when investors are chasing yield and managers are leaning heavily on leverage, it’s our job to provide the research to tell you why that’s happening. In fact, some of the largest funds today are posting double-digit distribution yields, but they come with really complex fee structures, limited liquidity, and valuation lags. We’ve even found that the average semiliquid fund today is charging more than 3 times the fees of a typical mutual fund or ETF. If you’re interested in the research behind this, you can scan the QR code behind me to get access to our latest paper on this subject.

I also want to emphasize that what you should be paying attention to, among other things, are the incentive fees that are applied here to the entire total return of these funds. They’re not just applied above a hurdle rate, but total return. That’s a nuance that’s often overlooked, but it can have such a meaningful impact on outcomes.

To help demystify all this, it’s Morningstar’s goal to bring the same principles to private market analysis that we’ve been bringing for all these years to public markets. It’s going to be a long journey, just as it was on the public market side, but we’ve got a time-tested process for creating transparency and fighting for the investor, and it boils down to four ingredients. One, no surprise, actionable data. Two, standardized analytics. Three, independent IP. and four, unified workflow tools. We’ve built deep capabilities, for example, in private markets through our decade-long ownership in PitchBook, which is our platform for PE and VC investors.

Morningstar today, through PitchBook, tracks over 6 million privately held companies around the world, 400,000 debt deals, and over 31 trillion in debt volume for private companies globally. So we have access to all this data. We’re also expanding coverage across vehicles and asset classes from PE and VC to private credit and semiliquid funds. You probably saw that we announced yesterday that those of you who use Direct Advisory Suite now have access to data on 1,000 private capital funds, so you can start looking at them as you consider including any of these in your clients’ portfolios.

For comparable analytics, we’ve rolled out a new “% private” data point. Sounds super similar, but what it’s actually doing is looking at traditional offerings and trying to find what degree of private market exposure do they have. You can look at this in Direct or Direct Advisory Suite itself. Maybe if you were getting ready for Ron Baron’s presentation tomorrow, and you were looking at his Baron Partners Fund BPTRX, you’ll see that that fund already has 20% exposure to private market investments.

On the other end of the spectrum, as we’re starting to look at funds such as the Cliffwater Enhanced Lending Fund CELFX, which is an interval fund, we’re able to share with you now that 90% of the exposure is coming from private assets. As you’re thinking about building that client portfolio, you can start to include this data point into how that portfolio gets built. Then when it comes to differentiated independent IP, we’re extending the Morningstar Medalist Rating to semiliquid funds so you can evaluate them with the same forward-looking lens that we bring to traditional long-only vehicles, and we’ll put them side by side for comparison purposes. The idea is to allow for real, real trade-offs and conversations around those trade-offs. Sitting down with your client, you want to ask the question, “if you’re giving liquidity and paying more, is the expected outperformance really worth it?” This is certainly a journey, but we want to set the table so that as you start thinking about this and working through it, you can certainly find your way through it.

I’m going to leave you with this thought. Expect there will be a lot of marketing at you in the next few years to get you to think about this convergence, and your clients inevitably will also be seeing some level of it. It’s OK to come to it with a skeptical lens, but we’re going to be your partner in helping to do it with an independent voice that provides a common language and a critical eye, signaling what could be right for an investor and which managers and at what kind of fee level. Whether you’re talking about investing publicly or investing in private assets, at the end of the day, investing still has to be about great advice and getting your clients to their goals. Together we want to work with you on creating a path to investing success. So Thank you for being here today. Thank you for bringing the energy and look forward to a bunch of good conversations here. Thank you.